See exactly what a sole proprietor owes: Schedule C net profit, the 15.3% self-employment tax, the half-SE-tax adjustment, the 20% QBI deduction, and your federal income tax bracket.
A sole proprietor pays two separate taxes on the same profit: self-employment tax (Social Security + Medicare, 15.3%) and federal income tax on what is left. The examples below are computed with this page's own formula.
| Scenario | Revenue | Expenses | Net Profit | SE Tax | QBI Ded. | Total Fed Tax |
|---|---|---|---|---|---|---|
| Solo Consultant | $95,000 | $12,000 | $83,000 | $11,728 | $15,427 | $17,094 |
| Etsy Seller | $42,000 | $15,000 | $27,000 | $3,815 | $5,019 | $4,322 |
| Freelance Writer | $60,000 | $8,000 | $52,000 | $7,347 | $9,665 | $8,213 |
The self-employment tax base is 92.35% of net profit — the other 7.65% represents the employer half you would not pay as an employee, and Congress excludes it from the base. So a $50,000 profit is taxed on $46,175, not $50,000. The Social Security portion (12.4%) stops at the annual wage base ($176,100 for 2025), while the 2.9% Medicare portion has no ceiling.
Combined federal tax (SE + income) on a single filer with no other income, before credits:
| Net Profit | SE Tax | Income Tax | Total | Effective Rate |
|---|---|---|---|---|
| $20,000 | $2,826 | $0 | $2,826 | 14.1% |
| $50,000 | $7,065 | $2,422 | $9,487 | 19.0% |
| $83,000 | $11,728 | $5,367 | $17,094 | 20.6% |
| $150,000 | $21,194 | $16,149 | $37,343 | 24.9% |
Note the effective rate never reaches the top marginal bracket, because the SE tax flattens out above the wage base and the QBI deduction shaves 20% off the income-tax base.
As a sole proprietor you are not an employee of your own business. The IRS treats you and the business as one taxpayer: profits flow onto Schedule C of your personal Form 1040, and the tax is computed in three layers.
Gross receipts minus ordinary and necessary business expenses. This figure is the base for everything that follows, and it is also subject to self-employment tax.
You subtract half the SE tax and the 20% QBI deduction (Section 199A) from profit before applying the ordinary income-tax brackets. The QBI deduction phases out for specified service trades above the income thresholds, which is why a consultant at $250,000 of profit cannot always take the full 20%.
A sole proprietor has no employer withholding, so the IRS expects four payments (April 15, June 15, Sept 15, Jan 15). Underpaying triggers interest under IRC §6654 — roughly 7% annualized in 2025.
1. Half of self-employment tax. An above-the-line deduction on Form 1040 Schedule 1 — worth $5,800 on a $83,000 profit alone.
2. The QBI deduction. 20% of qualified business income, available even if you take the standard deduction.
3. Self-employed health insurance. 100% of premiums for you, your spouse, and dependents, as long as the business earns a profit.
4. Retirement contributions. A SEP-IRA allows up to 25% of net earnings; a solo 401(k) allows $23,500 plus a 25% employer contribution.
5. The home-office deduction. $5 per square foot up to 300 sq ft (simplified) or actual expenses on Form 8829.
Roughly two-thirds of US businesses are sole proprietorships — freelancers, consultants, gig drivers, Etsy and eBay sellers, contractors, tutors, and anyone who receives a 1099-NEC. All of them report business income on Schedule C and pay self-employment tax in place of the FICA that an employer would otherwise split with them.
The structural surprise is the 15.3% combined Social Security and Medicare rate landing entirely on the owner. An employee pays only half that, with the employer covering the rest. The self-employed get a partial offset through the half-SE-tax deduction, but the cash-flow timing is worse: no withholding means four large estimated payments instead of small paycheck deductions.
The three structures are not mutually exclusive — an LLC is a legal form, an S-corp is a tax election, and a sole proprietor can elect S-corp status. What changes is the payroll-tax base:
| Structure | How Profit Is Taxed | Self-Employment Tax | Best When |
|---|---|---|---|
| Sole proprietor | All profit on Schedule C | On 92.35% of full profit | Profit under ~$60K |
| Single-member LLC | Same as sole prop (disregarded) | On 92.35% of full profit | Liability protection, low admin |
| S-Corp | Salary + K-1 distribution | Only on the salary | Profit over ~$80K |
| Partnership | K-1 distributive share | On the share (with limits) | Two or more owners |
An S-corp requires payroll, a separate return (Form 1120-S), and reasonable-compensation compliance. Below roughly $80,000 of profit the payroll-tax saving rarely beats the added $1,500–$3,000 annual accounting cost.
⚠️ Important: This calculator provides an estimate for planning purposes using 2025 federal parameters. It does not include state income tax, tax credits, the QBI phase-out for specified service trades, or the additional Medicare tax. Consult a qualified tax professional for your specific situation.