No Additional Forms

• One of the advantages of operating your business as a sole proprietorship is that you report your business income with your personal tax return. The IRS requires you to separately report your business income and deductions on a Schedule C with the same deadline as your personal taxes. In contrast, businesses that operate as a corporation must file a separate tax return on Form 1120 every year, regardless of whether they earn income or not. And if you operate a partnership, the tax filings become even more complex. In addition to filing an annual informational return for the partnership, you must also prepare a Schedule K-1 for each partner.
  
  

Full Expense Deductions

• For purposes of deducting the expenses of your business, you can claim the same deductions that all other formal business entities can. This means that any expense you incur that's ordinary and necessary to your business operations is fully deductible. In contrast, employees who incur expenses that relate to their job are also eligible for similar deductions; however, the amount is subject to potentially substantial decreases depending on the amount of Adjusted Gross Income, or AGI, they report. This is because employees include their work expenses in the miscellaneous expense category that is subject to a 2 percent AGI limitation. Essentially, only the total of these expenses that exceed 2 percent of AGI are deductible.
  
  

Control Tax Payments

• Self-employment also affords you more control over the amount of each periodic federal income tax payment you make during the year. Employees are subject to withholding by their employer, and once they fill out a W-4, the amount withheld from each paycheck is the same throughout the year. However, sole proprietors must make up to four estimated tax payments during the year. But unlike an employee, the first payment is not due until your earnings exceed the filing threshold amount. As a result, a sole proprietor may find it unnecessary to make an estimated tax payment on the first deadline if their cumulative income for the year falls under the filing threshold.
  
  

Sole Proprietor Disadvantages

• One advantage that employees have over sole proprietors is that they are only responsible for paying half of the Medicare and Social Security taxes because their employer covers the other half. Sole proprietors, however, are responsible for paying the entire tax themselves. And although you can deduct half of your payments on the first page of your 1040 form, the deduction doesn't save you as much money as having someone else pay it for you.