Sole Proprietorship

If you earn business income and never file paperwork to become anything else, you're a sole proprietor by default. There's nothing to form, no separate tax return, and no annual filing fee. You report the business on Schedule C, attach it to your personal 1040, and you're done. That simplicity is the whole appeal, and for a freelancer or side-hustler it's usually the right call.

The catch is that the simplicity cuts both ways. Because there's no legal wall between you and the business, a creditor or a lawsuit can come after your house, your car, and your bank account, not just whatever the business owns. An LLC gives you that wall for a few hundred dollars and a state filing. If your work carries any real liability exposure, that's money well spent.

Then there's self-employment tax. As a proprietor you pay both halves of Social Security and Medicare yourself, 15.3% total. Mechanically, 12.4% Social Security applies to 92.35% of your net profit up to the 2026 wage base of $184,500, and 2.9% Medicare applies to all of it with no ceiling. You get to deduct half of what you pay as an above-the-line adjustment, which softens the blow but doesn't erase it.

On the income-tax side, the qualified business income (QBI) deduction is the proprietor's best friend, and the July 2025 OBBBA made it permanent instead of letting it sunset at the end of 2025. You can still take 20% off your qualified business income before tax, though for a proprietor that base is your net profit reduced by the deductible half of your SE tax (and a few similar adjustments), not the raw Schedule C profit. For 2026 the phase-out thresholds run to $403,500 of taxable income for joint filers and $201,750 for single filers, and OBBBA widened the phase-in ranges and added a $400 minimum deduction for anyone with at least $1,000 of active QBI. Most proprietors sit comfortably under the thresholds and take the full 20%.

Where do you outgrow this structure? Watch the SE tax line. Once net profit climbs into the low six figures, the savings from electing S-Corp treatment (paying yourself a reasonable salary and taking the rest as distributions that escape the 15.3%) start to outrun the cost of payroll and a separate return. Below roughly $50,000 of profit, an S-Corp's overhead usually isn't worth it, and a plain proprietorship, or an LLC taxed as one, keeps your life simple.