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Definition of a Sole Proprietorship

A sole proprietorship is a business owned entirely by a single person.

  • The owner of a sole proprietorship is subject to self-employment taxes, and will report Federal income as an individual on Form 1040.
  • Sole proprietors must also identify any employees who are also family members (spouses, parents, or dependents).
  • A sole-proprietorship may have W-2 employees. If so, the proprietorship is subject to normal Federal (Income, FICA, FUTA) and State employment taxes (Income, SUI, SDI, etc.) on wages paid to employees, and will file Forms 940 (FUTA Tax return) and 941 (Quarterly Return for Income and FICA taxes) for amounts withheld.
  • Wages paid by a sole proprietor to his or her children, parent(s), and/or spouses are not subject to FUTA taxes.

For more information, see the IRS guide to Sole Proprietorships.

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