Tax Benefits for Sole Proprietors: What You Need to Know

Sole proprietors – individuals who own unincorporated businesses (think freelancers, gig workers, owners of small businesses not set up as an LLC or S-Corp) – also see significant benefits from the "big beautiful" tax bill. Many provisions for sole proprietors overlap with what we’ve already covered, since your business income is a part of your personal tax return.

Key Changes for Sole Proprietors

Here’s how the changes shake out for you:

Lower Tax Rates & High Standard Deduction

First off, as an individual taxpayer, you keep the lower tax brackets and the larger standard deduction that directly impact your bottom line. This means the profit from your Schedule C business will continue to be taxed at the reduced TCJA rates. You’ll likely use the standard deduction, nearly double the old amount, unless your itemized write-offs are larger. In practical terms, more of your sole proprietorship income is taxed at rates of 10%, 12%, and 22%, instead of higher rates that are set to return in 2026.

Expensing and Write-offs

Even as a one-person business, you benefit from the expansion of expensing rules:

• If you buy tools, equipment, a work vehicle, or other assets for your business, you can likely use 100% bonus depreciation through 2029. This allows you to write off the full cost immediately. No more spreading the deduction over many years means you get the tax benefit upfront. This flexibility helps your cash flow and ability to reinvest.

  
  

• The higher Section 179 limit ($2.5 million) may sound enormous for a sole proprietor. Most likely, you won’t spend that much on business assets in a year. However, it ensures that relatively expensive gear or vehicles you purchase can be fully expensed without worrying about hitting a cap. For example, if you’re a freelance photographer and invest $20,000 in new equipment, that’s fully deductible in Year 1 under these rules.

  
  

• Are you using a personal vehicle partly for business? Here’s an interesting quirk: car loan interest for vehicles assembled in the U.S. is now deductible up to $10,000, even for personal use cars. If you use one car for both personal and business reasons, you were already deducting the business-use percentage of interest on your Schedule C. Now, the personal-use portion might be deductible above-the-line too, subject to new rules and phase-outs. This effectively gives you a deduction for the remainder of the interest. The bill extends a tax break to interest on personal auto loans, which could benefit you if your car is used for both business and personal purposes.

Simplified Taxes for Gig Workers

Many sole proprietors are also part of the gig economy. If you use platforms like Etsy, Uber, or PayPal to sell products or services, the 1099-K reporting threshold returning to $20,000/200 transactions is quite a relief. You won’t receive a flurry of IRS forms for a few hundred bucks of side income. That doesn’t change your tax obligations (income is still income), but it avoids confusion and potential over-reporting. Additionally, if you hire other freelancers (or subcontractors) and used to send out 1099-MISCs for over $600, you now only need to do so if you paid them over $2,000. Less paperwork is always a welcome relief for a one-person business.

No-Tax Overtime & Tips – Self-Employed Version

The “no tax on tips” deduction allows for 1099-NEC and 1099-K tip income to be deducted, not just W-2 tips. If you’re an independent contractor who earns tips (for instance, a self-employed ride-share driver who receives tips through the app), you can deduct those tips and not pay tax on them, just like employees do. Likewise, the "no tax on overtime" concept generally applies to hourly employees under labor law. As a sole proprietor, you don’t get overtime pay per se. However, there are opportunities to increase your own working hours. Unfortunately, there’s no direct analogous deduction for you since overtime rules don’t apply to self-employed individuals. The spirit of these provisions favors labor income; your overall lower rates and QBI deduction already significantly reduce the effective tax on your self-employment income.

Retirement and Healthcare

While not a direct component of “business” taxes, be aware that the bill has a health subtitle expanding HSA (Health Savings Account) access. If you’re over 65 and still running your business, you’re now allowed to contribute to an HSA, even if you’re on Medicare. This could greatly assist sole proprietors in managing healthcare costs in semi-retirement. Moreover, both spouses can make catch-up HSA contributions to a single account now.

On the retirement side, nothing explicitly new for solo 401(k)s or SEPs was included in this bill. However, the existing higher contribution limits from prior legislation remain effective and are inflation-adjusted. It’s wise to continue taking advantage of those to shelter your earnings.

Be Mindful of Loss Limit and SALT

As a sole proprietor, you file on Schedule C, meaning your business losses are directly your personal losses. The excess business loss cap has been made permanent. If you ever have a year where your business losses exceed around half a million dollars (rare for most sole proprietors, but possible in disaster years), you can’t use that entire loss right away. Instead, it will carry forward. This primarily affects wealthy investors but is still worth noting.

Regarding SALT (state and local tax), since you don't have a pass-through entity, you’re subject to the personal SALT deduction limits. After 2025, the cap will be $30,000 if your income is under $400,000. This offers more breathing room for deducting property and state taxes. However, if your income is higher, you’ll still be capped at $10,000. At least it won’t drop to $0, but this compromise means you should factor that limit into your estimated taxes.

Conclusion: A Favorable Tax Outlook

Overall, sole proprietors come out ahead with this bill. You retain all the major tax cuts: low rates, a large standard deduction, and the QBI deduction that keeps your personal taxes low. Additionally, you gain new deductions that reward you for investing in your business and for day-to-day expenses like car loan interest.

The tax code is set to continue treating small business owners favorably, which is great news for those of you managing everything in your one-person enterprise. Remember, these changes are significant and can have a profound effect on your financial situation as a sole proprietor. Embrace the opportunities provided by this tax bill, and make the most of your status as a small business owner.