Tax Law Impacts on America's Sole Proprietors

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

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 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, and 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 prop income is taxed at 10%, 12%, 22%, etc., instead of higher rates that would have returned 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, meaning write off the full cost immediately. No more spreading the deduction over many years – you get the tax benefit upfront, which helps your cash flow and ability to reinvest.

  • The higher Section 179 limit ($2.5M) probably sounds huge for a sole proprietor – most likely you won’t spend that much on business assets in a year. But it ensures that even 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 $20k in new equipment, that’s fully deductible in Year 1 under these rules.

  • Are you using a personal vehicle partly for business? If so, here’s a quirk: car loan interest for vehicles assembled in the US is now deductible up to $10k even for personal use cars. If you use one car for both personal and business, you were already deducting the business-use percentage of interest on Schedule C. Now, the personal-use portion might be deductible above-the-line too (subject to the new rules and phase-outs) – effectively giving you a deduction for the rest of the interest as well. It’s an interesting opportunity: the bill basically extends a tax break to interest on personal auto loans, which could benefit you in full if your car is for business and personal combined.

• 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 a relief. You won’t get a flurry of IRS forms for a few hundred bucks of side income. That doesn’t change your tax obligations (income is 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 if you paid them over $2,000. Less paperwork is always welcome for a one-person business.

• No-Tax Overtime & Tips – Self-Employed Version: The “no tax on tips” deduction specifically allows for 1099-NEC and 1099-K tip income to be deducted, not just W-2 tips. So if you’re an independent contractor who earns tips (say you’re a self-employed ride-share driver who gets tips through the app, or a freelance cosmetologist paid via Venmo including tips), you can deduct those tips and not pay tax on them, just like employees can. Similarly, the “no tax on overtime” concept mostly applies to hourly employees under labor law. As a sole proprietor, you don’t get overtime pay per se, but you might increase your own working hours – unfortunately, there’s no direct analogous deduction for you (since overtime rules don’t apply to self-employed). However, the spirit of these provisions is to favor 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 part of “business” taxes, note that the bill had a health subtitle expanding HSA (Health Savings Account) access – for instance, if you’re over 65 and still running your business, you’d now be allowed to contribute to an HSA even though you’re on Medicare. This could help sole proprietors manage healthcare costs in semi-retirement. And both spouses can do catch-up HSA contributions to one account now. On the retirement side, nothing explicitly new for solo 401(k)s or SEPs was in this bill, but the existing higher contribution limits from prior legislation remain in effect and are inflation-adjusted, so keep taking advantage of those to shelter your earnings.

• Be Mindful of Loss Limit and SALT: As a sole proprietor, you file on Schedule C and your business losses are directly your personal losses. The excess business loss cap being permanent means if you ever have a year where your business losses exceed about half a million dollars (rare for most sole props, but possible in a disaster year or closing down a shop with big write-offs), you can’t use that entire loss right away. It will carry forward. This mostly targets wealthy investors, but worth noting. And SALT – you don’t have a pass-through entity to do any workaround, so you’re subject to the personal SALT deduction limits. After 2025, the cap will be $30k if your income is under $400k, which is more breathing room for deducting property and state taxes, but if your income is high, you’ll still be capped at $10k. At least it’s not dropping to $0; but this compromise means you should still factor that limit into your estimated taxes.

  
  

Overall, sole proprietors come out ahead with this bill. You retain all the major tax cuts (low rates, big standard deduction, QBI deduction) that keep your personal taxes low, and you gain new deductions that reward you for investing in your business and even for everyday things like car loan interest. The tax code will continue to treat small business owners favorably, which is great news if you’re wearing all the hats in your one-person enterprise.