If the business is designated a sole proprietorship, profits are passed along to the owner. For tax purposes, these profits are accounted for with any other personal income the owner may have accumulated and taxed at the owner's personal income tax rate.

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The profits of a sole proprietorship are passed through to the owner, and taxed at the owner's personal tax rate. However, owners do have to pay self-employment tax (for Social Security and Medicare). By law, sole proprietors are required to estimate their taxes and make quarterly payments to the government or suffer penalties for nonpayment.

If the Business Is Designated a Sole Proprietorship, Profits Are