Income tax returnsSole proprietors must file Schedule C (Form 1040 or Form 1040-SR), Profit or Loss From Business, with their Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors, for the year in which they go out of business. Also, with their Forms 1040, sole proprietors may need to file:
- Form 4797, Sales of Business Property, if they sell or exchange property used in their business. They also need to file this form if business use of certain Section 179 or listed property drops to 50% or less.
- Form 8594, Asset Acquisition Statement, if they sell their business.
- Schedule SE (Form 1040), if they're liable for self-employment tax.
Sole proprietors need to file Form 941, Employer's Quarterly Federal Tax Return (or Form 944, Employer's Annual Federal Tax Return), for the calendar quarter in which they make final wage payments. They check the box and enter the date final wages were paid on line 17 of Form 941 or line 14 of Form 944. They must attach a statement to their return showing the name of the person keeping the payroll records and the address where those records will be kept.
Sole proprietors must file Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, for the calendar year in which final wages were paid. They need to check box d in the Type of Return section to show that the form is final.
Sole proprietors also need to provide Forms W-2, Wage and Tax Statement, to their employees for the calendar year in which they make final wage payments. Generally, they furnish copies B, C and 2 to the employees. They file Form W-3, Transmittal of Income and Tax Statements, to transmit Copy A to the Social Security Administration.
Reporting due datesVisit IRS.gov for information on employment tax due dates.
Other reporting for sole proprietorships with employeesIf employees receive tips, the sole proprietor must file Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips, to report final tip income and allocated tips.
If the sole proprietor provides employees with a pension or benefit plan, they need to file a final Form 5500, Annual Return/Report of Employee Benefit Plan.
Sole proprietorships that pay contract workersSole proprietors report payments to contract workers who they've paid at least $600 for services (including parts and materials) during the calendar year in which they go out of business on Form 1099-NEC, Nonemployee Compensation.
Some filers must file Forms 1099 electronically. Those who file paper forms must also file Form 1096, Annual Summary and Transmittal of U.S. Information Returns, to transmit paper copies of Forms 1099 to the IRS.
RecordkeepingHow long a business owner should keep a document depends on several factors. These factors include the action, expense and event recorded in the document. Businesses should keep records relating to property until the period of limitations expires for the year in which they dispose of the property in a taxable disposition.
Business owners should keep all records of employment taxes for at least four years.
Employer identification numbersOnce the IRS has assigned an employer identification number to a sole proprietor, it becomes the permanent federal taxpayer identification number for that business. To close their business account, a sole proprietor needs to send the IRS a letter that includes the complete legal name of their business, the EIN, the business address and the reason they wish to close their account. If they have a copy of the notice that the IRS issued with the EIN assignment, they should include that with the letter. They should write to the IRS at: Internal Revenue Service, Cincinnati, Ohio 45999.
Sole proprietors who:
- made a federal tax deposit or other federal tax payment,
- are liable for any business taxes, or
- are notified by the IRS that a business tax return is due,
FS-2020-16, September 2020