against the sole proprietor and recover from his or her personal assets. Employees, customers, or other persons injured on the job or otherwise in contact with the business can seek recovery from the sole proprietor from his or her personal assets. Taxes Like all businesses, a sole proprietorship will pay income taxes, employment taxes, and – if it has employees – unemployment taxes. • A sole proprietorship, whether it has employees or not, is treated as a “pass through entity” for both federal and state income tax purposes. That is, the income passes through directly to the owner. The sole proprietorship itself does not file an income tax return. Instead, the sole proprietor files federal Form 1040 (U.S. Individual Income Tax return) with accompanying Schedule C on which business income and deductions are computed. The business income and personal income are taxed at the sole proprietor’s individual income tax rate. For Minnesota income taxes, the sole proprietorship files M1, Individual Income Tax Return with federal Form 1040 and Schedule C attached. • With Form 1040 the sole proprietorship must also file federal Schedule SE to calculate and pay the federal self employment tax. That tax has two parts: one (FICA) for contributions to Social Security and one for contributions to Medicare. • If a sole proprietorship has no employees, income tax filings and owner’s employment tax filings may be done using the sole proprietor’s Social Security Number as an identification number. The Social Security Number may also be used on the Minnesota M1 form when there are no employees. • If a sole proprietorship has employees, federal income tax filings for the business and federal employment tax filings for the sole proprietor and any employees must be made using a Federal Employer Identification Number (FEIN) which is available from the Internal Revenue Service at no cost by completing form SS4. In that
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