Final answer:
Sole proprietors must report all operating and investment income on their individual tax returns, and they are also responsible for paying self-employment taxes. Their business and personal finances are not legally separate, and they have unlimited liability.
Step-by-step explanation:
Do sole proprietors have to report ALL operating and investment income for the year on their individual tax return? Yes, sole proprietors must report all operating and investment income on their individual tax returns. Sole proprietorships are not separate legal entities from their owners; therefore, all income and losses are passed through to the individual's personal tax return. The owner reports business income and expenses on Schedule C (Form 1040) and is taxed at their individual tax rates.
In addition to income tax, sole proprietors are also responsible for paying self-employment taxes, which cover Social Security and Medicare, and may be responsible for other taxes depending on state regulations. Sole proprietors have unlimited liability, meaning personal assets could be at risk if the business incurs debts or legal obligations. This differs from corporations where the business is a separate legal entity providing limited liability protection to its owners.