A sole proprietor is taxed on what type of income?

A sole proprietor is taxed on ordinary income, which encompasses all profits earned from the business after deducting allowable business expenses. In the context of taxation, ordinary income refers to income received by a business for which the services or products provided are typically taxed as regular income within the current tax rate brackets.

This means that after calculating the total revenue from the business, any costs associated with running the business—such as materials, labor, and other necessary expenses—are subtracted to determine the net income. This net income is then reported on the individual's personal tax return.

Understanding ordinary income is key because it forms the basis for how sole proprietors report their earnings and pay taxes, differentiating it from other forms of income or revenue that might not directly relate to the profits of the business. Other options, such as pass-through wages, would imply earnings from employment rather than from the operations of a sole proprietorship, while cost plus fee and gross revenues don't adequately capture the taxable income concept under sole proprietorship taxation.