If you are an independent worker or are self-employed, you might have come across the term Schedule C. Read this article to find out what is Schedule C and how you can file for it.
On the off chance that you work as a freelancer, have a side gig, maintain a private venture, or are self-employed, it is probable you need to round out an IRS Schedule C to report how much cash you made or lost in your business. This structure, featured “Benefit or Loss From Business (Sole Proprietorship),” should be finished and included with your income expense form in the event that you had self-employment income. Much of the time, individuals who round out Schedule C will likewise need to round out Schedule SE, “Self-Employment Tax.” Here’s a basic explainer of what is Schedule C, who needs to file one, and a few hints and deceives that could set aside cash and time. So let us head straight into the article to learn more.
What is schedule C?
Any individual who works a business as a sole owner should round out Schedule C when recording their yearly tax return. Schedule C goes with the principle tax return form, 1040, for citizens who pay taxes and are required to report a profit or misfortune from their business. This schedule gets some information about the citizen’s business name, product or administration, business address, accounting technique, net receipts or sales, and cost of merchandise sold. This form is likewise where business proprietors report their assessment deductible business costs, like publicizing, vehicle and truck costs, commissions and charges, supplies, utilities, home office costs, and some more. A business cost should be customary and important to be recorded as a tax deduction on Schedule C.
Small business owners likewise use Schedule C to take a deduction for the utilization of a personal vehicle for business purposes and to report when it was set in help for business purposes and the quantity of miles it was driven for business use. Utilizing the passages on Schedule C, the citizen ascertains the business’ net profit or shortfall for income tax purposes. This figure at that point is moved to form 1040 and is utilized in ascertaining the citizen’s general tax liability for the year. Citizens who work more than one sole proprietorship should record a different Schedule C for every business.
Who has to file a Schedule C?
Schedule C is for two sorts of businesses: sole owners or single-member limitted liability corporations (LLCs). Schedule C is not for C companies or S partnerships.
- Sole proprietorships are unincorporated businesses that are possessed and run by one individual who is entitled to each one of the profits and is liable for each one of the misfortunes and liabilities. They are frequently the selection of individuals who freelance, have a side gig, are self-employed entities or work a business without anyone else.
- Single-member LLCs are business elements claimed by only one individual. Much of the time, there’s no differentiation between the proprietor and the LLC for income tax purposes; the business’ income and profits go right onto the proprietor’s very own personal tax return.
You may need to document a Schedule C regardless of whether you have a standard day job where you are somebody’s worker. So in case you’re freelancing as a side job, your self-employment implies that you will presumably have to add the Schedule C to your plan for the day.
- For tax purposes, the IRS says you are in business in case you are seeking after your gig constantly and consistently to bring in cash.
- In the event that your side gig is farming, you may have to round out Schedule F.
- In the event that your side gig includes rental income or royalties, you may have to fill out Schedule E.
Do I need to file Schedule C?
In the event that you are a sole owner, you will probably have to file Schedule C — and you will have to document a different one for every business on the off chance that you have multiple. You are a sole proprietor if:
- Your business is not another lawful business entity, like a partnership or a corporation
- You do not have a boss or supervisor to answer to, who keeps down a part of your salary for taxes
- The main reason for your business action is to bring in cash
- You conduct business routinely, and it is more than just a hobby
- You are a single member LLC that has not chosen to be taxed as an S organization
What is a Schedule C used for?
Use Schedule C (Form 1040) to report income or misfortune from a business you managed or a profession where you were a sole owner. An activity qualifies as a business if your main role for taking part in the action is for income or profit, and you are engaged in the activity with progression and consistency. For instance, a sporadic activity, not-for-profit work, or a pastime does not qualify as a business. To report income from a non-business movement, see the directions for Schedule 1 (Form 1040), line 8. Additionally, use Schedule C to report (a) wages and costs you had as a legal worker, (b) income and deductions of certain certified joint ventures, and (c) certain sums appeared on a Form 1099, for example, Form 1099-MISC, Form 1099-NEC, and Form 1099-K.
How to fill a Schedule C?
You can find a PDF version of the Schedule C form on the official IRS website. Before you fill it out, you will need the following:
- The IRS’s instructions for Schedule C
- Mileage records
- Your SSN (Social Security Number)
- Your balance sheet for the year
- Your EIN (Employer Identification Number) — if you have one
- An inventory count and valuation (if you sell products)
- An income statement for the tax year
- Receipts or statements for any business purchases—including smaller items, like food expenses, and big-ticket items like equipment, cars, or buildings
The form consists of a total of six parts, with five main ones being as follows:
- Part I is where you compare your sales and report your expenses of goods sold, so you can see your gross profit.
- Part II is where you document your business expenses. There are over twelve classes to help you stay coordinated, like publicizing, car and truck costs, legal and proficient administrations, lease, travel and meal costs and different expenses. The guidelines for Schedule C clarify the standards for each kind of cost. You will include each one of the costs and deduct them from your gross profit to come up with your net profit, which is taxable income on your personal tax return. On the off chance that you have a total deficit, it could be deductible on your personal tax return.
- Part III assists you in calculating your cost of goods sold.
- Part IV is where you report particular information on a vehicle if you have car, or truck-related business expenses.
- Part V is where you list other business expenses that did not fit into the categories in Part II.
Although we are going to take you through the six sections of Schedule C, you will still need the official instructions to find the Principal Activity Code for your business. Let us look at these in slightly more detail:
The top portion of Schedule C is not named mathematically, yet rather has ten separate lettered boxes: A through J. A large portion of this is quite self-explanatory, requiring essential information like your name and business address. Possibly confusing boxes can be:
- A-B: In Box A, write a short one-line description about the kind of business you are operating, and the relevant code (found in the IRS instructions).
- F: Document your accounting technique. Typically, small business owners use cash accounting.
- G: “Material participation” usually implies if you worked in your business. If you did, check “Yes.” If you are unsure, talk to an expert.
- H: Check the box if this is your first year in business.
- I-J: If you paid subcontractors or individuals $600 or more for work in your business, you will be required to file Form 1099. If you answer “Yes” to I, you also need to answer “Yes” to J, and file a 1099.
- Social Security Number (SSN): Even if you use an EIN for business purposes, you still need to enter your SSN. If you do use an EIN, enter it in Box D.
This is where Schedule C starts to get more like a tax form, and less direct. Lines 3, 5 and 7 can be taken as instructions, but for the rest, here is a quick translation.
The form says: Gross receipts or sales. See directions for Line 1 and check the box if this income was reported to you on Form W-2 and the “statutory employee” box on that form was checked.
Translation: Complete income, excluding sales tax, goes here. This is your gross income — do not deduct discounts or returns. Statutory employees are self-employed entities who are treated as employees, which means their “employers” retain taxes. They additionally use Schedule C, which is the reason they get a reference here. On the off chance that you are both a sole owner and a statutory employee, you will need to fill in two Schedule Cs — one for every job. In the event that somebody you worked for sent you a Form 1099-NEC (rather than a Form W-2), all that implies is that you are not viewed as a worker for tax purposes. Income from Form 1099-NEC ought to be remembered for Line 1.
The form says: Returns and allowances
Translation: This is where you record the total amount issued in refunds for the tax year.
The form says: Cost of goods sold (from Line 42)
Translation: You need to compute the expense of products sold, as given on Line 42 (in Part 3 of Schedule C). Put a pin in this one until you reach Line 42, at that point return and fill this in. On the off chance that you do not sell goods, and you did not subcontract any labor, enter 0 and proceed onward.
The form says: Other income, including federal or state gasoline or fuel tax credit or refund
Translation: This is the place where you record any auxiliary income, for example, interest from your business ledger, awards or grants, and tax credits for fuel. In the event that you do not have some other income, enter the gross income sum from Line 1.
Consistently, you may be enticed to go wild with business costs, since more costs mean less net profit (and along these lines a lower tax trouble). Be that as it may, you’re simply going to save 15-30 pennies for every dollar through cost claims, so do not take on pointless costs only for the tax discount — it is not worth it.
A large portion of Part 2 is self-explanatory, mentioning the sums spent on explicit business exercises — like publicizing, travel, meals, and pension plans. You ought to have the option to discover these numbers in your income explanation. Below, we will look at the more difficult sections.
The form says: Car and truck expenses (see instructions)
What you need to know: In case you are utilizing your own car for business, you have a decision: claim back the specific costs, or take a mile deduction. Whichever you pick, you should give proof to help your case. Mileage reports will be needed for the mile deduction and receipts for claiming exact costs.
The form says: Depletion
What you need to know: Depletion is a niche case, utilized by businesses in mining, quarrying or wood industries. Business proprietors in these fields can guarantee a deduction to represent spending (depleting) a portion of their item over the span of business. There are various standards for ascertaining consumption, contingent upon what material resource you are working with. On the off chance that you plan on claiming a depletion deduction, first get in touch with your accountant.
The form says: Depreciation and Section 179 expense deduction (not included in Part 3)
What you need to know: For the most part, you cannot deduct the full purchase cost of fixed resources — like buildings, vehicles, or hardware — in one year. What you can guarantee is the deterioration deduction for that year, more than quite a while. Yet, a few resources fit the bill for the Section 179 full deduction. This is a mind-boggling estimation, so get an accountant or tax proficient to deal with this one for you.
The form says: Office expense
What you need to know: Line 18 is only for postage and office supplies, such as stationery. Other office expenses are reported in Part 5.
The form says: Expenses for business use of your home
What you need to know: Numerous freelancers work from home. That implies a portion of your household charges — like heat and power — can be guaranteed as a business cost. The IRS has a specific meaning of what establishes a home office, so read the directions (C-9 to C-13) cautiously to ensure you qualify.
Part 3—Cost of Goods Sold
On the off chance that you sell items or subcontract, you will need to fill in Part 3. The vast majority of this segment is really direct, with unmistakably named demands, like the expense of materials or supplies. You can discover a large portion of this information on your income explanation. Line 33 is the only real exception. This is the place where you clarify how you esteemed your stock. Most independent ventures will utilize the Cost technique (in a real sense, the expense of procurement). In case you are utilizing cash accounting, this is the best way to esteem your stock. The other named choice is Lower of Cost or Market — contrasting the price you paid and the market value for the product, on a particular valuation date every year. This is an undeniably more convoluted, less famous technique. Remember that when you fill in Line 42, remember to return to Line 4 and enter the same number.
Part 4—Information on Your Vehicle
Is it accurate to say that you are claiming costs for a truck or vehicle (Line 9)? At that point you need to fill in Part 4. You will require mileage records to make a claim. Try not to attempt to guess or gauge — you need proof to back up your cost claim.
Part 5—Other Expenses
Actually like it says on the form, this segment is for any costs you did not report on Lines 8-26 or Line 30. Make sure to return to Line 27a and enter the total of all lines, remembering anything for Part 5.
How to file Schedule C on form 1040?
You can record Form 1040 and Schedule C a similar way you document the remainder of your tax forms, regardless of whether you like to do as such via mail or electronically. In the event that you record via mail, make certain to incorporate any fundamental payments with your form. Send it to your state’s IRS handling office, stamped on or before the deadline, which is normally April 15. In the event that you e-file your taxes, you can pay on the web, however make certain to submit before the deadline.
Is a 1099 the same as a Schedule C?
A form 1099 is not the same as a Schedule C form. A form 1099 is a tax form utilized by organizations to report payments they have made, other than customary wages, salaries or tips (which are accounted for through a W-2 form). On the off chance that a business gives you employment, however you do not work for that organization full time, at that point you are viewed as a specialist or project worker. You do not round out form 1099, that organization does, and it will incorporate the expenses it paid you on that form. It will at that point record the 1099 with the government, and give you a duplicate too, so you can do your own income tax return utilizing the figure given.
What is the minimum income to file Schedule C?
When it comes to filing Schedule C, there is no minimum income. All income and costs must be mentioned on the Schedule C, regardless of how little you earned. If you meet specific criteria, you may be able to file the Schedule C EZ instead. There is a minimum limit of $400 for paying self-employment tax. If your income is less than $400, you will not be required to pay that tax. But do not confuse that with not needing to report your self-employment income. You have to report all self-employment income.
What is a Schedule C-EZ?
A schedule C-EZ is a shorter version of Schedule C. This form is basically meant for very small businesses, and can only be used in place of Schedule C, when the following conditions are met:
- There is only one business.
- There are no employees.
- The business did not have a net loss.
- There was no deduction for business use of the proprietor’s home.
- The business’s expenses were not greater than $5,000 for the tax year.
- The business uses the cash method of accounting.
- There is no inventory.
There are certain common misconceptions that usually end up taking a lot of time. Typing errors in names and Social Security Numbers, mathematic errors, and missing the April 15th deadline are the mistakes that can be prevented without any difficulty. However, there are other misunderstandings also that might cause you to stumble.
“I only need to file one Schedule C”
In the gig economy, many sole owners work many self-employed jobs. What they probably will not know is that you should round out a different Schedule C for each different sort of work. For instance, on the off chance that you are in freelance sales, selling different items, every deal is considered “related work”, and you just need to record one Schedule C to cover all work of that kind. Notwithstanding, on the off chance that you additionally drive an Uber (at present viewed as a form of self-employment in the United States), you would separately need to report your profits and losses from that business. This likewise implies saving separate records for every job — including mileage records, office supplies, and fuel tax credits. In the event that you are a married couple, each with a different sole proprietorship, you cannot file on th same Schedule C — every individual is answerable for their own.
“I only earned X amount, so I don’t have to file”
All income and losses from your sole proprietorship or single-member LLC must be reported by filing a Schedule C form. There is a minimum limit of $400 for paying tax on your self-employment income — but there is no minimum for documenting any loss or profit on your business. Your self-employment income and business income are one and the same, unless you are filing a Schedule C form as a statutory employee.
“I lost money, so my business qualifies as a ‘hobby’”
There is another common misconception that in the event that you do not show a profit for two out of five years, your business is viewed as a side interest, and you do not have to document a Schedule C. This might be the case — however it also might not. Profit is just one factor in choosing if you are maintaining a business or going for a hobby. Your expectation to make a profit, keeping purposeful records, and the kind of business you run, would all be able to influence the IRS into classifying you as a true business, instead of a hobby. In case you are in doubt, converse with an expert to see where you stand. The lines, letters, numbers, and boxes can cause Schedule C to appear to be significantly more taxing than it truly is. In any case, when you get rolling, it is surprisingly pretty clear and direct — and, obviously, it generally assists with having organized and accurate records to work with. Whenever you are done, you will not need to consider Schedule C for an entire year.
Schedule C tips and tricks
- Most name-brand tax software providers sell versions that can prepare Schedule C. Despite the fact that you will probably need to buy the highest-end version to get Schedule C functionality, the cost of it might still turn out to be less than paying someone else to do your taxes.
- You may need to fill out more than one Schedule C. Keep in mind that you have to fill out one Schedule C per side gig. Therefore, if you have two side gigs, you will need to round out two Schedule C forms.
- Find out your home office’s square footage. In case you have a home office, some costs that are usually associated with maintenance and running, can probably be deducted if you are self-employed. For a home office space, the IRS offers a flat-rate deduction of $5 per square foot for up to 300 square feet. However, if a large percentage of your home’s square footage is dedicated to your home office and the costs, for example, utilities, etc., are high enough, and you are able to maintain and compare detailed records, there are chances that you might get a bigger deduction with the “regular” method.
- Be sure to take advantage of other tax deductions. Self-employment can help you achieve a lot of tax deductions, and one of the most recent is the qualified business income deduction. On the off chance that you qualify, you can deduct up to 20% of your business’s net income on your tax return. So you would have to clearly see and understand whether you can take this deduction.
- Make estimated quarterly tax payments to avoid penalties. Keep in mind that in the United States, taxes are a pay-as-you-go arrangement. As soon as you earn money, the IRS wants its cut. That is why employers withhold taxes from employee paychecks. However, when you are paying yourself, that will probably not be happening. You can make estimated quarterly payments to the IRS, in order to steer clear from late-payment penalties.
There are a couple of other more uncommon situations that require the utilization of Schedule C. These incorporate procuring wages and bringing about costs from being a legal worker, accepting income and taking deductions from certain certified joint ventures, and getting certain income given an account of Form 1099-MISC, Miscellaneous Income. Additionally, sole owners occupied with specific lines of business may need to record different forms notwithstanding Schedule C. For instance, landowners may have to document Schedule E to report rental income that is not dependent upon self-employment tax, and sole owners with a home office should record Form 8829 to claim a deduction for costs identified with the business utilization of their home.