Longtime self-employed individuals and sole proprietors are likely to be familiar with filing a Schedule C tax form. However, if you are recently self-employed you will need to familiarize yourself with this document.
Let’s take a closer look at the Schedule C tax form. We will define this document and what self-employed individuals should know about completing each part of it for accurate tax reporting purposes. We will also break down the differences between Form 1040 (Schedule C) and Form 1099-MISC and reveal if it’s still possible to file using Schedule C-EZ.
What is Schedule C (Form 1040)?
How does the IRS define Schedule C (Form 1040)? The Schedule C tax form is used to report income or loss from a business that you operated or a profession you practiced as a sole proprietor. Essentially, if you earned or lost money in your business and operate as a sole proprietorship you will need to file Schedule C for tax reporting purposes.
Who Needs to File Schedule C?
How do you know if you, and the activities you pursued with your business, are eligible to file a Schedule C tax form? In determining if an activity qualifies as a business, the IRS states that one would file Schedule C for the following reasons:
- Your primary purpose for engaging in the activity is for income or profit.
- You are involved in the activity with continuity and regularity.
Can other entity formations file a Schedule C tax form? Only sole proprietors and single-member limited liability companies (LLCs) may file Schedule C. Sole proprietorships are unincorporated businesses often run by individuals that wish to be self-employed workers or freelancers. Sole proprietors are responsible for paying taxes on the business’ profits, reporting all income on the owner’s personal income tax return, and must pay self-employment taxes.
If you are the sole owner (often referred to as a member) of an LLC, then you may structure the entity as a single-member LLC. This means one member runs and operates the business. As such, the business’s income and profits will go onto the owner’s personal tax return. This is because there is no distinction between the owner and the LLC in regard to income tax purposes.
Which entities cannot file a Schedule C tax form? If you are incorporated as a C Corporation or S Corporation, you would not be eligible to file Schedule C.
Filing Schedule C Taxes: Step-by-Step Guide
Schedule C (Form 1040), under the headline Profit or Loss From Business, is broken down into five parts.
First, complete the opening regarding your personal information.
1. Business Information
This includes the name of the proprietor and the principal business with business name and address. You may write in your social security number (SSN) or your employer identification number (EIN). An EIN is a nine-digit number that may be used in lieu of an SSN to identify a business on tax documents. You may obtain it by filing for an EIN directly with the IRS. If you incorporate the business, the IRS will also issue you an EIN.
Then, fill in the section on your accounting method. Check yes or no on a series of questions regarding your participation in the operation of the business and if you made any payments this year that would require you to file Form 1099-MISC. (We will share more about whether Schedule C and Form 1099-MISC share any similarities in a bit.)
After completing the opening, you will notice the rest of the Schedule C tax form breaks down into five parts:
- Income
- Expenses
- Cost of Goods Sold
- Information on Your Vehicle
- Other Expenses
2. Income Reporting
There are seven lines in part one that calculate your gross profit and detail the income of the business.
This includes gross receipts or sales, returns and allowances, and cost of goods sold. You may also tally in additional income, including federal and state gasoline, fuel tax credit, or refunds.
3. Deductible Business Expenses
Part II is a bit more detailed in your Schedule C tax form. Here you will report your business expenses. Some of these may include expenses as they pertain to advertising, employee benefit programs, insurance (other than health), pension and profit-sharing plans, travel, repairs and maintenance, and additional expense categories.
Add lines 8 through 27a. This will determine the total business expenses. Please note that expenses for business use of your home may only be listed on line 30 of Schedule C. You may attach Form 8829 with the headline Expenses for Business Use of Your Home and may not report these expenses elsewhere.
Subtract line 28 from line 7. This subtracts your total business expenses from your gross profit. You are then able to calculate your net profit or net loss. This is taxable income for your personal tax return.
4. Net Profit or Loss Calculation
The remaining three parts of Schedule C are not necessary to complete for every person filing Schedule C. Complete Part III if there are a purchase of inventory throughout the year and to calculate the cost of goods sold.
How Schedule C Impacts Self-Employment Taxes
Schedule C is a tax form used by sole proprietors and single-member LLCs to report their business income and expenses to the IRS. It plays a significant role in calculating self-employment taxes because it determines the net profit or loss from the business. This net profit is then used to calculate the self-employment tax owed.
Are Form 1040 and Form 1099-MISC the Same?
Earlier, we mentioned that there is a question asked on Schedule C about whether you made any payments this year that require you to file Form 1099-MISC. Would it be a safe assumption to think Schedule C is the same as Form 1099-MISC?
The answer is no, Form 1040 and Form 1099-MISC are not the same. Form 1040 is the main tax return form that individuals use to report their income, deductions, and tax liabilities to the IRS. In contrast, Form 1099-MISC is used to report income received from freelance work, contract jobs, or other non-employee compensation. If you receive a 1099-MISC, you’ll report that income on your Form 1040, typically using Schedule C to calculate net profit and self-employment tax.
Can I Still File Using Schedule C-EZ?
Longtime Schedule C filers may recall a simplified version of Schedule C known as Schedule C-EZ. This form only factored in three parts for tax reporting and determining the net profit from business.
However, this form is no longer available to sole proprietors. The last year one could file using Schedule C-EZ was in 2018. As of 2019 until today, filers may only file using Schedule C.
Do You Still Have Questions?
You may still have questions about reporting self-employment taxes or additional tax deductions for your business.
While we personally cannot provide tax advice, our recommendation is to work alongside a trusted tax professional, CPA, or legal professional. They may provide you with extra guidance and assist in filing and better understanding Schedule C.