If you're self-employed, freelance, or run your own small business, chances are you need to file a Schedule C with your annual tax return. This important IRS form allows you to report income and expenses related to your self-employment or business.
While Schedule C may seem complex, having a solid understanding of what it entails and who needs to file can save you headaches and money come tax time. This comprehensive guide will cover everything you need to know, including:
Let's get started!
What is IRS Form Schedule C?
Schedule C, officially called "Form 1040 Schedule C", is a tax form used by the Internal Revenue Service to report income and expenses related to self-employment, sole proprietorships, freelancing, and other single-member LLCs.
This form allows you to calculate your net profit or loss from your business. You then transfer this number to your Form 1040 personal tax return to calculate how much tax you owe. Schedule C allows you to deduct valid business expenses, which reduces your net income and thus reduces your overall tax burden.
Some key things to know about Schedule C:
Used to report income and expenses from a sole proprietorship
Attached to your Form 1040 personal income tax return
Allows you to deduct business expenses before calculating net profit/loss
Completed annually to report your prior year's self-employment activity
Who Needs to File a Schedule C?
If you were self-employed or operated an unincorporated business in the last tax year, you likely need to file a Schedule C.
You need Schedule C if you earn income from any of the following sources:
Self-employment as a freelancer or independent contractor
Sole proprietorship
Single member LLC (when you're the only member)
Side business or gig work in addition to a regular job
Money made from a hobby that qualifies as a for-profit business
Common examples of sole proprietors who need to file Schedule C include consultants, tattoo artists, gig drivers, photographers, Amazon sellers, artists who sell their work, handymen, and more.
You do not need to file Schedule C if your business is set up as a partnership, multi-member LLC, S corporation, or C corporation. These entities would file a different business tax return.
How to Fill Out IRS Form Schedule C
While Schedule C may look intimidating, it's organized into clear sections that walk you through reporting your income and expenses. Here's a step-by-step guide:
Identify your main business activity and enter it at the top along with your Employer ID Number (EIN) if you have one.
Fill in your business name and address.
Check the box indicating you are filing a 1040 Schedule C for a sole proprietorship.
Enter your total gross income from your business activity for the year. This includes income reported on 1099 forms, cash/check payments, and barter transactions.
Enter any returns or refunds you issued to customers if applicable. This reduces your gross income.
Calculate your gross profit by subtracting returns/refunds from gross income.
Enter your total business expenses for the year, organized by category (see next section for details).
Add up all business expenses and enter the total under "Total expenses."
To calculate your net profit or loss, subtract total expenses from gross profit.
Transfer this net profit/loss number to your Form 1040.
Deductible Business Expenses You Can Claim
One of the biggest advantages of filing Schedule C is that you can deduct a wide variety of business expenses before calculating your net business income. But what expenses actually qualify as deductible?
Here are some of the most common deductible business expenses for Schedule C filers:
Advertising costs - This includes print ads, online ads, business cards, etc.
Car and truck expenses - You can deduct mileage, gas, maintenance, insurance, and other car expenses used for business purposes.
Contract labor - Payments made to freelancers, temporary workers, and independent contractors.
Insurance premiums - Such as liability and malpractice insurance.
Interest you pay on business loans and credit cards used solely for your business.
Legal and professional service fees - Including lawyers, accountants, consultants, designers, etc.
Office expenses - Purchases like office supplies, postage, printing, software, etc.
Rent for business property and utilities.
Repairs and maintenance costs for business equipment and property.
Supplies - Items purchased and used during the tax year to run your business.
Tax preparation fees specifically for preparing your business taxes.
Travel and meals - Hotel, airfare, and 50% of meals for business trips.
Depreciation on assets like vehicles, computers, furniture, and equipment.
The key is that expenses must be considered both ordinary (common for your trade or business) and necessary (important and appropriate for your business) to be deductible. Keep detailed records such as receipts and mileage logs.
Valuable Schedule C Tax Tips & Tricks
Follow these tips to maximize your potential tax savings when filing Schedule C:
Open a dedicated business bank account to easily track income and expenses.
Take advantage of the home office deduction if you do any work from home.
Deduct the business use percentage of your cell phone, internet, etc.
Claim vehicle expenses using the standard IRS mileage rate or actual expenses.
Depreciate big ticket items like equipment over 5-7 years.
Contribute to a SEP IRA or Solo 401k to lower your taxable income.
Consider hiring a bookkeeper or accountant to prepare your Schedule C accurately and efficiently. Their fees are deductible!
Common Schedule C Frequently Asked Questions
If you're new to Schedule C, chances are you still have some questions. Here are answers to some frequently asked questions:
What if I have multiple businesses? Do I need to file multiple Schedule Cs?
If you operate more than one sole proprietorship, you should file a separate Schedule C for each business. Add up the totals from each Schedule C and transfer to your Form 1040.
When does my Schedule C need to be filed by?
The due date for filing Schedule C is the same as your Form 1040 personal tax return, which is typically April 15 for most taxpayers.
Should I mail my Schedule C or e-file it?
These days, most taxpayers e-file their Schedule C along with their Form 1040 for faster processing and to minimize errors. But you can still file by mail if preferred.
Do I have to send receipts for my business expenses to the IRS?
You should keep receipts and documentation in case of an audit, but do not need to send them with your tax return.
Can I deduct start-up costs for a new business on Schedule C?
Unfortunately start-up costs cannot be fully deducted in the year they occur. But you may be able to deduct up to $5,000 in start-up costs as amortization over 15 years.
The Takeaway On Schedule C
I hope this guide provided you with clarity on who needs to file Schedule C and how to properly report your self-employment income and expenses. While Schedule C adds complexity to your tax return, taking the time to file accurately can help maximize your deductions and tax savings! Just be sure to keep detailed records to support the business expenses you claim. And if in doubt, the tax experts at United Tax would be happy to discuss your tax situation and add value where ever possible.
