Freelancers, self employed, and solo business owners have different forms when filing their taxes. One of these forms is Schedule C, which you have to attach to your form 1040 when tax time is around the corner.
Here’s a simple explainer of what IRS Schedule C is for, who has to file one, the structure of the form and some tips and tricks that could save you money and time.
What is Schedule C?
Schedule C it’s a tax form that allows you to report your income and profits from a sole proprietorship corporation, a single member LLC or self employed.
You fill out a Schedule C at tax time and attach it to, or file it electronically with, your Form 1040. The title of IRS Schedule C is “Profit or Loss from Business.”
Who uses Schedule C?
- Schedule C is for sole proprietors — very often the choice of people who freelance, have a side gig, are independent contractors or operate a business by themselves. Sole proprietorships are unincorporated businesses that are owned and run by one person who is entitled to all of the profits and is responsible for all of the losses and liabilities.
- Schedule C is also for single-member limited liability corporations. A single-member LLC is a business entity owned by just one person. In most cases, there’s no distinction between the owner and the LLC for income tax purposes; the business’s income and profits go right onto the owner’s personal tax return.
- You may have to file a Schedule C even if you have a regular day job where you’re someone’s employee. So if you’re working full-time for, but you’re freelancing on the side, your self-employment means you’ll need to add the Schedule C to your to-do list.
- For tax purposes, the IRS says you’re in business if you’re pursuing your gig continually and regularly in order to make money.
How to fill Schedule C?
Schedule C is a place to report the revenue from your business, as well as all the types of expenses you incurred to run your business. Your business income minus your business expenses is your net profit (or loss). You then report your net profit as income on your Form 1040.
Here are some of the expenses you can include in your Schedule C:
You’ll need to fill it:
- Your income statement and balance sheet for the tax year.
- Receipts for your business expenses.
- Inventory records, if you have inventory.
- Mileage and other vehicle records if you used one for business.
Schedule C structure is:
- Part I is where you input your sales and report your cost of goods sold so you can see your gross profit.
- Part II is where you report your business expenses. There are over a dozen categories to help you stay organized, such as advertising, car and truck expenses, legal and professional services, rent, travel and meal expenses and other costs. You’ll add up all the expenses and subtract them from your gross profit to arrive at your net profit, which is taxable income for your personal tax return. If you have a net loss, it may be deductible on your personal tax return.
- Part III helps you calculate your cost of goods sold.
- Part IV is a place to report certain information on a vehicle if you have car- or truck-related business expenses.
- Part V is a place to list other business expenses that didn’t fit into the categories in Part II.
Advise and tips for Schedule C
- If you’re easily overwhelmed with everything about accounting, and tax filing isn’t your thing, we recommend you to hire a professional tax preparer.
- Maybe, you don’t have to fill entirely the Schedule C, it’s not that long anyways, only has two pages. However, there is a shorter version called C-EZ. It’s for people with business expenses up to $5.000 or less, people who used a cash accounting method and don’t have an inventory, employees or home office deductions or expenses.
- Maybe, you’ll need to fill more than one Schedule C. This will be the case if you have more than one aditional job, then, you’ll have to fill a Schedule C for every extra source of income.
- Make sure you take advantage of all the other tax deductions. Being self-employed can give you a bunch of tax deductions, being the newest the qualified business income deduction. If you apply, you might be able to deduct up to 20% of your total income in your tax return.
- Make estimated quarterly payment to avoid penalties. The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. That’s why employers withhold taxes from their employees paychecks. But, when you have to pay yourself, you might not withhold taxes. To avoid penalties for paying taxes late, you can’t make estimated quarterly payments to IRS.
File your taxes properly and beat taxes
Now you know it, if you make an activity that generate some extra income besides your full time job, most likely you’re in a business and you’ll need to file your taxes using schedule C.
Take advantage off all tax deductions the Law permits you to ease your tax burden. Also, don’t forget to file your taxes on time and avoid hefty penalties.
If you need help with your taxes, contact us and we’ll be more than delighted to give you all the information you need to earn taxes.