What Is Schedule C (IRS Form 1040)?
If you are self-employed as a sole proprietor or a single-member LLC and generate income as a freelancer or small business, you'll use the Schedule C form to report your business income throughout the year. This form helps track the income that your business generated throughout the year and the expenses that your business incurred so that you can figure out how much you owe the IRS in self-employment taxes.
In this tax guide, we'll cover how to file taxes on your self-employment income and provide instructions for Schedule C.
Who Files a Schedule C Form?
The Schedule C tax form ("Profit or Loss From Business") was created by the IRS for anyone who earns money as a sole proprietor or single-member LLC. If you do any freelancing or work as an independent contractor, you will use Schedule C to record your net profit or net losses from your business. This stands if you freelance full time or work a traditional full-time job and only contract a few hours each year on the side.
Some professionals who work as independent contractors wonder if they would be considered a sole proprietor. According to the United States Small Business Administration (SBA), a sole proprietorship means there are no differences between you, the business owner, and the business itself. There is no formal process to begin a sole proprietorship. It's the default option for anyone starting a business unless they choose to form another type of business, such as a single-member LLC. If you do any freelance activity, you might already have a sole proprietor business without even realizing it.
Self-employed people who do not need to fill out this form are those who have incorporated their business as a C corporation or an S corporation. Additionally, if the business is farming, you will need to fill out a form known as Schedule F.
What Is the Minimum Income to File Schedule C?
It is important to note that there is no minimum income that requires you to fill out Schedule C. As long as you earned any income as a sole proprietor over the year, you need to fill out this form to declare your full income to the IRS at tax time.
Note that there is a $400 minimum income requirement when it comes to having to pay self-employment taxes. If you made less than that or even had a loss from your self-employment income, it may be beneficial to look into Schedule SE (Form 1040 or 1040-SR) to see if you qualify for what is called an "optional method." An optional method may give you credit toward your Social Security coverage or increase your earned income credit.
1099 vs. Schedule C
When people begin working on a self-employed basis, they often hear about two forms used in the tax process: 1099 and Schedule C. Although both forms play important roles in taxation for independent contractors and freelancers, they don't complete the same job.
The 1099-NEC (previously 1099-MISC) is filled out by any business that hires outside workers, such as freelancers, to complete a job for them. This form declares their wages of $600 or more. The business will send one copy of the form to the IRS and the other one to the worker. On the other hand, Schedule C is filled out by the contractor to declare all their income from their sole proprietorship and then sent to the IRS with their tax payments.
How to Fill Out a Schedule C Form
Schedule C focuses on quantifying the profits and expenses you incurred through your business activity. To fill out this form, you'll need to gather some important information. You will want to have:
- Your gross income
- Your balance sheet
- Any receipts you have from business expenses
- Records for any of your inventory
- Details for any deductions you plan to take (e.g., how much of your home you used for business purposes so that you can deduct a home office)
You'll notice there are five parts to the form:
- Part I focuses on finding your gross profit.
- Part II explores all of your business expenses.
- Part III looks at the cost of goods sold (COGS).
- Part IV will detail vehicle usage, such as truck expenses.
- Part V is your place to record any business expenses that don't fit in earlier parts of the form.
Schedule C Form Best Practices
Given the importance of the form Schedule C when running a business, professionals want to make sure they navigate the process correctly. No one wants to spend unnecessary time filling out tax paperwork, nor do they want to risk misfiling their taxes and receiving penalties or incurring other costs. Here are six best practices that can help you successfully fill out your paperwork.
Use a Tax Software
Many professionals find that running their business consumes their time and energy. Learning how to fill out tax forms only adds one more source of stress. Schedule C can require various information, and no one wants to input the data incorrectly. However, tax software can be the solution. These programs walk you through each step, help you gather the necessary information, and then fill in the information correctly so that you can file your taxes with confidence.
Fill Out More Than One Schedule C (If Needed)
Those who operate more than one sole proprietorship will need to fill out more than one Schedule C. The IRS requires business professionals to include a separate form for each business they own. This means carefully tracking your business expenses for each one. You may find some common costs between the two businesses, such as an internet connection bill or leasing an office space. If one business uses more time and a larger portion of your resources, you want your claimed business expenses to reflect this reality.
Use Schedule C-EZ (for Tax Years Before 2019)
Schedule C-EZ was a simplified version of form Schedule C that allowed people who fit certain criteria to fill out their form faster and easier. To meet the eligibility requirements of this version of the form, you must:
- Make less than $5,000 from the business
- Have a net profit for your business
- Not hold inventory for the business throughout the year
- Not need to claim a deduction for your home office
- Not have employees
- Only have one sole proprietorship
However, this form was discontinued, and even those with this type of small sole proprietorship need to use the regular Schedule C.
Measure Your Home Office or Work Space
Some business expenses are considered deductible for the IRS Schedule C form. If you use a room in your home exclusively for your business and have it set up as a home office space, you can claim the portion of your home expenses that go toward your business as a business expense. However, to successfully do this, you need to know the size of the room. Measuring the room can help you determine the amount you can claim on your tax form.
Utilized Additional Tax Deductions
To minimize your tax burden and maximize any potential income tax return you receive, you'll want to take advantage of any other potential tax deductions you're eligible for. This can decrease the income tax you need to pay. Before you deduct your business expenses, you must also determine your gross profit. Your gross profit is calculated by subtracting the cost of goods sold from your gross receipts. If you include a particular expense in your calculations for the cost of goods sold, you can't also deduct it as a business expense.
Some common tax deductions available for contractors are:
- Using your car for your business
- Using part of your home for business purposes
- Paying for any employees
- Taxes you pay to others, such as state taxes, federal taxes, or foreign taxes
- Certain office supplies
If you have other expenses you believe you can deduct, seek tax advice from qualified professionals.
Make Estimated Quarterly Payments
For those who are self-employed, you'll need to pay self-employment taxes. This is because you don't have an employer who pays or deducts taxes, such as Social Security or Medicare taxes, for you. Therefore, for tax purposes, you're responsible for these payments. Since taxes don't come out of your paycheck, you need to pay the IRS four times a year for quarterly taxes.
To file your quarterly taxes, you need to estimate your likely tax burden based on your income from prior years and pay it on the quarterly tax days. Paying estimated quarterly taxes will help you avoid having a large tax bill at the end of the year. It'll also help you avoid penalties for not paying taxes throughout the year.
Manage Your Tax Forms and Accounting With Skynova
To help your business manage expenses associated with your Schedule C, you need to keep careful track of your net income and your office expenses so that you can determine your taxable income and minimize your tax liability.
At Skynova, we want to make running a business easier. That's why we offer a variety of templates that can help you better track expenses and prepare for your small business taxes. Explore the templates we offer along with our accounting software to see how they might help your business thrive.