There are always countless tax forms to deal with, especially if you are a freelancer, have a side gig, or are a small business owner.
One of the most important forms you will need to deal with as an independent contractor, freelance, or small business owner is the IRS Schedule C form.
It is mandatory to file a Schedule C form every tax year with your other tax return form. Therefore, it is crucial to understand what it is all about and how to file it correctly.
This guide explains all this in detail to ensure you have an easy time dealing with the Schedule C tax form.
What is the Schedule C Tax Form?
The Schedule C tax form is part of IRS form 1040. You have to fill and attach it or submit it electronically together with form 1040 when filing taxes.
Independent workers use schedule C for income tax purposes, and it reports profit and loss for the tax year.
The IRS uses the information you provide to determine a business's net profit for the year and, hence, taxable income. Additionally, the tax authority can use it to figure out other important things like the tax refunds they owe you.
Since the Schedule C form reports all the business expenses for the tax year, it also makes it easy to determine deductible business expenses for tax purposes and to reduce your tax bill.
Who Should File the Schedule C Tax Form?
There are three broad categories of businesses that have to file a schedule form: single-member limited liability corporations (LLCs), sole proprietorships, and employee side gigs.
1. Single-member LLC
A single-member LLC is owned by one person but registered as a corporation with limited liabilities. Unlike other corporation types, there is no distinction between the LLC and the owner ,when filing taxes.
Therefore, any business income and expenses are incorporated with the owner's personal tax return hence the need to file a Schedule C form. With a single-member LLC, you will not have to file separate taxes for your business.
2. Sole proprietorships
A sole proprietorship is a business that is not incorporated and is run by an individual. The business owner takes all the profits and is responsible for all the business expenses and liabilities.
Most freelancers and independent contractors fall in this category. They will use Schedule C to report all business income and expenditures to calculate net profit or loss to determine how much to pay in self-employment tax or income tax.
3. Employees side gigs
Employees that are part or full-time employed but have side gigs will also need to file the Schedule C to report this self-employment income. They also need to pay self-employment tax for these earnings like freelancers and independent contractors.
Side gigs have to pay taxes separate from when you pay based on your income as an employee, as the IRS treats them as separate entities.
What Amount of Self-Employment Income is Required to File a Schedule C Tax Form?
The IRS does not have a minimum amount required to file a Schedule C form. The form is mandatory for self-employed individuals regardless of how much net profit or loss they make from their business in the tax year.
However, filing this form does not obligate you to pay self-employment taxes as there are other conditions you have to meet to get this tax obligation. For example, the IRS will only require a self-employed individual to pay a tax for self-employment if their business income for the year is over $400.
That said, you will still need to report all your income when filing a personal tax return, even if your earnings do not meet the $400 threshold.
How Many Schedule C Forms Do You Need to File?
Whether you need to file one or several Schedule C forms depends on your specific situation as a self-employed individual.
Sole proprietors that run several independent businesses will have to file Schedule C forms for each business individually. A separate form is necessary since you have to track business expenses and income for each establishment separately. For example, if you have a retail store and are also a part-time Uber driver, you must file a Schedule C form for each business.
However, if you have several businesses but run them under one sole proprietorship or LLC entity, you can include all the income and expenses from the businesses under one Schedule C form. Here you will file the Schedule C form for your sole proprietorship and not for the individual entities under it. Things can sometimes be a little confusing in such a situation, so it is a good idea to talk to a tax professional.
While IRS allows for a married couple to do joint filing, if a spouse is self-employed in the same line of business as you but their income and deductions are unrelated to yours, they have to file separate Schedule C forms.
There are many other situations where you might need to file more than one Schedule C, and you should seek tax advice from a tax expert if you are not sure.
How to File a Schedule C Tax Form
Filing a Schedule C form should be relatively straightforward, provided you have all the information and relevant documents, such as a business income statement. Therefore, the first step in filing the form is to gather all the information you will need.
What information do you need?
- Business income statement
- Balance sheet for teh tax year
- Business expense receipts
- Mileage and other business vehicle travel expenses like maintenance costs
- Inventory records
Filling Out the Schedule C Form
1. Part I: The first part is the income section, and this is where you will record all your sales and gross receipts. You also record the cost of goods sold, which allows you to determine your gross profit.
2. Part II: All business expenses are tallied on the second part of the form. Here the IRS provides some instructions that clearly outline the expenses to include. Once you add all the expenses, you can subtract them from the gross profit to determine the business's net profit. If you get a net loss, it might be deductible from your taxable income.
3. Part III: The third part is not as detailed as the first two, and its only purpose is to help you calculate the cost of goods sold to use for gross profit calculation in part I.
4. Part IV: This section is where you will report any expenses and other information related to the vehicles you use for your business as they are a tax-deductible entry that can lower your income tax.
5. Part V: All other business expenses that do not qualify for inclusion on the second part will go to part V. These miscellaneous expenses can also reduce your taxable income, so you should not overlook them.
Is Schedule C the Same as the 1099 Form?
Although freelancers and independent contractors use 1099 and Schedule C forms to file a personal tax return, they are not the same.
Clients and businesses use the form 1099s to report payments to an independent contractor or freelancer that are over $600. The employer prepares these forms and sends copies to both the freelancer/independent contractor and the IRS.
Schedule C forms are prepared by freelancers, sole proprietors, or small business owners to report profit and loss for the year, which is essential for determining gross income and other things like your tax refund.
Both forms are essential for tax preparation, and most self-employed individuals will use the two as their primary source of information when filing income tax.
Schedule C vs. Schedule C-EZ
The Schedule C-EZ is a shorter abbreviated version of the IRS Schedule C form. This form is meant for small businesses, so not everyone can report business income using Schedule C-EZ.
Here are the conditions you have to meet to file a tax return using the Schedule C-EZ.
- Business expenses for the tax year have to be under $5,000
- Business should not be set up as a legal business entity such as a corporation
- Cash should be the predominant accounting method for the business
- The business should not make a net loss in the year
- The business has no employee within the tax year
- You did not maintain any inventory or stick for the tax year
- It is only one business
- The sole proprietor is not claiming home office deductions
Note: The Schedule C-EZ form is no longer available, but you can still use it to file taxes for tax years before 2019. After this tax period, small businesses should file anything else using the Schedule C form.
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The IRS Schedule C form can be pretty intimidating when looking at it for the first time, as there seem to be endless sections and lines to fill out. However, filling out the form is much easier than it might appear.
All you need to do is ensure you keep good track of all your income and expenses. With a good understanding of what the form is all about and this post to guide you on how to fill out the form, tax filling should be hassle-free.
That said, you can always use the services of a tax preparer if you have difficulties understanding the form or talk to tax professionals for tax advice on how best to handle this and any other IRS form.