Are you a small business owner? If so, you may be looking for advice on filing your Schedule C. The IRS Schedule C is used by sole proprietors and single-owner LLCs to report your small business taxes and is part of your personal tax return.
We understand that business taxes can seem confusing, if not overwhelming. That’s why we’re here to help you with filing your Schedule C so you can stay in compliance and get back to business.
Is it Worth Filing a Schedule C?
As with other details surrounding your small business taxes, it’s unfortunately not a question of whether it’s “worth” filing your Schedule C. Schedule C is required for the following business types:
- Single-owner LLC
- Sole proprietor
The only other business type that might need Schedule C is when two married people organize a special type of partnership known as a Qualified Joint Venture. In this instance, the couple will use two Schedule C forms when filing small business taxes.
Using a Schedule C doesn’t exempt you from paying your quarterly estimated business taxes, of course. You’ll still need to make these regular estimated payments to avoid any penalties and fees when it comes time to file your return.
Your Schedule C will help determine your actual tax debt for the year, and you can then see how it compares with your quarterly estimates.
Can I File a Schedule C By Itself?
By itself, a Schedule C will not count as an acceptable tax filing form. Instead, a Schedule C must be submitted along with your personal income taxes using Form 1040. Your Schedule C can be submitted electronically with your personal income tax or stapled to your paper form.
To understand this better, consider the way that small business taxes are typically handled. Sole proprietorships and single-owner LLCs are legally considered pass-through entities.
This designation means that your business is not considered to be a taxable entity by itself. Instead, the profits from your business go directly to you, the owner. This passthrough means that you’ll report business income when you file your personal tax returns each year.
Your Schedule C, therefore, contains detailed information about your company’s financial performance for the relevant tax year, including:
- Cost of goods/supplies
This information will be used to calculate a net profit or loss, which will be recorded on Form 1040. Keep in mind that there is no minimum income requirement. All sole proprietors and single-owner LLCs will have to file Schedule C each tax year.
What Do I Need to File a Schedule C?
Filing your Schedule C isn’t complicated, though you’ll need some time to complete the details, as well as the information necessary to complete the forms properly. You can expect to need the following pieces of business data for your Schedule C:
- Your business income statement for the tax year
- Your company’s balance sheet for the tax year
- Receipts for any and all business expenses
- Inventory records (if applicable)
- Mileage records
If you operate more than one business, you’ll need a separate Schedule C for each one. This setup isn’t terribly common, of course, but if you receive income from multiple side hustles, you’ll have to report for each using its own Schedule C.
How Do I Submit a Schedule C?
Ultimately, you’ll use Schedule C to calculate your net profit or loss for the year. Your net business profit will then be recorded on Form 1040 as personal income. Calculating these figures isn’t challenging, but it can be a bit intimidating if you’re not used to doing your own business tax preparation. We’ll walk you through each step.
Step One: Gather Information About Your Business
Start by gathering as much information as you can about your business. This step is all about data. You’ll want to have records about items such as:
- Your business income for that tax year
- Cost of goods sold
- Any business expenses
Remember, you can calculate business expenses the same way you always would, including items such as office supplies, mileage, utilities, meals, and others.
You won’t have to show supporting documentation when filing your Schedule C, though anytime you’re dealing with the IRS, you’ll want to make sure to have receipts, business documents, and any other paperwork to authenticate your earnings and expenses for the relevant tax year.
Step Two: Calculate Your Gross Profit and Income
Now that you have your information gathered, you can start filling out your Schedule C. Under section I, you’ll report your sales and the cost of goods sold. Your expenses can be reported under section II.
But here, you’ll also calculate your gross profit from your business. To calculate your gross profit, you’ll first need to determine your net receipts. You can accomplish this through the following calculations:
- Gross sales – returns and allowances = net receipts
- Net receipts – the cost of goods sold = gross profit
Once you have your gross profit, you can simply add it to any other income you’ve received to calculate your total gross income.
Step Three: Deduct Your Business Expenses
Check your form, and you’ll see that deductible business expenses are listed on lines 8 through 27. These lines account for expenses such as:
- Section 179 expenses
- Employee benefits
- Legal and professional fees
- Office expenses
- Rental of vehicles or equipment
- Travel expenses
- Office supplies and furniture
- Wages and employment costs (e.g., benefits, unemployment insurance)
The more deductions you take, the greater your profits will be. But before you start taking deductions, be aware that there may be some stipulations associated with certain categories or expenses. If you’re ever in doubt, ask a tax professional.
Step Four: Deduct Your Home Office
Many small business owners work from home. If that applies to you, you’ll have two options for reporting the expense associated with your home office.
Option A allows you to take a deduction based on the total square footage of your home.
Using Form 8829, you’ll take the total area of your home, then determine the percentage occupied by your home office. So if your home is 1,000 square feet, and your office is 100 square feet, it occupies 10% of your home. This percentage can be included on line 30 of Schedule C.
Option B is simpler, allowing you to take a standard deduction on home business space up to 300 square feet.
The IRS allows you to take a $5 deduction per square foot on this space, to a maximum of $1500. This amount will also be reported on line 30 of Schedule C, and there is no separate form to fill out.
Just remember that to take this deduction, your home office space must be devoted to the regular and exclusive use of your business; otherwise, you cannot legally qualify for this deduction.
Step Five: Provide Other Details About Your Deductions
After this, you’ll complete parts IV and V of Schedule C. These are primarily information sections. Part IV asks for information about your vehicle relating to driving frequency, mileage, etc.
Part V will allow you to provide any additional details about other expenses you may be deducting. The total will be recorded on line 27 of Schedule C.
Step Six: Calculate Your Net Profit
You’re now ready to calculate your net income. To do this, simply follow the following steps:
- Enter your total expenses on Line 28
- Subtract Line 28 from Line 7. This total will give you your tentative profit on Line 29
- Subtract business expenses from your home (Line 30) to get net profit (Line 31)
Profit will be reported as personal income, but a business loss must be accounted for on lines 32a and 32b to determine your risk.
Step Seven: Add Schedule C to Form 1040
The net profit/loss from line 31 of Schedule C can now be recorded on Schedule 1, line 12 of Form 1040. You’ll then file Schedule C along with Form 1040 (and any other tax paperwork) when you file your personal income taxes.
Is a Schedule C the Same as a 1099?
A Schedule C is a very different form from a 1099. Form 1099 is used to indicate that a company has paid an employee as a contractor or independent employee. So if you employed these individuals during your tax year, you’ll be responsible for filling out Form 1099s and distributing them to these contractors.
However, Form 1099 may be necessary to fill out Schedule C. Any money you spent on employees would be classified as a business expense, and therefore should be included when filing your Schedule C.
Specifically, part II of your Schedule C will provide space for you to record business expenses, which would include any money you paid to contract employees in the past tax year.
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