For self-employed individuals, filling out an IRS Schedule C is necessary to report how much you earned or lost in your business. A self-employed individual must complete the form entitled "Profit or Loss From Business (Sole Proprietorship)," and include it with their income tax return.
The Schedule C: Profit or Loss From Business shows how much money you made or lost when you operated your own business as a sole proprietorship. Your business tax form reports how much of your income is taxable or whether you have a taxable loss.
What is Schedule C?
The Schedule C: Profit or Loss From Business (Sole Proprietorship) shows how much money you made or lost when you operated your own business. According to the form, you can find out how much of the income from your business is subject to tax or whether you have a tax loss.
There are five parts to Schedule C. Part I contains a list of your business's earnings and gross profit calculation. Your net profit or loss is calculated in Part II after you deduct all your business expenses. You report this amount on your tax return. Parts III through V are only necessary if your business requires you to purchase inventory, if you need to deduct car expenses, or if you have any other expense that is not listed in Part II.
The following business information is collected by Schedule C:
- Product or service activity
- Employer Identification Number (EIN) if applicable
- Accounting method
- Gross receipts or sales
- Cost of goods sold
- Business expenses
Who Should File a Schedule C Tax Form?
If you are self-employed and set up your business as a sole proprietorship, you should file Schedule C with your Form 1040.
In order for an activity to qualify as a business activity, it must be conducted regularly and continuously with the intent of making a profit. A Schedule C is not needed to report income from a hobby.
Schedule C is for two types of businesses: sole proprietorships and single-member limited liability companies (LLCs). Schedule C is not for C corporations or S corporations.
A sole proprietorship is an unincorporated business in which one person owns and operates it and is responsible for its profits, losses, and liabilities. Many people who freelance, have a side gig, are independent contractors or run their own business choose this option.
A single-member LLC is a business entity owned by just one person. There is generally no distinction between the business owner and the LLC for income tax purposes; the business's profits and income go straight to the owner's personal tax return.
Your business is a sole proprietorship if:
- You don't have another legal business entity such as a corporation or partnership
- You don't have a boss or manager who withholds tax money from your salary
- Your business exists to earn money
- Your business isn't just a hobby; it's a source of income
- You are an LLC with a single member and have not elected to be taxed as an S corporation
Even if you're employed by someone, you may need to file a Schedule C. In other words, if you freelance on the side, you need to file a Schedule C.
The IRS defines you as a business if you make money by pursuing your side hustle continuously and regularly.
Helpful Resource: Paying Taxes on a Side Hustle
What Is the Minimum Income to File Schedule C?
There is no minimum income requirement to file Schedule C. All income and expenses must be reported on Schedule C, regardless of how much you earn.
Depending on your circumstances - explained further below - you may be able to file the Schedule C EZ.
There is, however, a $400 minimum threshold for self-employment taxes. You won't have to pay this tax if you make less than $400. Do not assume, though, that you do not have to report your self-employment income. If you earn income from self-employment, you must report it.
How to fill out Schedule C
You will calculate the net profit or loss of a business based on the entries on Schedule C. The results are then transferred to Form 1040 and are used to calculate overall tax liability. If you operate more than one sole proprietorship, you must file a separate Schedule C for each one.
You'll need the following information available before you begin:
- A statement of income and balance for your business for the year
- Your business expenses receipts
- Inventory records, if applicable
- If you used a vehicle for business, the mileage and other records
Schedule C's upper part is not numbered; instead, it has ten numbered boxes: A through J. You need to provide basic information like your name and business address.
You may be confused by the following boxes:
A-B: In Box A, give a brief one-line description of what type of business you're in and the appropriate code (found in the IRS instructions).
F: Describe your accounting method. Cash accounting is commonly used by small businesses.
G: Generally, "material participation" means that you worked on your business. Assuming that you did, check "Yes." If you're uncertain, consult a tax professional.
H: Check this box if it's your first year in business.
I-J: If you have paid subcontractors or individuals $600 or more for work in your business, you must file Form 1099. Answering "yes" to I also means you must answer "yes" to J, and you must file a 1099.
SSN: Even if you use an EIN for business purposes, you must enter your SSN. Enter your EIN in Box D.
Part I - Income
This is where Schedule C starts to look like a tax form rather than a straightforward information document. There are clear instructions in lines 3, 5, and 7, but here are the instructions for the rest.
The total income, excluding sales tax, is reported here. Don't subtract your refunds or returns - this is your gross income.
In this field, you should put the total amount of refunds for the tax year.
You will need to figure out the cost of goods sold to enter on this line. This will be done on Line 42 in Part 3 of Schedule C. Hold on with this one and come back later when you get to Line 42.
Enter 0 if you did not sell any goods or subcontract any labor.
Any auxiliary income - like interest from your business bank account, grants, awards, and tax credits - can be recorded here. Enter the gross income amount from Line 1 if you do not have any other income.
Part 2 - Expenses
The majority of Part 2 consists of self-explanatory requests for amounts spent on business expenses, such as advertising, travel, business meals, and pension plans. Your income statement should provide you with these numbers.
Let's look at some of the more complicated segments.
You have two choices if you use your business vehicle for personal reasons: claim your actual expenses or take a mileage deduction. You must provide evidence that supports your claim, regardless of your choice. Mileage reports and receipts will be required for the mile deduction.
The use of depletion occurs in mining, quarrying, and the timber industry. A business in these fields can deduct the cost of using up (or depleting) some of its products.
According to the type of material resource you are working with, there are different rules for calculating depletion. Consult your accountant before claiming a depletion deduction.
Fixed assets, such as buildings, vehicles, and equipment, cannot usually be fully deducted in a single year. A deduction for depreciation can be claimed for several years, beginning in that year. However, some assets qualify for the full Section 179 deduction. Taking care of this calculation yourself is difficult, so hire an accountant or tax professional to assist you.
Line 18 is devoted to postage and office supplies, such as paper or ink. All other office expenses are reported in Part 5.
It is common for freelancers to work from home. Therefore, certain household expenses, such as electricity, can be claimed as business expenses. The IRS has a very specific definition of a home office, so please read the instructions (C-9 to C-13) carefully.
Part 3 - Costs of Goods Sold
Part 3 is required if you sell goods or subcontract. This section contains mostly straightforward requests, such as the cost of materials and supplies. Most of this information can be found on your income statement.
It is only line 33 that stands out. In this line, you explain how you value your inventory. The Cost method, which is the cost of purchase, is most often used by small businesses. This is the only way to value your inventory if you're using cash accounting. Another option is Lower of Cost or Market - where you compare the price you paid for an item with its market value on a particular date each year. That's a much more complex approach.
Helpful Resource: Cash vs Accrual Accounting
Don't forget to go back to Line 4 when you fill in Line 42.
Part 4 - Information on Your Vehicle
Do you wish to claim expenses for a truck or a car on Line 9? If so, fill out Part 4.
To make a claim, you will need to keep mileage records. Make sure you have evidence to support your expense claim. Don't guess or estimate!
Part 5 - Other Expenses
This section is intended for any expenses you did not report on Lines 8-26 or Line 30.
Be sure to go back to Line 27a and enter the total of all lines, including anything in Part 5.
How to Calculate Schedule C Income
It's relatively easy to calculate - start with the net profit (or less) and add back a few items, subtracting meals and entertainment.
A loss on the net income will be a negative number. You can also end up with a negative taxable income if your expenses total more than your income on line 28.
Net Profit (or Loss) (Line 31)
+ Plus Depletion (Line 12)
+ Plus Depreciation (Line 13)
– Minus Meals & Entertainment (Line 24B)
+ Plus Business Use of Home (Line 30)
= Qualifying Income
What happens if you don’t file Schedule C?
A tax audit can be triggered if you fail to include Schedule C or calculate your self-employment taxes on your return. Failure to file a tax return can lead to the IRS charging you with tax evasion. Failure to file a tax return for a year in which you owe the IRS is a federal crime, and the penalties can be severe -- up to $25,000 for each year you fail to do so.
Helpful Resource: What happens if you don't pay your taxes?
Tax evasion is also punishable by prison time. In the event the IRS can prove that you willfully failed to file a return in order to cheat the IRS out of taxes, you could be charged with a felony. This results in a potential prison sentence of five years and a fine of $100,000.
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