If you freelance, have a side gig, run a small business or otherwise work for yourself, you may need to fill out IRS Schedule C at tax time. Here’s a simple explainer of what IRS Schedule C is for, who has to file one and some tips and tricks that could save money and time.
What is Schedule C?
IRS Schedule C is a tax form for reporting your revenue and profit from a sole proprietorship or single-member limited liability corporation. 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 needs to file 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.
- This schedule is not for C corporations or S corporations, however. So if you’ve incorporated your business that way, you’ll need to use different forms.
- 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 “The Man,” 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.
- If your side gig is farming, you may need to fill out Schedule F.
- If your side gig involves rental income or royalties, you may need to fill out Schedule E.
How to fill out 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’s some stuff you’ll need:
- 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.
And here’s the basic structure of Schedule C:
- Part I is where you tally 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. The instructions for Schedule C explain the rules for each type of expense. 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.
Schedule C tips and tricks
- Most name-brand tax software providers sell versions that can prepare Schedule C. Although you’ll likely need to purchase the highest-end version to get Schedule C functionality, that still might end up costing less than paying someone else to do your taxes.
- You may not have to fill out the whole Schedule C. Schedule C is just two pages long, but there’s an even shorter version — the C-EZ. It’s for people who had less than $5,000 in business expenses, used the cash method of accounting and had no inventory, no employees, no home office deduction and no net loss. There are a few other restrictions, too; see the instructions to Schedule C-EZ for more.
- You may need to fill out more than one Schedule C. It’s one Schedule C per side gig. So if you have two side gigs, you’ll need to fill out two Schedule Cs.
- Measure your home office’s square footage. If you have a home office, you can probably deduct some expenses associated with keeping it up and running if you’re self-employed. The IRS offers a flat-rate deduction of $5 per square foot for up to 300 square feet of home office space. But if a big percentage of your home’s square footage is dedicated to your home office and your home expenses (utilities, etc.) are high enough, and you’re able to keep and compare detailed records, you might get a bigger deduction with the “regular” method.
- Be sure to take advantage of other tax deductions. Self-employment can score you a lot of tax deductions (here are five popular ones), and one of the newest is the qualified business income deduction. If you qualify, you can deduct up to 20% of your business’s net income on your tax return. See if you can take this deduction.
- Make estimated quarterly tax payments to avoid penalties. Taxes are a pay-as-you-go arrangement in the United States; when you earn money, the IRS wants its cut as soon as possible. That’s why employers withhold taxes from employee paychecks. But when you’re paying yourself, that’s probably not happening. To avoid late-payment penalties, you can make estimated quarterly payments to the IRS.