If you operate as a freelancer or run a small business, chances are you file taxes as a sole proprietor. According to the Small Business Administration, a sole proprietorship is the easiest way to start and run a business, and as a result, it’s also the most common small business type. If you operate a sole proprietorship, you’ll use a Schedule C form to report profit and loss for your business, filing it with your taxes each year.
What Is a Schedule C?
A Schedule C form is used to file taxes with the Internal Revenue Service when you earn self-employment income. You don’t have to operate a business full time to file a Schedule C. In fact, you can be a W-2 payrolled employee and still need to report side income on a Schedule C.
The IRS provides Schedule C to report income and losses from a business or sole proprietorship. The form gathers data on your income and subtracts your expenses to arrive at your total taxable income for the year. This income is added to your other income for the year, including any W-2 pay you received. Schedule C is also known as Form 1040 or 1040-SR.
Who Files a Schedule C?
If you earn money as a contractor or self-employed worker, you have to report it on your income taxes. This includes gig work, babysitting money or extra funds you make cleaning houses for friends. There’s a common misconception that you don’t have to claim amounts less than $400. You have to claim all your income, but you won’t have to pay self-employment tax if you made less than $400.
Your venture doesn’t have to be making money for you to report losses on Schedule C. The IRS provides nine factors to use in determining if your venture is a hobby or business. Those include whether you treat it like a business, whether you’re working toward making it profitable and whether the activity makes a profit in some years even if it doesn’t in others.
How to File Schedule C
Before you get started with your Schedule C, you need to gather information on your income and business expenses for the tax year. For income, this includes any 1099-C forms you received and gross receipts from your business sales. Next, you need to gather all receipts and logs of expenses related to your business during the tax year.
If your business carries an inventory, you have to complete Part III, which is the Cost of Goods Sold. You’re expected to log your inventory at the start of the tax year, then again at the end of the tax year, and track all expenses connected to selling those goods. You can deduct those expenses from your profits to arrive at the true cost of goods sold.
The IRS provides Schedule C to report income and losses from a business or sole proprietorship. The form gathers data on your income and subtracts your expenses to arrive at your total taxable income for the year.
What Is a Schedule SE?
If you’re a sole proprietor, you also need to take a look at Schedule SE, which is where you calculate the taxes you owe on your self-employment income. If you earned less than $400, you probably won’t need to file this form, but it’s important to start Section A to make sure. But if you had a loss from your business, it may still be worth it to fill out the form so that you can claim the deductions.
Self-employment tax is due on your income for the year if it was greater than $400. If you’re a W-2 employee and your self-employment endeavors are a side gig, only the income you made on the side gig counts toward that $400 figure. You have to continue to pay self-employment tax on the income you earn even if you’re retired and receiving Social Security benefits.
Statutory Employees and Schedule C
Self-employed professionals aren’t the only ones who have to file a Schedule C with their tax returns. Some W-2 employees need to, as well. If your W-2 form has the box checked to state you’re a statutory employee, you need to file a Schedule C at tax time.
A statutory employee is a contractor who still has statutory deductions taken from each paycheck. This employee sees Social Security and Medicare taxes withheld, so there’s no need to pay self-employment taxes. But if you’re a statutory employee, you still need to file a Schedule C.
The best thing about being a statutory employee is that you can claim deductions against your earnings. Often statutory employees are those who work on commission while using company equipment. A statutory employee may use a personal car for the work, at which point those deductions would need to be claimed on Schedule C.
Read More: Self Employed Tax Classifications
What Is Form 1099-NEC?
Employees receive a W-2 at tax time. Sole proprietors receive a Form 1099-NEC from each client who paid them $600 or more during the tax year. It’s important to note that failure to receive a form does not free you from claiming income earned on your taxes. You’re expected to pay income tax on every dollar you make, even if you don’t receive a form.
Form 1099-NEC displays any income you were paid for income as a non-employee. If the payer withheld income taxes on the funds, that will show as well. You need to remit a copy of each form with your tax return. Copy 1 goes to your state tax department, Copy 2 is for your state tax return and you keep Copy B for your records.
Rental Income and Expenses
Landlords and property owners have a more complicated tax situation. Although Schedule C may apply to you, rental property income and expenses for real estate rentals generally go on Schedule E. You use Schedule E to report income and expenses for any real estate rentals you own. However, the services you provide that are primarily for your tenant’s convenience need to go on Schedule C.
Most taxpayers report the rental money they receive in the year they receive it. Rental income includes rent, advanced rent, security deposits, cancellation fees and expenses paid by a tenant. If you as a landlord pay the expenses, you report it as an expense during the year you received it. Expenses can include repair costs and operating expenses like bookkeeper salaries. You can also claim depreciation on the property you rent.
Read More: Tax Implications of an Investment Property
Paying Estimated Taxes
W-2 workers have taxes taken out of each paycheck, with that amount remitted to the IRS throughout the year. If you don’t have an employer submitting the taxes for you, you need to do it yourself. You can wait until tax time, but if you plan to owe more than $1,000, you must pay your taxes once each quarter to avoid owing penalties at tax time.
To pay quarterly taxes, you need to estimate your annual earnings for the year and divide the taxes on that into four. You can use the tax Form 1040-ES to do this calculation. The form includes four slips you can print and remit with your check if you’re paying by mail. You can also go online and pay at IRS.gov/payments.
Whether you run a small business or you do work as a freelancer, Schedule C lets you claim the income and expenses associated with your work each year. Even if you have a full-time job and only make money freelancing on the side, you need to claim any income you earned during the year and pay any taxes that remain due on the amount.
- SBA.gov: Sole Proprietorship
- IRS.gov: Schedule C (Form 1040 or 1040-SR)
- IRS.gov: About Schedule C (Form 1040 or 1040-Sr), Profit or Loss From Business (Sole Proprietorship)
- IRS.gov: Frequently Asked Questions: How Do You Distinguish Between a Business and a Hobby?
- IRS.gov: 2019 Instructions for Schedule C
- IRS.gov: Schedule SE (Form 1040 or 1040-SR)
- Investopedia: Statutory Employee
- Investopedia: Form 1099-MISC: Miscellaneous Income Definition
- IRS.gov: Topic No. 414 Rental Income and Expenses
- IRS.gov: 2020 Form 1040-ES
- IRS.gov: Paying Your Taxes
- IRS.gov: About Form 1099-NEC, Nonemployee Compensation
- Internal Revenue Service. "About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship)." Accessed March 16, 2020.
- Internal Revenue Service. "2019 Schedule C: Profit or Loss from Business," Page 1. Accessed Jan. 28, 2020.
- Internal Revenue Service. "2019 Instructions for Schedule C: Profit or Loss from Business," Page 15. Accessed Jan. 28, 2020.
- Internal Revenue Service. "2019 Schedule C: Profit or Loss from Business," Page 2. Accessed Jan. 28, 2020.
- Internal Revenue Service. "2019 Instructions for Schedule C: Profit or Loss from Business," Page 3. Accessed Jan. 28, 2020.
- Internal Revenue Service. "2019 Instructions for Schedule C: Profit or Loss from Business," Pages 1–3, 10. Accessed Jan. 28, 2020.
- Internal Revenue Service. "Prior Year Products." Accessed March 16, 2020.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.