Chances are that you file taxes as a sole proprietor if you operate as a freelancer or run a small business. According to the Small Business Administration, a sole proprietorship is the easiest way to start and run a business and it’s also the most common small business type as a result.
You’ll use a Schedule C form to report profit and loss for your business, filing it with your tax return each year if you operate a sole proprietorship.
What Is Schedule C?
A Schedule C form is used to report income and business expenses to 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 an employee, working for someone else on a regular basis, and still have 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 lists your sources of income and subtracts your expenses to arrive at your total taxable income for the year. This income is added to your other income, including any pay you received from which taxes were withheld.
Who Files Schedule C?
You have to report money you earn as a contractor or self-employed worker to the IRS on your tax return. This might include gig work, babysitting money or extra funds you make cleaning houses. 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.
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
First gather all information regarding your income and business expenses for the tax year. This includes any 1099-NEC forms you received reporting cumulative payments for your services of $600 or more over the course of the year. It would include gross receipts from your business sales. Next gather all your receipts and logs of expenses you paid relating to your business during the tax year.
The form begins with Part I where you can enter your income. Part II allows you to subtract your allowable business expenses. Your taxable income is what remains after these deductions.
You must complete Part III of Schedule C for "Cost of Goods Sold" if your business carries an inventory. 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.
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 must do so as well if their W-2 forms bear a check in the box that states that they're a statutory employee. This is a contractor who has statutory deductions taken from each paycheck. This employee sees that Social Security and Medicare taxes have been withheld, so there’s no need to pay self-employment taxes. But they should still file a Schedule C.
Statutory employees can claim deductions against their earnings on Schedule C just as a freelancer or independent contractor can. Statutory employees are often those who work on commission while using company equipment. A statutory employee may use a personal car for the work, and the expenses related to doing so can be claimed on Schedule C.
Read More: Self Employed Tax Classifications
Paying Estimated Taxes
W-2 workers have taxes withheld from each paycheck and that amount is remitted to the IRS throughout the year by their employers on their behalf. You'll have to take care of this task yourself if you don’t have an employer submitting the taxes for you. You can wait until tax time, but you'll owe penalties if you end up owing more than $1,000.
Estimate your annual earnings for the year, less your estimated expenses, then calculate the likely tax percentage you'll owe on that amount. Divide that number by four. Tax Form 1040-ES will walk you through the calculation. The form also includes four slips you can print out and remit with your check if you’re paying by mail. You can also go online and pay at IRS.gov/payments.
Read More: IRS Video for Schedule C
- SBA.gov: Sole Proprietorship
- IRS: 2021 Schedule C Profit or Loss From Business
- IRS: Frequently Asked Questions/ Income & Expenses
- IRS: Schedule SE (Form 1040 or 1040-SR)
- IRS: Topic No. 414 Rental Income and Expenses
- IRS: 2020 Form 1040-ES
- IRS: Paying Your Taxes
- IRS: Self-Employed Individuals Tax Center
- IRS: Statutory Employees
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.