If you enjoy the benefits of running your own business, you’re also responsible for your own taxes. Unlike employees, who have taxes withheld out of every paycheck, independent contractors may need to withhold taxes on their own income or use their own funds to make quarterly payments to the IRS.You should talk with your tax accountant when preparing your taxes. Schedule C form is used to report taxes annually for your yearly income.
Here’s the rundown on the Schedule C:
The Schedule C form helps anyone who is self employed calculate the profit (or loss) of the business for annual taxes, which are due on April 15. A Schedule C form has two general parts: earnings and expenses. Under the earnings category, you will see “Gross receipts or sales,” which refers to all the money flowing into the business. “Gross income” refers to revenue minus direct costs such as wholesale purchases.
The expenses section of the Schedule C includes common costs like advertising, utilities, rent, car expenses, and insurance. Make sure to track these expenses regularly, always saving and organizing receipts. Even though Schedule C only has to be filed with annual taxes, it’s good practice to fill one out for quarterly taxes too. Remember, it's important to make accounting a regular business habit to build a financially viable business.
Let’s go through the steps to take in filling out the Schedule C:
What is the Schedule C-EZ and could you use it?
Similar to the 1040-EZ, which is the simplified version of the 1040 form, the Schedule C-EZ is the simplified version of the Schedule C. Self-employed workers and contractors should fill out the Schedule C-EZ if they:
Earned a profit
Have expenses no greater than $5,000,
Have no employees,
Have no inventory, and
Are not using depreciation or deducting the cost of their home
How many Schedule C’s do I need to fill out?
Depending on the sources of 1099 income, contractors may need to fill out multiple Schedule Cs. Why? Because the IRS requires contractors to fill one out for each business type or professional activity they engage in. However, the IRS isn’t incredibly straightforward on what constitutes a separate business type. Any contractor who provides different services or goods for different industries, may need to fill out a Schedule C for each business type or industry. Say, for example, a freelance graphic designer also drives for Lyft. In this case, the designer may need to fill out two Schedule Cs: one for Lyft income and another for design income.
Let’s walk through the first part of the Schedule C where basic information is entered.
A. Principal Business or Profession
In this line, describe the type of work, like “driving services” or “design services.”
The code referred to in this line corresponds with the “Principal Business or Professional Activity Code” that the IRS uses to keep track of industries’ growth. Find the code for the type of business. Here’s a list of principal activity codes.
C, D, E. Business Name, EIN and Address
Only registered incorporated businesses (e.g. LLC) need to fill out business name and employer identification number. This should be left blank if the business is not registered. The address should be the contractor's up-to-date personal address or office space address.
F. Accounting Method
In this section, input the kind of accounting method used — either a cash or accrual basis. Many independent contractors (who are unincorporated) use the cash method in which earnings and expenses are counted as they happen. You should talk with your tax accountant if you have questions about which method to use.
G, H, I, J. Additional Questions
These questions are pretty self-explanatory. If a business hired any contractors or freelancers (or hired legal services), the business likely needs to send out 1099s and note that they’ve filed them with the IRS.
In this part, input the contractors income. Here are the key components:
Gross Receipts or Sales: Include total gross earnings.
Returns and Cost of Goods Sold: Contractors may only need to fill this out if they sell a material or product. Returns applies to any time a customer returned a product. Cost of goods sold applies to amounts spent creating the products sold.
Other Income: Input an amount here of “other income” earned as defined by the IRS such as interest on loans or renting office space.
Gross Income: Tally all earnings after costs. This box generally equals the amount of gross receipts unless an amount was included for “Returns and Costs of goods sold”.
In this part, input all of the business-related expenses incurred throughout the year (or quarter). Here’s a full list of what the IRS allows for business expenses.
Boxes 8-27: Input the amount spent for each expense in these boxes. The IRS Schedule C form instructions provide a box-by-box definition of the expense portion.
Box 28: Add all of the expenses from the above boxes 8-27. Home office and vehicle expenses are entered below.
This part is typically for contractors who make physical products and input the amount of inventory and goods you’ve sold.
This is where information regarding the vehicle expenses related to a business are included. There are two different methods the IRS allows for counting these expenses: the standard mileage rate or the actual expense method. For the standard mileage rate, the deduction is based on the number of business miles traveled (contractors can deduct $0.54 per mile) and accounts for gas, insurance, and depreciation. The actual expense method requires that itemize gas, insurance, etc be itemized to add costs together.
Record what the IRS counts as “other expenses” that are less common. Here’s an explanation of what expenses the IRS includes as “other”.
The secret to Schedule C forms is simple: begin way in advance. Build an accounting system that tracks your income, direct costs, and expenses. When it comes to filling out the forms, it should be as easy as copying and pasting your regular calculations into the boxes. If you need to do more accounting leading up to the end of the quarter and tax season, begin early. Take some time to double check your numbers before you send in checks or transfer money, and always, always get them in before their due dates. You should talk with your tax accountant if you need assistance with completing Schedule C.