What is an IRS Schedule C Form (and What You Need to Know About It)
If you’re self employed or a single member LLC than you likely need an IRS Schedule C Form. Read more to find out where to get a Schedule C form and how to use it.
Self employed Individuals or those operating a single member LLC report profit and loss from their business on a Schedule C tax form. A Schedule C form is attached to the standard 1040 tax form.
What is a sole proprietor?
According to the US Small Business Administration, a sole proprietor is the simplest and most common business structure. It is defined as a unincorporated business owned and run by one individual with no distinction between the business and the individual.
What is a Schedule C tax form?
An IRS Schedule C (sometimes called a 1040 Schedule C) is a form used to report income or loss from a business operated by a sole proprietor or a single member LLC. On this form entrepreneurs report their income, expenses, profits and losses for their business activities for a given year. Also, entrepreneurs that own and operate more than one business need to file a separate Schedule C form for each business.
What qualifies as a business activity for a Schedule C form?
For an activity to qualify as a business, the individual must be engaged in the activity for income or profit and be involved in that activity with continuity and regularity. For example, sporadic activity, or hobby, does not qualify as a business. To report income from a nonbusiness activity, see the instructions for Schedule 1 on Form 1040 or 1040-SR, line 8, or Form 1040-NR, line 21.
What is Schedule C income?
Schedule C income is any income (or loss) earned by an individual who worked as a sole proprietor or as a member of a single member LLC.
In addition, when using an IRS Schedule C form the individual may be subject to state and local taxes and other requirements such as business licenses and fees. Therefore, check with local state and governments to find out more information.
You need to complete a Schedule C and attach it to your 1040 personal tax return if you received profits or losses from self employed work that was completed as an individual and not under a formal, separate, entity (unless it is a single member LLC).
How is a Schedule C different from a 1099-MISC (and a 1099-NEC)
A 1099-MISC form (in 2020 a 1099-NEC) is the form provided to individuals that worked as a freelancer or contractor for another company. An independent contractor that performed the work as an individual and not under a registered, formal, entity (other than a single member LLC) would be recognized as a sole proprietor. Therefore, they are required to file a Schedule C form. With that said, the 1099-MISC and 1099-NEC forms received by this individual should be included in the Schedule C, along with any other business income an individual receives.
Important Note: Starting with the 2020 tax year a new form for miscellaneous income will be used. This form is known as 1099-NEC. With the growth of self-employment the IRS felt that a dedicated form for self employment income was necessary. Therefore, the 1099-MISC will be reserved for income earned from rent, royalties, prizes, and awards and substitute payments in lieu of dividends. The new 1099-NEC, which is a form resurrected from the 1980s, is for only non-employee compensation. Review the following article for more information on this new form:
Form 1099-MISC vs Form 1099-NEC: How are they Different?
How to complete a Schedule C form?
There are six major sections of an IRS Schedule C form. Below, each section is organized and explained. Click the link about about the Schedule C instructions for instructions about how to fill out the IRS Schedule C form.
1. Top Quarter, Background Information
This section is for filling in the basic information about your business. Such as business name, address, EIN, etc.
Do you have to have an EIN number to file a Schedule C?
Only corporations and partnerships are required to have an EIN number. Therefore, if you are a sole proprietor then you can use your Social Security Number to report your income on an IRS Schedule C tax form. However, if you have a sole proprietorship operating as a single member LLC then you would need an EIN number. Refer to the following article for more information about EIN numbers, Do I Need and EIN Number and How to Get One?
Line A: Describe the business or professional activity that provided the income reported on line 1.
Line B: Enter the six-digit code from the Principal Business or Professional Activity Codes chart, located at the end of the Schedule C instructions document published by the IRS.
Line C: Business name. Leave this field blank if no separate business name exists.
Line D: Employer ID number (EIN). Check out the following article if you don’t have an EIN number, and you don’t know what an EIN number is to learn more.
How do I get an Employer Identification Number (EIN)?
Line F: Select the box for the accounting method used: Cash, Accrual, Other (specify).
Line I: Did you make any payments that would require you to file Form(s) 1000?
Line J: If ‘Yes,’ did you or will you file required Forms 1099?
2. Part I, Income
What is business income?
Gross income includes income from whatever source derived. However, in some cases gross income does not include extraterritorial income that is qualifying foreign trade income. Use IRS Form 8873 to determine the extraterritorial income exclusion.
In this section enter gross receipts or sales. In addition, enter costs of goods sold and calculate gross profit. There is also a line for other income. Add this to gross profit to get the gross income amount, which is the final amount for this section,.
3. Part II, Expenses
In this section enter business expenses. Business expenses include everything from advertising, car and truck expenses, commissions and fees, contract labor, rent, office expenses, supplies, repairs, etc.
Check out the following article for more information on business expenses: IRS Rules for Recording Business Expenses, Travel, Transportation, Meals and Entertainment.
4. Part III, Cost of Goods Sold
What are cost of goods sold?
According to Investorpedia, Cost of Goods Sold (COGS) are the direct costs of producing the goods sold by a company. This includes the costs of materials and labor directly used in the creation of the good. This does not include indirect expenses. Examples of indirect expenses include distribution costs and sales force costs.
5. Part IV, Information on Your Vehicle
This part is only completed only for individuals that are claiming car or truck expenses on line 9 from Part II, Expenses. In addition, individuals requited to fill out IRS Form 4562 are not required to fill out this section.
The following post provides an informative overview about business use vehicle tax deductions and the different tax deductions methods available:
How To Maximize Business Use Car Tax Deductions (Standard Mileage Rate vs Actual Car Expense Methods)
Also, this post about commuting is informative for this section:
Temporary Work Locations & Commuting Expenses Tax Deductions
6. Part V, Other Expenses
In this section other business expenses are listed that are not included on lines 8-26 or line 30.
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