Taxpayers need to file the tax form 1040, which is often accompanied by Schedule C — a form used to report profit or loss from your business. People running a small business as sole proprietors or partners with limited liability need to file Schedule C with their income tax return forms. The main purpose of Schedule C is to help taxpayers calculate and show their net profit or loss for the calendar year.
Simply put, a self-employed taxpayer has to file a Schedule with tax form 1040 to report their earnings and expenses for the financial year. You can use Schedule C-EZ, a shorter and less complicated version of Schedule C. However, you need to report spending above $5000 for the calendar year to use this form. You can hire an accountant to fill out the tax returns Schedule C or use tax prep software.
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What’s on the Schedule C Form?
The form consists of sections that ask about your personal information, such as business name, gross sales, the total cost of goods sold, your income, and business expenses. Schedule C is also used to list your tax deductibles. You need to list all the expenses incurred while running your business — from the office or home. For example, the utility, commissions, or fees paid to a professional for business work or the space in your home used for office work are all business expenses that can be listed as deductions on Schedule C.
It also consists of a section where you can specify the number of miles driven in your business vehicle (if you have one). Make sure you keep receipts of all transactions so that you can show them to the IRS if you are audited. The IRS has not established a minimum threshold for income or expenses for filing Schedule C. No matter how much you earn or spend, you need to fill out a Schedule C form with the standard tax return forms to show your expenses. However, the IRS has set a limit for self-employed taxpayers. If your income from self-employment exceeds $400, you need to pay the tax. If it falls below this threshold, you can skip the tax.
How to Fill Our Schedule C?
As mentioned before, Schedule C is used to arrive at the net profit/loss for the year. Once you have calculated your net income, the figure is transferred to form 1040, which helps you determine your total taxable income. If you are running separate businesses or report income from multiple clients for your freelancing projects, you need to file separate Schedule C forms for each source of income (if it exceeds $400).
Those who report an earning from rental income or interest need to file other forms with Schedule C. For instance, landlords are supposed to file Schedule E to show their earnings from rent, and those running a small business from home need Form 8829 to report home office deductions. You can find the Schedule C form on the IRS website. Fill out the form on the website, download it in PDF format, save it on your hard drive, and get a print. You can then mail it to the IRS with other tax return forms.
How is Schedule C Different from Form 1099-NEC?
Schedule C is not a substitute for Form 1099-NEC. The IRS has introduced over 18 different 1099 forms that are used by self-employed individuals. Form 1099-NEC is used by businesses that pay freelancers and contractors. If the amount they spend on these gig-workers exceeds $600 for the financial year, they need to file form 1099-NEC. The employer sends a copy of this form to the contractor by 31st January.
If the transaction involves debit/credit cards or any third-party payment app, then the payment company will be responsible for reporting the transaction to the IRS. Schedule C, on the other hand, is used to list your business expenses and all profits you have made during the year. If you work as a freelancer and receive a form 1099-NEC from your client, you need to transfer the amount to your Schedule C form to show your income for the year.
Also read - What Is A 1099 Tax Estimator Form?
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