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 need to withhold their own income and make quarterly payments to the IRS. The Schedule C form enables you to file taxes annually for your yearly income.
Here’s the rundown on the Schedule C:
The Schedule C form helps you to calculate the profit (or loss) of your business for your 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 your business. “Gross income” refers to your revenue minus direct costs such as your 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 you only have to file a Schedule C with your annual taxes, it’s good practice to fill one out for your quarterly taxes too. Remember, you need to make accounting a regular business habit to build a financially viable business.
Let’s go through the steps you’ll take in filling out the Schedule C:
What is the Schedule C-EZ and could you use it?
How many Schedule C’s do I need to fill out?
Depending on the sources of your 1099 income, you may need to fill out multiple Schedule Cs. Why? Because the IRS requires you to fill one out for each business type or professional activity you engage in. However, the IRS isn’t incredibly straightforward on what constitutes a separate business type. If you provide different services or goods for different industries, then you will likely need to fill out a Schedule C for each business type or industry. Say, for example, you’re a freelance graphic designer who also drives for Lyft. In this case, you would fill out two Schedule Cs: one for your Lyft income and another for your design income.
Let’s walk through the first part of the Schedule C where you enter basic information.
A. Principal Business or Profession
In this line, you’ll describe the type of work you do, 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. You’ll need to find the code for the type of business you run. Here’s a list of principal activity codes.
C, D, E. Business Name, EIN and Address
You only need to fill out business name and employer identification number (EIN) if you’ve registered your services as an incorporated business (e.g. LLC). It’s alright to leave those blank if you’ve not registered your business. The address should be your up-to-date personal address or office space address.
F. Accounting Method
In this section, you’ll input what kind of accounting method you use — either a cash or accrual basis. The majority of independent contractors (who are unincorporated) use the cash method in which you count earnings and expenses as they happen. Learn more about the cash vs accrual method of accounting.
G, H, I, J. Additional Questions
These questions are pretty self-explanatory. If you’ve hired any contractors or freelancers yourself (or hired legal services), you’ll likely need to send out 1099s and note that you’ve filed them with the IRS.
In this part, you’ll input your income. Here are the key components:
Gross Receipts or Sales: This is where you put your total gross earnings.
Returns and Cost of Goods Sold: Only fill this out if you sell a material or product. Returns applies to any time a customer returned a product. Cost of goods sold applies to how much you spent creating the products you sold. If you don’t sell any tangible, physical products just input $0.
Other Income: Input an amount here if you earned any “other income” as defined by the IRS such as interest on loans or renting your office space.
Gross Income: This is where you tally all of your earnings after costs. Unless you’ve put an amount for “Returns and Costs of goods sold” than this box will likely equal your “gross receipts.”
In this part, you’ll input all of the business-related expenses you’ve had throughout the year (or quarter). Here’s a full list of what the IRS will allow for business expenses.
Boxes 8-27: Input the amount you’ve spent for each expense in these boxes. The IRS Schedule C form instructions provide a good box-by-box definition of the expense portion.
Box 28: This is where you 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 you’ll include any vehicle expenses related to your business. There are two different method the IRS allows for counting these expenses: the standard mileage rate or the actual expense method. For the standard mileage rate, your deduction is based on the number of business miles you’ve traveled (you can deduct $0.54 per mile) and accounts for gas, insurance, and depreciation. The actual expense method requires you to itemize gas, insurance, etc to add costs together.
This is where you would record what the IRS counts as “other expenses” that are less common. Here’s a helpful 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.
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