How to File Schedule C Form 1040 as a Small Business and Freelancer?
Many small business owners and freelancers start businesses and build them up but never actually know how to file taxes for their businesses, and they are normally very stressed and confused when tax time is due.
Thus, in this post, we will talk about one of the popular tax forms that small business owners and freelancers need to take care of every year – Schedule C.
I often get asked where they report their income and expenses on their tax returns, so I think this will be super helpful for many.
What is Schedule C?
The IRS defines Schedule C on your Form 1040 – personal tax return as where you report your revenue/income from a business or profession that you practiced as a sole proprietor. This is also used to report income/ revenue and expenses if you are a single-member LLC.
Unless your business selects to report as a C corporation or S corporation, it does not file a separate return.
How to fill out Schedule C
Schedule C is on the form 1040 of your tax return, which has five parts.
1) the first -couple of lines are where you fill in the basics of the business, such as:
- Name.
- Employer ID number (EIN) or social security of the sole proprietor.
- Business address
- Accounting method
2) Part 1: Income: This is where you report your total income, cost of goods sold,
returns, and allowance.
3) Part 2: Expenses: this is where you report all of the business expenses.
4) Part 3: This section details the costs of goods sold, such as direct labor, materials,
and supplies.
5) Part 4: If you have a vehicle used for the business, this is where you report vehicle
expenses.
6) Part 5: final other expenses. Many will have the other expenses detailed here that
were not listed in part 2.
Common Mistakes People Make when Filing Schedule C
- Not filing a separate Schedule C for each business you own: If you have three businesses, you need
to report in 3 separate Schedule C and only combine some to report under one Schedule C. One of the main reasons is that each business has its business code; combining them can mislead the business code. The other reason is that the deduction part will not reflect the nature of the business expenses. - Not reporting all income and losses from your business: this can quickly happen, especially if you need excellent bookkeeping in place, such as monthly bookkeeping, reconciliation of bank statements, and review of the coding. I see so many people using Excel or spreadsheets for this and typically miss a lot of expenses due to many different credit cards. Keeping an excellent record is a must for your tax return to be correct.
Tips to file Schedule C correctly:
Maintain good bookkeeping during the year: not only do you need to read your number, but bookkeeping done incorrectly can cost you a lot in terms of tax.
Understand the deductions: Not everything you can deduct, but a good rule of thumb is that if the expenses are necessary for doing business, you can take that deduction. Of course, there are many rules for specific things such as a home office, vehicle, and work clothing. If you are unsure, a great accountant can help you navigate these tricky parts.
I hope this helps you in filing the schedule C tax return. Please contact us if you have any questions.
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