Freelancers are often uncertain of what they need to do with their taxes, and one form that can be particularly confusing is Schedule C. As an independent contractor, you're required by the IRS to fill out the form each year in order to report your business income.
This blog post will be exploring what a Schedule C IRS form is, why 1099 workers need to file it, and how to fill out the form. Let's get started.
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A Schedule C form is a tax document filed by independent workers in order to report their business earnings. It's important to note that this form is only necessary for people who have had income reported on 1099 forms, meaning they are considered contract employees rather than full employees of the company or organization contracting them.
Schedule C forms are used to report business profit from self-employment. When filing this form with the IRS you'll need to include any contract earnings you had for the year along with information about deductions related to your business which allowed you to decrease your taxable income by a certain percentage.
Two types of businesses have to file a Schedule C form: sole proprietorships and single-member limited liability companies (LLCs). Note that Schedule C is not meant for C or S corporations.
Here are a few of the things you'll need before filling out the form:
You'll use the entries on Schedule C to calculate your business’s net profit or loss. This figure is then transferred to Form 1040; it helps in determining your overall tax liability for the year. Usually, a sole proprietor only has to file one tax return for his or her personal and business income taxes.
Realize that if you work in certain industries, you may be required to fill out other forms in addition to Schedule C.
If you're a landlord, for example, you may need to file Schedule E to report rental income that is not subject to self-employment taxes. And if you're a sole proprietor with a home office, you'll have to complete a Form 8829 to claim the home office deduction.
Here are a few things you need to keep in mind when handling a Schedule C:
There is no minimum income associated with filing a Schedule C form. Regardless of how much you've made or lost from your business, you need to report all your earnings and expenses on Schedule C.
That said, you need to pay self-employment tax if you earned at least $400 from self-employment income during the year. Social Security and Medicare taxes are meant for individuals who work as sole proprietors. If you meet the $400 threshold, the IRS requires you to complete a Schedule SE.
If you made less than $400 from your side business, you're exempted from paying self-employed tax on those earnings.
Try our free tax calculator to estimate how much you'll owe.
A lot of the expenses incurred by business owners are tax-deductible. As a rule, you can deduct all "ordinary and necessary" costs that are related to your business.
To the IRS, an ordinary expense refers to costs that are "common or accepted” in your trade or business. Necessary expenses are those that "are helpful and appropriate” for your trade or business.
Keep in mind that this is a broad definition that allows for a lot of 1099 write-offs.
Below are some examples of common expenses you can deduct.
You can include any of these tax write-offs when you're completing your Schedule C form. You can visit this page to read more on business tax deductions.
That said, documenting your expenses is crucial when you're claiming business tax deductions. Your records must show what you're deducting and how the business spent the money. The IRS can audit you at any time, and you need to arm yourself with proper documentation. That's why you'll need to maintain records of any business receipts and invoices you receive.
Schedule C-EZ is a short form of Schedule C. Not everyone can report their business income using this form, though. You can use it if you meet all of the following conditions:
Keep in mind that the Schedule C-EZ is no longer available, but you can use it to file your returns for tax years before 2019.
A form 1099 is a tax form that companies use to report payments they've made to independent contractors, other than regular wages or salaries. If you get money from a company and do not work for them full time, then you are considered a freelancer or contractor. The company reports the fees it pays you on the 1099 form and files it with the government. They also give you a copy so that you can do your taxes using that information.
Filling out the Schedule C form can seem like a daunting task. The endless lines, letters, and numbers can make the form appear a lot more challenging to file. But once you get a hang of things, you’ll be able to complete the form without much hassle. Hopefully, this blog post will help you when tax season arrives.
And if you’re an independent contractor looking for more tax help, you can sign up for a Bonsai Tax account today. With Bonsai Tax, you’ll be able to maximize your tax deductions, estimate your quarterly taxes, and track your expenses seamlessly. Try our software today for a 14-day free trial here.
Note: The team at Bonsai always recommends you get tax advice from a professional or CPA. At the end of the tax year, if you have any questions about how to file taxes, contact an expert for tax advice for your Federal tax return.