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.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?