Sole Proprietorship Taxes – Understanding the Schedule C Tax Form
If you’re thinking about embracing entrepreneurship and striking out on your own, don’t let the prospect of business taxes make you reconsider. So long as you structure your business as a sole proprietorship or single-member LLC, dealing with the tax consequences is actually quite easy. The hardest part is keeping detailed records of your business expenses all year. If you’ve done that, the rest is easy.
Paying Federal Income Tax
As you’ve no doubt heard, there’s no escaping death or taxes. So if you decide to operate your own small business, how do you pay your federal income tax? The answer is that you’ll pay your business taxes personally. As a sole proprietor or single-member LLC, the IRS will view you and your business as a single entity, taxing you directly rather than taxing your business itself. The same is true for independent contractors.
As such, you have two options for paying your tax. If you expect to make less than $1,000 in profit for the year, you can simply calculate and pay your income tax at the end of the year as part of your tax return. If you make more, you’ll need to send in estimated tax payments to the IRS at the end of each quarter.
What Is Schedule C?
The Schedule C is an IRS form that collects data about your small business and then calculates your net profit. The profit is the amount of money you made after covering all of your business expenses and obligations. This is the amount the IRS taxes – not your income.
This Schedule provides a recap of your company’s income and expenses, including deductions for the company use of your personal vehicle. The form also contains a Cost of Goods Sold (COGS) section that will help value your physical inventory, if applicable to your business. Once your taxable profit is determined, this schedule will tell you exactly where to report your business profits on your Form 1040.
What if your business suffered a loss? You can report this loss as you would income and use it to reduce your tax liability. The IRS may, however, limit how much of a loss you can claim in a single tax year, allowing you to spread the loss over several years.
It is important to note here that the IRS isn’t the only entity that requires a Schedule C filing. Many states and some localities require the same or similar schedules for themselves. Some states make it easy and simply ask for a copy of your federal schedule. Others have their own similar form that you’ll be required to file with your state or local taxes.
Who Must File
If you qualify as a business, the IRS requires you to complete and file a Schedule C. In order to meet the definition of a business for IRS purposes, you must have a profit or loss from activities you engaged in for the specific purpose of generating income. You are also considered a business if you actively engage in said business continuously and regularly. Here are two examples that can help clarify.
Ann is a stay-at-home Mom. About twice a month, however, she works as a model for the art college near her home. She gets paid when she does. Because she is compensated fairly and models specifically for the money, Ann meets the IRS definition of a business.
Cathy, however, does not. Cathy is a sign language interpreter who works full time with deaf students at a school. Every once in a while, Cathy goes to her local community theater and interprets plays for deaf audiences. She does get paid for this, but at a rate substantially lower than her typical pay rate. Because the theater work is intermittent and not work she engages in regularly or for the money, the IRS doesn’t count Cathy as a business. She must, however, still report her theater income and pay tax on it. This is considered “other” income for tax reporting.
If you do meet the requirements of a business, remember that you need a separate schedule for each business you run. If you’re operating multiple business ventures, each one will require its own form.
Attaching Your Schedule To Your Tax Return
Tax forms can change over time, so you’ll need to read your forms and schedules carefully when filing your taxes. At the time of publication, however, you’ll report your business profit or loss from line 31 of your C Schedule onto line 3 of your Schedule 1.
Your Schedule 1, in turn, will calculate two numbers that you need to for your Form 1040. Line 9 of your Schedule 1 will also appear on Line 8 of your From 1040. Line 22 of your Schedule 1 correlates to Line 10A on your 1040.
If you file your taxes electronically, the software you use to submit your return to the IRS will automatically generate and send any schedules or attachments you need. If you’re filing manually with paper forms, remember to send all of the appropriate schedules along with your tax return. In the top right corner of IRS forms, there is a sequence number. This number tells you in what order you should attach schedules and other supplemental forms to your return.
Other Schedules You May Need
If required to file a C Schedule with your taxes, be aware that there are a few other forms you may need. One is the Schedule SE, which calculates self-employment taxes. If your income isn’t subject to self-employment tax, you’ll need to file a Schedule E. This schedule reports income from real estate rentals, royalties and other sources of income not subject to self-employment taxes.
If required, you’ll also need to report an excessive loss on Form 461. Form 3800 allows you to claim certain business credits if you’re eligible and Form 4562 allows you to claim depreciation and amortization expenses. These forms aren’t necessary for every small business, but it’s important that you don’t neglect them if they apply to you.
Get Help From A Pro
Not sure which extra forms and schedules you need? Picnic Tax is here to help. We know small businesses can operate on tight budgets, which is why we offer accounting services on an a la carte basis. We’ll match you to one of our CPAs who specialize in self-employment tax issues so you can get the exact help you need to handle your unique tax situation and questions. We never take a generic one-size-fits-all approach to tax filing and planning. Get started with us today to access personalized accounting services that can help you and your business.