Starting a business is exciting, but it can also feel like drinking from a firehose!
Between launching your business, building your client base, and figuring out cash flow, completing a Schedule C and other tax forms is probably the last thing you want to think about, so in today’s post, I got your back. This is your step-by-step guide to completing your Schedule C.
Do I need to file a Schedule C?
A Schedule C is how sole proprietors report their business’ income and losses for the year. You’ll complete this tax form if you can check both of these boxes:
- Your business is structured as a sole proprietorship or as a single member LLC that isn’t taxed as a corporation.
- You earned $400 or more in gross income during the year through your business.
In other words, most freelancers, gig workers, and side hustlers reporting $400 or more in gross income will need to complete a Schedule C.
On the other hand, if your business is structured as a multi-member LLC, partnership, or S Corporation, the filing process may look different and include other forms. Speak with an accountant if you’re unsure what you need to do at tax time.
How do I complete the first section of my Schedule C?
Before reporting your income and expenses, the Schedule C has a section where you need to identify who you are and what you do. It should be straightforward, but there are a few fields that tend to raise questions.
Here’s what you need to know:
Line A: Principal business or profession
You can just keep this simple by entering a phrase like “graphic design” or “wedding photography.” If you offer two services as part of the same business, like if you provide “graphic design” and “copywriting” services for websites, you could combine those on one Schedule C. However, if you have two unrelated lines of business that make you money like “photography” and “baking,” you’ll need to complete a separate Schedule C for each enterprise.
Line B: Enter code from instructions
This code has to do with your industry, and you can find the list on the last two pages of the Schedule C instructions. Some of the categories are outdated, so just find the closest match. No need to overthink this one.
Line D: Employer ID Number (EIN)
If you don’t have an EIN, you can just use your Social Security Number. However, it’s pretty simple and quick to get an EIN, so I suggest applying for one.
Line F: Accounting method
Most solo entrepreneurs use cash accounting, which means you report income when it hits your bank account and deduct expenses when you pay them. The alternative, accrual accounting, tracks income and expenses when they are earned or incurred. Whichever you pick, you should stick to one method for the year unless you have a good reason to change.
Line G: Did you “materially participate” in the operation of this business?
If you actively worked in your business, then you’ll answer yes here. If you only collected passive income from the business, like through royalties or rental income, then the answer might be no.
Lines I and J: Form 1099 questions
If you paid a contractor $600 or more via cash, check, or a bank transfer, then you’ll likely need to file a 1099-NEC for each contractor and check the box for “Yes” on both of these lines.
How do I complete Part I of my Schedule C?
Part I of the Schedule C is used to report your income. The form walks you through the math for each of these:
Line 1: Enter your gross receipts or sales. This is everything you earned before expenses, which may include:
- Income you collected from sales invoices you sent out
- Income from point of sale or online transactions through PayPal or other payment services
- Income from 1099s that you received from working as an independent contractor for another business
Lines 2: Enter any returns (refunds) or allowances you have, if applicable.
Line 3: Subtract your returns or allowances total in Line 2 from your gross receipts or sales total in Line 1 and enter the difference here.
Lines 4: Jump down to Part III of the form to calculate your Cost of Goods Sold (COGS) for things like materials, packaging, or inventory expenses. Enter that number here.
Line 5: Subtract your COGS amount in Line 4 from the amount you entered in Line 3 and enter the difference here.
Line 6: Add any miscellaneous income, like recovered bad debt or interest earned on your business banking account.
Line 7: Add the amount you entered in Lines 5 and 6. That new amount is your gross income. Enter it here.
How do I complete Part II of my Schedule C?
Part II of the Schedule C is where you’ll track your expenses. This is where all of your careful record keeping pays off! In Lines 8 through 27, you’ll list your business expenses by category for things like advertising, supplies, travel, rent, insurance, and more. Most of these are pretty straightforward, but if you’re not sure what qualifies, be sure to read my full guide on tax-deductible business expenses.
There are, however, a few that may trip you up:
Line 9: Car and truck expenses
If you used a vehicle for work, you’ll need to provide mileage details in Part IV.
Line 13: Depreciation
If you are claiming a depreciation expense for a large fixed asset or have depreciation from prior years that you haven’t fully expensed, you may need to complete and attach Form 4562.
Line 30: Expenses for business use of your home
You can deduct part of your rent, utilities, and other home office costs by using the simplified method or Form 8829.
Line 31: Net profit (or loss)
Take the total of all of your expenses and subtract that number from your gross income. The difference is your net profit or loss. Enter that here.
Boxes 32a and 32b:
If you did take a loss, you’ll need to let the IRS know if you are personally at risk of losing all the money if the business fails, or if there’s outside investment preventing you from actually losing all the money. Most self-employed people will mark box 32a to indicate “All investment is at risk” because they’ve put up the funds needed to run their own business.
One other thing to keep in mind is that if you have an expense for something that doesn’t seem to fit in the pre-listed lines, then you can add your own expenses in Part V of the Schedule C.
How do I report my profit or loss from my Schedule C?
Now that you’ve crunched the numbers, you’ll take your net profit or loss and report it on both of these tax forms:
- On Schedule 1 (Form 1040), Line 3
- On Schedule SE, Line 2 (to help the IRS calculate your self-employment tax)
Abridged by Amy
While this all probably still feels like a lot, once you complete your first Schedule C (or let a CPA help you do it), it gets easier every year. Even though it’s a pain, knowing your numbers and how they’re calculated can actually give you more clarity and confidence as a business owner.
If you ever feel stuck or overwhelmed, you should know that you’re not alone. Help is just a click away.
