Solving the Mystery of the Schedule C
We know when we start talking about forms, there is a tendency for people’s eyes to glaze over and for their minds to drift.
No… tax forms aren’t exactly exciting dinner party topics, but they are important.
Often we find that clients don’t want to talk about forms because they’re afraid of hearing that they might be missing some crucial piece of paperwork. There is a real feeling of “am I going to get in trouble” when even the most experienced business owners hear there might be an item missing in their financial toolbox. Small business owners are inherently driven to do the right thing to ensure the safety of their company, but they are also motivated to take on as little extra work as possible given their busy schedules. So forms fall to the bottom of the slush pile.
Let’s work on getting them out of the dark and into a place of clear understanding, starting with Schedule C.
What is a Schedule C form?
This tax form is designed to report your business’s profits and losses to the IRS. It is included when you file your personal tax return. As you might imagine, this is a particularly crucial piece of information about your business and can have a big impact on what you owe come tax season.
Who needs to fill out a Schedule C?
Schedule C tax forms are intended for sole proprietors and single-member limited liability companies (LLCs). Whether you’re a freelancer or a solopreneur, the government anticipates receiving this report of your income and expenses as part of your tax return.
What is the difference between a sole proprietor and a single-member LLC?
There is very little difference between the two. Both indicate a solo-owned enterprise in which all the business’s profits go directly to the owner. Sole proprietorship is typically the distinction taken on by someone who is a freelancer, contract worker or has a side gig. An LLC is a registered business structure typically chosen when the business owner wants a bit more protection for their personal assets.
Is it the same as a 1099?
It is not the same as a 1099. Though your business may operate entirely on contract work which will mean you receive one or more 1099s by which you report your income and pay taxes, it isn't the same as a Schedule C. You may also find that you need your 1099 forms in order to complete your Schedule C, but as this only informs your income and not your expenses, 1099s alone don’t report on the full health of your business.
What information is reported on the Schedule C?
Your Schedule C form is where you report all the revenue your business has earned as well as all of your business expenses. This gives a true view on if you’re earning a profit or suffering a loss. It is that number that is then reported on the 1040 and also on Schedule SE (used to calculate self-employment tax).
In order to accurately convey this information on the Schedule C you’ll need:
Your Profit and Loss statement
Information on inventory and cost of goods sold (if this is relevant)
A listing of expenses related to your home office
Details on the business use of your vehicle (if relevant)
*Note: if you are keeping a proper set of books, most of the information for the Schedule C will come from your Profit and Loss report.
The form itself is broken into five parts.
The first part is where you tally sales, deduct cost of goods sold, and determine your gross profit (the amount you made before your expenses).
The next part is where you report your expenses. The form helps by categorizing the main sources of business expenses and you can follow this set of instructions to determine if your expenses qualify as defined under the Schedule C. Your gross profit, minus your expenses, gives you your net profit. It is that number that your personal income tax is based upon. The home office deduction is also included in this section. Make sure you are tracking expenses related to your home office in a spreadsheet. It can be helpful to have your tax accountant assist you in calculating the home office deduction.
The third section helps you calculate the cost of goods sold (if you are a business that holds inventory).
Four is related to business use of a vehicle. Deductions related to business vehicles can be a little complicated. It is best to check in with a tax accountant if you are new to using your vehicle for business use.
Finally, the last section is reserved for any expenses that are outside the categories listed in section two.
If you are working with a tax expert or using a software service like TurboTax, this process of filling out a Schedule C will be included in that service. It is important to be familiar with a Schedule C form, but you by no means have to be an expert. After perusing the Schedule C, you may want to line up some of the accounts in your bookkeeping software with the categories in the Schedule C, just to make things easier.
Another important thing to note is that if you are succeeding at bookkeeping on your own or have hired a bookkeeper to help you, the information required to accurately fill out a Schedule C should be readily available and fairly easy.
The only areas where we see sole proprietors/single-member LLCs struggle with a Schedule C is when their documentation and record keeping is mismanaged or ignored throughout the year. Being involved and engaged with proper bookkeeping tends to demystify a lot of these forms. Though you may not make a weekend habit of learning the names of every tax document, you can be assured that they will be much less intimidating if the accounting groundwork is laid throughout the year.
Though understanding tax forms can induce some anxiety, taking control over what you need to have prepared for tax season will empower you. Knowing what you earn and what you spend should be fundamental knowledge essential to the growth and success of your business. The fact that you have to report that is just a minor technicality compared to how essential it is to understand that information for your own prosperity.