You’ll need a pair of reading glasses or at least a monocle to read all the fine print on a Schedule C tax form. Of course, if you use a monocle, you probably also wear a top hat and are too busy building hotels on Park Place to look at a “shed-yool.”
For the rest of us though, Schedule C is a two-page IRS form for reporting profit or loss from business (sole proprietorship). In other words, if you’re self-employed, Schedule C is where you report the money you made and subtract your expenses to figure out your net profit.
Why do you need to know your net profit? Well, so you can be a responsible citizen and pay taxes (including the self-employment tax).
Who Files a Schedule C?
If you earned money working for yourself—whether it’s a side hustle or a full-time gig—you have to fill out Schedule C to report income and expenses. The fancy business term for someone who works for themselves is a sole proprietor. So that’s why you’ll see that term at the top of Schedule C.
How Do You Report Income on Schedule C?
Schedule C is divided into five parts. It’s kind of like a boring five-act play that you know isn’t going to end well for the hero because he’s going to have to pay a big price in the final act.
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So back to Schedule C. Part I is dedicated to income. This is where you list the money you earned from being self-employed. This could be from a side hustle, like driving for Uber or selling honey at a farmers market, or from something you do full time, like working as a carpenter or a freelance writer.
If you received any 1099-NEC, 1099-MISC or 1099-K tax forms reporting money you earned working as a contractor or selling stuff, you’ll have to report that as income on Line 1 of Schedule C. You’ll also need to add any other money you earned while being self-employed. Yep, you have to pay taxes on it all!
We’re skipping ahead a little, but if you earned income from selling stuff—exotic fish, cookies, baseball cards, crafty creations, etc.—you’ll calculate the cost of goods sold on Part III of Schedule C. Basically, you need to report the cost of the inventory you sold.
Here’s a quick example of what Part III might look like. Say you sell vintage books online. At the beginning of the year, you had $10,000 in inventory, and over the year, you added $2,000 in inventory for a total of $12,000. You take your total inventory and subtract your remaining inventory (let’s say it’s $5,000) to come up with your cost of goods sold. In this example it would be $7,000. Keep in mind, inventory refers to your actual cost, not the selling price.
Once you have your cost of goods sold, you go back to Part I and subtract it from your earnings to get your gross profit. (And by gross, we don’t mean chewing with your mouth open.) Add any additional business income, like interest or awards, not reported on Line 1 and boom! You’ve got your gross income.
How Do You Report Expenses on Schedule C?
Schedule C is 48 lines of fun, and the fun keeps coming with Part II: Expenses. This section is where you can include self-employment tax deductions: home office expenses, advertising, vehicle use, office supplies, equipment and software, business travel and meals, phone and internet costs, start-up costs, and vanilla lattes. (Okay, that last expense isn’t legit, but a little caffeine could be helpful when digging into Schedule C.)
Make sure to keep receipts and invoices for all these expenses in a central location. And no, your wallet stuffed with coupons, cash and cards is not the place for them. Having detailed records will make tax time much easier and protect you if the IRS ever audits you.
Deductions lower your net income, and since you pay taxes on your net income, that means they lower your tax bill. Bravo for deductions!
So that leaves us with Part IV and Part V. (If you haven’t ever seen the Rocky movies, IV = 4 and V = 5.) Both of these parts are related to expenses. Part IV is where you calculate your vehicle expenses. And Part V: Other Expenses is where you list . . . you guessed it . . . other expenses. These are miscellaneous expenses not listed as a line item in Part II.
How Do You Find Your Net Profit or Loss?
At this point, you’ve figured out your gross income and your expenses. And now it’s a matter of simple subtraction: gross income - expenses = net profit or loss. Hopefully you earned a profit! But even if you had a loss, you have to report that on your taxes.
Your net profit or loss goes on your main 1040 tax form as part of the income component. You’ll also include it on Schedule SE to calculate your self-employment tax, which is a 15.3% tax made up of both the employee and employer portions of Social Security and Medicare taxes.
Get Help With Your Self-Employment Taxes
Hey, when it comes to being self-employed, taxes can get pretty complicated pretty fast. A tax pro can help you make sure you never have to read a 1,000-word article on Schedule C ever again! If you’re looking for a tax expert in your area, RamseyTrusted Endorsed Local Providers (ELPs) have years of experience and can help you file your taxes with confidence. Find a tax pro today!
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