As a self-employed worker, you need to remember to file a separate form when preparing your tax return. As you might have guessed, it is Schedule C. Self-employed means it is just you who owns 100% of the company, so there is no corporation or even simple partnership.
So, what is a Schedule C? It is a tax basis profit and loss for the past accounting period. The purpose of this form is to get a net profit (net taxable income) you have received thanks to the activity you are doing as a self-employed person. This figure is then passed onto the tax return every individual is required to send to the IRS.
Who does it apply to?
There are a couple of questions you need to ask yourself to figure out if Schedule C is something you need to complete during the tax time.
- Do you earn money as a 1099 contractor?Any entity or client that pays you for work or products over six hundred dollars in a given year should be mailed a 1099 form to you. Typically, independent contractors, side hasslers, gig workers, and solopreneurs will be getting these.
- Do you get paid as a sole proprietor?Individuals can work as sole proprietors and make money, but you might not necessarily receive the 1099 form (e.g. you were paid less than six hundred dollars). However, you still should report these earnings as revenue when filing taxes.
- Do you have an LLC?Regardless of what you call yourself, if you set up a separate business entity with a separate tax ID number, it is just you owning the company, then filing this additional form and reporting money earned as self-employed right on an individual tax return you complete is mandatory. An exception would be when you elect to be taxed somehow otherwise.
In all these three cases, Schedule C is something the IRS expects to receive from you. Whether you provide consulting services, do some freelancing, or simply earn cash or receive checks or other types of payments from individuals, businesses, or government agencies (even if you don’t receive 1099), you need to attach Schedule C to the tax return.
How does it work?
There is no separate tax return required when you are a Schedule C business, just an additional form to your 1040. Your 1040 is your individual tax return. All of your business income, all of your business expenses are reported onto this Schedule C form.
The last line in this form, called Net Income, is going to be the only number off that Schedule C that gets transferred onto your 1040 form. The Net Income is the income your entrepreneurial activity generates fewer expenses. It is used in two different ways to calculate two different types of tax that are reported and paid for within your individual tax return.
- The net income of your business is first reported on the bottom of your Schedule C. Next, it transfers to the first page of your 1040 form. On the last form, it is considered part of your ordinary or earned income and eventually becomes part of an individual’s taxable income. Thus, the money your entrepreneurial activity generates for you gets thrown together with all of your other income, including wages or salary you might be earning at another company. Accordingly, you will use the same tax rates as for any other income you receive.
- The second type of tax that comes into play when you have a Schedule C business type is the money you earn as self-employed. It is an often-overlooked portion of taxes, but you still owe it on top of the income tax. Thus, you should also set aside slightly less than 16% of business profits to cover the self-employment tax.
To conclude, Schedule C is a tax form necessary for calculating income and self-employment taxes.