Schedule C 1040: Everything You Need to Know
Schedule C 1040 is used to report income for those operating as sole proprietors. 3 min read
2. Sole Proprietorship: The Basics
3. Section 1040C: What’s Involved?
4. Frequently Asked Questions
What is a Schedule C 1040?
Schedule C 1040 is used to report income for those operating as sole proprietors. If someone engages in activity for a profit, or engages in the activity regularly, then that activity meets the requirement of a sole proprietorship, and such a business should be created by the individual to separate the business profits from other earned income.
Sole Proprietorship: The Basics
A sole proprietorship is an ordinary business that offers goods or services to the public, but is generally owned and run by only one individual. If you own a sole proprietorship, you can still open physical offices and hire employees. The only difference between operating your company in this manner as opposed to a corporation or partnership is that you manage everything, including your pay. For example, if you baby-sit, you technically run a sole proprietorship.
Section 1040C: What’s Involved?
Schedule C is used to report both profits and losses from a sole proprietorship. It has five parts as follows:
- Part One. You will list all of your income, calculating the gross profit you made in the taxable year.
- Part Two. You will then deduct all business expenses, thus calculating your net profit.
- Part Three. After completing part two, you have to figure out what will be reported on your tax return.
- Parts Four and Five. These parts must be completed only if you purchase inventory for your business, you have to claim deductions for car expenses, or if you have any other expenses that are not listed in part two.
Most sole proprietors can use an easier version called Schedule C-EZ so long as you:
- Operate only one sole proprietorship
- Have less than $5,000 in business expenses
- Report a net profit (cannot be $0 or less)
- Don’t have any business inventory
- Don’t have any employees
- Are not claiming a deduction for maintaining a home office
Such a form includes less detail than that identified in Schedule C. It only asks for your business receipts and expenses as opposed to the information requested in parts four and five. However, if you need to claim expenses for utilizing a vehicle for business purposes, then this information still must be included in the C-EZ form.
Frequently Asked Questions
- How do I report self-employment taxes?
Schedule SE is the form utilized to pay self-employment taxes, which is required for a sole proprietorship that earns a net profit of $400 or more. When you fill out your 1040, however, the IRS allows you to deduct some of the tax payments that you may otherwise be required to pay.
- What other information do I need to give in Schedule C 1040?
Since Schedule C accompanies the main 1040 tax form, the schedule itself simply asks a few questions regarding your business, the product(s) or service(s) offered, your business address, gross receipts or sales, and the costs associated with the goods sold. You’ll also be required to explain your method of accounting, specifically how you earn your money, any business bank accounts you utilize, and any other payment/accounting methods you use for your business.
Lastly, you’ll include your business expenses, including automobile, office, utilities, advertising expenses, and any other business-related expense you’ve incurred in the past year. However, the business expenses must be “ordinary and necessary” to be deducted from your income tax. Also included in this Schedule are expenses you incurred from the use of your personal vehicle, including mileage used when driven for business purposes.
Important note: Those who operate more than one sole proprietorship are required to file a separate Schedule C for each business.
- Are there other situations other than a sole proprietorship that require the filing of a Schedule C 1040?
Yes, including the following:
- If you earn wages and incur expenses from being a statutory employee
- If you earn income and have deductions from certain joint ventures
- If you receive miscellaneous income, which may include at least $10 in royalties or broker payments or at least $600 in a variety of services. See Form 1099-MISC- Miscellaneous Income for full details.
If you need additional help learning more about Schedule C 1040, or if you have questions about forming a sole proprietorship, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.