What is a Schedule C? How do I file taxes for my LLC?

‍Key Takeaways

• Schedule C is an IRS form used by self-employed individuals to report their business profit or loss on their annual tax return. 
• It is important to keep good records because Schedule C requires you to report a lot of information about your business activities. 
• You must include all income you earned from being self-employed, whether you received a tax form for the income or not. 
• Your business expenses must be ordinary and necessary to be deductible on Schedule C. 
• To calculate your profit or loss, you will take your gross income less all business expenses. A business profit will be subject to self-employment taxes. 

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Summary

IRS form Schedule C is common among the self-employed during tax time. Independent contractors, freelancers, and small business owners use it to report how much money they made or lost from running their business during the year. Whether you just became self-employed or have been doing it for a while, this post will give you all the details you need to know about Schedule C. 

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What is Schedule C?

Schedule C, Profit or Loss From Business, is a two-page IRS form that gets included on your individual tax return (Form 1040). It is used to report all of your business income and expenses for the year in order to calculate your profit or loss from self-employment. 

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Who Needs to Fill Out Schedule C?

The IRS requires you to fill out Schedule C if you earned money working for yourself on a full-time or part-time basis. It is used to report the business income and expenses of sole propretiors and single-member LLCs, as long as the LLC is not taxed as an S corporation or C corporation. A sole proprietor is someone who is self-employed and does not have an incorporated business. 

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What Information Goes on Schedule C?

A lot of information gets reported on Schedule C, so it is important to track your business activity throughout the year and maintain good records. Some of the information includes:

• Your name and social security number
• The name, address, and employer identification number of your business (if applicable)
• The principal product or service provided by your business
• Your business’s accounting method (cash, accrual, or other)
• Whether or not you materially participated in your business during the current year
• Whether you acquired your business in the current year
• Detailed reporting of your business income
• Information about your inventory and cost of goods sold (if applicable)
• Your itemized business expenses such as advertising, rent, wages, supplies, etc. 
• There is also a section to enter other expenses that cannot be categorized by the fields already provided on the form

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How Do You Complete Schedule C?

Schedule C is broken out into five parts for reporting business income and expenses. It is possible you will not need to complete every part depending on the type of business you have. 

• Part I is dedicated to the income that you earned from being self-employed. This income can come from a side gig, like grocery delivery, or a full-time job like working as a graphic designer. You may receive form(s) 1099-NEC, 1099-K, or 1099-MISC reporting income earned during the year. You must report all income on Line 1 whether you get a tax form or not! 

• Part II is where you will report your business expenses. This may include items such as travel, equipment, vehicle use, etc. If you work from a home office, it will be included in this part as well. Keep in mind that expenses must be both ordinary and necessary to be deductible. The IRS considers expenses to be ordinary if they are common and accepted in your industry. A necessary expense is one that is helpful and appropriate in conducting your business. For example, a guitar would be considered ordinary and necessary for a professional musician, but not a copywriter. 

• Part III is applicable to you if you earned income by selling things. The cost of purchasing that inventory needs to be reported. To help you visualize this part, imagine you run a shop selling rare shoes. You had $5,000 worth of inventory (shoes) at the beginning of the year and purchased an additional $3,000 of inventory during the year for a total of $8,000. You would take your total inventory and subtract the inventory remaining at year-end (we’ll use $2,000) to calculate your cost of goods sold which is $6,000 in this scenario. Cost of goods sold is subtracted from gross sales to arrive at your gross profit. 

• Part IV requests information about a vehicle used in your business (if applicable). It’s important that you keep track of your total personal, business, and commuting mileage during the year.  A simple app can help with this.

• Part V is “Other Expenses” and gives you an opportunity to list any other business expenses not already included in earlier parts. 

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What is My Net Profit or Loss?

Thankfully, this is the easy part. You will take your gross income and subtract your business expenses to arrive at your net profit or loss. If you earned a profit, you will be subject to self-employment tax which is 15.3%. This tax is made up of the employee and employer portions of social security and medicare taxes. Fun fact: you can claim 50% of this as an income tax deduction.

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Is a Schedule C the Same as a W2?

No, a Schedule C is not the same as a W2. A W2 will report the income you earned working as an employee of a business. Schedule C is only for people who earn income from being self-employed either as a sole proprietor or a single-member LLC. It is possible to have W2 income and Schedule C income during the same year if you were both an employee and self-employed. 

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Is a Schedule C the Same as a 1099?

No. A 1099 is typically used to report money paid by a payor to the payee. The income reported to the payee on a 1099 may go on Schedule C, or it may be reported elsewhere on the tax return. For example, if you are a freelance virtual assistant, you may receive a 1099-NEC for services performed. This would get reported on Schedule C. 

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