Is Schedule C Easy to Fill Out

What is a Schedule C?

Schedule C is used to report self-employment income on a personal return.

"Self-employment income" is how we describe all earned income derived from non-W-2 sources. This could be income from your small business, freelance work, or just extra cash earned through a side hustle.

Schedule C is also where you report your business write-offs. Those are the work-related expenses you incurred during the year, like supplies, software costs, your cell phone bill, and more.

Who needs to fill out Schedule C?

If you would describe yourself as one of the following, you should be using a Schedule C:

• Freelancer
• Gig worker
• Side hustler
• Sole proprietor
• Independent contractor
• Sole owner of an LLC
• Business owner with your spouse
  

In a nutshell, if your income isn't reported on a W-2, you don't have a business partner, and your business isn't incorporated (or treated as a corporation for tax purposes), the Schedule C is for you.

How many schedule C forms do you need?

As a general rule, you should use one Schedule C for every business activity you're involved in. For instance, if you DJ on the weekends and sell custom t-shirts on Etsy, those should be reported separately.

The reason is that certain write-offs are only available to certain industries, so if you mix together your different ventures on a single schedule C, it's much more likely that your return will get flagged and audited.

The goal is to keep all similar or related activities together. So for example, if you drive for both Uber and Doordash, you could combine those activities on a single schedule C, since they both fall under the umbrella of driving services.

How to fill out your schedule C, step-by-step

The best way to learn is with examples. So for our Schedule C walkthrough we're going to look at how Bruce Banner — also known as The Hulk — would complete his tax form.

Step #1: Input your information

The first section of the Schedule C is reserved for your business information. We're going to review this in detail below.

💁 Name of proprietor

In most cases, this will be your personal name. If you have an LLC you're registered under, you can use the business name here.‍‍

‍#️⃣  Social Security number

You'll fill out either this box, or box D, never both.

If you haven't registered for an employer tax ID number, use your Social Security. If you do have an employer tax ID number, leave the Social Security box blank.

The important thing is that the tax ID number listed here matches any 1099-NEC's you receive.

🦸 Box A: Principal profession‍

This box describes the industry you work in. In the example above, Bruce Banner's profession is working as an Avenger.

There's really no right or wrong here, just pick a word that best describes what you do. That could be "dog walker," "massage therapist," or even something general, like "janitorial services."

📍 Box B: Code‍

This code helps the IRS identify your industry more precisely. The IRS uses a list of predetermined NAICS codes to pick from.

It's not always easy to determine which code makes the most sense, but your best guess is fine. There's no penalty for accidentally choosing the wrong thing.

In Dr. Banner's case, it's hard to find a code that adequately describes "superhero," so he went with 812990 - "other personal services."

🦸 Box C: Business name

This is optional, but it's used to list your "doing business as" name. This helps the IRS tick and tie records in the event that some of your 1099's are issued under your personal name, and some under your DBA name.

When working on the team, Mr Banner goes by Bruce, but his public-facing name is The Hulk, so he listed both to minimize confusion.

🏢 Box E: Business address

If you have a separate location for your business, list it here. If not, your personal address will do.

💸 Box F: Accounting method

The majority of taxpayers use the cash method.

The other accounting methods won't be applicable to most of you, but if you're like Tony Stark and don't like being kept in the dark, here's where you can learn more.

‍🏋️  Box G: Material participation

For the majority of taxpayers, this will be yes. The IRS needs to confirm that you were the person actually earning the income, because if you weren't, there are additional rules for claiming business losses.

🤝 Box I & J: Filing 1099's

If you paid a contractor more than $600 you are required to send them a 1099-NEC. These boxes ask you to report whether or not that applies to you.

Note that if you mark "yes" to the first box, and "no" to the second, it's likely the IRS will follow up, and you could get penalized for every unsent 1099.

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Step #2: Fill out your income and cost of goods sold

 Part 1 of schedule C is where you record your total income and the cost of your sales.

🤑 Box 1: Gross receipts

Remember all those 1099-NECs and 1099-Ks you've been saving? This is where they go. Tally up your income for the year using your 1099s and bank statements and input the total in box one.

↩️ Box 2: Returns

This is used to report any returns or refunds you had to give during the year. Typically it's used by people selling physical products, but any refunds can be put here.

🎨 Box 4: Cost of goods sold

Cost of goods sold (COGS) refers to the costs directly related to creating a product. For example, if you sell artwork, your COGS would be things like canvases and paint.

To determine what amount should go on line 4 of the Schedule C, you have to fill out part III on page 2.

Line 33 asks you to choose an inventory method. For most taxpayers, this will be "cost."

Line 34 asks if you've made any changes to how you track or value inventory. The answer will be "no" for most people.

How to calculate cost of goods

Traditionally, COGS is calculated using the following formula:

Starting inventory + (purchases + labor +materials) - ending inventory ‍

So for example, say you have $300 worth of unsold artwork at the start of the year.  During the year, you purchase supplies to make an additional $400 worth of artwork. At the end of the year, you have $500 of unsold artwork. In that case, your cost of goods would be $200. (300 + 400 - 500 = 200)

The idea is to not write off the cost of anything that hasn't been sold yet.

🤷 Box 6: Other income

This is where you can report miscellaneous income related to your business. For example, let's say you're ready to upgrade your computer, and you decide to sell your old one for some pocket cash. That income would be reported here, since it's only tangentially related to your business.

Step #3: Fill out your business expenses

For this next step, we're going to look in-depth at Dr. Banner's business expenses on Part II of his Schedule C:

🪧 Box 8: Advertising

As you can imagine, it's not always easy for The Hulk to get good press, so Dr. Banner has had to run several social media campaigns to improve his public image.

In addition, he hired a firm to make Hulk t-shirts, action figures, and other merchandise. All of those costs are included in box 8.

Naturally, Dr. Banner had a team of S.H.I.E.L.D's top bookkeepers keeping track of these expenses for him.

While our bookkeepers don't carry Vibranium weapons, the Keeper Tax team can help you track your advertising costs during the year directly through our app.

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🚗 Box 9: Car and truck expenses

Auto expenses are ubiquitous in every industry. Box 9 of the Schedule C is where you record either your actual car expenses or your business mileage deduction.

Regardless of the method you choose, you'll have to report some additional information about your car.

If you plan to claim depreciation on your vehicle, you're required to use Form 4562 to disclose your car details.

If you're not claiming depreciation — either because you're claiming mileage, your vehicle is leased, or it's already been fully depreciated — you can use part IV of the Schedule C to list your car details.

If you have multiple autos, you can attach as many copies of page 2 part IV as you need.

Use box 44 to list out your mileage details for the year. If you're claiming actual expenses, you can leave box 44 blank.However, boxes 45-47a/b must be completed for either method.

For your mileage deduction, "written evidence" refers to a mileage log. For actual expenses, your business records will do. (The summary of expenses on the Keeper Tax app is sufficient).

🏷️ Box 10: Commissions and fees

As a member of S.H.I.E.L.D, Dr. Banner is required to pay a 5% fee on his gross sales for their services.

This commission arrangement is similar to what many hair stylists and estheticians have with the beauty salons that they operate out of. These payments can be listed here.

🤝 Box 11: Contract labor

This field reports payments made to workers who perform services for you, but aren't your employees. If you work as a DJ and hire a friend to help set up your equipment prior to an event, that would be contract labor.

In Dr. Banner's case, he regularly contracts mechanics, translators, and local guides for his work. Since he usually pays them more than $600, he also files 1099-NEC's for them.

🛢️ Box 12: Depletion

This box is typically used by those in the oil and gas industry, or anyone mining natural resources. It's not commonly used by most taxpayers.

🚚  Box 13: Depreciation

Most major purchases can't be expensed all at once. Things like machinery, equipment, cars, and so on, must be reported as a fixed asset on Form 4562 and gradually depreciated over their useful life.

For more on how this works, check out our guide to computer write-offs, which covers depreciation in depth!

The current year depreciation is reported here. ‍‍

👶  Box 14: Employee benefits program

Anyone who has W-2 employees and offers them benefits like health or disability insurance, childcare, or group-term life insurance can report those costs here.

☂️ Box 15: Insurance

As you can imagine, when your catchphrase is "SMASH," liability insurance is a must. Box 15 of the Schedule C is where all non-health insurance premiums are reported.

🏦 Box 16a: Interest

Do you have a mortgage for an office building or warehouse? If so, use this for the interest payments that are reported on Form 1098 by your bank at the end of the year.

💳 Box 16b: Interest

This line reports interest paid on all other channels, such as credit cards and loans.

👩💼 Box 17: Legal and professional services

This is used to report payments to attorneys, accountants, and any other advisory service. Note that any attorney you pay more than $600 needs to be issued a 1099-NEC.

🖨️ Box 18: Office expense

Office expenses cover a wide variety of purchases. The obvious ones are printers, paper products, computers and accessories, software, and office furniture. In general, this is a catch-all account for basic overhead expenses.

Note that office rent isn't included here, though. You'll report that in Box 20b.

💰 Box 19: Pension and profit sharing

If you have W-2 employees that you provide retirement plan options to, this would be where you would record those costs. That includes your employer contributions.

🏗️ Box 20a: Rent or lease machinery and equipment

In The Hulk's case, while some equipment is provided by S.H.I.E.L.D, much of it is leased from Stark Industries. Costs for renting equipment goes here.

🏪 Box 20b: Other business property‍

This is where office rent or leases would be recorded.

🛠️ Box 21: Repairs and maintenance

This category can include anything from computer repairs to plumbing fees.

As you'd expect, this is a big category for Dr. Banner who regularly damages his equipment and puts dents in the walls.

💅 Box 22: Supplies

Another great catch-all category, supplies can include anything you need to complete a job. Think of it as "cost of goods sold" for service providers.

To give an example, if you work as a manicurist, the nail polish you purchase could be included under supplies. If you side-hustle as a dog walker, this could be where you report treats or whistles.

🧾 Box 23: Taxes and licenses

Use this box to report sales tax, franchise taxes, property taxes on business assets, and payroll taxes (if you have employees). You can also report any business licenses you were required to pay for to operate in your state.

✈️ Box 24a: Travel

Business-related travel costs such as airfare, hotels, train tickets, and rental cars go here.

Note that Dr. Banner has left this box blank, even though he travels a lot for work during the year.

Why? Because he's been floating around in space, so he doesn't have a designated "tax home": a place where he routinely conducts business from.
As such, he's considered a "transient worker" for tax purposes and is explicitly disallowed from claiming travel expenses.

🍔 Box 24b: Meals

For 2021 and 2022, you're allowed to claim 100% of your work-related meal costs. Typically, these are limited to 50% in most cases. In 2023 and onward, meals will once again be 50% tax-deductible. ‍

💡 Box 25: Utilities

Typically utilities can only be claimed if you own, rent, or lease an actual office space, since your home office utilities will be reported elsewhere.

🎫 Box 26: Wages

For businesses that have employees, this is where you'll report their wages.

Important note: this amount should match the total on your annual W-3 for the year. If you just report your employee's take-home pay, you'll understate your write-off and potentially miss out on a larger Qualified Business Income Deduction.

🌈 Box 27a: Other expenses

If you can't figure out where to record an expense on lines 8-26, line 27 gives you the opportunity to list out alternative categories.

On page 2 of the Schedule C, under Part V, you can write custom expense items and their values. The total will carry to line 27 on page 1.

As you can see from the example above, Dr Banner has some unusual business expenses that don't fit in any of the other categories.

Because of the unique nature of his superpower, his modified garments are a good example of clothing that is specifically designed for work.‍

And while hypnotherapy is usually personal, it's an essential cost for creating a safe work environment and improving his job performance.

A similar exception is made for pro athletes, who are allowed to write off the costs of physical therapy and massages. Who else can't forget Michael Phelps's cupping marks?

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Step #4: Calculate your net profit

Congratulations — you're down to the final lap. All that remains is to calculate your net profit or loss and factor in your home office deduction.

💵 Box 29: Tentative profit

Add up all of the expenses in lines 8-27b, and enter the total in box 28. From there, subtract your total expenses from your gross income on line 7.

Voila! Your tentative profit.

🏠 Box 30: Business use of home

You have two options when writing off your home office: the simplified method and the actual method.
‍
To learn more about each option and how to calculate them, check out our comprehensive home office guide.

If you're claiming the actual method, you need to complete Form 8829 and attach it to your return.

Dr. Banner has elected the simplified method, so he included his home and office square footage on lines a and b. If he were to take the actual method, he could leave those lines blank.

However, since Dr. Banner spent the last few years in space, he actually doesn't have a strong case to take the home office deduction.

Claiming the simplified method is the most conservative approach that will raise the least amount of scrutiny from the IRS. That's a good thing, because nobody wants to be in the room when The Hulk learns he's being audited.

💰 Box 31: Net profit

‍The very last step is to subtract your home office deduction from your tentative profit to determine your actual net income.

This amount will carry to Schedule 1 of your 1040 and line 2 of Schedule SE to calculate self-employment taxes.

📈 Box 32: Investment risk

This section prompts you to categorize the income as either "at risk" or "not at risk."

It's another way of asking, "what do you stand to lose?" In other words, if your business goes under, would you be personally on the hook for paying the outstanding debts?

For most taxpayers, the answer is going to be "all investment is at risk."

You made it to the end — congratulations!

I hope you feel ready to file on your own. But if you decide you have better things to do with your time, there is an easier way!

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Filing with Keeper Tax is safe and fast, since the software is designed specifically for self-employed people. That leaves you with more time to save the world – or whatever it is you do for work!

At Keeper Tax, we're on a mission to help freelancers overcome the complexity of their taxes. That sometimes leads us to generalize tax advice. Please email support@keepertax.com if you have questions.

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Source: https://www.keepertax.com/posts/schedule-c

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