Schedule C is part of Form 1040. It’s used by sole proprietors to let the IRS know how much their business made or lost in the last year. The IRS uses the information in Schedule C to calculate how much taxable profit you made—and assess any taxes or refunds owing.
Do I need to file Schedule C?
If you are a sole proprietor, you’ll likely need to file Schedule C—and you’ll need to file a separate one for each business if you have more than one.
You’re a sole proprietor if:
-Your business isn’t another legal business entity, such as a corporation or partnership
-You don’t have a boss or manager to report to, who holds back a portion of your salary for taxes
-The primary reason for your business activity is to make money
-You conduct business regularly, and it isn’t just a hobby (more on that below)
-You are a single member LLC that has not elected to be taxed as an S corporation
There are a few common mistakes that crop up time and again. Here are some misunderstandings also might trip you up.
-You only need to file one Schedule C
In the gig economy, many sole proprietors work several self-employed jobs. What they might not realize is, you must fill out a separate Schedule C for each distinct type of work. For example, if you are in freelance sales, selling multiple products, each sale is considered “related work”, and you only need to file one Schedule C to cover all work of that type. However, if you also drive an Uber (currently considered a form of self-employment in the United States), you would have to report your profits and losses from that business venture separately.
This also means keeping separate records for each role—including mileage records, office supplies, and fuel tax credits. If you are a married couple, each with a separate sole proprietorship, you can’t file on the same Schedule C—each individual is responsible for their own.
-You only earned X amount, so I don’t have to file
You must report all income and losses from your sole proprietorship or single-member LLC by filing Schedule C. There is a minimum threshold for paying tax on your self-employment income ($400)—but no minimum for reporting any loss or profit on your business.
Unless you are filing Schedule C as a statutory employee, your self-employment income and business income are one and the same.
-You lost money, so my business qualifies as a ‘hobby’
There is a common myth that if you don’t show a profit for two out of five years, your business is considered a hobby, and you don’t need to file a Schedule C. The truth is, it might—but it also might not.
Profit is only one factor in deciding if you’re running a business or charging for a hobby. Your intention to make a profit, keeping deliberate records, and the type of business you run, can all sway the IRS into classifying you as a honest-to-goodness business, not a hobby. If you’re in doubt, talk to a professional to see where you stand.
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