When you're self-employed, there's much more to tax season than just plugging in information from your W-2 form into tax preparation software and letting it do the work. You also have to file a Schedule C tax form. So whether you're just starting as a freelancer or have been running your own business for years, understanding the Schedule C is essential to being self-employed.
Don't worry, though, if you've been keeping good bookkeeping records throughout the year, filing a Schedule C is much simpler than it sounds. Here's everything you need to know about the Schedule C form, why it's important, and how to complete it correctly.
Here’s what the Schedule C (Form 1040) looks like:
A Schedule C is a tax form to report your business income and expenses to the IRS. It calculates your net profit or loss from your business, which is then reported on your personal income tax return (Form 1040).
The Schedule C helps self-employed individuals and independent contractors keep track of how much money you made in a calendar year and how much you spent on your business expenses. The purpose of the Schedule C is to calculate your net profit or loss from your business, which is then used to determine the amount of taxes that you owe.
Accurately filling out the Schedule C is important since it affects your overall tax liability. For example, you can claim deductions for business-related expenses on your Schedule C form, which can help to reduce the amount of taxes you owe.
If this is the first time you’re hearing about a Schedule C form, you may be wondering if it applies to you this tax season. Here’s a list of individuals who typically file a Schedule C form alongside their personal returns:
Self-employed individuals who receive income from freelance work, consulting, or other services
The recession prompted many Americans to take the leap into self-employment to build a safety net and diversify their incomes. Even if you’re still working a full-time job and running your side hustle on the side, you’ll be expected to file a Schedule C with your personal tax return.
Note: If you are self-employed and your business is structured as a corporation or partnership, you will not file a Schedule C. Instead, you will file a separate tax return for your business.
The Schedule C form is divided into different sections, each with its own specific purpose, and you’ll need to have a few things handy to make sure you fill it out accurately, including:
Your social security number or employer identification number (EIN)
Business income and expenses
Cost of goods sold
Total miles you drove for business purposes
Documentation for all the above
At the beginning of your Schedule C form, you'll enter your business name, contact information, and Employer Identification Number (EIN) if you have one. You will also indicate the type of business you operate and answer a few preliminary questions.
This section is used to report all income received from your business, such as sales or services. This includes money you received from customers, clients, or patients and any other income related to your business. This is the total amount of income before any expenses are deducted.
Next, you'll use this section to report all the expenses incurred in running your business, such as rent, utilities, and supplies. If you've kept your business and personal expenses separate, this section will be easy to fill out. The expenses section is an integral part of the Schedule C form since it helps calculate your net profit or loss from your business.
Remember: One of the best ways to keep your tax bill as low as possible is to track your business expenses as you go. Each purchase you make for your business is likely deductible on your taxes—and every time you take a deduction, you lower your profit and lower the amount of income that you can be taxed on. The lower your income, the less you pay in taxes. A good bookkeeping routine is essential here since you'll need to keep accurate records and documentation.
The cost of goods sold (COGS) section of a Schedule C form reports the cost of materials and direct labor used to produce the goods you sold during the year. Here's why this is important: The COGS figure is subtracted from your gross receipts to determine your gross profit. This information is then used to calculate your net profit or loss from your business, which is then reported on your personal income tax return (Form 1040) and is used to determine the amount of taxes you owe.
This section reports the business use of your vehicle, including the total miles you drove and the expenses related to the car. There are two different methods for deducting your vehicle expenses: the “actual expense method,” and the “standard mileage method.”
Remember: You can only deduct the business-use percentage of the vehicle expenses, so you’ll need to have accurate records and receipts of your vehicle's expenses and the miles you drove for business purposes.
The final section of the Schedule C form is used to report, you guessed it, any other business expenses that aren't reported elsewhere on the form. For example, if you have a home office, you can claim a percentage of your rent or mortgage, utilities, insurance, property taxes, and repairs as home office expenses.
Like all aspects of tax, keeping accurate records and receipts is essential. Not only will it make it easy for you to fill out your Schedule C form, but it is also important to have documentation in case of an audit.
If you are self-employed, you will typically file a Schedule C along with your Form 1040 on your annual tax return since it's filed as part of your personal tax return. The deadline for filing your personal tax return, including the Schedule C, is April 15 each year, or whenever the annual tax deadline is (2022 taxes are due by April 18, 2023)
Unable to file your tax return by the deadline? You may be able to request an extension, but it's important to note that an extension of time to file is not an extension of time to pay any taxes that you owe. You'll still be required to pay any taxes due on or before the original due date, even if you file your return later. If you owe taxes and do not pay them by the deadline, you may be subject to penalties and interest charges.
Not filing a Schedule C form could result in serious financial penalties. Self-employed income is considered taxable income by the IRS, so you want to make sure you are filing one each year.
Even if your business didn't make a profit for the year, you still need to file the Schedule C form. This is because the IRS wants to see that you've been active in your business and trying to make money from it.
Expenses are the costs incurred in running a business that are not directly related to the products or services being sold, while cost of goods sold is the cost of the products or services that a business sells or provides to its customers, including the cost of materials and labor used to produce them. For example, a self-employed hairdresser would report both expenses and COGS on their Schedule C form:
Cost of goods sold might include beauty products and supplies used in the services provided to customers, such as hair dye, shampoo, conditioner, styling products, and any other products used in the salon's services.
Expenses would include things like rent and utilities for the salon's physical location, marketing and advertising costs, and office supplies. These expenses are incurred in running the business but not directly related to the services being provided.
Whether you left your job during the “Great Resignation” or are pursuing your side hustle during your free time, our guess is you aren’t doing it because you love paperwork. But completing your Schedule C is an essential part of making sure your self-employment taxes are filed correctly. Not only will it help you avoid penalties, but it can also assist you in claiming any deductions or credits you may be eligible for.
When you're self-employed, even when the job is done, there's still a ton of work to do—especially during tax season. Having a solid understanding of deadlines and tax forms and keeping accurate accounting records throughout the year might not make it enjoyable. Still, checking it off your to-do list will undoubtedly make it easier.
If you've been using Found's tools to track your expenses, find write-offs, and save receipts, then you're in luck! Found customers can download a pre-filled Schedule C when you log into your account under "Taxes." Not using Found? Sign up for free and get started today.
This information is not intended to provide, and should not be relied on, for tax advice.
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