Tax Form Schedule C (Form 1040): Definition, Overview, Uses

Being self-employed is great and sometimes offers you lots of freedom, but with it comes lots of other responsibilities like filing your Tax 1040 form.

Doing this has proved difficult for most small business owners, thereby making this article necessary.

We will help you understand if your business qualifies as one that should fill a Schedule C Tx 1040 form, and also give you a guide on how to do it.

This article will also be looking at some of the things you’re expected to see in the Form Tax 1040.

What Is Schedule C: Profit or Loss From Business (Form 1040)?

The IRS Schedule C, Profit or Loss from Business, is a tax document that you submit with your Form 1040 to detail your business’s income and costs. The profit or loss that results is usually classified as self-employment income.

If you file Schedule C, you’ll almost certainly have to file Schedule SE, “Self-Employment Tax.” This form will help you calculate and submit your Social Security and Medicare taxes based on your self-employment income on Form 1040, Schedule 2 Part II, Other Taxes.

Tax Deductions and Benefits for the Self Employed

Who Should File A Schedule C Tax 1040 Form?

If you make money as a sole owner or through a single-member Limited Liability Company, you’ll need to file a Schedule C tax (1040). (LLC).

A Corporation or an S Corporation would not use a Schedule C to disclose their business income and costs.

Your business clients should give you 1099 forms, such as the 1099-NEC if you are self-employed. These documents detail the money you received from a firm throughout the tax year.

You could also have to send 1099s to any vendors or contractors you paid through your company. These payments are usually listed as costs on your Schedule C, along with all of your other allowable business expenses.

If your business falls into the description above, you’re a sole proprietor and as such should file the tax 1040 form.

For clarity purposes, below is another definition of a sole proprietorship.

Who Is A Sole Proprietor?

A sole proprietor is a person that operates and controls by a single person and is not set up as a separate legal business entity, such as a corporation or partnership. In most cases, there is no legal distinction between you and your company.

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You own and operate the company on your own, and you are solely responsible for its earnings, losses, and obligations. Sole proprietorships are commonly used by freelancers, gig workers, independent contractors, and other small business owners.

Can An LLC File A Schedule C?

Yes, you can, this is because as a single-member LLC, you can also run your own company. You’ll almost always need to finish Schedule C in that instance. It doesn’t have to be a company with workers or a physical location, but it may.

For tax purposes, there is no distinction between you and the LLC if you manage a single-member LLC. Rather, any earnings or losses generated by the LLC are reported on your personal tax return. This is classified as a “Disregarded Entity” by the IRS.

Whether you’re a sole proprietor or a single-member LLC, the fact that you’re the boss and no one is writing your paychecks or withholding taxes from your income is the defining feature of both.

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Is Schedule C Only For Self-Employed?

No, it is not. You could be self-employed as well as hired by another company. If you work as an employee and your compensation is reported on Form W-2, you may need to file a Schedule C if you have income from sources other than your W-2 job.

It important to note that on Schedule C, you should not include your W-2 income with your self-employed income.

When you’re running a business, you’ll employ Schedule C. If you’re producing money on the side without the intention of running a business and profiting from it, it could be considered a pastime.

Your income and expenses aren’t disclosed on Schedule C in this scenario. Instead, the income is usually reported on Schedule 1, Part I, Additional Income, Line 8, “Other income.” When your activity is classified as a hobby, you must declare all of your earnings, but you cannot deduct any of your expenses.

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What Would You See On A Schedule C?

Schedule C requests information about your trade or business. The following are some of the items:

  • Business name and address
  • Principal product, service, or profession offered by your business
  • An accounting method used for your business (cash, accrual, or other)
  • Whether or not you have materially participated in the business
  • If you started or acquired the business during the current tax year
  • Detailed reporting of your income
  • Itemized reporting of your business expenses, including items like advertising, insurance, legal and professional services; rent or lease payments, repairs and maintenance expenses, utilities, wages, and more
  • Information about the cost of goods sold used in your business (if applicable)
  • Details about vehicles used in your business (if applicable)
  • Other expenses are not easily categorized by the fields provided within the form

How To Apply For Tax Exemption

What Are Ordinary And Necessary Expenses?

To be deducted, business costs must be both “ordinary” and “necessary.” If an expense is frequent and acceptable in your sector, the IRS deems it routine.

An expense must be useful and appropriate for your trade or business in order to be regarded as necessary for your business. A cost does not have to be absolutely required to be considered necessary.

For example, if you operate in an office, you’re likely to incur expenses such as office furniture, supplies, software, and computer hardware as part of the normal course of business.

How To Complete a 1040 Schedule C (Step by Step)

To complete a 1040 Schedule C, you will need to provide the following information:

Personal Information

  • Name of proprietor
  • Social security number
  • Principal business or profession
  • Code from instructions
  • Business name
  • Employer identification number
  • Business address
  • Accounting method
  • Whether you materially participate in the operation of the business this fiscal year
  • Whether you started or acquired this business during 2018
  • Whether you made payments in 2018 that would require your to file Form(s) 1099
  • Whether you did or will file the required Form(s) 1099

Income

  • Gross receipts of sales
  • Returns and allowances
  • Cost of goods sold
  • Gross profit
  • Other income
  • Gross income
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Expenses

  • Advertising
  • Car and truck expenses
  • Commissions and fees
  • Contract labor
  • Depletion
  • Depreciation and section 179 expense deduction
  • Employee benefit programs
  • Insurance
  • Interest
  • Mortgage
  • Other
  • Legal and professional expenses
  • Office expense
  • Pension and profit-sharing plans
  • Rent or lease
  • Vehicles, machinery, and equipment
  • Other business property
  • Repairs and maintenance
  • Supplies
  • Taxes and licenses
  • Travel and meals
  • Utilities 
  • Wages
  • Other expenses
  • Total expenses
  • Tentative profit or loss
  • Expenses for business use of home
  • Net profit or loss
  • Description of investment in any activity that is a loss expense

What Is Tax Underpayment Penalty?

Costs of Goods Sold

  • The method used to value closing inventory
  • Whether there was any change in determining quantities, costs, or valuations between opening and closing inventory
  • Inventory at beginning of the year
  • Purchases less cost of items withdrawn for personal use
  • Cost of labor
  • Materials and supplies
  • Other costs
  • Inventory at end of year
  • Cost of goods sold

Information on Your Vehicle

  • Date vehicle was placed in service for business purposes
  • Whether the vehicle was available for personal use during off-duty hours
  • Whether you or your spouse has another vehicle available for personal use
  • Total number of miles driven for business, commuting, other
  • Whether you have evidence to support your deduction
  • Whether the evidence is written

Other Expenses

Any other business expenses not included above.

Conclusion

It’s not enough to want to own a business, you must take on certain responsibilities to keep your business out of trouble and afloat. One of such responsibilities is filing for your tax 1040 schedule C form.

Doing this appropriately would keep the IRS away and allow you to focus your energy on other things, for your business to thrive.

We hope that this article has cleared doubts, and answered whatever questions you might have about the tax 1040 form schedule C.

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