Schedule C is a tax form that lists a business’ profit or loss and must be submitted to the IRS with necessary documentation before April 15th. Self-employed individuals must file it, and those with a simple business can use Schedule C-EZ. Deductions should be discussed with a tax professional, and those who earn more than $400 per year must also file Schedule SE.
Schedule C is the part of the federal tax return that lists a business’ profit or loss. It is submitted to the Internal Revenue Service (IRS) along with the 1040 form and the necessary documentation before April 15 of each year. Anyone who has income from the sale of goods or services for profit should complete this form.
Some people are not sure if they consider themselves self-employed. There is a fine line between what is considered a hobby and what is considered a business. A hobby is defined as an activity in which the person does not expect to earn taxable income. If the activity is expected to generate income, it is considered a business. If a writer is blogging for fun and earns enough to cover her own expenses, she’s a hobbyist. If she then starts earning a regular income through advertising services and paid links, she’s probably in business.
Anyone who is self-employed must file Schedule C, regardless of the amount of income they had that year. Since it is used to track profit and loss, everyone who sells goods or services at a profit must keep records of their sales and expenses. This information must be kept in a ledger and all receipts must be kept for seven years after the forms are filed.
Those with a simple business can save some time by using a Schedule C-EZ. To qualify for this form, the business must have less than $5,000 United States Dollars (USD) in expenses, no additional employees, and no home office deductions. This form works well for those who are self-employed part-time or have few complications in their business structure.
Those who file a Schedule C are looking to find as many deductions as possible, but too many frivolous deductions are a red flag for IRS auditors. One of the most common deductions that freelancers try to take is for a home office. Home office deductions are only possible if the workplace is used only for work. Someone who works from home in an office that is also a game room, a storage room for holiday decorations, and an entertainment room generally cannot deduct home office expenses. Telephone lines or Internet use must be dedicated lines to be counted as expenses. Deductions should always be discussed with a tax professional to ensure they are valid.
Those who file a Schedule C and earn more than $400 in earnings per year must also file a Schedule SE. With employer-based income, the employer pays half of the social security and Medicare tax, which means the employee and employer pay 7.65%. Those who are self-employed must pay 15.3% of the participation on their own. The SE form calculates this tax and it is written on the 1040 form under the heading Taxes due.
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