Reporting Business Income by the Self-Employed

Schedule C Overview

Use this tab as a quick reference when filing Schedule C for a self-employed taxpayer.

A self-employed taxpayer is required to file an IRS Form Schedule C if within the calendar year their net earnings from self-employment are $400 or more

IRS Form 1040 C, Profit or Loss from Business, is used to report business income and expenses, and Form 1040 Schedule SE is used to compute self-employment taxes owed if net profit exceeds $400 for a year. The tax computation software automatically completes Schedule SE from data the preparer provides in Schedule C.

The Center for Economic Progress does not normally use form 1040, Schedule C-EZ. However, Schedule C -EZ may be used if business expenses are less than $5,000, but only once per return. If the taxpayer receives self-employment income from more than one source, a Schedule C must be filed for each.

Form 1040 Schedule SE

Net income or loss on line 31 is entered on line 2 in Schedule SE, either on page 1 or 2, and the self-employment tax and its deductible part are calculated. The deductible part is entered on Line 27 Form 1040, while the full self-employment tax is entered on line 57 of Form 1040. Note that the taxpayer pays the self-employment tax even if she owes no income tax.

Scope/Eligibility

Returns are OUT OF SCOPE if business expenses exceed $25,000; or if the business is conducted out of the home; uses contract labor; has a net loss; or leases vehicles, machinery or equipment. Also, OUT OF SCOPE are returns that must claim casualty losses, depreciation or asset write-offs. Also, vehicle expenses are only calculated on a cost-per-mile basis, and only a cash accounting method is acceptable. The self-employed taxpayer must also meet the test for material participation. (See Section on Material Participation in IRS Instructions for Schedule C.)

Reference

Required Info

For the self-employed, income is shown in box 7 on 1099-MISC. If the taxpayer accepts payment by credit card the gross amount will be shown in box 1a on form 1099-K

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General Information

 General

Line A - Describe the business or professional activity that provided the taxpayer’s principal source of income reported on line 1 on Form 1099-MISC. If the taxpayer has more than one business, she must complete a separate Schedule C for each business. Give the general field or activity and the type of product or service. If the general field or activity is wholesale or retail trade, or services connected with production services (mining, construction, or manufacturing), also give the type of customer or client. For example, "wholesale sale of hardware to retailers" or "appraisal of real estate for lending institutions."

Line - B On TaxWise use F1 to find IRS codes and the click to Schedule C for Business Codes or find Business codes on the NAIC site. For example, for pizza delivery boy, enter delivery service in the search window. The search will yield a result for the NAIC code as 492210.

Line - D CEP taxpayers are typically not involved in complex business arrangements that would require an EIN. If the taxpayer doesn’t have an EIN, leave this line blank.

Line – E If the taxpayer does not have a separate business address, but conducts his business from home, leave this entry blank. Otherwise, enter the business street address including the suite or room number if any. (If the taxpayer uses part of her home as a business deduction, the return is OUT OF SCOPE.)

Line - F Only cash accounting methods are in-scope for CEP preparers.

Line – G Only returns that meet the test for material participation are in-scope for CEP preparers. (See Section on Material Participation in IRS Instructions for Schedule C.)

Line H - If the business was started or acquired during the tax year, check the box on line H. Also check the box if the business is restarted after a temporarily closing it, and Schedule C or C-EZ was not filed in the previous year for this business.

Line I & J - Returns that include issuance of 1099-R’s are OUT OF SCOPE.

Part I Income

PartI 

Line 1 - Link line 1 to a 1099-MISC form and input the information as shown on the paper form. Box 1a on Schedule 1099-K, is input into line 1 via a scratch sheet. Cash, tips, and the value of barter transactions should also be input via scratch sheet. If more than one business is involved with multiple sources of income, additional copies of Schedule C will need to be submitted.

Line 2 - A sales return is a cash or credit refund the taxpayer gave customers who returned defective, damaged, or unwanted products. A sales allowance is a reduction in the selling price of products, instead of a cash or credit refund. This is seldom used at CEP.

Line 6 - Other Income includes scrap sales, bad debts recovered, state gasoline or fuel tax refunds the taxpayer received during the tax year, or any other income received by the business.

Part II Expenses

Only CEP in-scope expenses are described in this Part. Lines 12, 13, 14, 16 a, 19, 20, 26, 30 and 32 are OUT OF SCOPE.

 PartIIa

Line 8 - Report expenses for advertising.

Line 9 - Vehicle expenses are tabulated in Part IV. See below for details.

Line 15 - Enter here premiums paid for business insurance.

Line 16 b - In the unlikely event that the business paid interest but did not receive a Form 1098, enter the interest on line 16b.

Line 17 - Include on this line fees charged by accountants and attorneys that can be considered ordinary and necessary expenses directly related to operation of the business. Also Include fees for tax advice, preparation of tax forms, and expenses incurred in resolving asserted tax deficiencies related to the business. For more information, see Pub. 334 or 535.

Line 18 - Include on this line the taxpayer’s expenses for office supplies and postage.

PartIIb

Line 21 - Deduct the cost of incidental repairs and maintenance that do not add to the property's value or appreciably prolong its life. Do not deduct the value of the taxpayer’s labor. Do not deduct amounts spent to restore or replace property; they must be capitalized.

Line 22 - The cost of materials and supplies consumed and used in the business during the tax year are deductible (unless deducted in a prior tax year).

Books, professional instruments, equipment, etc., if used within the tax year are deductible. However, if their usefulness extends substantially beyond a year their costs must recovered through depreciation, which is OUT OF SCOPE.

Line 23 - The following taxes and licenses can be deducted on this line. (a) State and local sales taxes imposed on the taxpayer as the seller of goods or services. (b) Real estate and personal property taxes on business assets. (c) Licenses and regulatory fees for the trade or business paid each year to state or local governments. (d) Federal unemployment tax paid. (e) Federal highway use tax. Do not deduct the following. (a) Federal income taxes, including the taxpayer’s self-employment tax. (b) Estate and gift taxes. (c) Taxes assessed to pay for improvements, such as paving and sewers. (d) Taxes on the taxpayer’s home or personal use property. (e) State and local sales taxes on property purchased for use in the business. Instead, treat these taxes as part of the cost of the property. (f) Other taxes and license fees not related to the taxpayer’s business.

Line 24 - This deduction can be very complicated and is seldom used by CEP-assisted taxpayers. If necessary, see IRS Instructions for Schedule C for details.

Line 25 - Deduct utility expenses only for the trade or business. If the taxpayer used her home phone for business, the base rate (including taxes) of the first phone line into the taxpayer’s residence cannot be deducted. However, any additional costs incurred by the business that are more than the base rate of the first phone line can be deducted. For example, if the business uses a second line, the business percentage of the charges for that line, including the base rate charges, can be deducted.

 PartIIc

Line 31 - The net profit or loss appears on line 31, and line 12 on form 1040.

Part III Cost of Goods Sold

Part III is OUT OF SCOPE.

 PartIII

Part IV Vehicular Expenses

This part is used to tabulate vehicle expenses using a fixed rate per mile. The preparer must verify that the result appears on Line 9. The software may not necessarily fill this in automatically.

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Line 43 - If the taxpayer has had the vehicle as part of his business for a long time, she may not remember when it was first put into service. Use the closest estimate the taxpayer can remember.

Line 44 - Vehicle use to get from the place of residence to the first job, and the return trip home from the last job, are not deductible, even if the taxpayer runs her business from home. Vehicle use between jobs is deductible. The taxpayer must keep good records of business, commuting and other vehicle uses to qualify for this deduction. If the taxpayer tries to estimate these figures, try to make certain the estimates are reasonable. Check to see that the expenses calculated on line 44 appear on line 9 in Part II.

Line 45 - The taxpayer should be careful to make certain that 44.c is consistent with this answer.

Line 46 & Line 47 - These questions simply require a truthful answer.

Part V Other Expenses

PartV

Include all ordinary and necessary business expenses not deducted elsewhere on Schedule C. List the type and amount of each expense separately in the space provided. Enter the total on lines 48 and 27a. Do not include the cost of business equipment or furniture, replacements or permanent improvements to property, or personal, living, and family expenses. Do not include charitable contributions. Also, do not deduct fines or penalties paid to a government for violating any law. For details on business expenses, see Pub. 535.