If you are a sole proprietor, any earnings you make or expenses you incur as a business owner are included as part of your individual annual tax return (Form 1040). To calculate exactly what to report on Form 1040, you must itemize all operational income and expenses on one of two forms – Schedule C or Schedule C-EZ.
But which one should you use and how do you file? Here’s what you need to know.
Who Should Use Schedule C?
Schedule C (Form 1040) Profit or Loss from Business is the federal tax form filed by most sole proprietors or one owner businesses. The form is used to report both income and losses during tax season.
Sole proprietorships are often considered new to business ownership. However, the truth is that over 70 percent of U.S. business are owned and operated by sole proprietors or sole traders.
Business owners who make very little, or even those who are trading at a loss, can also use schedule C.
What is Schedule C-EZ?
Schedule C-EZ is a simplified and abbreviated version of Schedule C (hence the “EZ” in the title) and can save eligible business owners time and trouble when reporting business income and expenses on the 1040 federal income tax form.
Should You File a Schedule C or Schedule C-EZ?
Businesses that are eligible to use the simpler Schedule C-EZ must meet the following criteria:
- Your expenses are not greater than $5,000
- You have no employees
- You have no inventory
- You are not using depreciation or deducting the cost of your home you can use Schedule C-EZ.
If you can check all these boxes, then Schedule C-EZ can make tax season a lot easier.
If you run a home-based business, to take advantage of the home office deduction you’ll need to use Schedule C. It may take longer, but the tax savings will be worth it.
What is the Process for Filing a Schedule C?
Start with good records – something you should be doing as a business owner from the get-go. Every expense, payment, receipt, tax form and loss needs to be recorded and kept separate from your own personal financial records (separate credit cards, for example, will ensure you can easily identify and track business costs).
Schedule C itself is filed annually as an attachment to Form 1040 – Individual Tax Return. The quickest and safest way to file is by IRS e-file—either online with commercial tax preparation software or through a tax professional who is an authorized IRS e-file provider.
Don’t Forget to Make Quarterly Estimated Payments
As a Schedule C filer, you also need to make quarterly estimated tax payments to cover your income tax (federal and state), social security and self-employment tax. This article explains the process: How To Calculate and Make Estimated Tax Payments.
These tips were drawn from the SBA Small Business Learning Center video series on financing topics (specifically Schedule C Profit or Loss from Business). Check out the Center for more free self-paced online training courses, quick videos, web chats and more to help small business owners explore and learn about the many aspects of business ownership.