If you’re self-employed, work as a freelancer or contractor, or have a side gig, you are a business. And that means you’ll need to fill out Schedule C as part of your federal income tax return.
When you use Schedule C, you can deduct business expenses against the money you earned to lower your income… and lower your tax bill. Your tax software will do all of the math for you – but you still have to enter all the correct information. After all, the tax software has no idea how much you spent on office supplies unless you tell it.
We’ll go over this section by section to make sure you don’t skip anything the IRS wants to see… and to make sure that you take advantage of every possible deduction for your business.
Schedule C: Section 1
The first section asks for some general identifying information:
- Your name and Social Security number
- The “principal business or profession” (such as freelance writer or editor)
- The Business Type Code –
- There’s a very long list of codes at the end of the IRS instruction booklet for Schedule C. If what you do isn’t listed or you offer a mix of services, you can use the “Other” code 999999.
- Your business name (if it’s different than your name)
- The Employer ID Number (EIN)
- If your business has a different tax ID number than you do
- The business address (fill this in even if it’s your home address)
Schedule C: Section 2
The next section covers general business information:
- Line F asks for your accounting method. Most self-employed people will use the Cash method.
- Line G asks if you “materially participated” in the business. You did. Check the box.
- Line H asks if you started the business in 2020. If you did, check the box.
- Line I asks if you made any payments that required you to file Form 1099.
- If you paid any contractor more than $600 through your business in 2018, check YES. If not, check the NO box.
- Line J wants to know if you sent (or will send) any 1099s you were supposed to send. If you checked YES on Line I, check YES here.
If you were supposed to send out 1099s to contractors but didn’t, you could be facing some steep tax penalties. Contact me and we’ll fix it.
Schedule C: Section 3
The next section is the meat and potatoes of your Schedule C: your income and expenses.
If you use bookkeeping software like QuickBooks or Wave, you’ll find this information on your Profit and Loss report. If you don’t use bookkeeping software, use the worksheet below to tally up your revenues and expenses, and see if your business had a profit or loss for tax purposes.
NOTE: If your business has inventory, employees, or revenues greater than $50,000, or if you’re unsure of how to fill in this worksheet, contact me for a free consultation.
Part I covers income. There are lines on here that freelancers can just skip over – so we’re skipping over them here. These are the lines you have to fill out:
Gross Receipts or Sales _______________________________ Use this line to report all the money you got paid for your freelance services.
Other Income _______________________________ Use this line to report money your business got paid from other sources, like interest on a bank account.
Gross Income _______________________________
Add your gross receipts and other income and write the total here.
Part II covers expenses. The form includes a lot of specific expenses, many of which won’t apply. If you have expenses that aren’t listed in Part II, you’ll include them in Part V on the second page of Schedule C. Include as many (legit) expenses as you possibly can and that you have some form of proof for (just in case of an audit). Proof includes things like receipts, bank statements, credit card statements, handwritten notes, expense logs, and mileage logs.
The list below includes all of the expenses you’ll see in Part II. The highlighted ones are the ones most freelancers might use.
Bad debts from sales _______________________________
Car/truck expenses* _______________________________
• Fill in Part IV on page 2 if you have vehicle expenses, like mileage, gas, and car insurance. You can find a free worksheet here.
Commissions & fees _______________________________
Dues & subscriptions (including memberships) ____________________________
Employee benefits _______________________________
Insurance (other than health) _______________________________
Interest paid _______________________________
Professional fees (like a CPA or lawyer) _______________________________
Office expenses _______________________________
Rent and leases _______________________________
Repairs and maintenance _______________________________
Salaries & wages (paid to other people) _______________________________
Taxes (other than income taxes) _______________________________
Travel, meals & entertainment _______________________________
Utilities (like dedicated phone and internet) _______________________________
Other expenses (copy the total from part V here) ___________________________
Line 28 shows your Total Expenses before home office expense.
Line 29 shows your Profit of Loss before home office expense.
Line 30 is for your home office expense. The easy way is to just multiply the room’s square feet (up to 300 sq ft) by $5. The simple method is so much easier – but if your room is bigger than 300 sq ft or you will get to deduct more by doing it the hard way, you should do that. You’ll find a full explanation and DIY instructions here.
Line 31 shows your final net profit or loss. If it’s a loss, you have one more step on Schedule C. Go to line 32 and check the box next to “All investment is at risk” (unless you won’t lose money because your business lost money).
Your tax software or tax preparer will automatically add this information to your main Form 1040, Schedule 1 and your Schedule SE to calculate your self-employment tax.
Part V: Other Expenses
Other expenses you can deduct that don’t show up on the IRS form include:
- Up to $5,000 of business start-up costs if you started your business in 2020
- Postage and shipping
- Software and apps
- Website creation and maintenance
- Professional books and reference materials
- Printing and copying
- Education such as seminars, webinars, and courses
If you earned less than $163,300 ($326,600 if your married and filing a joint return) in 2020, you’re eligible for the Qualified Business Income Deduction.
In a nutshell, you only have to pay income tax on 80% of your Schedule C net income. And that can translate to huge tax savings. To get this deduction, you have to fill out IRS Form 8995 as part of your tax return.
If all of this just feels like too much, get help! You want to get every possible tax deduction… and you definitely don’t want to pay extra taxes. Contact me and together we can make sure you pay only what you owe and not $1 more.