wiseGEEK: What is a Schedule C Form?
Schedule C is the part of federal income tax reporting that lists the profit or loss from a business. It is filed to the Internal Revenue Service (IRS) along with form 1040 and the necessary documentation by April 15th of every year. Anyone who has income from the sale of goods or services for a profit must fill out this form.
Some people are unsure if they are considered 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 where the person does not expect to make taxable income. If the activity is expected to make income, it is then considered a business. If a writer is blogging for fun and earning just enough to cover her expenses, she is a hobbyist. If she then starts to earn a regular income through advertising services and paid linking, she is probably in business.
Every person that is self-employed must file Schedule C, regardless of the amount of income they had that year. Since it is used to track losses as well as profits, everyone who sells goods or services at a profit must keep records of their sales and expenses. This information should be kept in a ledger and all receipts must be kept for seven years following the filing of the forms.
Those with a simple business can save some time by using a
Schedule C-EZ. In order to qualify for this form, the business must have under $5,000 US Dollars (USD) in expenses, no additional employees, and no home office deductions. This form works well for those who have part-time self-employment or few complications in their business structure.
Those who file a Schedule C look 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 the self-employed try to take is for a home office. Home office deductions are only possible if the work location is used only for work. Someone who works from home in an office that is also a playroom, storage room for Christmas decorations, and entertainment room are generally not able to deduct home office expenses. Any phone lines or internet usage need to be dedicated lines to be counted as expenses. Deductions should always be discussed with a tax professional to be sure that they are valid.
Those who file a Schedule C and make more than $400 profit for the year also must file a Schedule SE. With employer-based income, the employer pays half the social security and medicare tax, meaning that the employee and employer each pay 7.65%. Those who are self employed must pay the entire 15.3% share on their own. Form SE figures this tax and it is written into form 1040 under the Taxes Owed heading.Source: m.wisegeek.com