How to File Taxes if Your Status Is Self-Employed

File Taxes if Your Status Is Self-Employed

How to File Taxes if Your Status Is Self-Employed. When you work as an independent contractor, receive professional fees or run a small business, you need to file a Schedule C form with your tax return to report income and expenses from self-employment.

Beginning Schedule C

Step 1

Determine that you have a sole proprietorship. If you contract your labor or services to someone or if you sell products for a profit and are not an employee, corporation, limited liability company or member of a partnership, then you are a sole proprietor.

Step 2

Verify that your business is not farming or fishing. The rules and form (Schedule F) are different for farming and fishing.

Step 3

Obtain a Schedule C from an Internal Revenue Service office. You may use a Schedule C-EZ if your expenses were $2,500 or less and you had no inventory, used cash accounting, did not have a loss, had only one sole proprietor business, had no employees, are not deducting depreciation, are not claiming business use of your home, and don't have prior year passive-activity losses from this business.

Step 4

Fill in your name, Social Security Number and address on the form. You must also fill in the Employer Identification Number if you have to send in any alcohol, tobacco, firearms, excise, employment or fiduciary returns or if you have a Keogh plan.

Step 5

Describe your primary business or professional activity and enter the six-digit business code. Enter the name of your business if you have one.

Step 6

Check the box explaining your accounting method. Most people use a simple cash method. Schedule C-EZ uses only the cash method. The accrual and hybrid methods are commonly used only by those who keep inventory records.

Step 7

Check the box "yes" or "no" as to whether you "materially participated" (took an active role) in the business. Also check the box if you started or bought this business in the tax year. These questions are not asked on a Schedule C-EZ.

Determining Gross Income

Step 1

Write the dollar amount of gross receipts on Line 1. This is the total amount of money paid to you for your work, business or profession. Include the sales cost of products sold and the material costs that you charged your client.

Step 2

Write the sales cost of any returns or allowances on Line 2. There is no line for this on the C-EZ, so include this amount in expenses.

Step 3

Write the cost to you of goods you sold on Line 4. This is calculated in Part III of Schedule C. There is no line for this on the C-EZ, so include this amount in expenses.

Step 4

Write the amount of other income on Line 6. Other income includes bad debts recovered, interest you received on outstanding accounts, scrap sales, fuel tax and credit refunds, excess depreciation recapture, finance reserve income and excess government food payments to day-care providers. On the C-EZ, simply add these things to Line 1.

Step 5

Calculate your gross income from these figures and write it on Line 7 of the Schedule C. For most people who do not sell a physical product, the amount on Line 7 will be the same as Line 1. For C-EZ users, there is only Line 1.

Determining Expenses

Step 1

Determine whether your total expenses are $2,500 or more. If less, use the simpler Schedule C-EZ unless you do not fit the requirements described earlier in Step 3. Otherwise, use Schedule C.

Step 2

Fill out Part IV if you used your vehicle for your business.

Step 3

Multiply the number of business miles driven in the tax year before April 1, 1999, by 32.5 cents per mile.

Step 4

Multiply the number of business miles driven in the tax year after March 31, 1999, by 31 cents per mile.

Step 5

Add the two amounts together.

Step 6

Add any parking charges for business.

Step 7

Add the business percentage of any finance charges and car registration costs (divide business miles by total miles driven to get business percentage).

Step 8

Write the total on Line 10 of the Schedule C. You may use the actual costs of operating your vehicle for business instead of this standard deduction if you prefer.

Step 9

Write the total of depreciation of business equipment and business furniture on Line 13. Use Form 4562 to calculate depreciation.

Step 10

Write your travel expenses on Line 24a and your expenses for meals and entertainment on Line 24b. Enter 50 percent of the amount on Line 24b on Lines 24c and 24d.

Step 11

Write the cost of renting equipment on Line 20a and the cost of renting office space on Line 21b.

Step 12

Write all other business expenses except office-in-home expenses on the appropriate lines of Part II.

Step 13

Write the type and cost of any other expenses for which there is no specific line in Part V and put the total of Part V on Line 27 for other expenses.

Step 14

Total all the expenses in Part II and write that amount on Line 28.

Step 15

Subtract these expenses from gross income (Line 7) to get tentative profit on Line 29.

Step 16

Complete Form 8829 if you claim office-in-home expenses. Write the allowable deduction on Line 30 of the Schedule C. Be aware the office-in-home deduction may be limited if your business is operating at a loss.

Step 17

Enter your net profit or loss on Line 31 of Schedule C and Line 12 of Form 1040. You must also fill out Schedule SE to determine your self-employment tax.

Tip

Owning rental property is not a sole proprietorship. Use Schedule E instead. It is not unusual for some employers to pay employees as if they were independent contractors. If you received a 1099-MISC reporting nonemployee compensation when you really are an employee, you are losing up to 7.65 percent of your income unfairly. Go to a tax preparer and get a substitute W-2 to send with your tax return. The IRS will make the employer pay its fair share of employment taxes. If you have a space in your home that you regularly and exclusively use for your work, including paperwork and record keeping, this can be claimed as an office-in-home expense, even if it is a very small space. If you have an office-in-home space, the travel costs from that office to another place of work is deductible as a work expense. Without an office-in-home space, your travel to a workplace from home is considered commuting and is not deductible.

Warning

You need written records of your expenses, including vehicle mileage. Receipts are best, but having any written record is better than having none. Even a calendar with work notations is a written record. But expenses are legitimate even without a written record, although they are harder to justify in case of an audit. Some people believe that an office-in-home deduction is a "red flag," an item that increases your chances of being audited. Take photos of your office to back up your regular and exclusive use of the area. Rounding off your expenses to tens, hundreds or thousands is usually considered a "red flag." Use exact figures, omit the cents and round off to the nearest dollar.

Things You'll Need

  • IRS Forms

  • Financial Statements

  • Financial Calculator

  • File Cabinets

  • File Folders

  • Paper And Pencils

  • Tax Preparation Software