Most independent contractors and small businesses must complete a Schedule C as part of their 1040 Income Tax Return. Here is a breakdown of the form to help identify what to record when bookkeeping and what information is required at the year end for the completion of tax filings.
Schedule C Income
For 1099 contractors income should be split into income declared on 1099 forms and income not declared on those forms. It is YOUR responsibility to report ALL of your income for services provided regardless of the 1099 forms you receive.
Under investigation procedures the IRS will be interested in amounts entering your bank account rather than solely focusing on 1099s. That in mind, be sure that you can account for all income you receive, if there’s income that’s not sales related, e.g. birthday gift from parent, make sure you can substantiate that at a later date.
Schedule C Expenses
Advertising – advertising and promotional costs like print or media ads, sponsorship, business cards, mailers, brochures, signs, pens and give-away items with the business name, samples or freebies to promote business.
Insurance – You can deduct the cost of any insurance you carry strictly to protect the business (such as general liability business insurance). If you have a home office and pay renters’ insurance or homeowners’ insurance, don’t deduct it here – instead, deduct that as part of your home office deduction.
Interest Paid – Whilst you can not deduct the total repayments on loans and mortgages used to finance your business and its property, you can deduct the interest portion of that finance.
Office Expenses – Not to be confused with office supplies, office expenses includes public bathroom toiletries, snow removal, cleaning service, and coffee services/hospitality.
Supplies – General consumables, small tools and office supplies such as ink/toner, paper, pens, staplers and staples, paper clips etc.
Dues and Subscriptions – This is an “other business expense”, professional dues etc should be collated under the heading Due and Subscriptions and entered on a line in the area for other business expenses. The same rule goes for any expenses you cannot justify entering under an already listed heading on the Schedule C or that you want to show separately, give it a heading you feel appropriate and list the total under other business expenses.
Taxes and License – Business Licenses, permits and employer related taxes go under this heading. State and local taxes do not feature on the Schedule C under this heading and are instead listed on the Schedule A.
Vehicle expenses, depreciation and mileage
Car and truck expenses – Include expenses such as gas, insurance, parking, tolls, repairs and services, lease fees, essentially any expense directly relevant to the maintenance of the vehicle/s you are using for business.
Depreciation – You should keep records of the vehicle/s make model, date placed in service and purchase and sale prices. You will need this information in order to calculate the depreciation you are able to take as an expenses each year.
Mileage – Total mileage will need to be recorded and a breakdown between business mileage and personal mileage should be noted. This will be used to either apportion your actual costs or used if you wish to take the standard mileage rate allowance instead of using the actual costs method.
Wages, contract labor and fees
Wages – You can deduct all the money you paid to employees as wages by using line 26. However, you can’t deduct money you paid to yourself. You should also subtract any amounts you received as tax credits for being an employer. Make sure that anyone whose wages are included on this line receives a W-2 from you.
Employee Benefits – Since you are self-employed, you can deduct your own accident, health, or life insurance premiums on line 29 of your 1040. You can also deduct premiums you paid for employees on line 14 of your Schedule C. This includes things such as health insurance, life insurance, or childcare assistance programs. Contributions you made on your employees’ behalf to pension or retirement plans can be deducted on line 19.
Contract Labor – This line is for payments made to 1099, non 1099 contractors and businesses (not for employees). Do not included anything already categorized as Legal and Professional Services, Commissions and Fees or included in Cost of Labor under Cost of Goods Sold.
Commissions and Fees – For anything that doesn’t quite fit under Contract labor but paid to contractors or businesses e.g. merchant fees.
Legal/Professional Services – Accounting fees, legal fees, consultancy etc
Property Costs, Maintenance, Utilities and Use of Home as Office
Rent and Lease – Both your business property rent and equipment leasing should be recorded and claimed under this heading
Repairs and maintenance – Includes property and equipment maintenance costs, service agreements etc.
Utilities – All business property related utility bills such as gas, electric, water and phone bills fall under this category. If claiming use of home as office enter those utilities on that separate calculation.
Use of home as office – If you use you an area in your home as an office or meeting place you may deduct the costs associated either by a standard allowance per sq foot or by the actual cost method apportioned by the sq footage of the office area. The actual cost method requires recording of all the associated expenses for your home such as, mortgage interest and property taxes or rent, insurances, gas, electric etc.
Travel, Meals and Entertainment
Travel – All travel costs directly related to business such as taxis, trains, buses, airfare, and hotels should be recorded and to be on the safe side with the IRS we recommend keeping a diary of your activities to support these figures. E.G. Flew to Florida for a meeting with Customer X on XXXX.
Meals and Entertainment – Record all meal costs for business meeting, although only 50% can be claimed federally, your state may allow a 100% deduction.
Assets and Section 179 Expense Deduction
Assets are generally higher value tangible purchases used over more than one year, such as a laptop. The section 179 expense deduction allows most of these type of assets to be written off in one year. For assets which are not allowed to take this deduction such as a car, depreciation is taken over the course of multiple years. Always make a note of these bigger purchases for your accountant to review so the assets are dealt with appropriately.
Cost of Goods Sold – (Primarily used for product related sales)
This expense category has multiple lines for calculating what directly went into a product or service sold. There are several lines to breakdown your direct expenses such as, purchases (items bought to sell on), cost of labor (wages are usually only allowed here for a manufacturing type business), direct materials and supplies, other.
There are beginning and ending inventory boxes to help deduce only direct costs for products and services sold in that year. This is done so that you cannot deduct costs in the current year for products or services sold in following years. Therefore it is important to keep accurate inventory figures at the end of each financial year.
This Schedule C blog has been sponsored by Liberate Artists to help their much loved sub-contractors gain an insight into what they can claim as a business owner.