A Schedule C is a form that US based sole proprietor businesses need to complete in order to report to the IRS the amount of money they made or lost that year.
The full name of the form is Form 1040 Schedule C: Profit or Loss From Business (Sole Proprietorship). What this essentially means is that it is an additional form (schedule) that needs to be filed alongside your regular personal 1040 tax return.
The Schedule C form is updated each year, so you'll want to make sure you have the correct one before you begin to complete it. The first thing you will need to do is download the form. It is available directly from the IRS website here:
The IRS provides 18 pages or so of accompanying documentation which can be really helpful for the finer details, however it can get quickly overwhelming as it is (as usual for the IRS) swimming with some pretty heavy tax jargon. To get you started with the Schedule C, this blog post covers each section, line by line.
A quick disclaimer before we begin the Schedule C tour: please note that laws and regulations do tend to change frequently. This information is for educational and informational purposes only should not be construed as legal advice. Please consult an expert in your local area with specific questions or concerns.
The very first part of the form (lines A through to J) are mainly to help the IRS identify you and your business. Most of this part is fairly self explanatory, apart from some slightly hairy questions about NAICS, EIN numbers and accounting methods that we will cover in detail below. Ready? Let's Go!
The first line you'll need to complete is the Name of proprietor. This is your personal name, not your business name (as this will be asked for later in the form). You'll also want to enter your Social Security Number (SSN) in the field to the right.
The next line (A Principal business or profession, including product or service) is to provide details about the type of business you operate.
If you make your own products and sell at least some of them online, this will most likely be: Online retail of manufactured goods.
To the right of this section, is a space (B Enter code from instructions) that you'll need to enter the NAICS code that best matches your business activities. There is a list of Principal Business or Professional Activity Codes in p17 of the Schedule C form for you to choose from.
As the codes cover all sorts of business activities it can take some time to wade through this list. To make this easier, but we've made you a handy summarised list of the most common NAICS codes for handmade sellers.
This next one should hopefully be a little less taxing: you'll want to enter your business name into the field called C Business Name. If you don't use a business name then you should just leave this blank.
The field to the right of business name is for your EIN (D Employer ID number (EIN)). An EIN is a Employer Identification Number (also known as a Federal Tax Identification Number), and is used to uniquely identify your business to the IRS. Important Note: This is not your SSN as you will have already entered this above.
Most businesses will need an EIN for various reasons. To find out more, read our blog post here: What is my sales tax number (EIN)?
If you don't have an EIN, you can leave this line blank.
We've made it to E already and it's another easy one! Business Address: This field is for your business address - this is this is the place that your business is officially registered. Make sure to enter all details, including zip code here.
This next line (F Accounting method) is often the place where handmade sellers get a little stuck as it requires a little bit of Accounting 101 knowledge.
This can either be Cash or Accrual depending on how you are accounting for your expenses and revenue. Cash based accounting essentially is where you record money in and out only when the payment is actually received; accrual based accounting records income and expenses when invoices are raised. If you aren't sure of which method you are using, its a good idea to ask your accountant as they will be able to quickly answer this question for you.
Onward to the next question: G Did you “materially participate” in the operation of this business during (year)?
This basically asks in a strange legalese fashion if the income you have made in this year was directly from working on your business (i.e. the income wasn't "passive" from activities like investments).
There are a couple of different criteria points to meet here which can seem confusing, but it essentially boils down to making sure you have worked on your business for a significant period of time in the financial year (they say 500 hours or more which is about 20 days in the year). As a handmade business, you'll have most likely have spent more than 20 days on your business, so you'll most likely be marking this one as a Yes.
H If you started or acquired this business during (year), check here: This one is fairly self-explainatory: if you started the business during this year or purchased it from someone else, make sure you check this box.
Almost there: 2 more to go. The next field (I: Did you make any payments in (year) that would require you to file Form(s) 1099?) is a little tricky, so it will need a bit of consideration.
This question essentially is asking about any payments you may have made that they need to additionally know about. Employee wage / contractor costs, non employee compensation, interest, rent, royalties and pensions are the types of things that they are concerned about here.
This can also be a yes if you have paid out at least $20,000 to a single vendor in the course of the year. If you have paid a total $20,000 in expenses but all to different vendors and have no other costs as above, then this would be No.
Also, if you have paid for contract help or paid rent and the total of this service is greater than $600, then you will need to ensure that you (or your contractor) completes 1099MISC.
There is a followup question to this one immediately below it, and is really just designed as a big hint to make sure you know you need to file the correct forms in this case. J: If "Yes," did you or will you file required Forms 1099?.
...and we are done with the first section of the form!
Part I: Income
This is the section where you record your income for the year, and is the start of the all important (but possibly a little dry) "numbers and tallies bit" of the Schedule C Form.
For a line-by-line walkthrough of Part I, please see our blog post here: Schedule C Guide: Part I - Income
Part II: Expenses
This section of the Schedule C Form is the relatively "fun" bit as you'll be listing out all of the claimable expenses you are making for this year so you can deduct this from your taxable income.
For a line-by-line walkthrough of Part II, please see our blog post here: Schedule C Guide - Part II: Expenses »
Part III: Cost of Goods Sold (COGS)
You've made it to the best part: COGS! This is the part where most people really struggle, however if you have your inventory situation sorted it should be a (relative) piece of cake.
For a line-by-line walkthrough of Part III, please see our blog post here: Schedule C Guide - Part III: Cost of Goods Sold »
Part IV: Information on your Vehicle
You only need to complete this section if you have made a claim on Line 9 (Car and Truck Expenses).
For a line-by-line walkthrough of Part III, please see our blog post here: Schedule C Guide - Part IV: Information on your Vehicle »
Part V – Other Expenses
This is the area where you can account for expenses that cannot be included elsewhere on your Schedule C. Bad debts and business startup costs are some examples of expenses that can be claimed here.
It's best to speak to your taxation adviser here to see what you are best to claim in this section as it depends on your circumstances.
Line 48: Total other expenses
This is where you could claim any other business expenses. For example, your Craftybase Inventory + Bookkeeping subscription would be included here. Remember to also enter the value in Line 27a (Other expenses) above.