How to File Taxes for Your Small Business
Understanding the Schedule C
Do you love being self-employed…until tax season rolls around? Whether you have piles of receipts scattered all over your dining room table or you have a hundred online purchases that never got categorized, you get a monster headache trying to organize a year’s worth of business transactions so that you can file your taxes. You’re not alone, friend!
Nearly every small business owner I’ve worked with over the past fifteen years dreads self-employed taxes. This is partly because small business owners are incredibly busy doing what they’re great at. But it’s also because no one has ever come alongside them to help them understand how small business taxes work.
If that sounds familiar, you’ve come to the right place! I’m about to walk you through the tax form you will use to report your business income and expenses–the Schedule C.
Getting Started
The first step in understanding your small business taxes is knowing what form to use and where to find it! The Schedule C is titled “Profit or Loss From Business (Sole Proprietorship)” and is part of the Individual Tax Return (Form 1040).
Click here for a link to the Schedule C. (It can also be found on the IRS website.)
Sole Proprietor Info
Are you a sole proprietor? This means that your small business is not taxed as a separate entity. If so, this is where you start. Fill in the top section (A-J) with your info.
Pro Tip: If you don’t know if you’re a sole proprietor, ask a tax professional or a business attorney to help you figure it out. It’s better to pay for a consultation now than end up in tax trouble down the road.
Income
It’s important to report ALL the income you’ve made in your small business on line 1, even if you didn’t receive a tax form (like a 1099). Add up payments you received from all sources, including Square, Venmo, PayPal, checks, and cash. This is called Gross Sales or Gross Receipts.
Pro Tip: To simplify your small business taxes (and your life), choose one payment processor and run everything through it so that all your income will be listed in one place.
Next, you will list any returns and allowances (refunds) and Cost of Goods Sold on lines 2 and 4. Then subtract those amounts from your Gross Receipts to find your Gross Profit. This is basically how much money your business made directly from what you sold.
On line 6, you will list any additional income you had that isn’t directly related to business sales. For example, I include interest from a business savings account here. Add that to your Gross Profit and you’ll have your Gross Income on line 7.
Expenses
One of the most important small business tax tips I give my clients is to separate expenses into categories. I’ve seen small business owners add up all their expenses for the year and call it “supplies”, and I’ve had others give me a spreadsheet that lists every purchase they made by date. Neither is very productive. It won’t help you on your tax return, and it won’t help you understand your business finances.
Lines 8-26 on the Schedule C provide a list of common small business tax expense categories. Your small business probably won’t have expenses in every one of these categories. It’s fine to leave some of them blank if they don’t apply to you.
Categories like Advertising and Rent are pretty straightforward, but you will probably need to dig deeper to understand others, like Car and Truck Expense and Depreciation.
Because small businesses are all unique, your expense categories might be unique as well. If you have expenses that don’t fall under any of the listed categories, you can list your own categories in Part V “Other Expenses” on page 2. Total those up and include them sum on line 27a.
Once you have reported all your expenses by category, add them up on line 28.
Now, subtract Total Expenses (line 28) from your Gross Income (line 7) to come up with your Tentative Profit.
Home Office Expense
Do you work from home and have a space that you only use for your business? If so, this deduction is for you. You can use one of two different methods to figure your home office deduction. Use Form 8829 to report actual expenses related to your home OR use the Simplified Method Worksheet to use a set dollar amount per square foot. Whichever method you use, the total flows through to line 30.
Net Profit (or Loss)
At this point, you will be able to subtract your home office expense, if applicable, from your Tentative Profit. This amount is your Net Profit (or Loss).
Showing a Net Loss means your business had more expenses than income and lost money for the year. If this is the case AND you can check the “All investment is at risk” box, you can show that loss on your Form 1040.
A Net Profit on Line 31 shows that your business made money for the year. Congrats!
The net profit or loss will carry over to both Schedule 1 and the Self-Employment tax form (Schedule SE), but you have successfully worked through the Schedule C portion of your small business taxes!
The more you understand your business finances, including your small business taxes, the more confident you will be in running and growing your company. For more info, check out these 10 Tax Tips for Solopreneurs or email me at briana@thefamilybusinesslife.com for a consultation. Best wishes in your small business!
