Reporting your solo business at tax time
If you are in business for yourself, you typically use the Schedule C to report your business income and expenses. The Schedule C is included in your personal income taxes, which are filed on the IRS Form 1040. You can use the Schedule C to report your income and expenses from any self-employed work you do, or work you do in a formal LLC partnership as long as the only other partner is your spouse and you file your taxes jointly. You do not have to file a separate business tax return, like the IRS Form 1120, unless you have formed a corporation or have partners in your business other than your spouse.
What type of work is covered?
You are a self-employed person if you perform any work outside of an employment arrangement, such as by being an independent contractor, rather than work for an employer. If you are employed, your employer issues you a W-2 form at the end of the year, reporting the wages they paid you. But if you are self-employed for tax purposes, you would either receive 1099 forms from each person or business who hired you to do work, or else you simply have to track for yourself the income you received from sales you made of goods or services. If you run your own selling business, like for Princess House or Pampered Chef, or Mary Kay or doTERRA, then you are self-employed and should receive a 1099 from that company. If you provide personal care services like hair and makeup styling, or yoga instruction, you are self-employed – and will probably not receive a 1099 from anyone, so it’s up to you to track and report your income on tax day.
To report your business income, you should fill out a separate Schedule C for each separate business you run. A business may have multiple clients or sources of income – so for example, if you are a housekeeper with 3 main clients, that’s one business rather than three. But if you are a housekeeper and a makeup stylist, that’s two separate businesses.
You will need to report the type of business you do on each Schedule C on Lines A and B. Line A asks for a short description of the business or professional activity that generated most of the income for that business. For example, you could say “Housekeeping”, or “Repair of Antique Cars”. The IRS uses a 6-digit code system to describe the activities, which is requested on Line B. You can look up the code that best fits your activities on the IRS site here. If you are in the sales business, you should use the code that matches the type of things you sell. Here are some commonly used codes:
- 611000 – Educational services (including schools, colleges, & universities)
- 524210 – Insurance agencies & brokerages
- 621610 – Home health care services
- 624410 – Childcare services
- 812910 – Pet care (except veterinary) services
- 541400 – Specialized design services (including interior, industrial, graphic, & fashion design)
- 541920 – Photographic services
- 458110 – Clothing & clothing accessories retailers
- 458310 – Jewelry retailers
- 455000 – General merchandise retailers
- 456190 – Other health & personal care retailers
- 485300 – Taxi, limousine, & ridesharing service
What income and business expenses should I track?
Business income is any money you receive for your work, which could be services you perform, goods you sell, or a mix of both. If you receive money as reimbursement for your travel to perform the work, or for expenses you incurred in doing your work, then these payments to you are also income. Whether you collect payments by check, cash, or through a service like Venmo or Paypal, you are responsible for adding up all of your income received during the year and reporting it accurately. The IRS will receive a copy of any 1099 form you receive, so make sure you don’t lose track of any of those forms and include them with your tax filing. And while the IRS won’t receive information on any cash payments you receive, or untracked payments through personal accounts like Venmo, you may have a problem if you are audited if you haven’t kept accurate track of all of those records. The IRS may request to look at those records in examining your tax return, and you could owe fines and interest on amounts that should have been included in your income.
Business expenses are any costs you spent to support your business. For example, if you bought Facebook ads to promote your sales, that expense would be reported as advertising cost on your Schedule C. If you traveled to meet with clients or to host a sales event, those costs would be reported as Travel costs. If you hired someone to deliver some packages for you, that cost would be reported as Contract Labor. All of these costs are reported in Part II of the Schedule C.
Sometimes business expenses can’t all be deducted in the year you spent them. Certain types of spending are considered investments, depending on their size and how long they will be used in your business. For example, if you buy a storage shed to store your business supplies and inventory, that cost would be considered an investment in your business. That cost must be divided over the useful life of the purchase and deducted in each year that you are using the storage shed for business purposes.
Other types of business expenses have restrictions or choices for your method of calculating the deduction. Two very common costs that fall into this category are use of your home office and use of a personal vehicle for business purposes. For more on how to handle and track these costs, see the article, How to deduct your home office [link] and Getting the most out of your personal vehicle deduction [link].
How do I track inventory and cost of goods sold?
Cost of goods sold are reported on Part III of the Schedule C. Costs of goods sold are the costs that went directly into the production of the good or service you sold or provided, rather than being a cost of the business. For example, if you sell goods for Amway, the cost of your purchase from Amway is a Cost of Goods Sold, while the cost of your store, insurance, and advertising are a cost of your business. If you sell essential oils for doTERRA and make a particular formulation for a client, the cost of your purchased oils are a cost of goods sold, while your cost of delivering the oil to your client and meeting with her is a cost of your business.
One important note – the cost of “freight in” or inbound shipping is a cost of goods sold. So if you bought a case of oils and paid $25 for the shipping, include that cost in your cost or purchases. But the cost of freight out – the cost of delivering goods to your customers – is not a cost of goods sold. These costs are separately deducted in Part II, under line 18 for Office expense as a cost of shipping.
Keeping up with tax tracking
Tracking your business income and expenses can feel overwhelming, and it’s easy to get behind. Sometimes you aren’t sure of what “counts” as a business expense, or you’re unsure if you kept complete enough records. But keeping track of how your business is performing is important both for accurate tax filings, and also to help you as a self-employed business owner track your progress and get more out of your work. A free tool like BossTax [link to download] can help make tracking – and catch-up – easier, and also offers options to get advice all year long or at tax time from a Tax Pro. With the right support, business profit tracking and tax filing can be a snap.
