Do You Need to File a Schedule C?

If you are the sole owner of a business or operate as an independent contractor, you're going to become very well acquainted with the tax form used by all such businesses: the Schedule C, Profit or Loss from Business, or its shorter cousin, the Schedule C-EZ, Net Profit From Business.

If one spouse is the primary business operator, that spouse can file as a sole proprietor even if the other spouse fills in as needed or consults on major decisions. If both spouses actively work in the business, the business will be considered a partnership unless you use one of the following strategies:

• Consider one spouse to be the owner for tax purposes and depending upon the nature of the work done treat the other as either
  • an employee or
  • an independent contractor
  depending on the nature of the work performed. Make sure you can support this tax treatment by documenting the nature of the employment relationship.
• treat the business as a qualified joint venture, an option that is only available for a husband and wife.

Remember this is a discussion of federal tax law and the qualified joint venture option is available only to those who can file joint federal tax returns. Under many state marital property laws, both spouses may be considered to be owners of the business assets in case of divorce, regardless of whose name is listed as the owner on the tax forms or the property records.

Do you need to file this form?

While we suspect that most of you already know the answer to that question, it pays to review the filing requirements, just in case your business does not meet them for a particular year.

Income. First of all, the income requirement: If you have net earnings of $400 or more, you need to file a Schedule C and a Schedule SE to pay self-employment tax, even if you would not otherwise have to file a tax return.

Planning Tools You can download Schedule C, Schedule C-EZ and Schedule SE to aid in your financial planning.

Although you may know exactly what your business earnings are for normal accounting purposes, if you're close to the $400 threshold or actually had a loss for the year, you'll need to use IRS rules to compute your net business income for tax purposes in order to know the exact amount.

Work Smart Even if your business does have a loss for the year, consider filing a tax return anyway. That way, you can take advantage of the opportunity to carry losses back and/or forward to future years, so you can deduct them in some other year(s) in which you do have a profit. If your business is just starting out and you have a profit of less than $400, you may want to file a Schedule C to establish your business's existence and show that your business activity was undertaken for a profit motive. In this case, you would not have to file Schedule SE.

If you run more than one business as a sole proprietorship, you'll need to net the income from all of them together to determine whether you've met the $400 threshold. For example, if one business has a profit of $2,000 and another has a loss of $1,700, your net profit from both businesses is only $300 and you won't need to pay any self-employment tax for the year. We recommend that you do file a Schedule C and a Schedule SE anyway, just to demonstrate to the IRS that you computed your taxes correctly.