 INCOME Self-Employment - Business

Scope  Beginning in tax year 2010, Schedule C is in scope on a limited basis for volunteer preparers. Schedule C completion is only in scope for VITA/TCE sites if all of the criteria for Schedule C-EZ are met, except for the limitation on $5,000 of expenses.  Volunteers can complete Schedule C with expenses of up to $10,000.

Conditions to be Met  Taxpayers can use Schedule C-EZ only if they:  Had business expenses of $5,000 or less  Used the cash method of accounting  Did not have an inventory at any time during the year  Did not have a net loss from their business  Were the sole proprietor for only one business  Had no employees during the year  Were not required to file Form 4562, Depreciation and Amortization  Did not deduct expenses for business use of their home  Did not have prior-year un-allowed passive activity losses from their business

Out of Scope  If preparing Schedule C, Part I, the following are out of scope for VITA/TCE programs:  return and allowances, cost of goods sold, and other income.  Taxpayers with these items should be referred to a professional tax preparer.

Schedule C-EZ  Business income is reported on either:  Schedule C-EZ, Net Profit From Business,  Or Schedule C, Profit or Loss From Business  Complete the items on Schedule C-EZ or Schedule C. The net profit will be reported on Form 1040, line 12.  The net profit will also need to be shown on Schedule SE in order to calculate the self-employment tax.

Self Employment  Self-employed person or independent contractor  Many taxpayers have jobs on the side or have a small home- based business and do not think of themselves as "self- employed" if most of their income is reported on Forms W-2.  Ask for any Forms 1099-MISC that document self-employment income.

Schedule C-EZ – Part 1  Line A, Principal business or profession, including product or service  Line B, Business code  Refer to the code list in the instructions for Sch C  Line D, Employer ID number  The IRS supplies this number to businesses and other professional activities  If the taxpayer does not have one, leave the space blank; you cannot use the taxpayer's social security number  Line E, Business address

Sch C-EZ – Part 2 Net Profit  Figure your Net Profit  Line 1, Gross receipts, includes all receipts from a trade or business, including income reported on  All items of taxable income received during the tax year are included.  Gross receipts are entered on Part II, line 1 of Schedule C-EZ.  Many taxpayers erroneously report amounts from Form MISC with wages or other income. This income should instead be reported on Schedule C or C-EZ and on Schedule SE.

Net Profit  If the taxpayer is a statutory employee:  Check the box next to line 1 of Schedule C-EZ  Report the amount shown in box 1 of the taxpayer's W2 in box 1 of Schedule C-EZ  Statutory employees:  full-time life insurance salespeople, certain agent or commission drivers, traveling salespeople, and certain homeworkers.  The Statutory Employee checkbox in box 13 of the taxpayer's Form W-2 should be checked.

Total Expenses  Total expenses, entered on line 2, include the total amount of all deductible business expenses actually paid during the year.  Examples of these expenses include :Advertising, Car and truck expenses, Commissions, Insurance, Interest, Legal and professional services and fees, Office expenses, Rent or lease expenses, Repairs and maintenance, Supplies, Taxes, Travel, 50% of business meals and entertainment, Utilities (including telephone)

 For earned income credit and self-employment tax purposes, the taxpayer must include all allowable deductions when computing net earnings.  If business expenses total more than $5,000, the taxpayer must use Schedule C.  For earned income credit and self-employment tax purposes, the taxpayer must include all allowable deductions when computing net earnings.

Example  Kiana runs a small business from her home. She has only one telephone line and frequently makes long-distance calls for business. The cost of the telephone line cannot be deducted, but Kiana can deduct the long-distance charges for her business calls.

Exercise  All of the following are deductible business expenses on Schedule C-EZ EXCEPT _____. a. Telephone bills b. Interest paid on business loans c. Legal and professional services and fees d. Expenses for business use of the taxpayer's home

Car Expenses  Taxpayers who use their car or truck for business purposes can deduct expenses related to using the car or truck:  Standard mileage rate  Actual car expenses  If taxpayers have used actual expenses in the past or wish to use actual expenses in the current year, refer them to a professional tax preparer.  Actual expenses include depreciation.  If taxpayers depreciate their car or truck, or their total expenses are more than $5,000, they cannot use Schedule C-EZ and you should refer them to a professional tax preparer.

Car Expenses  The 2010 rate for business use of a vehicle is 50 cents per mile.  "Business miles" includes travel between home and a temporary workplace when the taxpayer has one or more regular places of work. If the taxpayer has no regular place of employment, only the travel from one temporary place to another is counted.  Taxpayers may not include miles they commute between home and work or miles they drive for meals.

Gross Income Less Total Expenses  Line 3, Net profit, is the difference between gross receipts (line 1) and total expenses (line 2). If line 3 shows a profit:  Transfer this amount to Form 1040 line 12, and to Schedule SE, line 2 (except statutory employees)  If line 3 is zero: Enter zero on Form 1040, line 12  If net profit is less than $400, enter the amount on line 12 of Form 1040 and attach Schedule C-EZ to the return.  Schedule SE is not required unless there is a profit of $400 or more.  If line 3 shows a loss, the taxpayer cannot use Schedule C-EZ and should be referred to a professional tax preparer.

Part 3 – Info on Your Vehicle  It should be completed if the taxpayer is claiming car and truck expenses in Part III.  The taxpayer needs to provide information about how the vehicle was used, its mileage, who drove it, and other data, as well as whether the taxpayer has written records to validate the data.

Exercise  Taxpayers who file Schedule C-EZ may not be required to file Schedule SE if their net profit was ______. a. More than $5,000 b. Less than $5,000 c. Less than $400 d. None of the above  Taxpayers must complete Part III of Schedule C-EZ if their business expenses _____. a. Were more than $5,000 b. Exceeded their gross receipts c. Included car or truck expenses d. Any of the above

Exercise  Roger is an independent painting contractor in the construction industry. To complete Part I of Schedule C-EZ, what would you enter for Roger's business code on line B? As a painting contractor, Roger had gross receipts of $10,953 and supply expenses of $1,675. His written mileage log shows he drove 1,564 business miles during the year, and he uses the standard mileage rate to determine his driving expenses. How much can Roger deduct for his total business expenses? Remember to round off your answer to the nearest dollar. For this activity, use the standard mileage rate of 55 cents per mile to determine Roger's deductible driving expenses for the entire year.

Exercise  Which of the following is a deductible business expense on Schedule C-EZ? a. Wages paid to an employee b. Automobile depreciation c. Office rent d. A portion of mortgage interest related to a home office

Schedule SE  Self-employment (SE) tax is social security and Medicare tax collected primarily from individuals who work for themselves.  It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. Payments of SE tax contribute to the taxpayer’s coverage under the social security system.  TaxWise will automatically fill out Schedule SE when we enter information for Schedule C-EZ

Schedule SE  Adjustment to Income  Line 27 on Form 1040  Self-employed taxpayers can subtract half of their self- employment tax from their income.  This is equal to the amount of social security tax and Medicare tax that an employer pays for an employee, which is excluded from an employee’s income.