If you are self-employed, typically you need to file a Schedule C form. This form is required to report the income or loss of your business. Additionally, if you’re a sole proprietor, independent contractor (a statutory employee), or receive 1099-MISC income, you’ll need to file a Schedule C form.
The form itself is broken into 5 parts. First, you list all of your business’ income. Second, you calculate your net profit (or loss). Then, parts three through five are required if you purchase supplies or need to claim deductions.
Of course, this also means you need to provide receipts, financial statements and other documentation related to your business.
The difficulty with Schedule C forms is there are deductions you qualify for that you might be missing out on. If you underreport, you increase the likelihood of an audit later (plus more taxes) and if you overreport, you could lose money you rightly deserve.
This is also a big reason why Huddleston Tax CPAs focus on the needs of small businesses. Many start as sole proprietorships when they’re better off forming an S Corp. The key advantages of an S Corp are:
- Limited liability protection
- Salary (and lower taxes)
The limited liability protection ensures your personal assets are shielded from litigation. In other words, if you’re sued, your personal livelihood is safe whereas a sole proprietorship means they’ll come after you.
Regarding salary, if you convert your entity to an S Corp, you can assign yourself a reasonable salary and that’s what you’re taxed on, not the full extent of the business income. This is one of the reasons, it makes sense for sole proprietorships to convert to S Corp, as many self-employed businesses are run by a single individual. You can not only protect yourself and guarantee lower taxes, but you also have more income to invest in your business.