How To Report Income On Schedule C

December 18, 2011 by  Filed under: Taxes 

If you’re a sole proprietor, you are required to file Schedule C as part of your federal personal income tax return. Line 1 of Schedule C is where you report the gross receipts, or sales, of your business.

For 2011, note that Line 1 now consists of three parts: Line 1a, 1b and 1c. But also note that Line 1a, which is labeled “Merchant and third party payments” also says, “For 2011, enter 0.” So you can just ignore Line 1a for 2011, but you may need to use it for 2012 if you receive a Form 1099-K for income payments from credit card companies and/or third party networks.

Let’s jump down to Line 1c. This is used for “Income reported to you on Form W-2 if the Statutory Employee box on that form was checked.” If you are not a Statutory Employee, which is the case for most sole proprietors, just leave Line 1c blank.

So that leaves us with Line 1b, which reads, “Gross receipts or sales not entered on Line 1a”. This is where you will report your sales for 2011.

If you are using the cash method of accounting, you report the sales for which payments were actually received in 2011. If you are using the accrual method of accounting, you report all sales that were invoiced in 2011, whether or not you actually received payment in 2011.

Another important component of your sales reporting is how to include any income reported on Form 1099-MISC. Many self-employed folks receive Form 1099-MISC because this information return should be issued to any sole proprietor who performs at least $600 of non-employee services to other businesses.

The issuer of Form 1099-MISC must send you this form by January 31. And the issuer must also send a copy of the 1099 to the IRS.

Obviously, if you receive a 1099-MISC for services rendered, you should include that income on Schedule C, Line 1b. But here’s another important rule that many self-employed people are not aware of: if you perform services for another business and do not get a 1099-MISC (for example, because the annual amount was less than $600) you are still required to report that income on your Schedule C.

In other words, whether or not you receive a 1099-MISC, you should report all your income on Schedule C, Line 1b. This is what the law expects of you, and if you don’t, you are a part of the underground economy and are not paying your fair share of taxes. In the event of an audit, if the IRS discovers that you underreported your sales, you will not only have to pay the additional tax on the unreported income, but will also face penalty and interest payments.

Looking for more small business tax deductions? For a free copy of the Special Report “How to Instantly Double Your Small Business Tax Deductions” visit Wayne Davies is author of 3 ebooks on tax reduction strategies for small business owners and the self-employed.

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