Having a good bookkeeping system in place can help you complete your Schedule C, as a handmade, creative or craft business owner.
Tax season is HERE! Today we’re going to talk about the Schedule C, provide an overview of each section, and talk about how a good bookkeeping system will help you (or your tax preparer/CPA) fill it out.
Warning, this is a LONG post, you may want to print it out or save it for later.
Before we start diving into your bookkeeping and the Schedule C, here are some helpful resources:
- Grab a PDF of the Schedule C. Print it out and become familiar with it as we go through this overview. Seriously, make it your friend 🙂
- You might also want to grab a PDF of the instructions for completing the Schedule C. There’s a lot of information, written in IRS/accounting speak, but it’s important info.
- Another helpful PDF, is Publication 334 – Tax Guide for Small Business. It focuses on all of us who file a Schedule C.
- And, Publication 535 – Business Expenses. This PDF discusses common business expenses (for all types of businesses – not just handmade businesses). It talks about what is and isn’t deductible.
The Tax Guide for Small Business and Business Expenses PDF’s are great resources. They can be helpful if you have questions while you’re filing your tax return.
Now that you’ve downloaded the resources, here’s what we’re going to talk about in this post……
How a good bookkeeping system helps you complete your Schedule C:
- What is a Schedule C and who has to complete it?
- Overview & introduction to each section of the Schedule C
Are you ready? Let’s do this!
What is a Schedule C and who has to complete it?
The Schedule C is a 2-page form, used as a business tax return in the U.S. You’ll use this form when you run your handmade, creative, or craft business as a sole proprietor or single-member LLC.
A Schedule C (Profit or Loss From Business) gets included with/attached to your 1040 personal tax form. And then everything gets filed by April 15th with the IRS.
It’s important that you get to know and understand this form. Whether you do your tax return yourself, have a CPA, or tax preparer do it for you.
A good bookkeeping system can help you fill out the Schedule C and you’ll discover that tax time isn’t as awful as you thought it might be.
Basic info about you & your biz (the top of the form)
The top of the form is where you’ll enter basic info about you and your business.
- A – What you do
- B – your business code (you’ll find the codes starting on page 18 of the instructions)
- C – your business name
- D – your employer ID number
- E – your business address
- F – the accounting method you’ve chosen (for most of us, it’s Cash)
- G – did you “materially participate” (meaning were you actively involved in running your business)
- I & J – did you make payments of $600 or more to people/other businesses that would require you to file 1099’s? And, did you/will you file those 1099’s?
Part I – Income
This is where you report your business income for the year.
- 1 Gross Receipts or Sales – is where you enter your sales information. Including shipping and sales tax income that Etsy and others include in your monthly sales reports
- 2 Returns and allowances – this is where you enter refunds and discounts that you gave
- 4 Cost of Goods Sold – this is calculated on page 2 in Part III. Then the amount is entered here
- 6 Other Income – this is where you enter the total commissions, ad revenue, affiliate income that your business received
Part II – Expenses
This is THE MOST IMPORTANT PART of the Schedule C. It’s where you can enter/deduct ALL the things your business spent money on during the year.
In order to take the deductions, you need to record the expenses in your bookkeeping system to begin with.
If you didn’t do any bookkeeping, there’s a chance you’ll forget things your business spent money on. Which means you’ll loose the deduction.
The IRS has some pretty strict rules:
- Business expenses must be both ordinary and necessary
- and you need to keep ALL of your receipts to prove that the expenses you take are business related.
Review this section carefully to see how the IRS categorizes deductions – it’ll help you with your bookkeeping expense categories. You’ll just plug in the totals from a Profit & Loss or Income Statement into matching category on the Schedule C.
Need help categorizing everything in your bookkeeping system to make completing your Schedule C easier? Purchase the Handmade Business Bookkeeping 101 Challenge Course.
For most of us, a lot of our expenses will will get broken out (or listed) in lines:
- 8 Advertising – if you pay for Google, Facebook, Instagram, or Pinterest Ads
- 17 Legal and Professional Services – money you paid to a CPA for doing your taxes or to a lawyer for filing trademark or copyright paperwork.
- 18 Office Expenses – notebooks, pens, paper clips, Post-It Notes, etc.
- 27a Other expenses – you’ll actual make a list in Part V – Other Expenses. Then the total will be entered here
Don’t get stressed out about where to enter your expenses, just remember to
- categorize your expenses in a way that makes sense to you (and know where they go in this section)
- be consistent (don’t change how you categorize something from month to month or year to year)
- if you seriously don’t know how to categorize something, talk to a CPA or other tax professional
Miscellaneous calculations (bottom of page 1)
Here you’re pretty much re-entering amounts that you’ve calculated in other parts of the Schedule C. Then you add or subtract those amounts from one another.
Be very careful about Line 30 – Business Use of Home. To qualify for this deduction, you need to have a dedicated space/room in your house, used exclusively for business. See IRS Topic No. 509 Business Use of Home for more information.
Many of us work all over our house and can’t take this deduction. But that doesn’t mean we can’t include it in our fair hourly wage – more here.
The Net Profit (or Loss) from your business is calculated on Line 31. If your business has a profit, the amount flows over into Schedule 1 on your 1040 form. It also goes to Schedule SE Line 2 and you get to calculate your Self-Employment Tax.
Part III – Cost of Goods Sold
Ready to tackle Cost of Goods Sold? Sure you are!
Basically Part III – Cost of Goods Sold section of the Schedule C is just one big math problem. You solve it by plugging in amounts from your bookkeeping records, that haven’t been entered in other sections.
For tax purposes, it’s the costs associated with the goods you SOLD this year.
The part that seems to confuse people the most is the inventory part. So, let’s clear that up shall we?
You’ll need to keep track of inventory if you:
- sell physical goods. You’ll have to fill out this section, keeping track of materials that you have in inventory AND your finished items
- design patterns and keep supplies on hand and/or sell you finished samples. You’ll need to keep track of the materials/supplies you have on hand and finished samples that you intend to sell.
You won’t need to keep track of inventory if you:
- are strictly a service provider
- only sell printables or other digital goods
Let’s look at the Cost of Goods Sold section line by line:
- 35 Beginning Inventory – $0 if this is your first year in business or the previous years ending inventory
- 36 Purchases – what you spent or paid this year for new materials that you put into inventory. MINUS the cost of anything that you ended up keeping for yourself for personal use
- 37 Cost of Labor – money paid to others who were directly involved in creating the goods you made and sold. Payments to a contract maker, tech editor, professional photographer, etc.
- 38 Materials and supplies – the cost of the materials and supplies that were used in the goods that were sold.
- 39 Other Costs – this is a catch-all category for other expenses made to make the items you sell. Crochet hooks, scissors, patterns, supplies that are too difficult to track in inventory like thread.
- 40 – add up everything on lines 35 through 39
- 41 Ending Inventory – the value or cost of all your finished items (and samples you intend to sell). PLUS the cost of supplies you have stashed away on the last day of the year.
- 42 Cost of Goods Sold – subtract the amount on line 41 from line 40. Then enter this number in Part I – Income, Line 4. where it becomes a deduction and reduces your income.
Part IV – Info about your vehicle
If you use your car for business purposes like:
- driving to and from a craft fair,
- trips to the post office to ship items,
- going out to purchase supplies, etc.
You can take a mileage deduction for each mile you drive.
To find the mileage deduction amount, do a “Google Search” for mileage deduction (year).
BUT, there’s a catch!!!! You need to keep a written mileage log that includes:
- the date
- beginning odometer reading
- ending odometer reading
- total miles driven
- where you went
- why you went there
Part V – Other Expenses
If you remember from the Part II – Expenses section, there’s a Line 27a called Other Expenses. This is where you list out your categories and amounts that don’t fit into those buckets. You total them up on Line 48 and then go back and enter this total on Line 27a.
Now that we’ve the overview of the Schedule C and how your bookkeeping system helps you to fill it out.
You may be wondering “What happens next?”
Line 31 of the Schedule C is calculated way back on at the bottom of page 1. It tells you if your business had a Net Profit (or loss).
The amount from Line 31 is transferred to over into Schedule 1 of your personal 1040. If your business:
- made a profit then your business income gets added in with the rest of your personal or family income. And increases your income and any income tax that you might owe
- had a loss, it still gets transferred over. But it reduces your overall income and any tax that you might owe
If your business had a profit. A positive number on this line, then you’ll need to fill out Schedule SE – Self-Employment Tax, and do more math. Those numbers get transferred over to Schedules 1 and 2 of your 1040.
I know a lot of you are probably wondering –
“but how much am I going to owe in taxes on my business income?”
That’s a really hard question to answer with anything other than “it depends”. The answer really does depend on your individual financial situation. All the income (personal, business, interest, etc.) gets all lumped together and then taxed.
There is no magic answer.
The best thing you can do –is be prepared – in case you owe money for taxes. This is done by setting aside money in your business every month.
A good number to work with is 30% of your monthly Net Profit. Take that amount and put it in a savings account and don’t touch it, in case you need it.
Just so you know and don’t panic ….
there is no place to report owner withdrawals (or contributions) on the Schedule C
As a sole proprietor or single-member LLC, the IRS doesn’t give a hoot what you took as an owners withdrawal. Or what you took out of your own pocket and the family budget to invest in your business.
But it’s important to keep track of owner withdrawals and investments in your bookkeeping system for your own information.
Wow! That was a lot, wasn’t it?
With a good bookkeeping system in place, all you (or your CPA) need to do is plug in the numbers.
If you’re feeling like your bookkeeping system could use some improvement, check out the Handmade Business Bookkeeping Academy.
The Handmade Business Bookkeeping Academy includes step-by-step instructions for setting up and maintaining a bookkeeping system for your handmade business. Making tax time so much easier. Learn more here.