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 "selfemployed" 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 1099-
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 _____.
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
a.
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.
b.
c.
d.
More than $5,000
Less than $5,000
Less than $400
None of the above
 Taxpayers must complete Part III of Schedule C-EZ if their business
expenses _____.
a.
b.
c.
d.
Were more than $5,000
Exceeded their gross receipts
Included car or truck expenses
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?
Wages paid to an employee
b. Automobile depreciation
c. Office rent
d. A portion of mortgage interest related to a home office
a.
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.