Wiley Tax Preparer: A Guide to Form 1040

CHAPTER 11

Self-Employment Activities

Alarge number of taxpayers have full-time or sideline businesses. More than 17% of all taxpayers filed a Schedule C (or C-EZ), Profit or Loss From Business, in 2009 to report their income and expenses from self-employment (SE) activities.

If a taxpayer has not incorporated his or her business, report all business income on Schedule C (or C-EZ). Generally, income that is reported by the business must match income reported to the IRS on information documents such as Form 1099-MISC, Miscellaneous Income, or Form 1099-K, Merchant Card and Third Party Network Payments. However, sole proprietorships may have income that is not traceable to one or more 1099 forms.

Recall from Chapter 4 that taxpayers who are employees do not file Schedule C (except for statutory employees). Although a taxpayer who is a full-time employee may also have a business, only income generated by the business must be reported on Schedule C.

Expenses in a business are deductible if they are ordinary and necessary expenses to operate the business. Sometimes taxpayers use assets in their businesses (such as a car) personally as well. These taxpayers must keep adequate records to differentiate business expenses from personal expenses. Moreover, numerous limitations and special rules apply to restrict deductible expenses. For example, a sole proprietor cannot deduct on Schedule C a contribution for his or her own retirement savings. Also, some business expenses may qualify a taxpayer ...