Should You Use Schedule C or Schedule K-1 on Your Individual Tax Return?
It's tax time again! You will file your personal income tax return on April 15th or the "next business day" if it falls on a weekend or holiday. What income do you need to file on April 15th? It is all the money you earned the year before.
There are several tax forms that you need to fill out. The IRS has many tax forms, which have different uses and distinct purposes. Two of them are Schedule C and Schedule K-1. These forms have specific purposes and classifications. You have to choose correctly which form you need to prepare.
What Is a Schedule C?
Many individuals are small business owners or single proprietor. The business is usually managed by the proprietor, and the business structure is not as complex as a partnership or corporation.
The IR made it easier for small businesses to file its income and expenses during the tax year by using Schedule C. The Schedule C can be found on your personal income tax return (1040).
The Schedule C is the complete information you will provide to IRS as to how much your business has earned during the year (gross amount). You will also itemize your business expenses, backed with receipts. If there is profit left (net gain or net revenue), it will be added to the rest of your income from other sources during the year.
Your net income from Schedule C is subject to Self-Employment tax. Self-Employment tax is paying your own Social Security and Medicare contribution for both the employee's and the employer's share. In this case, since you are considered as an employer to yourself, 50% of your self-employment tax becomes deductible on your personal income tax return.
Example 1: I earn money on the side from writing on Hubpages. Since a freelance writer is considered as self-employment, I will use Schedule C when I file my income tax return for the earnings from Hubpages.
Example 2: I sell merchandise to the public. I didn't register my business as a partnership or corporation. Therefore, I will use Schedule C when I file my income tax return.
Example 3: I teach piano lessons or Taekwondo on weekends. All the income I received will be on Schedule C.
What Is a Schedule K-1?
A schedule K-1 is used when you are part owner of a Partnership or S-Corporation. The legal structure of a partnership and S-Corporation is usually owned by two or more persons. There are certain exceptions by owning it 100% yourself. The form Schedule K-1 is the "proof" of your income, expenses or losses from your partnership or S-Corporation business.
Schedule K-1 is also called a "pass-through." It means that all the income from your Partnership or S-corporation earned during the year, whether you took money from those earnings or not, will be taxed on your personal return (1040). It is also the same with the business losses.
By the looks of it, being a partner in a partnership or a stockholder in an S-Corporation, you are really taxed personally on your individual income tax return.
As a taxpayer, you need to know what the basic tax laws are and the correct forms to use in order to file your tax return properly.
It is best to consult with your Certified Public Accountant (CPA), Enrolled Agent (EA) or an IRS-certified Tax Preparer if you are not sure how to prepare your Income Tax Return correctly.
© 2012 Theresa Ventu