When it’s time to file taxes, business owners who made more than $400 annually know they need to report their profit and losses to the IRS. But very small businesses owned and operated by a single person (sole proprietorships) can often skip the Schedule C form. Instead, they’ll file the abbreviated Schedule C-EZ.
You Might Also Like:
- 2019 Mileage Rate: How much vehicle expense can you write off in 2019?
- IRS Schedule C: Decoding an otherwise complicated tax form.
- Subcontractors: What are they and why do they matter?
What is a Schedule C-EZ?
As the name implies, it’s a much shorter version of the Schedule C, which is used to file profit or loss from a sole proprietorship. It’s used only to report net profit.
Not every sole proprietor is eligible to use Schedule C-EZ, and not every sole proprietor benefits from using it. There are 7 important qualifications that determine your eligibility.
We’ll take a look at how the IRS defines a sole proprietorship, who is eligible, what information to report, and what kind of deductions are possible for business owners. Keep reading to learn if you’re eligible to file a Schedule C-EZ.
What is a Sole Proprietor?
If you own a business by yourself and it’s unincorporated, even if it’s an LLC, you’re a sole proprietor in the eyes of the Internal Revenue Service (IRS).
A sole proprietorship (a business owned by a sole proprietor) can hire employees and operate just like a small business. It could even be a single freelancer working from home or worker providing services on a contract basis.
Unlike LLCs, there are no fees or processes to officially become a sole proprietorship. In fact, when you start doing business, you’re already considered a sole proprietor, even before you report income. About 41% of businesses in operation are sole proprietorships, and the number grows every year.
Here are some common examples of sole proprietors:
- Caregivers
- Independent contractors
- Freelancers
- Housekeepers
- Repairmans
- Tutors
- Virtual assistants
You don’t even need a business name or business address. All you need is a home address to be a sole proprietor. You can do business under your personal name or under a name you make up (DBA, or Doing Business As).
In these cases, you wouldn’t want to go through the process of filing Schedule C. It’s possible to file the much shorter C-EZ. If you are a sole proprietor and only own one business, you meet the first qualification to file Schedule C-EZ.
There are 7 total requirements to meet that deal with your business expenses for the year, employees, loss amounts, inventory, deductions taken, and depreciation. We’ll talk about each of these in detail below.
Schedule C-EZ eligibility
The IRS doesn’t require some sole proprietors to file Schedule C for business taxes. As long as you meet the following criteria, you can skip the full form and use the abbreviated EZ form instead.
- Expenses must not be more than $5,000
- You must not have losses to report
- You do not have any employees
- You do not have any inventory
- You are not deducting the cost of your home
- You are not using depreciation on business property
- You own only one business
The requirements exist to ensure only very small businesses are able to use Schedule C-EZ because they simply don’t have as much information or income to report.
By capping expenses at $5,000 and focusing on businesses that don’t have employees, inventory, or losses to report, larger businesses with higher running costs are excluded from filing. If you meet these requirements, you’re eligible to file the EZ version of Schedule C and report your net profit from business only.
What’s Included in Schedule C-EZ?
Schedule C-EZ includes an instruction page detailing how to fill out the form and a 1-page form divided into 3 sections: General Information, Figure Your Net Profit, and Information on Your Vehicle. There’s a worksheet included that will help you determine what you can deduct and how much.
The form will ask for information like your principal business or profession, name, address, and whether or not you need to file Form 1099-MISC (if you hired a contractor) in Part 1.
You’ll figure your net profit by subtracting your total expenses from your gross receipts in Part 2. Part 3 asks for information on your vehicle, and you only need to answer those questions if you’re including business related car or truck expenses.
The expenses worksheet is included to help you itemize your expenses, or what you can deduct, for the tax year in Part 2. The form gives complete, detailed instructions for Schedule C-EZ if you run into questions.
Remember: If your expenses are more than $5,000, you’ll need to file Schedule C instead. Schedule C-EZ is for businesses with $5,000 or less in expenses for the tax year.
Schedule C-EZ Deductions
Deductible business expenses reduce the amount owed and enable business owners to recoup some of the money they put into running the business. The IRS allows business owners, including sole proprietors, to deduct certain business expenses on their federal tax form.
Without knowing which deductions are available to take, business owners can miss out on important savings and end up paying more than they need to. To be eligible to file Schedule C-EZ, these deductions, or expenses, must not total more than $5,000 and the home office deduction cannot be used.
Deductions small business owners can take include:
- Administrative expenses
- Home office deduction (not allowed if using Schedule C-EZ)
- Intangible expenses
- Meals and entertainment (for business purposes only)
- Operating expenses
- Self-employment expenses
- Startup costs (initial, one-time)
- Tax expenses
- Travel and mileage
Deductions help business owners recoup costs on things like startup costs, copy paper, client lunches, taxes paid, utility bills, wear and tear and mileage on company-use vehicles, and more.
In order to protect yourself in case of an audit, make sure to keep accurate receipts and dates on business expenses that add up throughout the year. It’s wise to keep a filing cabinet with this information filed by date should you need it in the future.
When Not to File Schedule C-EZ
Schedule C-EZ is certainly a time saver, but it might not be the best choice for all eligible business owners. For example, a sole proprietor that operates his or her business from home might choose to file Schedule C instead of C-EZ.
This is because the shorter form removes the option to use the home office deduction. The home office deduction can be incredibly helpful for business owners operating from home and whose home offices meet the right criteria.
- The simplified method doesn’t require specific information on your home office expenses. Instead, you multiply the square footage of your home office — up to 300 square feet — by $5 per square foot. This is what the IRS deems as an average home office size and expense. That’s a maximum total amount of $1,500 in home office expenses that could be deducted.
- The standard method is a little more complicated and requires documentation throughout the year as well as determining what percentage of your home (and utility expenses) are dedicated to your home office. It’s the best option for businesses with more than $1,500 in home office expenses.
In addition to home-based businesses, businesses that have more than $5,000 in expenses should not avoid reporting expenses just to stay eligible to file the EZ form.
Which Should You File?
Once you know that you’re eligible to file Schedule C-EZ, you still have a choice to make. Choosing between filing Schedule C or Schedule C-EZ should start with your business’ best interests and keeping in mind what the best option is financially for you.
It may not necessarily be the EZ option if you have a lot of initial startup costs or home office expenses you could deduct, which the EZ form does not allow under any circumstances.
If the Schedule C-EZ option keeps you from being able to deduct expenses that could lower your tax amount, it isn’t worth the amount of time you could save in the filling process.
However, if your expenses are low, you’re doing business according to the IRS requirements, and you’re not looking to deduct home office expenses, opting for Schedule C-EZ can save you a lot of time and ensure your income tax return is correct.
