- Schedule C (Form 1040)
- The IRS form titled 'Profit or Loss From Business' that sole proprietors and single-member LLCs use to report business income and expenses. Net profit from Schedule C flows to Form 1040 and Schedule SE.
- Self-Employment Tax
- The Social Security and Medicare tax paid by self-employed individuals, totaling 15.3% (12.4% Social Security up to the annual wage base plus 2.9% Medicare) on net earnings. It is calculated on Schedule SE and applies once net earnings exceed $400.
- Gross Receipts (Line 1)
- The total amount a business collected from sales or services before subtracting any expenses, reported on Line 1 of Schedule C.
- Net Profit (Line 31)
- Gross receipts minus total business expenses. Net profit on Line 31 of Schedule C is the figure that flows to Form 1040 and is subject to income tax and self-employment tax.
- Ordinary and Necessary Expense
- The IRC Section 162 standard for deductibility. An expense is 'ordinary' if it is common and accepted in your trade and 'necessary' if it is helpful and appropriate for your business.
- Section 179 Deduction
- A provision that lets a business expense the full cost of qualifying equipment in the year it is placed in service, rather than depreciating it over several years.
- Depreciation (Line 13)
- Deducting the cost of a long-lived business asset (such as a vehicle or equipment) over its useful life, reported on Line 13 of Schedule C.
- Standard Mileage Rate
- An IRS per-mile rate that self-employed taxpayers may use to deduct business vehicle use instead of tracking actual vehicle expenses.
- Home Office Deduction (Line 30)
- A deduction for the business-use portion of a home, available when a space is used regularly and exclusively for business. It can be calculated with the simplified method or the regular (actual-expense) method.
- Estimated Taxes
- Quarterly tax payments the IRS generally requires when you expect to owe $1,000 or more for the year. Deadlines typically fall in April, June, September, and January.
- Form 1099-NEC
- The information return used to report $600 or more of nonemployee compensation paid to a contractor during the year. Businesses issue it; recipients report the income on Schedule C.
- Sole Proprietor
- An unincorporated business owned by one individual. A sole proprietor reports business activity on Schedule C of their personal Form 1040.
- Single-Member LLC
- A limited liability company with one owner. By default it is a 'disregarded entity' for federal tax and files Schedule C, like a sole proprietor.
- Schedule SE
- The IRS form used to calculate self-employment tax owed on net earnings from self-employment.
- EIN (Employer Identification Number)
- A federal tax ID number issued by the IRS to identify a business. Sole proprietors may use an EIN instead of their Social Security number on some forms.
- Enrolled Agent (EA)
- A federally licensed tax practitioner who has passed a comprehensive IRS exam and is authorized to represent taxpayers before the IRS under Treasury Circular 230.
- Cash vs. Accrual Accounting
- Two accounting methods. Cash basis records income and expenses when money changes hands; accrual basis records them when earned or incurred. Most small sole proprietors use the cash method.
Definitions are educational and do not constitute tax advice. For preparation and IRS representation, our sponsor Arc & Ledger Accounting is a firm of IRS Enrolled Agents.