Business Income (or Loss)

The line item for business income (or loss) applies to any taxpayer who worked as an independent contractor1, practiced a profession as a sole proprietor, or operated a self-owned business.

No matter the work arrangement, Schedule C is used to calculate a wide-range of business-derived income (or loss); all earnings derived from (i) contract work or (ii) any sole proprietorship or taxpayer-owned business must be reported on the form. Independent contractor earnings are usually found in Box 7 of Form 1099-MISC, which the hiring organization should have mailed the contracted taxpayer. Reporting business earnings, however, will require the taxpayer to gather relevant financial information from his/her business, including profit and loss statements and business expense information. Once completed, Schedule C’s Line 31 will depict either a business profit or business loss. If the taxpayer earned a profit, he/she must pay federal income taxeson that achieved gain. Conversely, a taxpayer who reports a Schedule C business loss is able to take an income offset, thereby reducing taxable income (Form 1040, Line 12 business losses are indicated by bracketing the loss amount). Additional instructions regarding Schedule C computation can be found here.

NOTE: Certain less-common types of business income are reported on lines other than Line 12. Specifically, all income earned via real estate rentals, partnerships, and S-corporations should be listed on Line 17. Farm-derived business income should be listed on Line 18.

1An independent contractor is a worker who performs contract (or “project”) work or services. Often times, such an arrangement may have the appearance of an employee-employer relationship. Nonetheless, taxpayers who receive a Form 1099-MISC at year’s end are considered contractor’s and must report any Box 7 income (“Nonemployee Compensation”) on a Schedule C.

2Taxpayers with Line 12 business income must also pay self-employment taxes on Line 56 of Form 1040. Half of this additional tax liability, though, may be deductible on Line 27.

Photo by: Italy Chronicles Photos