When do you use Schedule C for income/expense and when would you use Form 1040?
asked 08 Feb '10, 05:20
Trade or business goes on Schedule C. You have to look to the nature of the income. Is it regular and recurring, it is engaged in with the intention of making a profit, is the activity conducted in a business like manner? There are lots of exceptions.
You need to read the rules addressing hobbies - IRC 183.
There is also an exception for incentive payments made by manufacturers to employees of distributors - these payments are often issued on a 1099-MISC as Non Employee Compensation. The default treatment for 1099-MISC NEC is to go on Schedule C. BUT these payments go on Form 1040 as other income, they are specifically exempt from SE tax and NOT considered self employment income.
Perhaps if you gave us some details about YOUR situation we could give you better guidance.
answered 08 Feb '10, 17:02
I am not sure what you mean by "use Form 1040" - Sch C is used for a trade or business operated as a sole proprietorship (including a single owner LLC which has not elected to be treated as a corporation).
This income is sometimes reported on Form 1099-MISC as NEC (Non-employee compensation). When reported on Form 1099-MISC as NEC, the IRS is going to look for a Sch C because it will also be looking for a Schedule SE for self-employment tax.
If there is a 1099-MISC reporting NEC and there is no Sch C, there should be some sort of explanation. If the payment reported as NEC is not self-employment income, I generally report it on Sch C and then subtract it on Sch C with an explanation (on the "other line") and report it in the correct place (or not at all depending upon what it is). For example, on time a client sold a house, but the real estate agent made some serious and costly (to the seller) errors during the sale. To mitigate the damages, the agent refunded part of the commission to the seller. The seller received a 1099-MISC reporting NEC (split sales commission) from the real estate company - the seller was not in the business of selling real estate and the "commission" was actually a reduction in the costs of selling the home (an adjustment to the settlement costs to the seller). If reported at all, it would be on the form for sale of residence. (I reported it on Sch C as gross proceeds, deducted under "other expenses" with an explanation).
Other items which may give rise to a 1099-MISC are not trade or business income subject to SE tax - for example a prize or award, rental income, or gross proceeds to attorneys (may or may not be). Hobby income is not a trade or business - it would go on Form 1040 line 21 (there could be a Form 1099-MISC involved). Compensation for serving as a corporate director is reported on Form 1099-MISC as NEC and could go on either Sch C (where the director is engaged in the trade or business of being a corporate director) or on line 21 with an explanation that the director is not in the trade or business of being a corporate director. Jury duty pay goes on line 21.
If the activity is a partnership, rental activity, royalties, or pass-through entity, usually Schedule C is involved. If the activity is a farm, Schedule F. Income from Wages and other employee compensation is reported on line 7 of Form 1040. Interest and dividends (1099-INT or DIV) on Schedule B, capital gains and losses (1099-B or S) on Sch D, business gains and losses on Form 4797, pension or IRA income (1099-R) on lines 15 and 16.
The Sch C is not "optional" with respect to whether you have expenses to offset the income, but is required if the income is from a sole proprietorship trade or business and is subject to SE tax. The Form 1040 instructions for line 21 read (on page 29) "Do not report on this line any income from self-employment or fees received as a notary public. Instead you must use Sch C, C-EZ, or F even if you do not have any expenses. Also do not report on line 21 any non-employee compensation shown on Form 1099-MISC. Instead see the chart on page 11 to find out where to report that income." By Patrick A. Haggerty Adjunct Faculty at Vance-Granville Community College
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answered 13 Feb '10, 21:40
Response to: "Patrick, I certainly agree with your textbook answer. However, if all a person has is a 1099-MISC, and he/she has absolutely no expenses to claim against that income, Schedule C is not required. That is one of the purposes for what line 21 is for, There is absolutely no reason to create another form if all you have to do is report the income from the 1099-MISC."
Actually, there is a reason to report NEC from self-employment on Sch C rather than on line 21 -- it is called Schedule SE. Line 21 is NOT for reporting Form 1099-MISC NEC "when the business has no expenses" - at the risk of being accused of repeating myself -----
The Sch C is not "optional" with respect to whether you have expenses to offset the income, but is required if the income is from a sole proprietorship trade or business and is subject to SE tax.
The Form 1040 instructions for line 21 read (on page 29) "Do not report on this line any income from self-employment or fees received as a notary public. Instead you must use Sch C, C-EZ, or F even if you do not have any expenses. Also do not report on line 21 any non-employee compensation shown on Form 1099-MISC. Instead see the chart on page 11 to find out where to report that income."
Line 21 is used to "report any taxable income not reported elsewhere on your return or other schedules." (also from page 29 of Form 1040 instructions). Since income from self-employment is to be reported on Sch C or C-EZ, it is not "any taxable income not reported elsewhere...".
I suspect the reason that many preparers THINK that line 21 can be used for that is that some professional tax software programs allow that to be done - and to allow income subject to SE tax to flow through to Sch SE from line 21 - however, the reason the software allows that (and I have confirmed this with a software developer - I think it was for CS UltraTax) is that many of their tax preparer customers demand the feature because they don't want to be bothered with doing a Sch C if the only thing on it is revenue. That does not make it correct -- popular, maybe, but not correct (grin).
If the activity reported is not self-employment, then I agree the amount may be properly reportable on line 21, such as an activity not engaged in for profit but reported as NEC on Form 1099-MISC. For example, I know some historic re-enactors who have received stipends or honorariums for participation in school district "Civil War Days" - but participation was more along the lines of a hobby or volunteer activity than a for-profit venture.
For my part, I feel part of my job is to manage the risk of unnecessary correspondence audits for my clients - So I run the amount shown as NEC through a Sch C on its way to line 21 and explain why it is not subject to SE tax - not a large amount of extra work in preparing the return, but possibly saving a lot of hassle later. After all, I have to put the number somewhere on the return, and if it is not subject to SE tax, I have to explain that somewhere as well. With e-filing, the "cost" of an additional form is minimal.
Checking - CS UltraTax has a check box for line 21 items to indicate if SE tax applies to the item. So far as I can tell, Drake does not. H&R Block TaxCut allows line 21 entries for NEC, but has radio buttons for explanation. By Patrick A. Haggerty Adjunct Faculty at Vance-Granville Community College
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answered 13 Feb '10, 21:45
I received 1099MIC NEC from an S Corp. I was a 51% shareholder. SCorp. was only in business for one year. Where should I report this NEC? Thanks
answered 07 Apr '13, 21:55
SJahanian: Were you an officer of the S corporation? If so, it was probably your responsibility to know and obey the rule that officers of corporations don't get 1099s for their pay. They get W-2s. And taxes should have been withheld from your paycheck. I mention this only because I suspect you were an officer of the S corporation. If you weren't an officer, I guess you weren't responsible...
Put it on Line 21 AND pay self-employment tax on it on Schedule SE. You get to pay all of the self-employment tax because the corporation didn't report your pay to you correctly, see above.
This specific reporting [Line 21 and Schedule SE] might not be totally correct in some eyes - see the professor's quite thorough treatise, farther above), but it's what you should do, considering it was propably you that decided not to withhold taxes from what the S corporation was paying you.