Schedule C Tax Deductions - "C" is For Contributions, Contractors & Commissions

Published: 09th February 2009
Views: N/A

Here are three legitimate tax deductions for the self-employed that begin with the letter "C". Do you have these expenses in your sole proprietorship? If so, be sure to report them on your tax return.

1. Contributions. By contributions, I'm referring to charitable contributions - donations you make to tax-exempt organizations (known in tax lingo as 501c3 organizations) such as churches, synagogues and other humanitarian or educational institutions that have IRS non-profit status.

This is one of those tricky deductions. If you are a sole proprietor and make a donation from your business checking account, you don't actually take the deduction for this contribution on Schedule C. Instead, the deduction is reported on Schedule A, Itemized Deductions. So if you don't file Schedule A, which is fairly common because IRS statistics show that about two-thirds of personal tax returns take the standard deduction, you don't get to write off the donation.

So, a word of caution to all you kind-hearted sole proprietors: do not assume that just because you made the donation from your business account, you automatically get to deduct it.

Corporations ("C" corporations but not "S" corporation) do get to deduct charitable contributions as a business expense on the corporate income tax return (Form 1120), provided certain conditions are met. Is that reason enough to incorporate? Probably not. But hopefully you aren't making donations merely for the tax benefits.

2. Contractors. If you hire independent contractors to perform services for your business, those fees are deductible on Schedule C. Line 11 is the logical place to report it, "Contract labor."

Keep in mind that this is one of the most controversial deductions in business and a potential red flag if the IRS suspects abuse. Why is that? Because many businesses pay their workers as independent contractors rather than employees merely to avoid the payroll taxes. This is a big no-no and if you get caught, you'll regret it. If the IRS can prove that your contractors are actually employees, they can reclassify past compensation as wages and required you to pay the overdue payroll taxes, plus late payment penalties and interest.

Now, if you have a legitimate contractor relationship with a service provider, you need not worry about this. Just be sure you do things right: if you hire an independent contractor, do you have a contract? Does the contractor send you invoices? And at the end of the year, do you send him a Form 1099-MISC? The answer to those questions better be "yes."

For me information on this topic, be sure to talk with your tax professional, or go to the IRS website, search on "independent contractor" and you'll access an excellent article entitled "Independent Contractor or Employee"?

3. Commissions. Another common form of compensation is commissions, reported on Schedule C, Line 10. Again, if you are paying other people a commission for services rendered, be sure that these folks are truly independent contractors and not employees. If they are contractors, you can report the expense on Line 10 and legally avoid payroll taxes. But if they are employees, the compensation should be included on Line 26, Wages, and be subject to payroll taxes, income tax withholdings, and the small mountain of payroll paperwork that accompanies employee compensation.


Looking for more small business tax tips? For a free copy of the 25-page Special Report "How To Instantly Double Your Deductions", visit . Wayne M. Davies is author of 3 ebooks on tax reduction strategies for small business owners and the self-employed.

Report this article Ask About This Article

More to Explore