Background

Schedule C (Form 1040) is the IRS form for reporting profit or loss from a sole proprietorship or single‑member LLC taxed as a disregarded entity. The form has sections for income, cost of goods sold (COGS), expenses, and vehicle/home‑office details. The IRS maintains the official Schedule C overview and instructions (see IRS Schedule C and Instructions) which should be your primary reference (IRS).

Step‑by‑step: How to complete Schedule C

  1. Gather documentation first: 1099‑NEC/1099‑MISC, bank records, invoices, receipts, and mileage logs.
  2. Identify gross receipts: enter total freelance revenue on Part I (Gross receipts or sales). Don’t include personal income or reimbursements already excluded by contract.
  3. Subtract returns and allowances (if applicable) to arrive at gross income.
  4. If you sell products or inventory, complete Part III for Cost of Goods Sold (materials, direct labor, beginning/ending inventory).
  5. Enter business expenses in Part II by category (advertising, supplies, contract labor, office expenses, etc.). Use ordinary and necessary standards from the IRS.
  6. If you use your home for business, calculate the home office deduction using either the simplified or regular method and report on the appropriate line (see IRS home office guidance).
  7. Complete Part V (other expenses) for categories not listed on the main lines and provide a breakout.
  8. Compute net profit or loss: subtract total expenses from gross income. Transfer net profit to Form 1040 and, if net earnings from self‑employment are $400 or more, compute self‑employment tax on Schedule SE.

Sources: IRS Schedule C overview and Instructions; IRS Home Office Deduction guidance.

Key sections explained

  • Income (Part I): All amounts received for freelance services. Include business credit card receipts and platform payments (PayPal, Stripe).
  • COGS (Part III): Only for sellers of physical goods. Track beginning/ending inventory and direct costs.
  • Expenses (Part II): Common deductible categories include advertising, supplies, contract labor, legal and professional fees, and software subscriptions.
  • Vehicle and Mileage (Part IV): Use either the standard mileage rate or actual vehicle expenses; keep contemporaneous logs.
  • Home Office: Use the simplified method (square footage × $5, max $1,500) or actual expenses; choose the method that yields the larger deduction but be prepared to substantiate it.

Common deductible expenses (examples)

  • Software subscriptions used for business (e.g., design tools)
  • Contract labor (freelancers hiring subcontractors)
  • Advertising and marketing
  • Office supplies and small equipment
  • Business insurance, professional fees, and continuing education
    Note: Personal expenses or expenses that are not ordinary and necessary for your trade are not deductible.

Real‑world example

A freelance web developer earned $60,000 in gross receipts and had the following business expenses: $6,000 in contract developers, $2,400 in software, $1,200 in advertising, $3,600 home office (actual method allocation), and $3,000 mileage/vehicle costs. Total expenses = $16,200. Net profit = $60,000 − $16,200 = $43,800 → report on Form 1040; compute self‑employment tax on Schedule SE if net earnings ≥ $400.

Who must file Schedule C

Any individual operating a business as a sole proprietor or single‑member LLC who has business income or expenses should file Schedule C. If your net self‑employment earnings are $400 or more, you must also file Schedule SE for self‑employment tax (see IRS Schedule SE).

Recordkeeping and audit readiness

Keep receipts, invoices, bank/credit card statements, and mileage logs. The IRS generally recommends keeping records for at least three years from the date you filed your return, and longer (six years) if you underreport substantial income. For home office support, keep floor plans, utility bills, and a method to allocate business vs. personal use. See the IRS records guidance and a detailed checklist for home‑office documentation (FinHelp resource).

Internal resources: Preparing for an IRS Exam of Home Office Deductions: Documentation Checklist (https://finhelp.io/glossary/preparing-for-an-irs-exam-of-home-office-deductions-documentation-checklist/). Also see A Homeowner’s Guide to Tax Credits and Deductions for overlap when your home figures into deductions (https://finhelp.io/glossary/a-homeowners-guide-to-tax-credits-and-deductions/).

Common mistakes to avoid

  • Mixing personal and business expenses without clear records.
  • Misclassifying employees as independent contractors (misclassification risk).
  • Overclaiming home office without meeting the exclusive‑and‑regular use test.
  • Failing to file Schedule SE when net earnings ≥ $400.

Practical tips

  • Use accounting software (QuickBooks, Wave) to tag income/expenses as you go.
  • Scan and back up receipts monthly to reduce year‑end stress.
  • When in doubt about a deduction’s validity, document the business purpose and consult a CPA—especially for complex issues like travel, meals, or the home office.

FAQs (brief)

  • Do I file Schedule C if I had no profit? Yes — if you had business activity and expenses you want to report, you can file Schedule C; reporting a loss may affect other tax limits. (Note: if truly no activity, you generally do not file.)
  • What if my expenses exceed income? You can report a business loss; repeated losses may trigger hobby‑loss scrutiny by the IRS.
  • When does self‑employment tax apply? Net earnings from self‑employment of $400 or more require Schedule SE filing. (IRS Schedule SE)

Professional disclaimer

This article is educational and does not constitute tax, legal, or financial advice. For personalized guidance, consult a licensed CPA or tax professional.

Authoritative sources

(Last reviewed 2025.)