Schedule C, officially titled “Profit or Loss from Business (Sole Proprietorship),” is a key IRS form attached to Form 1040, used by self-employed individuals—including sole proprietors, freelancers, and independent contractors—to report their business income and expenses to the IRS. This form allows taxpayers to determine their net profit or loss from their business activities, which directly affects taxable income and self-employment tax.
Who Should File Schedule C?
You generally need to file Schedule C if you run an unincorporated business as a sole proprietor or are self-employed. This includes gig economy workers, freelancers, independent contractors, and statutory employees whose earnings aren’t subject to withholding. Married couples who jointly own a business but do not treat it as a partnership can file separate Schedule Cs.
The IRS defines being “in business” as engaging in an activity with the primary purpose of earning income or profit and doing so continuously and regularly. If this applies to you, then Schedule C filing is required IRS Self-Employed Individuals Tax Center.
Reporting Income on Schedule C
The first section of Schedule C focuses on reporting your business’s gross income. This includes:
- Gross receipts or sales from goods and services,
- Returns and allowances,
- Other income such as interest on business accounts or business asset sales.
All income related to your business must be reported, even if you did not receive a Form 1099-NEC or other income statement.
Deductible Business Expenses
Schedule C allows you to deduct ordinary and necessary business expenses to reduce your taxable profit. Common deductible expenses include:
- Advertising: Costs for promotions and marketing materials.
- Car and Truck Expenses: Business-use vehicle costs, deductible by actual expenses or IRS standard mileage rate.
- Commissions and Fees: Payments to agents or subcontractors.
- Depreciation and Section 179 Expense: Deducting the cost of significant business assets over time or as an immediate expense.
- Insurance: Business insurance premiums.
- Legal and Professional Services: Fees paid to accountants, lawyers, consultants.
- Office Expenses: Supplies, postage, and small equipment.
- Rent or Lease: Payments for business property or equipment.
- Repairs and Maintenance: Costs to maintain business property.
- Supplies: Consumables used in business operations.
- Taxes and Licenses: Business-related taxes and fees.
- Travel and Meals: Business travel expenses and 50% of business meal costs.
- Utilities: Electricity, gas, internet related to the business.
- Wages: Compensation paid to employees; not payments to yourself.
Home office expenses are deductible if you use part of your home exclusively for business, generally reported on Form 8829, which can be filed alongside Schedule C Form 8829 Expenses for Business Use of Your Home.
Calculating Net Profit or Loss
After totaling income and subtracting all deductible expenses, Schedule C shows your net profit or loss:
- A net profit is taxable income subject to income tax and self-employment tax.
- A net loss may offset other income, lowering your overall tax liability, but hobby loss rules apply to ensure the activity is a legitimate business.
Self-Employment Tax
Net earnings reported on Schedule C are also subject to self-employment tax, which covers Social Security and Medicare contributions. As a self-employed person, you pay both the employer and employee portions, totaling 15.3% on net earnings up to the Social Security wage base, and 2.9% Medicare tax thereafter. You can deduct half of your self-employment tax when calculating your adjusted gross income on Form 1040.
For more on this, see our article on Self-Employment Tax.
Estimated Tax Payments
If you expect to owe $1,000 or more in taxes, including income and self-employment tax, you must make quarterly estimated tax payments using Form 1040-ES to avoid penalties. This helps spread your tax payments throughout the year rather than paying a lump sum at tax time.
Learn more about Estimated Tax Payments.
Common Pitfalls and Tips
- Keep detailed records: Maintain receipts, bank statements, invoices, and mileage logs to substantiate your income and expenses.
- Separate business and personal finances: Use dedicated accounts to simplify tracking.
- Understand deductible expenses: Only deduct expenses that are ordinary, necessary, and strictly for business.
- Avoid underreporting income: Report all income earned even without 1099 forms.
- Consider professional help: A CPA or enrolled agent can help optimize deductions and ensure compliance.
Example Scenario
Maria, a freelance writer, earns $45,000 in 2023. She incurs $2,850 in deductible expenses, including a portion of her new laptop, software subscriptions, home office internet, professional courses, website costs, travel, and meals. She reports $45,000 gross income and $2,850 expenses on Schedule C resulting in a net profit of $42,150, which she reports on her Form 1040 and uses to calculate her taxes.
Record Retention
The IRS recommends keeping tax records for at least three years after filing your tax return. For asset depreciation or business property, records should be retained longer to document your basis.
Additional Resources
- IRS official About Schedule C (Form 1040)
- IRS Self-Employed Individuals Tax Center
By understanding Schedule C and following best practices, you can accurately report your business income, maximize deductions, and meet your tax obligations with confidence.
