Schedule C (Form 1040) is the go-to IRS form for self-employed individuals, freelancers, sole proprietors, and independent contractors to report income and expenses from a business or profession. Understanding how to properly complete Schedule C not only ensures tax compliance but also maximizes deductions and improves your chances of getting the largest refund or minimizing tax owed.
Who Should File Schedule C?
If you earned income from self-employment during the tax year, you’re generally required to file Schedule C. This includes:
- Sole proprietors
- Freelancers and gig workers (e.g., Uber drivers, designers, writers)
- Independent contractors receiving Form 1099-NEC
- Single-member LLCs (unless elected to be taxed as a corporation)
- Side hustles or small businesses not registered as corporations
Note that income earned from hobbies or occasional activities not done for profit is reported differently (e.g., on Form 1040, Line 8z or other income lines).
Purpose of Schedule C
The purpose of Schedule C is to report both income and deductible expenses from a business. It determines your net profit or loss, which then flows into Line 8 of Schedule 1 and eventually to your Form 1040, affecting your total taxable income.
Basic Structure of Schedule C
Schedule C consists of five main sections:
Part I – Income
This section reports your business’s gross receipts or sales. Include all the income received from providing goods or services. If applicable, subtract returns, allowances, and the cost of goods sold (COGS) to calculate your gross income.
- Line 1: Gross receipts or sales
- Line 4: Cost of goods sold (from Part III)
- Line 7: Gross income (Line 3 minus Line 4)
Part II – Expenses
This is where you deduct your ordinary and necessary business expenses. These reduce your taxable profit. Common deductible categories include:
- Advertising and marketing
- Car and truck expenses (mileage or actual expenses)
- Contract labor and professional services
- Depreciation of business assets (Form 4562)
- Office expenses, rent, utilities, and supplies
- Business travel, meals (50% deductible), and lodging
- Insurance premiums (not health insurance)
- Wages paid to employees
Total expenses are reported on Line 28, and your tentative profit or loss is calculated on Line 29 (Gross income minus expenses).
Part III – Cost of Goods Sold (COGS)
If you sell physical products, COGS is essential to calculating your true profit. It includes beginning inventory, purchases, labor, and materials used in production. The formula:
COGS = Beginning Inventory + Purchases + Labor + Other Costs – Ending Inventory
Part IV – Information on Your Vehicle
If you claimed car or truck expenses in Part II, you must complete this section to justify the business use of the vehicle, including:
- Date placed in service
- Business miles vs. total miles
- Whether you have another vehicle
- Whether records are maintained
Part V – Other Expenses
Any allowable expenses not listed in Part II go here. Be sure to itemize and describe each expense clearly. Examples include:
- Bank fees
- Education and training
- Internet and phone usage (business portion only)
How to Report Income
Include all payments received during the year, even if you didn’t receive a Form 1099. Many gig workers receive a Form 1099-NEC or 1099-K (for payment processors). Keep meticulous records of all income and retain bank statements, invoices, and receipts for verification.
Self-Employment Tax and Form SE
If your net earnings from self-employment are $400 or more, you must also file Schedule SE to compute your self-employment tax (Social Security and Medicare). You can deduct half of this tax as an adjustment to income on your Form 1040.
Home Office Deduction
If you use part of your home exclusively for business, you may qualify for the home office deduction. This can be calculated using:
- Simplified method: $5 per square foot (up to 300 sq. ft.)
- Regular method: Actual expenses (e.g., utilities, depreciation, mortgage interest) based on the percentage of home used for business
Recordkeeping Requirements
Keep all records related to income and expenses for at least three years from the date you file your return. This includes:
- Receipts and invoices
- Mileage logs
- Bank and credit card statements
- Canceled checks
Common Mistakes to Avoid
- Not separating personal and business expenses
- Overstating deductions without documentation
- Forgetting to report income not listed on 1099 forms
- Neglecting to file Schedule SE for self-employment tax
- Not tracking mileage or maintaining logs
Benefits of Filing Schedule C Correctly
Accurate filing of Schedule C can help you:
- Lower your taxable income by claiming all eligible deductions
- Build a solid tax history if applying for loans
- Avoid IRS penalties and audits
- Qualify for tax credits such as the Qualified Business Income Deduction (QBI)
Conclusion
Schedule C is the cornerstone of tax reporting for the self-employed. Properly accounting for all income and legitimate business expenses allows you to comply with IRS rules while maximizing your refund or minimizing your tax liability. Whether you’re a full-time entrepreneur or a side-hustler, taking the time to understand and complete Schedule C thoroughly is a smart financial move.
