Whether you’re a full-time freelancer, gig worker, or run a small business as a sole proprietor, the IRS expects you to report your income and expenses on Schedule C (Form 1040), Profit or Loss from Business. Understanding how to correctly report self-employment income and related deductions is key to remaining compliant with tax laws while maximizing your refund or minimizing taxes owed. This blog walks through everything you need to know to report freelance and self-employment income using Schedule C.
Who Should File Schedule C?
If you engage in any business activity for profit and are not incorporated or operating as an LLC taxed as a corporation, you likely need to file Schedule C. Common examples include:
- Freelancers (writers, designers, consultants, developers)
- Gig economy workers (Uber, Lyft, DoorDash, TaskRabbit)
- Self-employed professionals (photographers, tutors, trainers)
- Independent contractors or 1099 workers
- Sole proprietors (retailers, repairmen, online sellers, etc.)
Income Reporting on Schedule C
All income received from your business activities must be reported in Part I of Schedule C.
Line 1: Gross Receipts or Sales
Report all payments received for services rendered or products sold. This includes cash, check, PayPal, Venmo, credit card payments, and third-party platforms like Etsy or Upwork.
If you received a Form 1099-NEC or 1099-K, use those documents to help tally your income. Even if you didn’t receive a form, you are still required to report all income earned.
Line 2: Returns and Allowances
If you refunded any amounts to customers, subtract them here.
Line 7: Gross Income
This is your total business income after adjusting for returns and cost of goods sold (if applicable).
Deductible Business Expenses (Part II of Schedule C)
You can deduct “ordinary and necessary” expenses directly related to your trade or business. Common deductible categories include:
- Advertising: Online ads, flyers, business cards
- Car and Truck Expenses: Mileage, gas, insurance (if used for business)
- Contract Labor: Payments to subcontractors
- Depreciation: For business equipment like computers or cameras
- Insurance: Business liability or professional insurance
- Legal and Professional Services: Accountant or attorney fees
- Office Expenses: Paper, printer ink, software
- Rent or Lease: Equipment, vehicles, or office space
- Repairs and Maintenance: Equipment upkeep
- Supplies: Tools, raw materials
- Utilities: Internet and cell phone (portion used for business)
- Travel, Meals, and Entertainment: Limited to 50% for meals
- Wages: If you paid employees
Tip: Keep receipts, mileage logs, and records of all business-related transactions to support your deductions in case of an audit.
Home Office Deduction
If you use a portion of your home regularly and exclusively for business, you may qualify for the home office deduction. There are two methods:
- Simplified method: $5 per square foot, up to 300 sq. ft.
- Actual expense method: Based on the percentage of your home used for business (includes mortgage interest, rent, utilities, insurance, and repairs)
Part III: Cost of Goods Sold (COGS)
If your business involves selling products, use this section to report your beginning inventory, purchases, and ending inventory to determine the cost of goods sold.
COGS = Beginning Inventory + Purchases – Ending Inventory
This cost is deducted from your gross receipts to calculate gross profit.
Part IV: Information on Your Vehicle
If you are claiming car and truck expenses, you must provide details on your vehicle, such as:
- Date placed in service
- Total and business miles driven
- Whether you have written mileage logs
You can choose to deduct either:
- Standard mileage rate: IRS-set rate per mile (e.g., 67 cents per mile in 2024)
- Actual expenses: Gas, maintenance, depreciation, insurance, etc.
Part V: Other Expenses
Use this section to report miscellaneous business expenses that don’t fit into the predefined categories in Part II, such as:
- Domain registration fees
- Business licenses or permits
- Bank fees
- Continuing education or training
Self-Employment Tax
Self-employed individuals are responsible for both the employer and employee portions of Social Security and Medicare taxes, collectively known as self-employment tax.
This is calculated on Schedule SE and reported on Form 1040. As of 2024, the rate is 15.3% (12.4% Social Security and 2.9% Medicare). However, you can deduct half of your SE tax when calculating your adjusted gross income (AGI).
Estimated Tax Payments
If you expect to owe at least $1,000 in tax, you may need to make quarterly estimated tax payments using Form 1040-ES. This helps avoid underpayment penalties at year-end.
Tips for Freelancers and Gig Workers
- Keep separate bank accounts for personal and business finances
- Use accounting software or spreadsheets to track income and expenses
- Retain all 1099-NEC, 1099-K, and receipts for business purchases
- Consult a tax advisor for large deductions or complex situations
- File electronically for faster processing and fewer errors
Conclusion
Filing Schedule C is an essential part of tax compliance for freelancers and self-employed individuals. While the process may seem overwhelming at first, understanding what income to report, which expenses to deduct, and how to track everything year-round can make tax time far more manageable. By accurately completing Schedule C and planning ahead with estimated payments and deductions, you can keep more of your hard-earned income and avoid IRS issues down the road.
