If you have business income as an independent contractor, gig worker, or sole proprietorship, you’ll need to include 1040 Schedule C with your personal tax return.
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This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.
What is 1040 Schedule C?
Schedule C is a schedule to Form 1040 Individual Tax Return. Schedule C is used to report your net profit or loss from a business.
What is Schedule C-EZ?
Schedule C-EZ was a simpler form of IRS Schedule C that some types of businesses used to use based on their income and expenses.
Presently, every Schedule C filer uses the regular Schedule C tax form. There is no option to use Schedule C-EZ.
It really didn’t make much difference if you used tax software, and it’s one less form for the IRS to manage.
Who needs to file a Schedule C?
Schedule C is for two types of business — a sole proprietor or a single-member LLC that hasn’t elected to be taxed as a corporation. The Schedule C tax form is not for corporations, S-corporations, or partnerships.
A sole proprietorship is an unincorporated business owned and run by one owner who is entitled to all profits and is responsible for any losses and liabilities.
Common examples of sole proprietorships are freelancing, having a side job, being an independent contractor, or operating a business alone. This can include Fiverr sellers, sports officials, Uber drivers, DoorDash drivers, or solo attorneys.
Single-member LLCs are a type of LLC with only one owner. There is no distinction between the owner and the LLC for income tax purposes. The business’s income and profits go directly to the owner’s personal tax return on Schedule C.
An LLC does not use a separate tax return unless the owner chooses to be taxed as a corporation or there is more than one owner. If an LLC has more than one owner and isn’t taxed as a corporation, it files a partnership tax return, not a Schedule C.
If you farm, you may need to file Schedule F instead of the Schedule C form. If you rent property, you may need to file using Schedule E.
When do you need to file IRS Schedule C?
There are two main times you need to file a Schedule C.
- You must file a tax return and include Schedule C if you have more than $400 in business income.
- If you have to file a tax return for another reason, you should include any amount of business income on a Schedule C.
Do you report estimated tax payments on Schedule C?
You don’t report estimated tax payments on Schedule C. Estimated taxes aren’t a business expense and don’t count as tax deductions.
Your tax return has a separate place to enter payments.
What is on a Schedule C?
Schedule C is a place to record the revenue from your business and all the costs associated with running your business. The net profit or loss from this schedule is reported on Form 1040.
If you use accounting software, Schedule C should closely match your profit and loss statement. If you use the same accounting categories as the IRS, you can usually just copy and paste your numbers over.
The top of your Schedule C form asks for basic information like what type of business you’re in, your name, if you have a separate business name, and where your business is located.
- Line B asks for a business activity code. You can look up your code in this IRS chart. The code you enter just helps the IRS with statistics and doesn’t change your taxes.
- Line F asks for your accounting method. Cash is when you report income when you receive the money and expenses when you spend the money. Most people who file Schedule C use this method. Accrual is when you report income when you do the work even if the customer hasn’t paid you yet or paid you early. For expenses, accrual is when you receive the work even if you paid in advance or haven’t paid yet.
Part I — Business Income
Part I is where you enter your gross income.
- Line 1 is where you enter all the money you received whether or not it was included on a 1099-NEC or 1099-K.
- Line 2 is mainly if you had to refund a customer. It’s a separate line because the customer payment and refund might be in two different tax years.
- Line 7 is your gross income before expenses. This is not the amount you pay taxes on because you can subtract your expenses later.
Part II — Business Expenses
Part II is where you can deduct your business expenses.
The listed business expenses include:
- Car and truck expenses (from Schedule C, Part IV or Form 4562)
- Commissions and fees
- Contract labor (if you hired someone else)
- Depreciation and Section 179 expenses
- Insurance (for your business other than health insurance)
- Legal and professional services
- Office expenses
- Rent or lease for vehicles, machinery, equipment, or business property (except the home office deduction)
- Travel and meals expenses
- Wages (paid to your employees)
- Home office deduction
Keep in mind that just because a type of expense is listed doesn’t mean you can deduct everything related to it or that you can deduct it in full.
For example, meal expenses generally need to be while you’re traveling or entertaining clients, and you can only deduct half of the cost of meals in most years. In 2021 and 2022, Congress changed the tax law to allow a 100% deduction for meals normally allowed a 50% deduction to help restaurants impacted by COVID-19.
Part III — Cost of Goods Sold
Part III is where you enter the cost of products that you sold. For example, if you run a lawn care business and sell plants, you can enter what you paid for the plants, soil, pots, or anything else you sell to your customers.
Part IV — Information on Your Vehicle
If you’re claiming the standard mileage deduction, enter it here. If you’re using the actual expenses method, you may need to complete Form 4562 instead of Part IV. If you’re not claiming car and truck expenses, skip Part IV.
Part V — Other Expenses
Part V is where you include any business expenses not listed in Part II. The list of expenses in Part II doesn’t include every type of allowed expense. There are simply too many to list.
For example, business software is a common deduction, but many types of software don’t fit into any of the Part II categories. In Part V, write “software” or a description of the software and the amount you paid for it. Repeat for all of your expenses not covered in Part II.
Of course, you need to make sure any expenses you list are a valid business expense in the eyes of the IRS. Ask a tax professional if you’re not sure whether you can deduct something.
You can view the full IRS instructions for the Schedule C tax form here.
Do you have to pay taxes on a Schedule C?
The Schedule C form calculates the net profit for independent contractors and small business owners. In other words, it counts as self-employment income, and you do have to pay tax.
You’ll likely owe federal income tax, self-employment tax, and state income tax (depending on your state).
If you believe you have hobby income instead of self-employment income, don’t include this income on a Schedule C form.
Similarly, if you think you don’t need to pay tax for any reason, don’t report that income at all. For example, don’t create a Schedule C form if you get a 1099-K for personal transactions that aren’t subject to tax.
Where do I claim the qualified business income deduction?
The QBI deduction is separate from Schedule C. Use Form 8995 to determine if you qualify and the amount of your deduction.
If you use tax software to file a Schedule C, it should automatically complete Form 8995 and add your QBI deduction.
You’ll need to file Schedule C if you’re a sole proprietor and don’t have a corporation. Schedule C doesn’t provide tax advice, and there may be special rules that limit or don’t allow deductions even for types of expenses that are listed. Be sure to research the tax rules for your type of business or talk to a tax professional to make sure you’re claiming proper expenses.