If you're a freelancer, independent contractor, small business owner, or self-employed individual, Schedule C is the form that reports your business income and expenses to the IRS. Think of it as the profit-and-loss statement for your one-person business. While it might look intimidating at first glance, this guide breaks down everything you need to know about filing Schedule C for the 2019 tax year in plain English.

What the Form Is For

Schedule C (Form 1040) is the IRS form used to report income or losses from a business you operated or a profession you practiced as a sole proprietor. According to the IRS, an activity qualifies as a business if "your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity." In other words, if you're regularly trying to make money from something (not just as a sporadic hobby), you'll likely need Schedule C.

Who needs to file Schedule C?

• Sole proprietors: Anyone running an unincorporated business by themselves
• Independent contractors and freelancers: Graphic designers, writers, consultants, Uber drivers, and gig workers who receive Form 1099-MISC or 1099-NEC
• Statutory employees: Certain workers like full-time life insurance agents or commission-based delivery drivers who receive a W-2 with the "statutory employee" box checked
• Qualified joint ventures: Married couples who are the only owners of an unincorporated business and elect to be treated as a qualified joint venture
• Single-member LLC owners: If you're the sole owner of a limited liability company not electing corporate tax treatment

What Schedule C does

Schedule C tallies up all your business income (the money coming in) and subtracts your legitimate business expenses (money going out) to arrive at your net profit or loss. This number flows to your main Form 1040 tax return and determines how much income tax you owe. It also feeds into Schedule SE, which calculates your self-employment tax—essentially your Social Security and Medicare contributions as your own boss.

When You’d Use Schedule C

Late Filing and Amended Returns

Normal filing deadline: Schedule C is attached to your annual Form 1040 tax return. For the 2019 tax year, the deadline was April 15, 2020. If you filed for an extension, you had until October 15, 2020.

Late filing: If you missed the deadline entirely and never filed your 2019 Schedule C, you should file it as soon as possible. The IRS imposes penalties for late filing (typically 5% of unpaid taxes per month, up to 25%) and late payment. However, if you're owed a refund, there's no penalty for filing late—though you must file within three years of the original deadline to claim that refund.

Amended returns: Made a mistake on your 2019 Schedule C? You'll need to file Form 1040-X (Amended U.S. Individual Income Tax Return) to correct it. According to IRS guidelines, you have three years from the date you filed your original return or two years from the date you paid the tax (whichever is later) to file an amended return and claim a refund. For 2019 returns filed on April 15, 2020, this means you generally have until April 15, 2023, to amend and claim a refund.

Common reasons to amend your Schedule C include:

• Discovering unreported income (like a forgotten 1099 form)
• Finding additional deductible business expenses you missed
• Correcting errors in cost of goods sold calculations
• Fixing mistakes in depreciation or vehicle expense claims

Key Rules or Details for 2019

Several important rules and thresholds applied specifically to the 2019 tax year:

Gross receipts test

For 2019, the IRS increased the "small business taxpayer" threshold to $26 million in average annual gross receipts. If your business averaged less than $26 million over the prior three years, you qualified for simplified accounting methods, including the cash method of accounting and potential exemption from complex inventory capitalization rules.

Standard mileage rate

If you used your vehicle for business in 2019, you could deduct either actual expenses or use the standard mileage rate of 58 cents per mile (up from 54.5 cents in 2018).

Business interest limitation

Under Section 163(j), if you weren't a small business taxpayer (see above), you might have faced limitations on deducting business interest expenses. This required filing Form 8990.

Material participation

To avoid passive activity loss limitations, you needed to "materially participate" in your business. The IRS provides seven tests, including working more than 500 hours in the activity or substantially all the participation being yours. If you didn't materially participate and had a loss, special passive loss rules might limit your deduction.

Information reporting

If you paid anyone $600 or more for services during 2019, you were required to file Form 1099-MISC by January 31, 2020. This is a common compliance requirement many self-employed individuals overlook.

Home office deduction

For 2019, you could claim expenses for business use of your home using either the simplified method ($5 per square foot, up to 300 square feet, or $1,500 maximum) or the actual expense method using Form 8829. Your home office had to be used regularly and exclusively for business.

Step-by-Step (High Level)

Here's how to complete Schedule C in straightforward terms:

Part I: Income

• Describe your business (Line A): Simply state what you do—"Freelance graphic design," "Rideshare driver," or "Marketing consultant."
• Enter your business code (Line B): Find the six-digit code from the list at the end of the Schedule C instructions that best matches your business type.
• Provide identifying information (Lines C-E): Your business name (if different from your personal name), employer identification number (EIN) if you have one, and business address.
• Choose your accounting method (Line F): Most small businesses use "cash" accounting (income when received, expenses when paid).
• Report gross receipts (Line 1): Enter all income from your business, including amounts on any 1099 forms. Don't subtract anything yet.
• Subtract returns and allowances (Line 2): Any refunds or credits you gave customers.
• Calculate gross income (Line 3): Subtract line 2 from line 1.
• Cost of goods sold (Line 4): If you sell physical products with inventory, complete Part III first, then enter that number here.
• Other income (Line 6): Add any miscellaneous business income like scrap sales, business interest, or bad debt recoveries.

Part II: Expenses

This is where you list every legitimate business expense. Common categories include:

• Advertising (Line 8)
• Car and truck expenses (Line 9)
• Commissions and fees (Line 10)
• Insurance (Line 15)
• Office expenses (Line 18)
• Supplies (Line 22)
• Utilities (Line 25)
• And many more...

The golden rule: An expense must be "ordinary and necessary" for your business. Ordinary means common in your industry; necessary means helpful and appropriate for your business.

Calculate your net profit or loss (Line 31): Subtract total expenses from gross income. This number represents your taxable business income.

Part III: Cost of Goods Sold (if applicable)

Only complete this if you manufacture products or maintain inventory for resale. It tracks beginning inventory, purchases, labor costs, and ending inventory to determine what you actually spent on items you sold.

Part IV: Vehicle Information

If you claimed car expenses on Line 9, provide details about your vehicle(s), including dates placed in service, mileage (business and total), and whether you have evidence to support your deduction.

Part V: Other Expenses

List any legitimate business expenses that don't fit the predefined categories in Part II.

Common Mistakes and How to Avoid Them

Mistake #1: Mixing personal and business expenses

This is the most frequent error. You cannot deduct personal, family, or living expenses. That coffee you grabbed on the way to work isn't deductible unless you met a client there for a genuine business discussion. Keep separate bank accounts and credit cards for business to maintain clear records.

How to avoid it: Maintain meticulous records. Use accounting software or even a simple spreadsheet to categorize every expense as it occurs.

Mistake #2: Not keeping adequate documentation

The IRS requires substantiation for all deductions. Without receipts, mileage logs, or invoices, your deductions may be disallowed during an audit.

How to avoid it: Save all receipts (digital or physical), maintain a contemporaneous mileage log in your vehicle, and document the business purpose of expenses.

Mistake #3: Misreporting 1099 income

If the total on your 1099-MISC forms exceeds what you report on Line 1, the IRS computers will flag your return. Even if you had legitimate expenses that reduced your net income, you must report the full gross receipts.

How to avoid it: If there's a discrepancy (like receiving a 1099 for income that wasn't actually yours), attach a statement explaining the difference.

Mistake #4: Claiming 100% business use of assets

Claiming your vehicle, phone, or home is used 100% for business raises red flags. Be realistic and honest about the actual business percentage.

How to avoid it: Calculate actual business-use percentages based on facts. For vehicles, maintain a mileage log showing business trips versus personal trips.

Mistake #5: Forgetting to file Schedule SE

If you have net profit on Schedule C, you also owe self-employment tax (Social Security and Medicare). Many first-time filers forget Schedule SE entirely, leading to underpayment penalties.

How to avoid it: If Line 31 shows a profit, automatically prepare Schedule SE as well. For 2019, self-employment tax was 15.3% on net earnings up to $132,900, then 2.9% on amounts above that.

Mistake #6: Deducting entertainment expenses

Starting in 2018, the Tax Cuts and Jobs Act eliminated deductions for entertainment expenses. You can't deduct tickets to sporting events, golf outings, or theater performances, even if clients attend. Business meals remained 50% deductible.

How to avoid it: Carefully distinguish meals from entertainment. Document the business purpose and attendees for any meal deductions.

What Happens After You File

Once you submit your Form 1040 with Schedule C attached, several things occur:

• IRS processing: The IRS computers match the income you reported against 1099 forms filed by your clients and customers. If everything matches and your math is correct, your return processes smoothly.
• Self-employment tax calculation: Your Schedule C net profit flows to Schedule SE, where self-employment tax is calculated at 15.3% (12.4% for Social Security on earnings up to $132,900, plus 2.9% for Medicare on all earnings). The good news: You can deduct half of your self-employment tax on Schedule 1, Line 14, reducing your adjusted gross income.
• Estimated tax requirements: If you owe more than $1,000 in tax after withholding and credits, you're required to make quarterly estimated tax payments for future years. This prevents a large tax bill next April 15.
• Qualified Business Income (QBI) deduction: Your Schedule C profit may qualify you for the QBI deduction (up to 20% of qualified business income) on Form 8995 or 8995-A, depending on your total income and business type. This deduction was introduced by the Tax Cuts and Jobs Act and can significantly reduce your tax bill.
• Refund or payment: If you had tax withholding that exceeded your total tax liability, you'll receive a refund. If you owe, payment is due by the filing deadline (or you'll accrue interest and penalties).
• Audit potential: While most returns aren't audited, Schedule C filers face slightly higher audit rates than W-2 employees, particularly for certain red-flag items like large home office deductions, consistently reporting losses, or round numbers throughout the form. Maintaining good records is your best protection.
• Carry-forward losses: If your business had a loss, it generally reduces your other income (like wages from a job). However, at-risk and passive activity loss rules might limit how much loss you can deduct in 2019, carrying the remainder forward to future tax years.

FAQs

Q1: Do I need to file Schedule C if I only made $500 from my side business?

Yes. There's no minimum income threshold for filing Schedule C. If you had net self-employment earnings of $400 or more, you must file Schedule C and Schedule SE to report and pay self-employment tax. Even if you earned less than $400, you should still report the income, though you won't owe self-employment tax.

Q2: What's the difference between a hobby and a business?

The IRS looks at several factors: Do you operate in a businesslike manner? Do you depend on income from the activity? Have you had profits in at least three of the last five years? Are your losses due to circumstances beyond your control? If it's truly a hobby (not engaged in for profit), you cannot deduct losses against other income. For 2019, hobby expenses were generally not deductible due to the suspension of miscellaneous itemized deductions.

Q3: Can I deduct health insurance premiums?

Yes, but not on Schedule C. Self-employed individuals can deduct health insurance premiums for themselves, their spouse, and dependents on Schedule 1 (Form 1040), Line 16 (now Line 17 on current forms). This is an "above-the-line" deduction that reduces your adjusted gross income without itemizing.

Q4: What if I operate multiple businesses?

You must file a separate Schedule C for each distinct business. You cannot combine a consulting business with an eBay resale business on one form. Each business gets its own Schedule C, and the net profits or losses from all are then combined on your Form 1040.

Q5: How long should I keep records?

The IRS generally recommends keeping tax records for at least three years from the date you filed the return or the due date (whichever is later). However, if you underreported income by more than 25%, keep records for six years. For employment tax records, keep documents for at least four years after the tax becomes due or is paid.

Q6: What if I use my car for both business and personal driving?

You must allocate expenses based on actual business use percentage. The best practice is keeping a contemporaneous mileage log noting the date, destination, business purpose, and miles driven for each business trip. Then calculate the percentage of business miles versus total miles and apply that percentage to actual expenses (or use the standard mileage rate for business miles only).

Q7: Can I deduct startup costs?

Yes, with limitations. You can deduct up to $5,000 in startup costs in the first year of business (reduced dollar-for-dollar if startup costs exceed $50,000). Any remaining startup costs must be amortized over 15 years. Examples of startup costs include market research, advertising before opening, and professional fees for setting up the business. However, if you started your business in prior years, you cannot deduct startup costs in 2019.

Additional Resources

For more detailed information about Schedule C and self-employment taxes, visit these authoritative IRS resources:

• 2019 Schedule C Form and Instructions
• About Schedule C (Form 1040)
• Publication 334: Tax Guide for Small Business
• Self-Employment Tax Information

Filing Schedule C doesn't have to be overwhelming. With organized records, honest reporting, and attention to the rules, most self-employed individuals can successfully navigate the process. When in doubt, consulting with a qualified tax professional can provide peace of mind and potentially save you money through legitimate deductions you might have overlooked.

All information in this guide is sourced exclusively from official IRS publications and forms for the 2019 tax year.