What the Form Is For

Schedule C (Form 1040) is the tax form you'll use to report income or losses from a business you operated or a profession you practiced as a sole proprietor during the 2022 tax year. Think of it as your business's "report card" to the IRS—it shows how much money your business brought in, what expenses you had, and ultimately whether you made a profit or took a loss.

You'll need Schedule C if you're self-employed, working as an independent contractor, running a side hustle, operating as a freelancer, or participating in the gig economy (driving for rideshare services, delivering food, selling handmade goods online, consulting, etc.). The form also applies if you're a single-member LLC that hasn't elected to be taxed as a corporation, or if you received a Form W-2 with the "Statutory employee" box checked (such as certain insurance agents, traveling salespeople, or commission drivers).

Schedule C attaches to your main tax return (Form 1040, 1040-SR, or 1040-NR) and helps calculate two important things: your income tax liability and your self-employment tax. Unlike employees who have taxes withheld from paychecks, sole proprietors must report all business income and pay both the employer and employee portions of Social Security and Medicare taxes—that's the self-employment tax, calculated on Schedule SE using your Schedule C net profit.

For your business to qualify for Schedule C reporting, the IRS requires that your primary purpose for the activity is making income or profit, and you're involved with continuity and regularity. Sporadic activities, hobbies, or not-for-profit endeavors don't count as businesses for tax purposes.

When You’d Use It (Late/Amended Filings)

Standard Filing Deadline

For the 2022 tax year, Schedule C is due with your Form 1040 by April 18, 2023 (the deadline was extended because April 15 fell on a weekend and April 17 was Emancipation Day in Washington, D.C.). If you requested an extension, you had until October 17, 2023, to file—though remember, an extension to file is not an extension to pay any taxes owed.

Late Filing

If you missed the deadline and haven't filed yet, you should file as soon as possible. The IRS imposes a failure-to-file penalty of 5% of the unpaid taxes for each month (or part of a month) your return is late, up to a maximum of 25%. However, if you're owed a refund, there's no penalty for filing late—though you'll want to file within three years of the original due date to claim that refund. Late filers should also be aware of the failure-to-pay penalty (0.5% per month of unpaid taxes) and interest charges that accrue on unpaid balances.

Amended Returns

You'll need to file an amended return using Form 1040-X if you discover errors on your 2022 Schedule C after filing. Common reasons include forgetting to report income (perhaps a Form 1099 arrived late), incorrectly calculating expenses, or claiming the wrong deductions. 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. If you filed your 2022 return early (before April 18, 2023), count the three years from the April deadline, not from when you actually filed.

The IRS typically takes up to 16 weeks to process amended returns, though it can take longer during busy periods. You can check your amended return status using the "Where's My Amended Return?" tool on IRS.gov, but you'll need to wait about three weeks after mailing your Form 1040-X before it appears in the system.

Key Rules or Details for 2022

Material Participation

One of the most important concepts on Schedule C is whether you "materially participated" in your business (Line G). This determination affects whether losses are considered passive (potentially limited) or active. You materially participated if you met any of seven tests, the most common being: you worked more than 500 hours in the business, your participation was substantially all the participation in the activity, or you worked more than 100 hours and at least as much as anyone else. If you check "No" on material participation and have a loss, you may need to file Form 8582 to limit that loss under passive activity rules.

Standard Mileage Rates

The 2022 standard mileage rate for business use of your vehicle changed mid-year due to rising fuel costs. From January 1 to June 30, 2022, the rate was 58.5 cents per mile. From July 1 to December 31, 2022, it increased to 62.5 cents per mile. You must choose between using the standard mileage rate or actual expenses (gas, repairs, depreciation, etc.)—you can't mix both methods in the same year for the same vehicle.

Business Meal Deduction

For 2022 specifically, business meals were temporarily 100% deductible (rather than the typical 50%) if purchased from a restaurant. This was part of COVID-19 relief provisions. This temporary increase ended on December 31, 2022, so it only applies to the 2021 and 2022 tax years.

Excess Business Loss Limitation

If your Schedule C shows a loss on Line 31, you may face an excess business loss limitation. For 2022, non-corporate taxpayers couldn't deduct business losses exceeding $270,000 ($540,000 for married filing jointly). Any disallowed loss gets carried forward as a net operating loss to future years. You'll use Form 461 to calculate this adjustment.

Information Returns

If you paid anyone $600 or more for services during 2022 (contract labor, professional fees, rent, etc.), you likely needed to file Form 1099-NEC or Form 1099-MISC by January 31, 2023. Line I on Schedule C asks if you made such payments and filed the required forms. Failure to file information returns can result in penalties.

Accounting Methods

Most small businesses use the cash method (report income when received, expenses when paid) or accrual method (report income when earned, expenses when incurred). Small business taxpayers with average annual gross receipts of $27 million or less for the prior three years have simplified accounting rules and aren't required to capitalize costs for inventory in certain cases.

Step-by-Step (High Level)

Step 1 – Basic Information (Top Section)

Fill in your name, Social Security number, business description (Line A), principal business code (Line B), business name if different from your personal name (Line C), Employer Identification Number if you have one (Line D), business address (Line E), accounting method (Line F), and answer questions about material participation, business start date, and Forms 1099 (Lines G-J).

Step 2 – Part I: Income (Lines 1-7)

Report your gross receipts or sales on Line 1. If you received Forms 1099-NEC or 1099-K, make sure all reported amounts are included here. Subtract returns and allowances (Line 2) to get net receipts (Line 3). If you sold products, calculate cost of goods sold in Part III and enter on Line 4. Subtract Line 4 from Line 3 for gross profit (Line 5). Add any other business income on Line 6 (such as scrap sales, interest, or recovered bad debts). Line 7 is your total gross income.

Step 3 – Part II: Expenses (Lines 8-27)

This is where you deduct legitimate business expenses. Common categories include advertising (Line 8), car and truck expenses (Line 9), commissions and fees (Line 10), contract labor (Line 11), depreciation (Line 13), employee benefit programs (Line 14), insurance (Line 15), interest on business loans (Lines 16a-16b), legal and professional services (Line 17), office expenses (Line 18), rent or lease payments (Lines 20a-20b), repairs and maintenance (Line 21), supplies (Line 22), taxes and licenses (Line 23), travel and meals (Lines 24a-24b), utilities (Line 25), and wages (Line 26). List any other expenses not fitting these categories in Part V and enter the total on Line 27a. Add Lines 8 through 27a to get total expenses (Line 28).

Step 4 – Calculate Net Profit or Loss (Lines 29-32)

Subtract Line 28 from Line 7 to get your tentative profit or loss (Line 29). If you're claiming home office expenses, complete Form 8829 or use the simplified method, entering the deduction on Line 30. Line 31 is your net profit or loss after home office deduction. If you show a profit, this amount goes to Schedule 1 (Form 1040), Line 3, and flows to Schedule SE for self-employment tax calculation. If you have a loss, check the appropriate box on Line 32 indicating whether all your investment is at risk. Losses may be limited by at-risk rules, passive activity rules, or excess business loss limitations.

Step 5 – Part III: Cost of Goods Sold (Lines 33-42)

If you manufacture products or purchase goods for resale, complete this section. Start with beginning inventory (Line 35), add purchases (Line 36), labor costs (Line 37), materials and supplies (Line 38), and other costs (Line 39). Total these amounts (Line 40), then subtract ending inventory (Line 41) to calculate cost of goods sold (Line 42), which transfers to Line 4.

Step 6 – Part IV: Vehicle Information (Lines 43-47b)

If claiming car or truck expenses and not filing Form 4562, provide details about when you started using the vehicle for business, total miles driven for business/commuting/personal use, and whether you have evidence to support your deduction.

Step 7 – Attach Schedule SE

Unless you had very low net earnings (less than $400), you'll need to complete Schedule SE to calculate self-employment tax, which is currently 15.3% (12.4% for Social Security on earnings up to $147,000 for 2022, plus 2.9% for Medicare on all earnings). The self-employment tax gets added to your total tax on Form 1040.

Common Mistakes and How to Avoid Them

1. Mixing Personal and Business Expenses: One of the most frequent errors is deducting personal expenses as business expenses. Only expenses that are "ordinary and necessary" for your specific trade or business are deductible. Keep meticulous records, use separate credit cards or bank accounts for business transactions, and never deduct personal meals, entertainment, or travel as business expenses unless there's legitimate business purpose documented.
2. Forgetting to Report All Income: If you received Forms 1099-NEC, 1099-K, or 1099-MISC, remember the IRS received copies too. Failing to report income shown on these forms will likely trigger an automated notice. Even if you didn't receive a 1099, you're still required to report all business income. Keep your own detailed records of cash payments, online sales, and other revenue streams.
3. Incorrectly Calculating Vehicle Expenses: Don't mix methods—choose either standard mileage rate OR actual expenses, not both. Keep a contemporaneous mileage log showing date, destination, business purpose, and miles driven. Commuting from home to your regular place of business doesn't count as business mileage (though travel from your home office to client sites does). Many taxpayers face audit challenges because they lack proper documentation of vehicle use.
4. Claiming 100% Business Use of Assets: The IRS scrutinizes claims that vehicles, cell phones, or computers are used 100% for business with zero personal use. Be realistic and honest. If you use your car 70% for business and 30% personally, only claim 70% of related expenses. The same principle applies to home office deductions—only the portion exclusively and regularly used for business qualifies.
5. Missing the Home Office Deduction: Many taxpayers either incorrectly claim home office expenses or fail to claim them when legitimately entitled. To qualify, you must use a specific area of your home exclusively and regularly as your principal place of business, or as a place to meet clients. The space must be used for business only—your kitchen table doesn't count if your kids do homework there. Use Form 8829 for actual expenses or the simplified method (allowing $5 per square foot, up to 300 square feet, for a maximum $1,500 deduction).
6. Poor Record Keeping: The burden of proof falls on you, the taxpayer. Without receipts, invoices, bank statements, and organized records, you risk having deductions disallowed in an audit. Implement a system (accounting software, organized folders, smartphone apps) to track income and expenses throughout the year—not just at tax time. Keep records for at least three years after filing (longer for certain situations).
7. Neglecting Estimated Tax Payments: Unlike W-2 employees, self-employed individuals must make quarterly estimated tax payments. Failing to do so results in underpayment penalties. As a general rule, you should pay 90% of your current year tax liability or 100% of last year's tax (110% if your adjusted gross income exceeded $150,000) through withholding and estimated payments to avoid penalties.

What Happens After You File

Processing Timeline

After you file your 2022 Schedule C with your Form 1040, the IRS typically processes e-filed returns within 21 days, while paper returns can take 6-8 weeks or longer. During processing, the IRS computers check for math errors, verify that income reported matches information returns they've received (Forms 1099, W-2, etc.), and run algorithms that flag returns for potential review.

Refund or Payment

If your Schedule C shows a profit, you'll owe income tax on that profit (reported on Schedule 1, then flowing to Form 1040), plus self-employment tax calculated on Schedule SE. Self-employment tax for 2022 is 15.3% on net earnings up to $147,000 (Social Security portion), with an additional 2.9% Medicare tax on all net earnings above that threshold. High earners may also owe an additional 0.9% Medicare tax on earnings above $200,000 ($250,000 married filing jointly). If your total tax exceeds what you paid through estimated payments and withholding, you'll owe the balance—payable by the April filing deadline to avoid penalties and interest. If you overpaid, you'll receive a refund.

Schedule SE and Your Tax Return

The self-employment tax calculation on Schedule SE is crucial. While this tax may seem burdensome, you get to deduct the "employer portion" (half of your self-employment tax) on Schedule 1, Line 15 of Form 1040, which reduces your adjusted gross income. Additionally, self-employed individuals can deduct health insurance premiums on Schedule 1, Line 17, and make contributions to self-employed retirement plans (SEP-IRA, Solo 401(k), etc.), which provides significant tax advantages.

Audit Risk

Schedule C filers statistically face higher audit rates than W-2 wage earners, particularly those reporting losses, those with income over $100,000, or those in businesses with high cash transactions (like construction, car washes, or restaurants). The IRS typically has three years from your filing date to audit your return (six years if you substantially underreported income). Common audit triggers include: claiming losses for multiple years (IRS may reclassify as a hobby), round numbers that suggest estimates rather than actual records, unusually high expenses relative to income, excessive vehicle or meal expenses, and large home office deductions.

Qualified Business Income Deduction

If you have net profit on Schedule C, you may qualify for the Section 199A deduction—also called the Qualified Business Income (QBI) deduction—worth up to 20% of your qualified business income. This deduction is calculated on Form 8995 or 8995-A and claimed on Schedule 1 (Form 1040), Line 13. It can significantly reduce your tax liability but has complex phaseout rules for high-income taxpayers and specified service trades or businesses.

State Tax Obligations

Don't forget that most states with income tax also require you to report Schedule C income on your state return. You may also have additional obligations like state sales tax collection and remittance, local business licenses, or annual LLC fees, depending on your business type and location.

FAQs

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

Yes, you must report all self-employment income regardless of amount. However, if your net earnings from self-employment are less than $400, you won't owe self-employment tax (though you'll still owe regular income tax on the profit). If you received a Form 1099-NEC or 1099-K showing this income, the IRS expects to see it reported on your return, so file Schedule C to match their records and avoid automated notices.

Q2: What's the difference between Schedule C and Schedule C-EZ?

Schedule C-EZ was a simplified one-page version of Schedule C for taxpayers with straightforward businesses. However, the IRS discontinued Schedule C-EZ starting with the 2019 tax year. All sole proprietors now use the regular Schedule C regardless of business complexity, though the form itself isn't overly complicated for simple situations.

Q3: Can I file Schedule C if I also have W-2 wages from an employer?

Absolutely. Many taxpayers have both W-2 employment income and self-employment income from a side business or freelance work. You'll report your W-2 wages in the wages section of Form 1040 and your business income/expenses on Schedule C. Your Schedule C net profit gets added to your other income, and all of it together determines your total tax liability. Keep in mind you'll owe self-employment tax on Schedule C profit even if you already paid Social Security and Medicare taxes through your W-2 job.

Q4: What happens if my Schedule C shows a loss several years in a row?

The IRS may reclassify your business as a hobby rather than a legitimate business under the "hobby loss rule." Generally, if you show losses in three out of five consecutive years (two out of seven years for horse breeding/racing/showing), the IRS presumes it's not engaged in for profit. Once classified as a hobby, you can't deduct expenses exceeding hobby income, and those expenses become miscellaneous itemized deductions (which aren't deductible under current tax law). To avoid this, maintain professional business practices, keep detailed records showing profit motive, and consider consulting a tax professional if experiencing ongoing losses.

Q5: Do married couples need to file separate Schedules C, or can they combine their business on one?

It depends. If you and your spouse operate separate businesses, each must file a separate Schedule C. If you jointly own and operate one business, you're technically a partnership and should file Form 1065 (partnership return) unless you qualify for special treatment. Married couples can elect "qualified joint venture" status if they're the only owners, both materially participate, file a joint return, and operate as a community property state business or meet other requirements. This election allows you to avoid partnership filing requirements while still each receiving Social Security credit for your business earnings—each spouse files their own Schedule C reporting their share of income and expenses.

Q6: How long should I keep records related to my Schedule C?

Keep records supporting your Schedule C for at least three years from the date you filed your return or two years from the date you paid the tax, whichever is later. However, for certain situations, keep records longer: seven years if you file a claim for a loss from worthless securities or bad debt deduction; six years if you don't report income that you should report and it's more than 25% of the gross income shown on your return; indefinitely if you don't file a return or file a fraudulent return; and keep employment tax records for at least four years after the tax becomes due or is paid.

Q7: Can I deduct health insurance premiums on Schedule C?

No, health insurance premiums for yourself (and your spouse and dependents if you're self-employed) don't get deducted directly on Schedule C. Instead, they're claimed as an "above-the-line" deduction on Schedule 1 (Form 1040), Line 17, which reduces your adjusted gross income. This is actually more beneficial than deducting on Schedule C because it reduces your income tax without reducing your net earnings subject to the Qualified Business Income deduction. However, you can deduct health insurance premiums paid for your employees on Schedule C, Line 14.

For More Information: Visit IRS.gov/ScheduleC for the current Schedule C form, instructions, and updates, or consult Publication 334 (Tax Guide for Small Business) for comprehensive guidance on sole proprietor taxation.