Schedule C (Form 1040): Profit or Loss From Business – A Complete Guide for 2023

If you're running your own business, working as an independent contractor, or earning income from a side hustle, Schedule C is the tax form you'll need to report your business profits or losses. This guide breaks down everything you need to know about this important form in plain language, using only official information from the IRS.

What Schedule C (Form 1040) Is For

Schedule C (Form 1040) is the tax form used by sole proprietors to report income and expenses from businesses they operate. Think of it as the IRS's way of calculating whether your business made or lost money during the year. The form attaches to your regular Form 1040 individual tax return and helps determine both your income tax and self-employment tax obligations.

You'll use Schedule C if you operate a business or practice a profession where your primary purpose is earning income or profit, and you're engaged in the activity with continuity and regularity. This includes traditional sole proprietorships, independent contractors, freelancers, consultants, and gig workers who drive for rideshare services or deliver food. The key distinction is that sporadic activities, hobbies, or not-for-profit endeavors don't qualify as businesses requiring Schedule C.

The form also serves other specific purposes. Statutory employees—certain workers who receive a W-2 with box 13 checked—report their income and expenses here. Married couples who jointly own and operate an unincorporated business may elect to file as a ""qualified joint venture"" using Schedule C instead of a partnership return. Additionally, if you receive income reported on Forms 1099-MISC, 1099-NEC, or 1099-K from business activities, you'll report it on Schedule C.

Each separate business or profession requires its own Schedule C. If you run a consulting business and also sell handmade crafts online, you'll file two separate Schedule C forms. The net profit or loss from all your Schedule C forms ultimately flows to your Form 1040, affecting your overall tax liability. IRS.gov/ScheduleC

When You'd Use Schedule C (Form 1040) (Late/Amended Filing)

Schedule C is filed with your annual Form 1040 tax return, which for the 2023 tax year is typically due on April 15, 2024. If April 15 falls on a weekend or holiday, the deadline moves to the next business day. If you can't meet the deadline, you can request an automatic six-month extension by filing Form 4868, which pushes your filing deadline to October 15, 2024. However, an extension to file is not an extension to pay—you still need to estimate and pay any taxes owed by the original April deadline to avoid penalties and interest.

What happens if you discover an error after filing your return, or you forgot to include business income or expenses on your Schedule C? You'll need to file an amended return using Form 1040-X for the tax year in question. Include a corrected Schedule C with your amended return showing the accurate income and expenses. You generally 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 claiming a refund. If you're reporting additional income or correcting an error that increases your tax liability, you should file the amendment as soon as possible to minimize interest charges.

There's also an important timing consideration regarding estimated taxes. If you expect to owe $1,000 or more in taxes when you file, you're generally required to make quarterly estimated tax payments throughout the year using Form 1040-ES. These are typically due April 15, June 15, September 15, and January 15 of the following year. Failing to make adequate estimated payments can result in penalties, even if you file your annual return on time and pay the full amount owed.

Keep in mind that if your net earnings from self-employment are $400 or more, you must file a tax return even if you wouldn't otherwise be required to file based on your income level. This threshold is important because self-employment income triggers both income tax and self-employment tax obligations. 2023 Instructions for Schedule C

Key Rules You Need to Know for 2023

Understanding the fundamental rules governing Schedule C will help you file accurately and avoid problems with the IRS. First, your business must be operated with the primary intention of making a profit. The IRS looks at whether you conduct your activity in a businesslike manner, maintain complete and accurate records, and actually generate profit in some years. If you report losses year after year without ever turning a profit, the IRS might reclassify your business as a hobby, disallowing your losses.

The method of accounting you choose matters. Most small businesses use the cash method, where you report income when you actually receive it and deduct expenses when you actually pay them. Some businesses must use the accrual method, reporting income when earned and expenses when incurred, regardless of when money changes hands. You must use the same accounting method consistently from year to year unless you receive IRS approval to change methods.

You can only deduct expenses that are both ordinary and necessary for your business. ""Ordinary"" means common and accepted in your trade or business, while ""necessary"" means helpful and appropriate. Personal expenses cannot be deducted, even if they're tangentially related to your business. For mixed-use expenses—like using your car or phone for both business and personal purposes—you can only deduct the business portion, and you must maintain records documenting that business use percentage.

Several important thresholds and requirements apply. If you pay anyone $600 or more during the year for services performed in your business (not for merchandise), you must generally file Form 1099-NEC by January 31 of the following year and provide a copy to the recipient. If you operate from home, you may qualify for the home office deduction, but only if you use a specific area of your home regularly and exclusively for business. You can choose between the simplified method ($5 per square foot up to 300 square feet) or the actual expense method using Form 8829.

Material participation is another key concept. You must indicate on Schedule C whether you ""materially participated"" in your business during the year. Generally, this means you were involved in the business operations on a regular, continuous, and substantial basis. This determination affects whether passive activity loss rules limit your ability to deduct losses.

If your business maintains inventory, you must use cost of goods sold calculations in Part III of Schedule C. You can't simply deduct inventory purchases as expenses; instead, you calculate the actual cost of products sold during the year. Business assets like equipment, vehicles, and computers generally must be depreciated over several years rather than deducted immediately, though Section 179 expensing and bonus depreciation may allow immediate deductions for qualifying property. IRS Self-Employed Tax Center

Step-by-Step (High Level)

Completing Schedule C systematically will help ensure accuracy. Start by gathering all your financial records: income statements, bank statements, receipts, mileage logs, Forms 1099 received, and documentation for all business expenses. Having organized records before you begin makes the process much smoother.

The form begins with basic identifying information. Enter your name, Social Security number, principal business description, and the business code from the North American Industry Classification System (NAICS) that best describes your primary business activity. If your business has a separate name, include it, along with your business address and Employer Identification Number (EIN) if you have one. Indicate your accounting method and answer several yes/no questions about material participation, whether you started or acquired the business during 2023, and whether you made payments requiring Forms 1099.

Part I focuses on income. Report your gross receipts or sales from all sources on line 1. If you had returns, allowances, or discounts, subtract them on line 2. The result is your net receipts or sales. Add any other business income on line 6, such as refunds, credits, or reimbursements from prior years. If your business doesn't involve selling products (you're a service provider), you may skip Part III and report your total gross income on line 7.

Part II is where you claim your business expenses. The form lists common expense categories: advertising, car and truck expenses, commissions and fees, contract labor, depreciation, employee benefit programs, insurance, legal and professional services, office expenses, rent, repairs and maintenance, supplies, taxes and licenses, travel, meals (typically 50% deductible), utilities, and wages. Enter the appropriate amounts for each category. Line 30 is specifically for business use of your home—you can either complete Form 8829 for the actual expense method or use the simplified method by entering up to $1,500 (300 square feet × $5 per square foot).

Any expenses not fitting the listed categories go in Part V, ""Other Expenses,"" which you'll total and carry to line 27a. After totaling all expenses on line 28, subtract them from your gross income to arrive at your tentative profit or loss on line 31. If you show a profit, you'll generally report it on Schedule 1, line 3 of your Form 1040, and also on Schedule SE to calculate self-employment tax. If you show a loss, you may need to apply at-risk rules (Form 6198) or passive activity loss limitations (Form 8582), which could limit or defer your ability to deduct the loss.

Part III applies only if you maintain inventory. Here you calculate cost of goods sold by starting with beginning inventory, adding purchases and labor costs, subtracting ending inventory, and determining what inventory was actually sold during the year. Part IV is for vehicle expense calculations, where you choose between the standard mileage rate (65.5 cents per mile for 2023) or actual expenses like gas, insurance, repairs, and depreciation. If you use the actual expense method, you'll need to complete Section B.

Before filing, review everything carefully. Ensure all Forms 1099 income is included, expenses are properly categorized and substantiated, and any required forms are attached (like Form 4562 for depreciation or Form 8829 for home office). File Schedule C with your Form 1040 by the April deadline, keeping copies of everything for your records. The IRS recommends keeping tax records for at least three years. 2023 Schedule C Form

Common Mistakes and How to Avoid Them

Many taxpayers make preventable errors on Schedule C that can trigger IRS notices, audits, or denial of deductions. Understanding these pitfalls helps you file accurately the first time.

One of the most frequent mistakes is failing to report all income. Every Form 1099-MISC, 1099-NEC, and 1099-K you receive is also reported to the IRS, which matches those documents against your tax return. If you omit income, you'll receive a computer-generated notice. Even if you don't receive a Form 1099, you're still required to report all business income. Keep thorough records of all payments received, including cash and electronic payments.

Mixing personal and business expenses is another common error. You can't deduct personal expenses just because you're self-employed. The dry cleaning for regular clothes, your daily commute from home to your office, family cell phone plans, and regular home utilities are personal expenses. Only the business portion of mixed-use items is deductible, and you must maintain documentation showing how you calculated the business percentage.

Many taxpayers combine different business activities on a single Schedule C. The instructions are clear: each separate business requires its own Schedule C. If you do landscaping and also rent out equipment, these are two distinct businesses requiring separate forms. Combining them makes it difficult for the IRS to understand your activities and can complicate audits.

Poor recordkeeping underlies many Schedule C problems. The IRS expects you to substantiate every deduction with adequate records. For most expenses, you need receipts showing the amount, date, place, and business purpose. For vehicle expenses, maintain a mileage log showing dates, destinations, business purposes, and miles driven. For meals and entertainment, document who attended, where you went, the business purpose, and the cost. Without proper documentation, the IRS can disallow deductions even if you actually incurred the expenses.

Incorrectly calculating the home office deduction causes problems for many taxpayers. Your home office must be used regularly and exclusively for business—occasional use or shared use with personal activities doesn't qualify. The simplified method is easier (300 square feet maximum at $5 per square foot) but may give you a smaller deduction than the actual expense method. Don't guess at square footage; measure your space accurately.

Some taxpayers fail to account for limitations on deductions. Business losses can be limited by at-risk rules if you're not personally liable for business debts, or by passive activity rules if you don't materially participate. The excess business loss limitation may also apply, potentially limiting losses above certain thresholds. Starting in 2023, you can deduct up to $1,160,000 in qualified business meals (100% deduction for 2021-2022 expired).

Vehicle expense calculations trip up many filers. If you use your car for business, you must choose between standard mileage or actual expenses—you can't mix methods for the same vehicle in the same year. The standard mileage rate includes most vehicle costs, so you can't also deduct gas, oil, repairs, or insurance. Actual expense method users must depreciate the vehicle over time and track business use percentage accurately. Commuting from home to your regular place of business never qualifies as business mileage.

Finally, many taxpayers overlook required information returns. If you paid $600 or more to any unincorporated person or business for services (not merchandise), you must file Form 1099-NEC by January 31. Failing to file these forms can result in penalties and may cause the IRS to question your expense deductions. Schedule C specifically asks whether you made such payments requiring Forms 1099, so answer truthfully and file the required forms. 2023 Instructions for Schedule C

What Happens After You File

Once you've submitted your Form 1040 with Schedule C attached, the IRS begins processing your return. For e-filed returns, you'll typically receive an acknowledgment within 24-48 hours confirming the IRS received your return. Paper returns take longer—generally several weeks before they're entered into the IRS system.

The IRS computers automatically check your return for mathematical errors, missing information, and discrepancies between information returns (like Forms 1099) and what you reported. If everything matches and no red flags appear, your return processes normally. If you're due a refund, you can typically expect it within 21 days of e-filing or six to eight weeks for paper filing. You can check your refund status using the ""Where's My Refund?"" tool on IRS.gov.

If you owe taxes and filed a balance due return, the IRS expects payment by the filing deadline. You can pay online, by phone, by mail, or through installment agreements if you can't pay the full amount immediately. Interest and penalties accrue on unpaid balances, so it's beneficial to pay as quickly as possible even if you can't pay everything at once.

Some returns undergo additional review. The IRS might send you a notice requesting additional information or clarification about specific items on your Schedule C. These notices aren't necessarily audits—they're often automated letters seeking supporting documentation for specific deductions or questioning discrepancies. Respond promptly with the requested information to avoid further complications. Common triggers for additional scrutiny include large losses year after year, unusually high expense ratios compared to industry norms, round numbers suggesting estimation rather than actual figures, and significant discrepancies between Forms 1099 and reported income.

A small percentage of returns are selected for audit, which can be conducted by mail (correspondence audit) or in person. Schedule C filers face higher audit rates than wage earners because of the potential for unreported income and inflated deductions. During an audit, you'll need to provide documentation supporting your reported income and claimed deductions. This is why maintaining organized records for at least three years is crucial. The IRS can examine returns from the past three years in most cases, though they can go back six years if substantial income was omitted.

If you filed electronically, the IRS may deposit any refund directly into your bank account or send a paper check. If you owed self-employment tax based on your Schedule C profit, that amount flows to Schedule SE and ultimately to your Form 1040, increasing your total tax liability. Remember that Schedule C profit also affects your eligibility for certain credits and deductions, as it's included in your adjusted gross income.

Looking ahead, your 2023 Schedule C results will help you plan for 2024. If you showed significant profit, consider increasing your quarterly estimated tax payments to avoid underpayment penalties. If you had a loss, evaluate whether your business model needs adjustment or whether you need to demonstrate profitability to avoid hobby loss rules. Keep refining your recordkeeping systems based on any challenges you encountered during tax preparation. IRS.gov

FAQs

Do I need Schedule C if I only made a few hundred dollars from my side business?

Yes, if you earned any self-employment income, you should report it on Schedule C regardless of the amount. If your net earnings from self-employment are $400 or more, you must file a tax return even if you wouldn't otherwise be required to file. The $400 threshold is important because it triggers self-employment tax obligations. Even if your net earnings are below $400, you should still report the income if you're filing a return for other reasons. Some people mistakenly believe small amounts don't need to be reported, but the IRS expects all business income to be declared.

Can I deduct my home office if I sometimes work at clients' locations?

You may qualify for the home office deduction even if you perform some work elsewhere, but your home office must be your principal place of business. The IRS considers it your principal place if you use it regularly and exclusively for administrative or management activities of your business and you have no other fixed location where you conduct substantial administrative activities. For example, if you're a consultant who meets clients at their offices but does all your billing, scheduling, research, and proposal writing from your home office, you likely qualify. However, if you work just as much from coffee shops or coworking spaces, your home office may not meet the exclusive use requirement.

What's the difference between an employee and an independent contractor for Schedule C purposes?

This distinction is crucial. Employees receive W-2 forms and have taxes withheld from their paychecks; they don't file Schedule C. Independent contractors receive Forms 1099-NEC, don't have taxes withheld, and report their business income and expenses on Schedule C. The key factors include who controls when, where, and how work is performed; who provides equipment and tools; whether there's a written contract; whether benefits are provided; and whether the relationship is ongoing or project-based. Misclassifying workers has tax consequences for both parties, so it's important to correctly determine status. If you're unsure about your status, review IRS Publication 15-A or use Form SS-8 to request an official determination.

Can married couples file one Schedule C for a business they run together?

Generally, if spouses jointly own and operate an unincorporated business, they should form a partnership and file Form 1065. However, there's an exception called a ""qualified joint venture"" available to married couples who file jointly. If you both materially participate in the business, you can elect to have each spouse file their own Schedule C reporting their respective share of income and expenses. Each spouse also files their own Schedule SE to pay self-employment tax on their share. This election allows both spouses to receive Social Security credits for their earnings. The qualified joint venture election is made simply by filing two Schedule Cs; no special form is required. Note that this option is only available to married couples filing jointly.

What records do I need to keep and for how long?

You should maintain complete and accurate records substantiating all income and expenses reported on Schedule C. For income, keep bank statements, Forms 1099, invoices, receipts, and payment records. For expenses, retain receipts, canceled checks, bills, and documentation showing business purpose. Vehicle expenses require a mileage log with dates, destinations, business purposes, and miles driven. Home office deductions need documentation of square footage and related expenses. Keep these records 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. If you file a claim for a loss from worthless securities or bad debt deduction, keep records for seven years. For property with basis that carries over multiple years, keep records until the statute of limitations expires for the year you dispose of the property.

What happens if I show a loss on Schedule C year after year?

The IRS may scrutinize businesses that report continuous losses because of ""hobby loss"" rules. If your activity is deemed a hobby rather than a business operated for profit, you can only deduct expenses up to the amount of hobby income, and you can't deduct hobby expenses at all under current law (the deduction was suspended through 2025). The IRS presumes you're operating for profit if you show a profit in at least three of the last five years (two of seven years for horse breeding, training, or racing). If you don't meet this presumption, you can still prove profit intent through factors like how you operate the business, your expertise, time and effort invested, expectation of asset appreciation, your success in similar activities, history of income or losses, and the amount of occasional profits. If you're showing losses, ensure you're operating in a businesslike manner and take steps to improve profitability.

Do I need an Employer Identification Number (EIN) to file Schedule C?

An EIN isn't required for most sole proprietors—you can use your Social Security number. However, you must obtain an EIN if you have employees, operate as a corporation or partnership, file certain tax returns (employment, excise, alcohol/tobacco/firearms), or withhold taxes on income paid to a nonresident alien. Many sole proprietors voluntarily get an EIN for privacy reasons (to avoid giving their SSN to customers and vendors) or to open business bank accounts. Getting an EIN is free through the IRS website and takes just minutes. Once you have an EIN, use it consistently; don't switch back and forth between your EIN and SSN on Schedule C. If you're required to file Forms 1099 for payments to contractors or service providers, having an EIN reinforces that you're operating a legitimate business.

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