Schedule C (Form 1040): Profit or Loss From Business – A Complete Guide for Sole Proprietors
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 a business they operate or a profession they practice. Think of it as your business's annual financial report card that attaches to your personal income tax return.
An activity qualifies as a business worthy of Schedule C if your primary purpose is earning income or profit and you engage in the activity with continuity and regularity. This distinguishes legitimate businesses from hobbies, sporadic activities, or not-for-profit ventures, which cannot be reported on Schedule C. If you're a freelance graphic designer, independent consultant, rideshare driver, or operate a small retail shop as a sole owner, Schedule C is where you'll document your business's financial story for the year.
Beyond traditional businesses, Schedule C also serves three additional purposes: reporting wages and expenses for statutory employees (such as full-time life insurance agents or certain commission drivers), reporting income and deductions for qualified joint ventures operated by married couples, and reporting certain amounts shown on Forms 1099-MISC, 1099-NEC, and 1099-K.
The form calculates your net profit or loss by subtracting business expenses from gross receipts, and this bottom-line number flows to your Form 1040 and determines both your income tax liability and your self-employment tax obligation for Social Security and Medicare.
When You'd Use Schedule C (Form 1040) (Including Late and Amended Filings)
You must file Schedule C as part of your annual Form 1040 by the regular tax deadline—typically April 15 for calendar-year taxpayers, or the 15th day of the fourth month after your fiscal year ends. If you operate multiple separate businesses, you'll need to complete a separate Schedule C for each one; you cannot combine them on a single form.
If you started or acquired a business during 2022, you'll check a special box on the form indicating this was your first year. Similarly, if you temporarily closed your business in a prior year but reopened it in 2022, you'll check this box as well.
Late filing: If you missed the original deadline and haven't filed yet, you should file as soon as possible. While late filing penalties apply (typically 5% of unpaid tax per month, up to 25%), filing late is always better than not filing at all. The IRS may charge both a failure-to-file penalty and a failure-to-pay penalty if you owe taxes.
Amended returns: If you discover an error after filing your original return—whether it's missing income, incorrect deductions, or a calculation mistake—you'll need to file Form 1040-X (Amended U.S. Individual Income Tax Return). The IRS will automatically correct certain minor mathematical errors, so you don't need to amend for those. However, if there's a change in your filing status, income, deductions, or credits that affects your tax liability, you must file an amended return. You have three years from the date you filed your original return (or two years from when you paid the tax, whichever is later) to file Form 1040-X if you're claiming a refund. When filing an amended Schedule C, you'll attach it to Form 1040-X and explain what changed and why.
Key Rules and Requirements
Who must file: Any sole proprietor with net earnings of $400 or more from self-employment must file Schedule C and typically Schedule SE (Self-Employment Tax) as well. Even if your business had a loss, you generally should file Schedule C to document the loss, which may reduce your overall tax liability.
Business versus hobby: The IRS scrutinizes whether your activity is a legitimate business or a hobby. A business operates with the intent to make a profit and involves continuous, regular activity. Hobbies—even if they occasionally generate income—cannot claim business losses on Schedule C. If you haven't made a profit in three of the last five years (two of seven for horse-related activities), the IRS may presume your activity is a hobby and disallow losses.
Cash versus accrual accounting: Most small businesses use the cash method, where you report income when actually received and deduct expenses when paid. However, if you maintain inventory, you generally must use the accrual method for purchases and sales of inventory items. Small business taxpayers (generally those with average annual gross receipts of $27 million or less for 2022) have more flexibility in accounting methods.
Passive activity limits: If you didn't materially participate in your business (meaning you weren't substantially involved in its day-to-day operations), it's considered a passive activity. Losses from passive activities may be limited and require Form 8582. Material participation generally means working more than 500 hours in the activity, or being substantially the only person who works in it, among other tests.
Self-employment tax: When your Schedule C shows a net profit, you'll owe self-employment tax (15.3% for Social Security and Medicare) on that income if it exceeds $400. This is calculated on Schedule SE. However, statutory employees whose employers withheld Social Security and Medicare taxes don't owe self-employment tax on those earnings.
Estimated tax payments: Because no employer withholds taxes from your business income, you typically must make quarterly estimated tax payments if you expect to owe $1,000 or more in taxes. These payments cover both income tax and self-employment tax.
Record retention: You must keep books and records to substantiate all income and expenses reported on Schedule C. The IRS can request documentation during an audit, and records must be retained as long as they may be material to administering any Internal Revenue Law—generally at least three years from the filing date, but often longer for certain items.
Step-by-Step Filing Guide (High Level)
Part I – Income: Start by entering your gross receipts or sales from your business. This includes all income from your trade or business activities, amounts reported on Forms 1099-NEC, 1099-MISC, or 1099-K, and any other business income. Subtract returns and allowances (refunds you gave customers), then calculate your cost of goods sold if you sell products. This gives you your gross profit. Add any other business income such as scrap sales, interest on business accounts, or recovered bad debts to arrive at your gross income.
Part II – Expenses: This section lists 28 expense categories where you'll enter ordinary and necessary business costs. Common categories include advertising, car and truck expenses, insurance, legal and professional fees, office expenses, rent, supplies, utilities, and wages paid to employees. Only deduct expenses directly related to your business; personal, living, and family expenses are never deductible. You can deduct either actual vehicle expenses or use the standard mileage rate (58.5 cents per mile for January through June 2022, and 62.5 cents per mile for July through December 2022).
Part III – Cost of Goods Sold: If you manufacture products or buy goods for resale, you'll complete this section to calculate what you spent on inventory that was actually sold during the year. This includes your beginning inventory, purchases, materials, labor, and other costs, minus your ending inventory. The result reduces your gross receipts to show your true profit from sales.
Part IV – Information on Your Vehicle: If you claim car or truck expenses, provide details about your vehicle including the date you placed it in service, total miles driven, business miles driven, and whether you have evidence to support your deduction. This information helps verify you're claiming legitimate business use.
Part V – Other Expenses: List any business expenses that don't fit into the categories in Part II. Common items include bank fees, business publications, professional dues, merchant fees, and software subscriptions. Be specific in your descriptions.
After completing all sections, total your expenses, subtract them from your gross income, and enter your net profit or loss on line 31. This amount flows to Schedule 1 (Form 1040), line 3, and becomes part of your adjusted gross income. If you have a net profit of $400 or more, you'll also report it on Schedule SE to calculate your self-employment tax.
Common Mistakes and How to Avoid Them
Mixing multiple businesses on one form: Many taxpayers mistakenly combine income and expenses from multiple separate businesses on a single Schedule C. The IRS requires a separate Schedule C for each distinct business you operate. If you run both a consulting practice and an online retail shop, file two Schedule Cs. This keeps records clear and properly calculates profit or loss for each venture.
Reporting hobby income as business income: Just because an activity generates some income doesn't make it a business. If you're not pursuing profit with regular, continuous activity, it's a hobby. Hobby expenses are no longer deductible under current tax law, but you must still report hobby income. Don't claim business losses on Schedule C for activities that are really hobbies—the IRS will disallow the losses and may assess penalties.
