What the Form Is For

Schedule C is the IRS form that sole proprietors, independent contractors, and freelancers use to report their business income and expenses. If you earned money from a business you ran yourself during 2013—whether as a consultant, freelancer, shop owner, or any other self-employed venture—you likely needed to file this form. Think of Schedule C as your business's profit-and-loss statement that attaches to your personal tax return (Form 1040). IRS.gov

Schedule C serves several important purposes for the 2013 tax year. First and foremost, it reports all income you earned from operating a business or practicing a profession as a sole proprietor. This includes money from consulting, freelancing, running a small retail shop, providing services, or any other business activity where you work for yourself rather than as an employee of someone else.

The form is specifically designed for businesses where your "primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity." This means sporadic activities or hobbies don't qualify—the IRS wants to see that you're running a legitimate business, not just occasionally selling items online. IRS.gov

Schedule C also applies to three special situations: statutory employees (certain workers who receive a W-2 with the "Statutory employee" box checked), qualified joint ventures between spouses, and certain income reported on Form 1099-MISC. If you operated multiple businesses during 2013, you must complete a separate Schedule C for each one.

For small businesses with expenses of $5,000 or less, the IRS offers Schedule C-EZ, a simplified one-page version that's quicker to complete. However, you can only use C-EZ if you meet several requirements, including having no employees, no inventory, and no depreciation to claim. IRS.gov

When You’d Use Schedule C (Late/Amended Filing)

Schedule C is filed as part of your annual Form 1040 tax return, which for most individuals was due April 15, 2014 for the 2013 tax year. If you didn't file by that date or discovered errors after filing, you have options.

Late Filing

If you missed the April 2014 deadline entirely, you should file as soon as possible. The IRS imposes penalties for late filing and late payment, but these penalties are reduced if you file quickly. The failure-to-file penalty is typically 5% of unpaid taxes for each month late (up to 25%), while the failure-to-pay penalty is 0.5% per month. The sooner you file, the lower these penalties will be.

Amended Returns

If you already filed your 2013 return but later discovered errors on your Schedule C—such as forgotten deductions, unreported income, or incorrect calculations—you can file an amended return using Form 1040X. You generally have three years from the date you filed your original return (or within two years from when you paid the tax, whichever is later) to file an amended return and claim a refund. For a 2013 return filed by April 15, 2014, this means you had until approximately April 15, 2017, to amend. IRS.gov

Not All Errors Require an Amendment

Not all mistakes require an amendment. The IRS automatically corrects math errors and will contact you if you forgot to attach a form. You only need to amend if there are substantial changes to your income, deductions, or credits that affect your tax liability. IRS.gov

Key Rules for 2013

Self-Employment Tax Threshold

If your net earnings from self-employment were $400 or more, you had to file Schedule C and pay self-employment tax using Schedule SE. Even if you didn't owe income tax, reaching this $400 threshold required you to file. The self-employment tax rate for 2013 was 15.3% (12.4% for Social Security and 2.9% for Medicare) on net earnings. IRS.gov

Accounting Methods

You could use the cash method (reporting income when received and expenses when paid) or the accrual method (reporting income when earned and expenses when incurred). Most small businesses used the cash method for its simplicity. However, if you had inventory, you generally had to use the accrual method for sales and purchases unless you qualified as a "small business taxpayer" with average annual gross receipts of $10 million or less for the prior three years. IRS.gov

Material Participation

This crucial concept determines whether your business is "active" or "passive" for tax purposes. You materially participated if you met any of seven tests, the most common being: participating more than 500 hours during the year, doing substantially all the participation, or participating more than 100 hours and at least as much as anyone else. If you didn't materially participate, the activity was considered passive, and losses could generally only offset other passive income. IRS.gov

Qualified Joint Ventures

For 2013, married couples who jointly owned and operated a business could elect to be treated as a "qualified joint venture" rather than a partnership. This allowed each spouse to file a separate Schedule C and Schedule SE, giving both credit for Social Security earnings while avoiding the need to file a partnership return (Form 1065). Both spouses had to materially participate in the business. IRS.gov

Standard Mileage Rate

The business standard mileage rate for 2013 was 56.5 cents per mile. You could choose this simplified method or deduct actual vehicle expenses (gas, repairs, depreciation, etc.). Once you chose a method for a vehicle in its first year of business use, you generally had to stick with it for that vehicle. IRS.gov

Simplified Home Office Deduction

New for 2013, the IRS introduced a simplified method for claiming home office expenses. Instead of calculating actual expenses and allocating them based on square footage, you could deduct $5 per square foot of home office space, up to a maximum of 300 square feet (for a maximum deduction of $1,500). This optional method significantly reduced recordkeeping requirements. IRS.gov

Step-by-Step (High Level)

Part I - Income

Start by entering your gross receipts or sales on line 1. This includes all money your business received during 2013. If you received Forms 1099-MISC, make sure your reported amount matches or exceeds the total from these forms. Subtract returns and allowances on line 2, then calculate cost of goods sold (Part III) if you sold products. Line 7 shows your gross profit, and line 6 captures other business income like scrap sales or bad debt recovery.

Part II - Expenses

This section lists common business expenses. You'll enter amounts for advertising, car and truck expenses, commissions, contract labor, depreciation, employee benefits, insurance, interest, legal and professional fees, office expenses, rent, repairs, supplies, taxes, travel, meals, utilities, and wages. For 2013, business meals and entertainment were deductible at 50%. The key is to claim only legitimate business expenses—personal expenses aren't deductible.

Part III - Cost of Goods Sold

If you manufactured products or bought goods for resale, complete this section. You'll calculate inventory at the beginning and end of 2013, add purchases and labor costs, then determine the cost of items you actually sold. This figure transfers to line 4 in Part I.

Part IV - Vehicle Information

If you claimed car and truck expenses, provide information about your vehicle(s), including dates placed in service, miles driven for business and total, and whether you have evidence to support your deduction.

Part V - Other Expenses

List any business expenses that don't fit the categories in Part II, such as professional dues, education, bank fees, or software subscriptions.

Final Calculations

Line 28 shows your tentative profit or loss. After adjusting for certain expenses (like home office deduction on line 30), line 31 shows your net profit or loss. A profit goes on Form 1040, line 12, and also on Schedule SE for self-employment tax. A loss may be limited by at-risk rules (Form 6198) or passive activity rules (Form 8582). IRS.gov

Common Mistakes and How to Avoid Them

Mixing Business and Personal Expenses

The number-one mistake is deducting personal expenses as business expenses. Keep separate bank accounts and credit cards for your business. Only deduct expenses that are "ordinary and necessary" for your business. Your morning coffee on the way to your home office isn't deductible, but coffee for a client meeting is.

Failing to Report All Income

The IRS receives copies of all Forms 1099-MISC issued to you. If your Schedule C shows less income than your 1099s, expect an IRS notice. Report all business income, even if you didn't receive a 1099 form.

Incorrectly Claiming Home Office Deduction

To qualify for any home office deduction, you must use a specific area of your home "exclusively and regularly" as your principal place of business. A corner desk in your living room where your kids also do homework doesn't qualify. The simplified method ($5 per square foot) made this easier in 2013, but the exclusive-use requirement still applied. IRS.gov

Not Filing Separate Schedule C Forms for Multiple Businesses

If you ran a consulting business and also sold crafts online, you needed two Schedule C forms. Each business must be reported separately with its own income and expenses tracked independently.

Combining Statutory Employee and Self-Employment Income

If you were a statutory employee (shown on your W-2), you can't combine that income with other self-employment income on one Schedule C. File separate forms. Statutory employee income isn't subject to self-employment tax, but other self-employment income is. IRS.gov

Misunderstanding Material Participation

Checking the wrong box on line G can trigger passive activity loss limitations. If you actively worked in your business (not just as an investor), you likely materially participated. Keep records of hours worked if your participation might be questioned.

Forgetting Information Returns

If you paid $600 or more to independent contractors or other service providers during 2013, you were required to issue Forms 1099-MISC by January 31, 2014. Failing to do so results in penalties. Answer "yes" on line I and keep proper records. IRS.gov

Overlooking Depreciation

For expensive equipment or vehicles purchased in 2013, you generally can't deduct the full cost immediately. You must depreciate it over several years using Form 4562. The Section 179 deduction allowed you to expense up to $500,000 of qualifying property in 2013, subject to limitations. IRS.gov

What Happens After You File

Once you file your 2013 Form 1040 with Schedule C attached, several things occur:

Self-Employment Tax

Your Schedule C net profit transfers to Schedule SE (Self-Employment Tax), where you calculate the 15.3% self-employment tax. This covers your Social Security and Medicare contributions. The good news: you can deduct half of your self-employment tax on Form 1040, line 27, reducing your adjusted gross income. IRS.gov

Income Tax

Your net profit also appears on Form 1040, line 12, where it's added to your other income. This amount is subject to ordinary income tax rates for 2013 (ranging from 10% to 39.6% depending on your total income and filing status).

Loss Limitations

If you reported a loss, it may not be fully deductible. Three sets of rules can limit losses: (1) At-risk rules limit losses to amounts you've actually invested and are personally liable for (Form 6198); (2) Passive activity loss rules generally allow passive losses only to offset passive income (Form 8582); and (3) Excess farm loss rules apply to farming businesses. Any disallowed losses carry forward to future years. IRS.gov

IRS Processing

The IRS processes your return and may correct mathematical errors automatically. They match your reported income against information returns (Forms 1099, W-2, etc.) they receive. Discrepancies trigger automated notices.

Audit Potential

Schedule C filers face higher audit rates than wage earners, particularly for returns showing losses, high expenses relative to income, or claiming large home office deductions. The IRS typically has three years from your filing date to audit your return (longer if substantial income is omitted). Maintain good records for at least three years after filing.

Quarterly Estimated Taxes

If your 2013 Schedule C showed a profit, you likely owed estimated taxes for 2014 (due quarterly: April 15, June 15, September 15, and January 15). The IRS expects you to pay taxes throughout the year, not just at filing time. Underpayment penalties apply if you don't pay enough through withholding or estimated payments.

FAQs

1. Do I need to file Schedule C if I only earned $300 from my side business?

Yes, you should report this income on Schedule C even though it's below the $400 self-employment tax threshold. You may not owe self-employment tax, but the income still counts toward your total income for purposes of determining if you need to file Form 1040. However, if your total income from all sources is below the filing threshold for your age and filing status, you may not need to file at all. IRS.gov

2. Can I deduct business expenses if my business lost money in 2013?

Absolutely. Schedule C reports both income and expenses regardless of whether you had a profit or loss. If your deductible business expenses exceeded your business income, you report a loss on line 31. This loss can offset other income (like wages from a job) subject to the loss limitation rules mentioned earlier. The IRS does watch for businesses that claim losses year after year—if you show losses for three out of five consecutive years, they may reclassify your business as a hobby, disallowing the losses. IRS.gov

3. What's the difference between Schedule C and Schedule C-EZ?

Schedule C-EZ is a simplified one-page version available if you meet all these requirements: business expenses are $5,000 or less, you use the cash accounting method, you had no inventory, you didn't have a net loss, you had only one business, you don't claim depreciation or Section 179 expenses, you don't deduct home office expenses (using the regular method), and you have no employees or prior-year passive activity losses. If you meet these criteria, C-EZ saves time. Otherwise, use the regular Schedule C. IRS.gov

4. How do I handle a business that I started or closed during 2013?

If you started a business in 2013, check the box on line H and report income and expenses from the date you began operations through December 31, 2013. If you closed a business during 2013, report income and expenses through the closing date. You may need to report gain or loss from the sale of business assets on Form 4797. For a partial-year business, you still report the full year's activity on your 2013 Schedule C. IRS.gov

5. What records should I keep to support my Schedule C deductions?

Keep receipts, invoices, canceled checks, credit card statements, mileage logs, and any other documentation supporting your income and expenses. For vehicle expenses, maintain a contemporaneous log showing dates, miles driven, and business purposes. For home office deductions, keep records showing the square footage of your office and total home, plus receipts for related expenses. The IRS recommends keeping these records for at least three years after filing, though longer retention is safer (six years if you substantially underreported income).

6. Can my spouse and I both claim the same business income on separate Schedule C forms?

Only if you file as a qualified joint venture, which requires that you both materially participate in the business, you're the only members, you file a joint return, and you jointly own the business. You then split the income and expenses according to your ownership interests, with each spouse filing a separate Schedule C and Schedule SE. This gives both spouses Social Security credits for their earnings. Without making this election, you'd need to file Form 1065 as a partnership. IRS.gov

7. I received a 1099-MISC for work I did. Am I automatically self-employed?

Generally, yes. If you received a 1099-MISC showing income in box 7 (nonemployee compensation), you're typically considered self-employed and must report this on Schedule C. The exception is if you're a statutory employee (shown on a W-2) or the income represents something other than business income. Form 1099-MISC income means the payer treated you as an independent contractor rather than an employee, so you'll owe self-employment tax on net earnings and can deduct business expenses related to earning that income.

Sources: All information is drawn from official IRS sources, primarily the 2013 Instructions for Schedule C (Form 1040) and related IRS publications. For complete details, forms, and the most current information, visit IRS.gov.