What the Form Is For

Schedule C (Form 1040) is the IRS form used to report income or loss from a business you operated or a profession you practiced as a sole proprietor. Think of it as your business's profit-and-loss statement that gets attached to your personal tax return (Form 1040).

This form is for self-employed individuals, freelancers, independent contractors, gig workers, and small business owners who run unincorporated businesses. An activity qualifies as a business if your primary purpose is to make income or profit and you're involved with "continuity and regularity"—meaning it's not just a hobby or one-time sale. Schedule C captures both your business income (like sales, fees, or commissions) and your business expenses (everything from supplies to mileage), then calculates your net profit or loss. That net figure flows to your Form 1040 as part of your total taxable income and also determines your self-employment tax obligations via Schedule SE.

There's also a simplified version called Schedule C-EZ for very small businesses with expenses of $5,000 or less and no inventory, employees, or home office deduction. IRS.gov

When You'd Use It (Late Filing and Amended Returns)

Original Filing Deadline

Original Filing Deadline: Schedule C for 2017 was due on April 17, 2018 (the regular Tax Day for the 2017 tax year), or October 15, 2018 if you filed for an extension. If you're reading this guide long after those dates, you can still file a late return—though you may face penalties and interest if you owed taxes.

Amended Returns

Amended Returns: If you already filed your 2017 Schedule C but discovered errors—perhaps you forgot to report some income, missed deductions, or made calculation mistakes—you use Form 1040-X (Amended U.S. Individual Income Tax Return) to correct it. To claim a refund from an amendment, you generally must file Form 1040-X within 3 years from the date you filed your original 2017 return, or within 2 years from the date you paid the tax, whichever is later. Because 2017 returns were originally due April 17, 2018, the three-year window would have closed around April 2021 for most taxpayers seeking refunds. However, you can still file an amended return to correct errors even outside this window—you just won't receive a refund if the time limit has passed. IRS.gov

How to Amend a Schedule C

To amend a Schedule C, you update the form with correct figures and complete Form 1040-X showing the changes to your income and expenses. If your net profit changes, it will also affect your self-employment tax (Schedule SE) and your overall Form 1040 totals. IRS.gov

Key Rules for 2017

Standard Mileage Rate

Standard Mileage Rate: If you used your vehicle for business and chose the standard mileage method, the rate for 2017 was 53.5 cents per mile (down from 54 cents in 2016). You could also add parking fees and tolls on top of this mileage rate. If you chose to deduct actual vehicle expenses instead (gas, repairs, insurance, depreciation), you couldn't switch back to the standard rate for that same vehicle later.

Section 179 Expensing

Section 179 Expensing: The Section 179 deduction allowed you to immediately expense (rather than depreciate over time) up to $510,000 of qualifying equipment and property purchased and placed in service during 2017, with a phase-out threshold beginning at $2,030,000 in total purchases. This was a powerful tax break for businesses buying computers, machinery, furniture, and certain vehicles.

Accounting Methods

Accounting Methods: Most small businesses used the cash method (reporting income when received and expenses when paid), which is simpler. However, if you had inventory to sell, you generally had to use an accrual method for purchases and sales of that inventory—meaning you reported income when earned and expenses when incurred, regardless of when cash changed hands. There were important exceptions in 2017 for small producers who could treat inventory items like regular supplies if they qualified. IRS.gov

Material Participation

Material Participation: Line G of Schedule C asks whether you "materially participated" in your business. This matters because if you didn't materially participate, your business might be treated as a passive activity, and losses could be limited. The IRS had seven tests for material participation—the most common being that you worked more than 500 hours in the business during the year. If you worked a full-time job elsewhere and just had a side gig, you might still meet one of the tests if you put in over 100 hours and nobody else worked more than you did.

Self-Employment Tax

Self-Employment Tax: Net profit from Schedule C is subject to self-employment tax (Social Security and Medicare), which for 2017 was 15.3% on the first $127,200 of net earnings (12.4% Social Security + 2.9% Medicare), plus 2.9% Medicare tax on everything above that. High earners also paid an additional 0.9% Medicare surtax on income over certain thresholds. You calculated this on Schedule SE and reported it on your 1040.

Information Returns

Information Returns: If you paid anyone $600 or more for services during 2017 (like contractors, freelancers, lawyers, or accountants), you were required to file Form 1099-MISC with the IRS and send a copy to the recipient. Line I of Schedule C asks if you fulfilled this requirement—checking "No" when you should have filed 1099s is a red flag.

Step-by-Step (High Level)

Part I – Income (Lines 1-7)

Part I – Income (Lines 1-7): Start by reporting your gross receipts or sales on Line 1. If you're a statutory employee (rare—certain drivers, salespeople, homeworkers), you'll check the box on Line 1 and enter income from your W-2. On Line 2, subtract any returns and allowances. Line 3 is Line 1 minus Line 2, giving you net sales. If you sold products, Lines 4 and 5 handle Cost of Goods Sold (COGS)—you'll need to complete Part III first to figure this out. Line 6 is for other income like bad debt recoveries, interest on business accounts, or scrap sales. Line 7 gives you your gross income (or gross profit if you had COGS).

Part II – Expenses (Lines 8-27)

Part II – Expenses (Lines 8-27): This is where you deduct everything you spent to run your business. Each line covers a specific category:

Line 9: Car and truck expenses (mileage or actual costs)
Line 11: Contract labor payments
Line 13: Depreciation and Section 179 expensing (you may need Form 4562)
Line 14: Employee benefit programs
Line 16a/16b: Interest on business loans and mortgages
Line 17: Legal and professional services
Line 18: Office expenses
Line 19: Pension and profit-sharing plans
Line 20a: Rent or lease of vehicles, machinery, equipment
Line 20b: Other rent (office space, etc.)
Line 21: Repairs and maintenance
Line 22: Supplies
Line 23: Taxes and licenses
Line 24a/24b: Travel, meals, and entertainment (meals and entertainment were 50% deductible in 2017)
Line 25: Utilities
Line 26: Wages paid to employees
Line 27a/27b: Other expenses (anything not fitting the above categories—list separately)

Line 28 totals all your expenses. Line 29 is your tentative profit (Line 7 minus Line 28). Lines 30 and 30a handle business use of home expenses if applicable. Line 31 gives your final net profit or loss.

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

Part III – Cost of Goods Sold (Lines 33-42): If you manufactured, produced, purchased, or sold merchandise, you must complete this section to determine COGS. You'll report inventory at the beginning of the year, purchases during the year, labor costs, materials, other costs, and inventory remaining at year-end. The resulting COGS goes on Line 4 of Part I.

Part IV – Information on Your Vehicle

Part IV – Information on Your Vehicle: If you claimed car expenses on Line 9, you must answer questions about when you placed your vehicle in service, your business versus personal mileage, whether you have evidence to support your deduction, and if you used another vehicle for business.

Part V – Other Expenses

Part V – Other Expenses: List miscellaneous business expenses that don't fit the Part II categories. Common examples include professional dues, business publications, advertising expenses not elsewhere listed, bank fees, or software subscriptions. IRS.gov

Common Mistakes and How to Avoid Them

1. Mixing Personal and Business Expenses: The IRS requires strict separation. Don't deduct your personal cell phone bill, family meals, or commuting mileage from home to a regular workplace. Keep a separate business bank account and credit card to make tracking easier. If an expense has both personal and business components (like your home internet), only deduct the business percentage.
2. Missing Income: One of the biggest audit triggers is underreporting income. If a client sent you a Form 1099-MISC for $5,000 but you only reported $4,500, the IRS computers will catch the discrepancy. Report all business income, including cash payments, barter transactions, and income from online platforms like PayPal or Venmo. If you receive a 1099 with an incorrect amount, still report what the 1099 shows on Schedule C and make an offsetting adjustment with an explanation.
3. Poor or Missing Recordkeeping: The IRS can disallow deductions if you don't have documentation. Save receipts, invoices, bank statements, mileage logs, and appointment calendars. For vehicle expenses especially, you need a contemporaneous log showing dates, destinations, business purpose, and miles driven—not a reconstructed estimate made at tax time.
4. Claiming 100% Business Use on Vehicles or Equipment: The IRS is skeptical when taxpayers claim a car or computer is used exclusively for business. Unless you have another vehicle for personal use (and can prove it), claiming 100% business use will raise eyebrows. Be honest about your actual business-use percentage.
5. Forgetting Self-Employment Tax: Many new sole proprietors think they only owe income tax on their Schedule C profit. Don't forget Schedule SE—self-employment tax is mandatory and substantial (15.3% on net earnings). Budget for this when estimating quarterly payments.
6. Not Making Quarterly Estimated Payments: If you expect to owe $1,000 or more in tax for the year (including both income tax and self-employment tax), you're required to make quarterly estimated tax payments using Form 1040-ES. Missing these can result in underpayment penalties even if you pay everything by April.
7. Improper Home Office Deduction: Line 30 allows a deduction for business use of your home, but only if you use a portion of your home regularly and exclusively for business as your principal place of business or a place to meet clients. A corner of your bedroom where you also watch TV doesn't qualify. The simplified method ($5 per square foot up to 300 sq ft) can make this easier.
8. Failing to File Required 1099-MISC Forms: Line I asks if you filed all required information returns. If you paid contractors $600+ and didn't issue 1099s, you face penalties of $50-$280 per form, and you may lose the deduction for those payments. IRS.gov

What Happens After You File

Processing

Once you file your Schedule C as part of your Form 1040:

Processing: The IRS will process your return, typically within 21 days for e-filed returns (longer for paper returns). Your Schedule C net profit flows to Form 1040, Line 12 (for 2017 returns), and affects your adjusted gross income. If you had a profit, you'll also need to file Schedule SE, with the resulting self-employment tax appearing on Form 1040, Line 57.

Refund or Payment

Refund or Payment: If your withholdings and estimated payments exceeded your total tax liability, you'll receive a refund. If you owe money, it's due by April 17, 2018 (for 2017) to avoid penalties and interest.

Potential for Audit

Potential for Audit: Schedule C filers face higher audit rates than W-2 employees—the IRS estimates about 1% of Schedule C returns are audited compared to 0.4% overall. Audit triggers include consistent losses year after year (suggesting a hobby rather than a business), round numbers (suggesting estimates rather than actual records), unusually high expenses relative to income, large vehicle or meal expenses, and cash-intensive businesses. Most Schedule C audits are correspondence audits (requests for documentation by mail) rather than face-to-face examinations.

Statute of Limitations

Statute of Limitations: The IRS generally has three years from your filing date to audit your return. However, if you substantially understated income (by 25% or more), the IRS has six years. If you never filed or filed a fraudulent return, there's no time limit.

Self-Employment Earnings Record

Self-Employment Earnings Record: Your Schedule SE (based on Schedule C profit) determines your Social Security credits for retirement benefits and Medicare coverage. Each year you pay self-employment tax builds your future benefits, just like W-2 wages do for employees. IRS.gov

FAQs

1. What's the minimum income I need to file Schedule C?

There's no minimum income threshold for filing Schedule C. If you had any self-employment income, you should file. However, you're required to file a tax return if your net earnings from self-employment were $400 or more, because that triggers the self-employment tax obligation even if you don't owe income tax.

2. Can I claim a loss on Schedule C, and what happens if I do?

Yes, you can report a loss if your business expenses exceeded your income. A Schedule C loss reduces your adjusted gross income on Form 1040, potentially lowering your overall tax bill. However, repeated losses year after year may cause the IRS to reclassify your activity as a hobby rather than a business, disallowing your deductions. The IRS presumes an activity is for profit if it had profits in at least 3 of the last 5 years (2 of 7 years for horse breeding/racing).

3. Do I need a separate business bank account or business license?

The IRS doesn't require a separate business bank account, but it's highly recommended to simplify recordkeeping and prove expenses are business-related. As for licenses, that depends on state and local requirements, not federal tax law. Many cities and states require business licenses or permits regardless of business size—check with your local government.

4. What if I'm married and my spouse and I own the business together?

If you and your spouse jointly own and operate a business, you're generally treated as a partnership and must file Form 1065. However, two exceptions allow you to avoid this: (1) You can elect qualified joint venture status if you're the only owners, both materially participate, and file jointly—each spouse files their own Schedule C for their share; or (2) If you own the business as community property in a community property state and only one spouse works in the business, that spouse can file a single Schedule C.

5. Can I deduct health insurance premiums as a business expense?

Not on Schedule C Line 14. However, if you're self-employed and had a net profit, you can deduct health insurance premiums for yourself, your spouse, and dependents on Form 1040, Line 29 (the self-employed health insurance deduction). This deduction reduces your income tax but not your self-employment tax.

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

Schedule C-EZ is a simplified, one-page version you can use only if you meet all these requirements: expenses were $5,000 or less; you use the cash method; you had no inventory; you didn't have a loss; you had no employees; you're not claiming home office deduction; and you had only one business. If you don't meet all criteria, use the full Schedule C.

7. I received a 1099-K from PayPal/credit card processor. How do I report this?

Include the 1099-K income in your gross receipts on Line 1 of Schedule C. For 2017, payment processors issued Form 1099-K if you had more than 200 transactions and received more than $20,000. The amount on Form 1099-K typically includes shipping, sales tax, and refunded transactions, so your actual taxable income may be lower—you'll need to account for these differences using Lines 2 (returns and allowances) and Line 4 (cost of goods sold). IRS.gov

Official IRS Resources

2017 Schedule C Form
2017 Schedule C Instructions
About Schedule C
Self-Employed Tax Center