What the Form Is For

Schedule C (Form 1040) is the IRS form that sole proprietors, independent contractors, freelancers, and single-member LLC owners use to report business income and expenses to the federal government. Think of it as the profit-and-loss statement for your one-person business that attaches to your personal tax return.

If you run a business by yourself—whether you're a freelance graphic designer, Uber driver, consultant, or handyman—Schedule C is how you tell the IRS what you earned and what it cost you to earn it. The form calculates your net profit or loss, which then flows to your Form 1040 and affects your overall tax bill. Your Schedule C income is also subject to self-employment tax (Social Security and Medicare), which you calculate separately on Schedule SE.

The 2018 version introduced significant tax law changes from the Tax Cuts and Jobs Act, including a new qualified business income deduction (up to 20% of your business income), elimination of entertainment expense deductions, and new limitations on business interest expenses. IRS.gov

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

Original Filing

Schedule C attaches to your Form 1040 and was originally due by April 15, 2019 (or October 15, 2019 if you filed for an extension) for the 2018 tax year.

Late Filing

If you missed the deadline entirely and never filed, you should file your 2018 Schedule C as soon as possible. The IRS can assess penalties and interest on unpaid taxes, and the failure-to-file penalty is typically 5% of unpaid taxes per month (up to 25%). The statute of limitations doesn't start until you file, meaning the IRS can pursue you indefinitely for unfiled returns.

Amended Returns

If you already filed but made mistakes—forgot to report income, miscalculated expenses, or missed deductions—you'll need to file Form 1040-X (Amended U.S. Individual Income Tax Return) with a corrected Schedule C attached. You have three years from the date you filed your original 2018 return (or by April 15, 2022, if you filed on time) to claim a refund through an amendment. If you owe additional tax, file the amendment as soon as you discover the error to minimize interest and penalties. IRS.gov

Important: The Taxpayer Certainty and Disaster Tax Relief Act of 2019 made retroactive changes to 2018 rules, so if these affect your return, you may need to amend even if you filed correctly at the time.

Key Rules or Details for 2018

Business Definition

Your activity must be regular, continuous, and primarily for profit—not a hobby. The IRS looks for profit in at least three of the last five years as evidence of legitimate business intent.

Qualified Business Income Deduction (QBID)

This was brand-new for 2018. You may deduct up to 20% of your qualified business income on your Form 1040 (not on Schedule C itself). This "pass-through" deduction has limitations based on your total taxable income, the type of business, W-2 wages paid, and qualified property. This deduction is in addition to the standard deduction or itemized deductions. IRS.gov

Standard Mileage Rate

The business mileage rate for 2018 was 54.5 cents per mile. You can choose between the standard mileage rate or actual vehicle expenses (gas, repairs, depreciation), but not both in most cases.

Entertainment Expenses Eliminated

Starting in 2018, you can no longer deduct any entertainment expenses—no more writing off tickets to sporting events or concerts, even with clients present. However, you can still deduct 50% of business meals that are ordinary, necessary, not lavish, and where you or an employee is present with a current or potential business contact. If you're a trucker subject to Department of Transportation hours-of-service limits, you can deduct 80% of qualifying meals. IRS.gov

Business Interest Limitation

If your average annual gross receipts exceed $25 million for the three prior tax years, your business interest expense deduction may be limited, and you'll need to file Form 8990.

Small Business Taxpayer Benefits

If your average annual gross receipts are $25 million or less for the three prior years, you may use the cash method of accounting, avoid certain inventory capitalization rules, and are exempt from the business interest limitation.

Step-by-Step (High Level)

Part I – Income (Lines 1–7)

Start by reporting your gross receipts or sales on line 1. Include all 1099-MISC income you received. Subtract returns and allowances (line 2) to get gross income (line 3). If you sell products, calculate cost of goods sold in Part III and enter it on line 4. Add other income like bad debt recoveries or scrap sales (line 6). The result is your gross profit (line 7).

Part II – Expenses (Lines 8–27)

This is where you list every ordinary and necessary business expense: advertising, car/truck expenses, commissions, contract labor, depreciation, employee benefits, insurance, interest, legal and professional fees, office expenses, rent, repairs, supplies, taxes, travel, meals (50% only), utilities, and wages. Be meticulous—good records are essential.

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

If you manufacture products or buy items for resale, calculate your cost of goods sold here. You'll report beginning inventory, purchases, labor, materials, other costs, and ending inventory to determine what inventory actually cost you during the year.

Part IV – Vehicle Information

If you're claiming car and truck expenses on line 9, provide details about your vehicle(s), including when you started using them for business, business versus personal mileage, and whether you have evidence to support your deduction. This section helps the IRS verify you're not inflating vehicle deductions.

Part V – Other Expenses (Lines 48)

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

Calculate Net Profit or Loss (Lines 28–31)

Subtract total expenses (line 28) from gross income (line 7). If you have employees, you might owe self-employment tax on your net profit (reported on Schedule SE). Your net profit also factors into the qualified business income deduction calculated elsewhere on your return. IRS.gov

Common Mistakes and How to Avoid Them

Mixing Personal and Business Expenses

The #1 audit trigger is claiming 100% deduction for items used both personally and for business—like your home internet, cell phone, or vehicle. Only deduct the business-use percentage. Keep detailed logs proving business use.

Failing to Report All Income

If you receive Forms 1099-MISC, the IRS gets copies too. Unreported income is easily caught by IRS computers matching 1099s to your return. If your reported income is less than your 1099s, attach a statement explaining why (perhaps some amounts were returns or reimbursements).

Excessive or Unusual Deductions

Claiming deductions far above industry norms (like 90% vehicle use or meals exceeding revenue) raises red flags. The IRS compares your expense ratios to similar businesses. Be honest and keep receipts.

Claiming Entertainment as Meals

Remember, entertainment expenses are no longer deductible for 2018. Don't try to disguise entertainment costs as meals—the IRS specifically warns against inflating food costs to circumvent the entertainment ban. IRS.gov

Forgetting Estimated Tax Payments

If you owe $1,000 or more in tax after withholding, you should make quarterly estimated payments. Failure to pay quarterly can result in underpayment penalties even if you pay the full amount by April 15.

Poor Recordkeeping

The IRS requires "contemporaneous" records—meaning you should track expenses as they occur, not reconstruct them from memory at tax time. Use accounting software, apps, or at minimum, a dedicated business bank account and credit card.

Hobby Loss Rule Violations

If your Schedule C shows losses year after year with no profit motive, the IRS may reclassify it as a hobby, disallowing all losses. Show you're running a real business by maintaining business-like practices and working toward profitability.

What Happens After You File

Initial Processing

Once you mail or e-file your return, the IRS processes it within a few weeks to months. If you're due a refund, expect it within 21 days of e-filing (longer for paper returns). If you owe taxes, they're due regardless of when you file.

Automated Matching

IRS computers automatically match the income reported on your Schedule C against Forms 1099-MISC, W-2s, and other information returns submitted by payers. Discrepancies trigger automated notices (CP2000) asking you to explain or pay additional tax. These aren't audits but "matching" letters—respond promptly with documentation.

Audit Selection

Schedule C filers face higher audit rates than W-2 employees. The IRS uses statistical formulas (Discriminant Function System) to score returns for audit likelihood based on unusual deductions, high expense ratios, round numbers, and specific red flags. IRS.gov

Timeline for Audits

The IRS generally has three years from your filing date to audit your return (or three years from the tax deadline if you filed early). Office audits typically begin within one year of filing and take 3–6 months. You'll receive a formal notice by mail—never by phone or email.

Self-Employment Tax

Your Schedule C net profit flows to Schedule SE, where you calculate self-employment tax (15.3% on net earnings up to $128,400 for 2018, plus 2.9% Medicare tax on amounts above). This is in addition to regular income tax.

Refund/Payment

If you overpaid through estimated payments or withholding, you'll receive a refund. If you underpaid, pay immediately to minimize interest charges (currently compounding daily at the federal short-term rate plus 3%).

FAQs

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

Not necessarily. You can use your Social Security Number if you're a sole proprietor with no employees. However, you need an EIN if you have employees, a qualified retirement plan (like a SEP-IRA), or file certain excise, alcohol, tobacco, or firearms tax returns. Single-member LLCs need an EIN for these purposes too. IRS.gov

2. Can I file Schedule C-EZ instead of the full Schedule C?

Yes, if your business expenses are $5,000 or less, you use the cash method of accounting, have no employees, no inventory, claim no depreciation or home office deduction, and didn't have a net loss. Schedule C-EZ is simpler but most self-employed people exceed the $5,000 expense threshold.

3. What if my spouse and I jointly own and operate our business?

Normally, jointly owned businesses must file Form 1065 (Partnership Return). However, married couples can elect "qualified joint venture" status, allowing each spouse to file their own Schedule C reporting their share of income and expenses. This gives each spouse Social Security credits without partnership complexity. To qualify, you must file a joint return, both materially participate, and be the only owners. IRS.gov

4. How do I prove my expenses if I get audited?

Keep all receipts, invoices, canceled checks, credit card statements, mileage logs, and calendar entries documenting business activities. For vehicle expenses, maintain a contemporaneous log showing date, destination, business purpose, and mileage for each trip. For meals, note who attended and the business purpose. Store records for at least three years after filing (six years if you underreported income by 25% or more).

5. Can I deduct my home office?

Yes, if you use part of your home regularly and exclusively for business. The space must be your principal place of business or where you meet clients. Calculate the deduction using Form 8829 (actual expenses method) or take the simplified option ($5 per square foot, up to 300 square feet). The home office deduction can't create a loss—it can only reduce profit to zero. IRS.gov

6. What happens if I show a loss on my Schedule C?

Business losses reduce your taxable income on Form 1040, potentially lowering your overall tax bill or generating a refund. However, excessive losses may trigger hobby loss rules. Additionally, for 2018, losses may be subject to the new excess business loss limitation—losses exceeding $250,000 ($500,000 if married filing jointly) may be disallowed and carried forward as a net operating loss. Use Form 461 to calculate this limitation.

7. Do I need to file Schedule C if I only earned a small amount of self-employment income?

Generally yes. If your net self-employment earnings are $400 or more, you must file Schedule C and Schedule SE to report self-employment tax. Even if you earned less than $400, you should still report the income, though you won't owe self-employment tax. It's better to report all income than risk an IRS notice for unreported 1099-MISC income.

For complete instructions and the official form, visit IRS.gov/ScheduleC or download the 2018 Schedule C Instructions (PDF).