What the Form Is For

Schedule C (Form 1040) is the IRS form sole proprietors and self-employed individuals use to report income or losses from businesses they operate. Think of it as your business's annual report card that tells the IRS whether your venture made or lost money during the tax year.

You'll use Schedule C if your primary purpose for running the business is to earn income or profit, and you're involved in the activity with continuity and regularity. This distinguishes a legitimate business from a hobby, sporadic activity, or not-for-profit venture. For example, if you're a freelance graphic designer, independent consultant, Uber driver, online seller, or run a home-based bakery, Schedule C is where you'll report this income.

The form also serves three additional purposes: reporting wages and expenses if you're a statutory employee (such as certain insurance agents or traveling salespeople), reporting income from qualified joint ventures operated with your spouse, and reporting certain amounts shown on Forms 1099-MISC, 1099-NEC, and 1099-K. Each separate business you operate requires its own Schedule C—you cannot combine multiple businesses on a single form.

IRS.gov/ScheduleC

When You'd Use It (Including Late and Amended Filings)

For the 2020 tax year, Schedule C was originally due on April 15, 2021, the same deadline as your Form 1040. However, if you filed for an extension, you had until October 15, 2021, to submit your return. Schedule C is attached to and filed with your main tax return (Form 1040, 1040-SR, 1040-NR, or Form 1041 for estates and trusts).

Late Filings

If you missed the deadline entirely, you should file as soon as possible. The IRS imposes a failure-to-file penalty of 5% of unpaid taxes for each month (or part of a month) your return is late, up to 25% of your unpaid taxes. If you're owed a refund, there's no penalty for filing late, but you must file within three years to claim that refund.

Amended Returns

You'll need to file an amended return using Form 1040-X if you discover errors on your original Schedule C after filing. Common reasons include forgetting to report income, claiming incorrect deductions, or discovering additional business expenses. To claim a refund through an amendment, you must file within three years after the date you filed your original return or within two years after you paid the tax, whichever is later. Good news: the IRS automatically corrects math errors and will contact you, so you typically don't need to amend for simple calculation mistakes or if you forgot to attach a form or schedule—they'll request it.

IRS.gov Topic 308 - Amended Returns

Key Rules and Changes for 2020

Several important rules applied specifically to the 2020 tax year:

Standard Mileage Rate

The business standard mileage rate decreased to 57.5 cents per mile for 2020 (down from 58 cents in 2019). You could use this rate instead of tracking actual vehicle expenses if you owned the vehicle and used the standard rate the first year it was placed in service, or if you leased it and used the standard rate for the entire lease period.

Excess Business Loss Limitation Repealed

The excess business loss limitation under section 461(l) was retroactively repealed for 2020, meaning you weren't subject to this limitation that otherwise would have capped losses at $518,000 for joint filers or $259,000 for others.

COVID-19 Tax Credits

The Families First Coronavirus Response Act (FFCRA) provided businesses with tax credits for providing employees with required paid sick leave and expanded family and medical leave related to coronavirus. Importantly, these credit amounts were included in gross income and needed to be reported as "other income" on line 6 of Schedule C.

Accounting Method Requirements

Unless you qualified as a small business taxpayer (generally, average annual gross receipts of $26 million or less for the three prior tax years), you had to use an accrual method for sales and purchases of inventory items. Small business taxpayers could use the cash method and treat inventoriable items like non-incidental materials and supplies.

Material Participation Tests

To avoid passive activity loss limitations, you needed to meet one of seven material participation tests, including participating more than 500 hours during the year, or participating more than 100 hours and as much as anyone else in the business.

IRS 2020 Instructions for Schedule C

Step-by-Step (High Level)

Filing Schedule C involves five main parts, though not everyone uses all of them:

Step 1 – Basic Information (Lines A-J)

Start by providing your business details—describe the activity that provided your principal income, enter the six-digit business code from the IRS list, list your business name and address, choose your accounting method (cash or accrual), and answer whether you materially participated in the business. You'll also need an Employer Identification Number (EIN) if you have employees, a retirement plan, or file certain other tax returns.

Step 2 – Calculate Income (Part I, Lines 1-7)

Report your gross receipts or sales, subtract returns and allowances, then determine your gross income. If you sell products, you'll also complete Part III to calculate cost of goods sold. Include all income from Forms 1099-NEC, 1099-MISC, and 1099-K, plus any other business income like scrap sales, interest on business accounts, or bad debt recoveries.

Step 3 – Report Expenses (Part II, Lines 8-27)

This is where you list all ordinary and necessary business expenses—advertising, car and truck expenses, commissions, contract labor, depreciation, employee benefits, insurance, interest, legal and professional services, office expenses, rent, repairs, supplies, taxes, travel, meals (with limitations), utilities, and wages. Each expense must be business-related; you cannot deduct personal, family, or living expenses, charitable contributions, or fines and penalties.

Step 4 – Calculate Net Profit or Loss (Lines 28-31)

Add up all your expenses, subtract them from gross income, and determine your tentative profit or loss. If you're claiming expenses for business use of your home, you'll calculate this separately (line 30) using either Form 8829 or the simplified method. Your net profit or loss appears on line 31.

Step 5 – Apply Limitations and Report (Lines 32a-32b)

Before finalizing your loss, you must apply at-risk rules (Form 6198) if you have amounts invested in the business for which you're not at risk, and passive activity loss rules (Form 8582) if you didn't materially participate. Finally, transfer your net profit or loss to Schedule 1 (Form 1040), line 3, and to Schedule SE to calculate self-employment tax.

Common Mistakes and How to Avoid Them

Mistake #1: Reporting Hobby Income as Business Income

Many taxpayers report income from hobbies or sporadic activities on Schedule C. If you're not regularly engaged in the activity for profit, it's not a business. Solution: Honestly assess whether profit is your primary purpose and if you're involved with continuity and regularity. Hobby income goes on Schedule 1 (Form 1040), line 8 instead.

Mistake #2: Missing Income Sources

Failing to report all income, especially amounts on various Forms 1099, triggers IRS scrutiny because they receive copies of these forms too. Solution: Carefully check all 1099-MISC, 1099-NEC, and 1099-K forms received, and reconcile them with your records. If the 1099 amount differs from what you're reporting, attach a statement explaining the difference.

Mistake #3: Using the Wrong Business Code

Entering an incorrect or missing six-digit Principal Business Activity code can delay processing. Solution: Carefully review the Principal Business Activity Codes chart included with the Schedule C instructions and select the code that most accurately describes your primary business activity.

Mistake #4: Combining Multiple Businesses on One Schedule C

Each separate business activity requires its own Schedule C, even if you run them all yourself. Solution: If you have multiple business ventures, file a separate Schedule C for each one. This also applies if you have both self-employment income and statutory employee income—these cannot be combined on a single form.

Mistake #5: Deducting Non-Business Expenses

Personal, family, living expenses, capital improvements, equipment purchases, charitable contributions, fines, and penalties are not deductible on Schedule C. Solution: Only deduct ordinary and necessary business expenses. For equipment and furniture, use depreciation (line 13) instead of deducting the full purchase price. Keep detailed records proving business purpose.

Mistake #6: Neglecting Required Forms and Schedules

Forgetting to attach Form 4562 when claiming depreciation on property placed in service in 2020, or Form 8829 for business use of home, creates processing issues. Solution: Review the "Other Schedules and Forms You May Have To File" section in the instructions, and attach all required forms with your return.

Mistake #7: Choosing the Wrong Home Office Method

Using both the simplified method and Form 8829 for business use of home, or claiming the deduction without meeting the strict exclusivity and regular use tests. Solution: Choose one method only—either the simplified method ($5 per square foot, up to 300 square feet) or Form 8829 with actual expenses. Ensure your home office space is used exclusively and regularly for business.

Mistake #8: Ignoring Loss Limitations

Reporting a business loss on line 31 without first applying at-risk rules (Form 6198) and passive activity loss rules (Form 8582) can result in adjustments. Solution: Before entering a loss on line 31, complete Forms 6198 and 8582 if applicable to determine how much loss you can actually deduct in 2020.

What Happens After You File

Once you submit your Schedule C with Form 1040, several things occur:

Income Tax Calculation

Your net profit or loss from line 31 flows to Schedule 1 (Form 1040), line 3, where it becomes part of your total income. A profit increases your taxable income, while a deductible loss reduces it, ultimately affecting your tax bill or refund amount.

Self-Employment Tax

Net profit from Schedule C generally creates self-employment tax liability. You must complete Schedule SE to calculate Social Security and Medicare taxes on your business earnings—for 2020, the self-employment tax rate was 15.3% (12.4% for Social Security on earnings up to $137,700, plus 2.9% for Medicare on all earnings). The good news: you can deduct one-half of your self-employment tax on Schedule 1 (Form 1040), line 14.

Earned Income Credit Eligibility

If you have a net profit, this earned income may qualify you for the Earned Income Credit (EIC), a valuable refundable credit for low-to-moderate income workers. Check the EIC requirements in Form 1040 instructions to see if you qualify.

IRS Processing and Review

The IRS processes your return and may select it for review or audit. Keep all books, records, receipts, and documentation supporting your Schedule C entries for at least three years from the date you filed (longer if you claimed certain deductions or credits). If the IRS has questions, they'll contact you by mail—never by phone, email, or text.

Future Year Implications

Some items affect future tax years. For example, losses not allowed in 2020 due to at-risk limitations carry forward to 2021 as a deduction. If you made a section 481(a) accounting method adjustment, you may need to include portions of it over four years. Net operating losses may be carried back or forward depending on specific rules.

State Tax Obligations

Most states require separate business tax filings or use federal Schedule C information for state income tax purposes. Check your state's tax agency website for specific requirements, as state rules often differ from federal rules.

IRS Self-Employment Tax Information

FAQs

Q1: Do I need an Employer Identification Number (EIN) to file Schedule C?

Not always. You only need an EIN if you have employees, maintain a qualified retirement plan (like a Solo 401(k) or SEP IRA), file employment, excise, alcohol, tobacco, or firearms returns, or are a payer of gambling winnings. Single-member LLCs need an EIN for these same purposes. If none of these apply, you can use your Social Security Number instead. However, getting an EIN is free, quick (apply online at IRS.gov/EIN), and provides privacy protection since you won't need to give your SSN to clients and vendors.

Q2: Can my spouse and I both file Schedule C for the same business?

Yes, if you elect qualified joint venture status. You and your spouse can avoid the complexity of a partnership return (Form 1065) if you each materially participate in the business, are the only owners, file a joint tax return, and divide income and expenses based on your ownership interests. Each spouse files a separate Schedule C reporting their share. This election gives both spouses credit for Social Security earnings, which affects retirement and Medicare benefits. However, this election is only available for unincorporated businesses owned as co-owners—it doesn't work for businesses owned through a Limited Liability Company (LLC).

Q3: What's the difference between the cash method and accrual method of accounting?

The cash method reports income when you actually receive payment (cash, check, or credit card) and deducts expenses when you actually pay them. It's simpler and more straightforward for most small businesses. The accrual method reports income when you earn it (even if not yet received) and deducts expenses when you incur them (even if not yet paid). For 2020, if you weren't a small business taxpayer (average annual gross receipts over $26 million for the prior three years), you had to use the accrual method for inventory purchases and sales. Most sole proprietors qualify as small business taxpayers and can use the cash method for everything.

Q4: Can I deduct 100% of my business meals?

No. For 2020, business meal expenses were generally only 50% deductible. However, there were exceptions—meals provided to employees as a de minimis fringe benefit, meals at employer-operated eating facilities, and certain recreational activities for employees could be 100% deductible. Meal expenses must be ordinary, necessary, not lavish or extravagant, and you (or an employee) must be present. You need detailed records including the amount, date, place, business purpose, and business relationship of attendees.

Q5: How do I handle startup costs for a business I launched in 2020?

You can elect to deduct up to $5,000 of business startup costs in the year your business began, but this $5,000 limit is reduced (not below zero) by the amount your total startup costs exceed $50,000. For example, if you had $52,000 in startup costs, you could deduct $3,000 in 2020 ($5,000 minus the $2,000 excess). Any remaining startup costs must be amortized (spread out) over 180 months, beginning with the month your business started. Startup costs include investigating potential businesses, traveling to line up suppliers or customers, advertising before opening, salaries before opening, and consulting fees. Report the current-year deduction on line 27 (other expenses) with a description like "startup costs."

Q6: What happens if I receive a 1099 form with an incorrect amount?

First, contact the payer and request a corrected 1099. If they issue a corrected form before you file, use the corrected amount. If you've already filed or can't get a correction in time, report the income as you know it to be correct on Schedule C, but include a statement with your return explaining the difference between the 1099 amount and what you're reporting. For example: "Form 1099-NEC from ABC Company reported $10,000, but actual payments received were $8,500. Two payments totaling $1,500 belong to another contractor with a similar name." Keep documentation supporting your position in case the IRS questions the discrepancy.

Q7: I worked from home due to COVID-19 in 2020. Can I claim a home office deduction?

Only if you meet all the requirements. The business use of home deduction requires that the space be used regularly and exclusively for business. "Exclusively" means you use that specific area only for business—not a kitchen table that's also used for family meals, or a guest bedroom that still functions as a guest room. The space must also be your principal place of business, or where you meet clients, or a separate structure used for business. Simply working from home during COVID-19 doesn't automatically qualify you for this deduction. If you qualify, you can use either the simplified method ($5 per square foot of business use space, up to 300 square feet) or the regular method (Form 8829, calculating actual expenses). Employees who receive W-2 wages generally cannot claim this deduction for 2020.

Sources

Sources: All information in this guide comes from official IRS.gov sources, including the 2020 Instructions for Schedule C, About Schedule C, and related IRS publications and tax topics.