What the Form Is For

Schedule C (Form 1040) is the tax form self-employed individuals use to report income and expenses from a business they operated as a sole proprietor. Think of it as your business's profit-and-loss statement for the IRS. IRS.gov

Your activity qualifies as a business if your primary purpose is earning income or profit and you're involved with continuity and regularity—not just occasionally selling items at yard sales or pursuing a hobby. The form calculates your net profit (or loss) by subtracting business expenses from your gross income. This net amount flows to your Form 1040, where it becomes part of your total taxable income.

You'll use Schedule C if you're a sole proprietor, an independent contractor, a single-member LLC that hasn't elected corporate treatment, a gig economy worker (rideshare drivers, delivery workers), a freelancer or consultant, or a statutory employee with the appropriate box checked on your W-2. Even if you have a full-time job and run a small business on the side, you'll file Schedule C for that side business. IRS.gov

When You’d Use Schedule C (Including Late & Amended Returns)

Standard Filing

Schedule C is filed along with your regular Form 1040 tax return. For the 2023 tax year, the standard deadline was April 15, 2024. If you requested an extension, your deadline was October 15, 2024. Even with an extension to file, remember that any taxes owed were still due by April 15 to avoid interest and penalties. IRS.gov

Amended Returns

Made a mistake on your Schedule C? You can file an amended return using Form 1040-X. To claim a refund, 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. For example, if you filed your 2023 return on April 15, 2024, you have until April 15, 2027, to amend it for a refund. IRS.gov

When You Don't Need to File

If your sole proprietorship had no profit or loss during the full year, you don't need to file Schedule C. However, if you earned less than $400 but had a loss, you should still file to document that loss for your records. IRS.gov

Key Rules or Details for 2023

Several important provisions affected Schedule C filers in 2023:

Standard Mileage Rate

The business standard mileage rate increased to 65.5 cents per mile for 2023, up from 62.5 cents in the second half of 2022. You can choose between tracking actual vehicle expenses or using this simplified mileage rate. IRS.gov

Business Meals Deduction

The temporary 100% deduction for restaurant meals expired. The business meals deduction returned to 50% for 2023. This means if you spend $100 on a business meal, you can only deduct $50.

Bonus Depreciation Phaseout

The bonus depreciation deduction under section 168(k) began its phaseout, reducing from 100% to 80% for qualified property placed in service in 2023.

Energy Efficient Buildings Deduction

This deduction is now reported on new line 27b of Schedule C for qualifying energy-efficient commercial building expenses.

The $400 Self-Employment Tax Threshold

If your net earnings from self-employment are $400 or more, you must pay self-employment tax and file Schedule SE along with Schedule C. This 15.3% tax covers Social Security (12.4%) and Medicare (2.9%). IRS.gov

Qualified Business Income Deduction

Your Schedule C income may qualify for the Section 199A deduction, which allows you to deduct up to 20% of your qualified business income on your Form 1040. Certain limitations apply based on your income level and type of business. IRS.gov

Step-by-Step (High Level)

While you'll likely use tax software or work with a tax professional, understanding the structure helps:

Part I – Income (Lines 1–7)

Start by reporting your gross receipts or sales. Include all business income you received, whether reported on Forms 1099-NEC, 1099-K, or as cash payments. Subtract returns and allowances, then report the cost of goods sold if you sell products. Add other business income to arrive at your gross income.

Part II – Expenses (Lines 8–27)

This is where you deduct ordinary and necessary business expenses. Categories include advertising, car and truck expenses, commissions and fees, contract labor, depreciation, insurance, interest, legal and professional services, office expenses, rent or lease payments, repairs and maintenance, supplies, travel, meals, utilities, and other expenses. Each has its own line, and there's a catch-all "other expenses" line for items that don't fit standard categories. IRS.gov

Calculating Net Profit or Loss (Lines 28–31)

Add up all your expenses, subtract them from your gross income, and calculate your net profit or loss. If you show a profit, it flows to Schedule 1 (Form 1040), line 3, and then to your main tax return. You'll also report it on Schedule SE to calculate self-employment tax.

Part III – Cost of Goods Sold

If you manufacture products or buy goods for resale, you'll complete this section to determine your inventory costs.

Part IV – Information on Your Vehicle

If you're claiming car and truck expenses, you'll provide details about your vehicle, including when you placed it in service, mileage driven for business and total, and whether you have evidence to support your deduction.

Part V – Other Expenses

List any business expenses not covered by the standard categories in Part II.

Common Mistakes and How to Avoid Them

Mixing Personal and Business Expenses

The most frequent error Schedule C filers make is deducting personal expenses as business expenses. Keep separate bank accounts and credit cards for business use, and maintain thorough records. Only deduct the business portion of any mixed-use expenses.

Failing to Report All Income

The IRS receives copies of your 1099 forms. If you don't report income that appears on a 1099-NEC or 1099-K, the IRS computers will flag the discrepancy. Report all business income, even if you didn't receive a 1099. Cash income counts too.

Inadequate Record-Keeping

Without receipts, invoices, bank statements, and mileage logs, you can't substantiate your deductions if audited. Maintain organized records for at least three years (the general statute of limitations for audits). Digital tools and apps can simplify this process.

Claiming 100% Business Use of Vehicles Without Documentation

Claiming 100% business use of a vehicle when you also use it personally is a red flag for audits. Be honest about your actual business use percentage and keep a mileage log.

Misclassifying Employees as Independent Contractors

If you pay workers, make sure you're correctly classifying them. Misclassifying employees as contractors to avoid payroll taxes can result in significant penalties.

Math Errors

Simple addition and subtraction mistakes delay processing and can trigger correspondence from the IRS. Tax software automatically handles calculations, reducing this risk.

Not Making Quarterly Estimated Tax Payments

If you expect to owe $1,000 or more in taxes, you generally need to make quarterly estimated payments. Failing to do so results in penalties and interest. IRS.gov

What Happens After You File

IRS Processing

The IRS processes your return and matches the income you reported against Forms 1099 and W-2s they received. Most returns are processed within 21 days if filed electronically.

Self-Employment Tax

If your net earnings are $400 or more, you'll owe self-employment tax calculated on Schedule SE. This tax funds your Social Security and Medicare benefits. The good news: you can deduct half of your self-employment tax as an adjustment to income on Schedule 1. IRS.gov

Refund or Payment

Based on your total tax situation, you'll either receive a refund or owe additional taxes. If you owe taxes and didn't make quarterly estimated payments, you may face penalties and interest.

Audit Risk

Schedule C filers have a slightly higher audit rate than wage earners, particularly those reporting losses for multiple years or showing unusually high expense ratios. However, if you're honest and can substantiate your income and expenses, you shouldn't worry about an audit.

Future Tax Planning

Your Schedule C results help you plan for next year. If you had a significant profit, consider increasing quarterly estimated payments for the current year. If you had a loss, evaluate whether your business is viable or whether the IRS might reclassify it as a hobby.

Social Security Credits

The self-employment tax you pay builds your Social Security work credits, which determine eligibility for retirement, disability, and survivor benefits. You need $1,640 in self-employment earnings (for 2023) to earn one credit, up to four credits per year.

FAQs

Q: Do I need a separate Schedule C for each business I operate?

A: Yes, file a separate Schedule C for each business you operate as a sole proprietor. Each business should have its own accounting records and its own form. However, you can combine multiple activities if they're part of the same business. IRS.gov

Q: Can I deduct home office expenses?

A: Yes, if you use part of your home exclusively and regularly for business. You can use the simplified method ($5 per square foot, up to 300 square feet) or calculate actual expenses using Form 8829. The space must be your principal place of business or used to meet clients. IRS.gov

Q: What's the difference between Schedule C and Schedule C-EZ?

A: Schedule C-EZ was a simplified version for straightforward businesses, but it was discontinued after 2019. Everyone now uses Schedule C regardless of complexity.

Q: I received a 1099-K from a payment app for personal transactions. Do I report this?

A: No, only report business income. If your 1099-K includes personal transactions (like roommates reimbursing you for utilities), don't include those amounts in your Schedule C income. Keep documentation explaining the difference in case the IRS asks.

Q: Can I deduct startup costs?

A: Yes, but with limitations. You can deduct up to $5,000 in startup costs in your first year (reduced if costs exceed $50,000), with remaining amounts amortized over 15 years. Startup costs include expenses incurred before your business opened, like market research, advertising, and training.

Q: Do married couples need separate Schedule Cs?

A: Generally, if both spouses work in an unincorporated business, you're considered a partnership and must file Form 1065. However, you can elect "qualified joint venture" status, which allows each spouse to file their own Schedule C, avoiding partnership paperwork while each earning Social Security credits. IRS.gov

Q: What if my business lost money?

A: Report the loss on Schedule C. It will reduce your other income on Form 1040. However, if you report losses for multiple years, the IRS may reclassify your activity as a hobby, disallowing deductions beyond your hobby income. Generally, showing profit in three of five consecutive years creates a presumption that you're operating a business, not a hobby.

Remember: While this guide provides general information based on IRS publications, tax situations vary. Consider consulting a tax professional for personalized advice, especially if you have complex business transactions, significant assets, or are facing an audit. The IRS Small Business and Self-Employed Tax Center at IRS.gov/SmallBiz offers additional free resources and guidance.