A Schedule C, Profit or Loss from Business (Sole Proprietorship) is the IRS form you use to report self-employed earnings to the IRS. You include Schedule C with your Form 1040 tax return at tax time to report your business income and expenses as a sole proprietor for that tax year. It’s for businesses that are either unincorporated sole proprietorships or single-member limited liability companies (LLCs) that haven’t elected to be taxed as corporations.
What is a Schedule C?
Schedule C is a profit and loss statement that freelancers, independent contractors, and small business owners typically include with their Form 1040 tax return when they file their taxes.
If you are self-employed, you will likely need to file a Schedule C with your individual income tax return to report how much money you made or lost in your business during the year. With the exception of being a landlord, most activities you do with the intent to earn a profit are reported on a Schedule C. If the activity is something you do primarily for pleasure, it may be considered a hobby rather than as a business.
If you fill out a Schedule C, you may also have to complete Schedule SE, Self-Employment Tax. You use this form to calculate your social security and Medicare tax based on your self-employment income.
Who should file a Schedule C?
You should file a Schedule C if you earn income through self-employment as either a sole proprietor or as a single-member LLC. Don’t use a Schedule C if you report business income and expenses as a C Corporation, S Corporation, or partnership. Schedule C applies to you if you are a small business owner, you have a sideline gig in addition to your regular job, you do freelance work, are a contractor, or have another separate source of self-employment income.
A sole proprietorship is an unincorporated business operated and owned by one person. It’s the simplest and least expensive type of business structure. An individual who operates a business on their own and hasn’t opted for another business structure is considered a sole proprietor.
Sole proprietorship is the easiest way to go if a business isn’t ready to take on the expense of forming an entity. Making the right choice depends on your income, the type of your business and individual management preferences. Even if you are only doing odd jobs to supplement your income, you must report your income and expenses from the business on Schedule C.
Limited liability company (LLC)
An LLC is a legally separate business entity that’s created by filing paperwork with the applicable state government. An LLC can have any number of members, but if there's only one, it’s treated by default as a disregarded entity, which means it’s not considered as an entity that’s separate from its owner, and it doesn’t file its own tax return. So unless you elect to have your LLC taxed as a corporation, taxes are handled on your personal tax return through Schedule C.
Information you provide on Schedule C
Schedule C requires you to provide information about yourself and your small business. It has a series of line items for you to fill out with income, expenses, and net profit or loss. To complete Schedule C, you need to put together an income statement for the tax year.
Details about your business
Include the name of the proprietor, business type or profession (plus a code for your type of business), business name and business address, and your employee identification number (EIN) if you have one.
You can look up your NAICS (North American Industry Classification System) code at the US Census Bureau website.
List your gross receipts. You’ll be asked to subtract both returns and allowances and cost of goods sold (see below) from gross receipts to get your gross profit. Next, add any other income to get to your total gross income.
Fill in all of your deductions for business expenses, like advertising and promotion, repairs, and insurance. There are separate sections for each of these. If you have any other expenses that are outside the categories listed, you can add them at the bottom of the Schedule C form.
Cost of goods sold
Businesses that sell products use this section to show the cost of goods sold (COGS). This includes line items such as inventory, purchases, materials and supplies, and other costs.
Vehicle expenses and depreciation
You can claim either the mileage deduction, which is determined on page 2 of the Schedule C form, or actual expenses, which includes depreciation. This means filling out the IRS 4562 form, plus completing a worksheet to calculate the allowable expenses. You can claim either actual vehicle expenses or a mileage deduction, but not both. For both types of deductions, you need to track your total and business mileage.
How to file a Schedule C
You must file your Schedule C as part of your Form 1040. You may need to complete other forms as well, such as Form 4562 for depreciation and Schedule SE to determine your self-employment tax.
Frequently asked questions about Schedule C
Do I need to file a Schedule C with no income?
If you were actively engaged in your business but didn’t receive any income, you should still file to claim your business expenses.
Do I have to file a Schedule C if I receive a 1099-NEC?
Yes. When you receive form 1099-NEC, it means you received earned income that wasn’t part of your wages, so the IRS considers you self-employed for this income, even if it’s part-time or a one-off. You’re required to report all of your self-employed income to the IRS.
Does an LLC file a Schedule C?
Yes, an LLC files a Schedule C if it only has one member and it hasn’t made any special elections. If you elect to file your taxes as a corporation, you won’t use a Schedule C to report business income and expenses. Also, if an LLC owns rental property or uses the LLC to hold investments, it doesn’t use Schedule C.
What is the minimum income to file a Schedule C?
There’s no minimum income threshold for filing Schedule C with the IRS. You must report all business income and expenses on your Schedule C no matter the size of the amount.
How do I determine my vehicle expenses?
There are two methods for calculating the business use of your car:
- Actual expense method: The actual expense method is based on the expenses you incur in the business operation of your vehicle, including gas purchases, oil changes, insurance, and vehicle depreciation.
- Standard mileage method: Using the standard mileage method, you simply multiply your business miles by the amount per mile allotted by the IRS.
Getting help with your taxes
You may want to work with a tax professional, especially at tax time. They can help you with any questions you might have about the Schedule C tax form.
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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