What is Schedule C, and who needs to file one?

If you operate your own business as a self-employed individual, freelancer, or solopreneur, you know how important understanding tax forms are. Schedule C is a form that nearly every self-employed business owner will touch during tax time.

This document allows you to report income, deductions, profits, and losses for your business activities. It also helps calculate your self-employment tax. Let’s look at what a Schedule C is, how to fill it out, and tips for maximizing your Schedule C deductions:

• How a Schedule C works
• Who has to file a Schedule C?
• Obtaining a Schedule C
• How to fill out a Schedule C in 7 steps
• Tips for maximizing Schedule C deductions
• Find peace of mind come tax time
• Schedule C FAQ

How a ‌Schedule C works 

The Schedule C tax form, also known as a self-employment expense form, is a requirement for self-employed individuals. These are generally individuals operating as sole proprietors or have single-member LLCs. This means freelancers, independent contractors, solopreneurs, and individuals with side gigs must complete and file a Schedule C.

Schedule C vs Form 1099-NEC

If you are self-employed, you’ll likely receive a Form 1099-NEC. Unlike Schedule C, the 1099-NEC form does not determine profit or loss but simply reports the income you earn:

For example, if you are a freelancer and work for various clients you may receive a 1099-NEC form from each of them. You’ll then include the income from these tax forms as revenue on your Schedule C.

On Schedule C, you report all revenue from your business activities. You can then subtract eligible business expenses to calculate your net profit. Once you have your net profit figure from Schedule C, you’ll include it on your Form 1040 (personal income tax return) and pay the necessary taxes on the income.

Schedule C vs. Schedule 1

Schedule C and Schedule 1 are both tax forms used by individuals, but they serve different purposes and apply to distinct types of income. 

Schedule C is used by self-employed individuals to report business income and expenses, typically for freelancers, sole proprietors, or small business owners. It covers all aspects of income and deductions related to running a business. Schedule C is a part of Form 1040. It calculates net profit or loss, which is then reported on the 1040.

Schedule 1 is broader and used by any taxpayer needing to report additional types of income like unemployment, alimony, or capital gains, as well as adjustments to income such as student loan interest or self-employment tax deductions. Schedule 1 is an attachment to Form 1040.

While Schedule C focuses solely on business income, Schedule 1 handles various forms of non-business income and certain non-business deductions.

In short, if you are self-employed, you'll file Schedule C, whereas Schedule 1 is used for non-business income or specific adjustments to income. Some individuals may need to file both, depending on their financial situation.

Schedule C vs. W-2

As noted before, if you’re self-employed, you’ll file a Schedule C to report your business income and expenses. It outlines the profit or loss from operating a sole proprietorship or doing freelance work, allowing for deductions on business-related expenses like supplies, travel, and equipment. According to the IRS, single-member LLCs that haven't elected to be taxed as a corporation also use Schedule C. Schedule C provides the IRS with a detailed picture of a business's financial performance over the year.

A W-2 form is issued by employers to employees. It reports wages, salaries, and the amount of taxes withheld from an employee’s pay throughout the year. Employees use the W-2 form when filing their taxes to report their income, unlike self-employed individuals, who use Schedule C. 

In simplest terms, a Schedule C applies to those working for themselves, while W-2 forms are for individuals earning a paycheck from an employer.

Who has to file a Schedule C?  

Schedule C taxes are relevant for those who earn self-employment income, whether full-time or part-time or as a gig or side hustle.

By completing a Schedule C, individuals can claim various business expenses, such as office supplies and advertising costs. This will ultimately reduce your taxable income and ensure compliance with IRS regulations.

Here are some common examples of individuals who typically file a Schedule C:

• Independent contractors and freelancers: Individuals who provide services to clients or businesses in various fields, such as writers and graphic designers. 
• Solopreneurs and small business owners: Individuals who operate as sole proprietors or single-member LLCs, such as online stores and service providers.
• Gig workers: Workers in the gig economy who earn income from platforms like ride-sharing or food delivery services. 
• Professional service providers: Professionals such as doctors, lawyers, accountants, and therapists who are in private practice and the sole owner of their business. 
• Artists and creatives: Artists, musicians, photographers, and other creative professionals who earn income from their artistic endeavors.
• Tradespeople: Skilled tradespeople like plumbers, electricians, carpenters, and construction contractors who operate are the sole owners of their businesses.

These individuals are responsible for reporting their business income and expenses accurately on Schedule C.

Obtaining a Schedule C

Visit the IRS website to find and download Schedule C—the full name of the form is Schedule C (Form 1040). The form will have instructions on how to fill it out. You may also pick up physical copies of Schedule C at your local IRS office, library, or post office. 

Keep in mind that the form and instructions are updated annually, so be sure you are using the correct version for the tax year you’re filing.

Information needed to file Schedule C

If you’re required to file Schedule C with your tax return, you’ll need the following information to complete the form.

Business information

You’ll need to provide basic details about your business, including your business name (if applicable), address, and the type of business you operate. If you have an Employer Identification Number (EIN), that will also need to be included.

Income

Since this form reports the profit or loss from your business, you must report your income. This includes the total gross receipts or sales. Any returns or allowances should also be noted. 

Expenses

When completing Schedule C, you’ll need to report specific expenses such as advertising, vehicle costs and mileage, commissions, contract labor, depreciation, and more. You’ll also want to include costs that don’t fit into any of the form’s predefined categories. Some examples of potential expenses are continuing education or training costs, bank fees, subscriptions, or memberships. 

Keeping accurate, up-to-date records of your business expenses helps facilitate this.

Cost of Goods Sold (If applicable)

Businesses that manufacture products or purchase goods for resale need to add the cost of goods sold. Schedule C requires information on the inventory at the start and end of the year, the purchase of materials, and the labor costs associated with manufacturing or selling of your goods. You’ll also need to include direct production-related expenses.

How to fill out a Schedule C in 7 steps 

Schedule C, also known as a business expense form, has a personal information section and five parts you’ll need to fill out:

Schedule C will ask whether you use the cash or accrual accounting method. With accrual accounting, you’ll report expenses as you incur them and income as you earn it. Most large companies use the accrual method, but many small businesses use the cash method. 

Here's a quick step-by-step guide on completing a Schedule C:

Step 1: Fill in personal information

Begin by filling out the top part of the form, including your name, Social Security number, and the type of business entity. 

Step 2: Tally your business revenue in Part I

Report the total sales, fees, or any other income your business generates during the tax year. 

Step 3: Deduct your business expenses in Part II

List your itemized business expenses, such as advertising, travel, and office supplies. 

Step 4: Calculate your cost of goods sold (COGS) in Part III

If applicable, indicate the direct expenses for producing or purchasing the goods you sell. The cost of goods sold also includes the cost of materials and labor from the production process. 

Step 5: Report vehicle expenses and other expenses in Parts IV and V

Calculate and deduct the allowable vehicle expenses if you use your vehicle for business purposes. If you have other legitimate business expenses that don’t fit into any of the categories in Part II, you can itemize them in Part V. 

Step 6: Summarize your business profit or loss

Subtract your total business expenses, cost of goods sold, and other deductible amounts from your business revenue. The resulting figure represents your net profit or loss.

Step 7: Transfer amounts to Form 1040

Once you have your net profit or loss, report the amount on Form 1040 or your personal income tax return. You’ll also attach your 1040 Schedule C to your tax return when filing. 

Filling out a Schedule C can seem intimidating, but it can be a straightforward process with the right approach. 

For example, having all your income and expenses in one place—where you can get paid and manage your money all in one with a business bank account like QuickBooks Money—can help streamline tax time.

Tips for maximizing Schedule C deductions

You can help reduce your tax burden by taking full advantage of allowable deductions.

The first step for self-employed tax deductions is to keep detailed records. You’ll want to maintain accurate records of all your business-related income and expenses. This includes receipts, invoices, bank statements, and financial records. From there, to maximize your Schedule C deductions, consider the following tips:

Claim all eligible business expenses

Identify and claim all legitimate business expenses. Common deductions include rent, utilities, office supplies, advertising, professional fees, and travel expenses. 

Use the home office deduction

If you use part of your home exclusively for business, you can use the home office deduction. This can include the standard deduction or a portion of your rent or mortgage. 

Track your vehicle expenses

Keep track of your business-related vehicle expenses or mileage. You can choose to deduct actual expenses or use the standard mileage rate provided by the IRS.

Make retirement contributions

Consider contributing to a type of 401(k) for the self-employed, such as a Solo 401(k) or a Simplified Employee Pension (SEP) IRA. Contributions can reduce your taxable income.

Include your health insurance premiums

If you're self-employed and pay for your health insurance, you may be eligible for a deduction. This deduction can also extend to your spouse and dependents. 

Capitalize on business asset depreciation

Depreciation allows you to deduct the cost of business assets like equipment and computers over their useful life. It can be a significant deduction for businesses with lots of assets. 

Keep track of your startup costs

If you're in the early stages of your business, you may be able to deduct certain startup costs. This can include research or marketing and organizational expenses.

Also, depending on your business structure, you might qualify for the Qualified Business Income (QBI) deduction, up to 20% of your qualified business income. Using these tax deductions for 1099 contractors and self-employed individuals can reduce your Schedule C taxes when it comes to tax time. 

Find peace of mind come tax time 

Filling out your Schedule C doesn't have to be daunting. You can effectively navigate the tax form by organizing your business expenses and understanding deductible expenses. 

Accounting software like QuickBooks Self-Employed can organize receipts and track miles, as well as help you seamlessly manage taxes.

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