In a Nutshell
New gig workers, freelancers and self-employed entrepreneurs need to get familiar with an important form in their tax returns: IRS Schedule C. This form is where you’ll report the income, expenses, profits or losses of your business.This article was fact-checked by our editors and Jennifer Samuel, senior product specialist for Credit Karma. It has been updated for the 2019 tax year.
Whether you work for yourself full time or part time, being self-employed means a bit of extra work come tax time.
Part of that extra time might be spent completing IRS Schedule C – Profit or Loss From Business (Sole Proprietorship). If you’re a sole proprietor (and you likely are if you run the business yourself and it isn’t incorporated or a partnership) you’ll need to report how much money you made or lost in your business on Schedule C, which you’ll file with your federal income tax Form 1040.
The IRS estimates it takes Schedule C filers approximately 22 hours to fulfill their tax compliance obligations. But don’t panic just yet. That time includes 12 hours of recordkeeping.
If you’ve diligently tracked your income and expenses throughout the year, you could be more than halfway to fulfilling your tax-filing obligation. Here’s an overview to help you through the process of filling out IRS Schedule C.
Who must file IRS Schedule C?
IRS Schedule C is required for anyone who owns and operates an unincorporated business as a sole proprietorship or a single-member limited liability company (LLC) — provided you don’t treat the LLC as a corporation — and owe federal income tax. You don’t have to take any formal action to set up a sole proprietorship — it’s your default status as long as you’re the only owner of the business. For example, if you’re a freelance writer or independent contractor and you haven’t incorporated your business, you’re likely a sole proprietor.
Single-member LLCs that choose not to be treated as a corporation also use Schedule C because they’re considered “disregarded entities” by the IRS. The name sounds unpleasant, but it’s not — it just means you’re not taxed like a corporation or partnership. Instead, your business income and expenses are reported on Schedule C attached to your Form 1040 individual tax return.
How to complete IRS Schedule C
Schedule C has six parts — an initial section for providing general information about your business and five numbered sections labeled Part I through Part V. Let’s look at each of these sections in detail.
Schedule C: General information
Much of the information needed to complete Lines A through J on Schedule C should be easy. Enter your name and Social Security number and the name, address and tax identification number for your business (if you have a separate business name, address and EIN).
Line A asks for your principal business or profession. Your principal business or profession is a description of how you earn income. For example, if you made money as a driver for Lyft or Uber, you could enter “rideshare driver” on Line A.
Line B asks for a six-digit code. You’ll find a list of codes on pages C-17 through C-18 in the Instructions for Schedule C. Just read through the list and find the code that best describes your business.
On Line F, you’ll state your accounting method, which would usually be cash or accrual.
FAST FACTS
What’s the difference between cash and accrual accounting methods?
Under the cash method, you record income when you receive it and expenses when you pay them. Under the accrual method, you report income when it’s earned and expenses when they’re incurred.
For example, say a freelance writer submitted an article in December 2018 and was paid for the work in January 2019. Under the cash method, the writer records the income when they receive it in 2019 . Under the accrual method, the writer records that income in 2018, because that’s when the work was done.
Many sole proprietors without inventory use the cash method of accounting because it’s the easier method. If you keep inventory, you might have to use the accrual method.
Line G asks whether you materially participate in the operation of the business during the tax year. Many sole proprietors will answer “yes” to this question. But if your business involves renting property or a working interest in an oil or gas well, look at the Instructions for Schedule C to see if your business activities are considered passive.
If your business is new or newly acquired this tax year, or you reopened or restarted it after a temporary closure (and didn’t file Schedule C or Schedule C-EZ for the prior year), you’ll answer “yes” on Line H.
Lines I through J have to do with filing Form 1099. Certain types of payments you make in a year as a sole proprietor might require you to file a 1099. If you’re unsure whether you need to file one or more 1099, check out the IRS rules on 1099 and other information returns.
Here’s the top of Schedule C where you’ll enter this information.
Image: Picture1Schedule C: Parts I and III
Now we move on to the meat of Schedule C. Part I asks for information on your business’s gross receipts and other income. Generally, gross receipts are your total earnings and you can get this from your Profit and Loss Statement (which is generated by your business) or add up income reported on the 1099-MISCs you received. Here’s Part I.
Image: part1Cost of goods sold typically applies only if you sell a product. It includes all the costs of creating the products you sell. You’ll calculate your cost of goods sold in Part III, and then enter the total amount on Line 4. Here’s Part III.
Image: part3If you’re a statutory employee — such as a full-time life insurance agent or traveling salesperson — and received a W-2 that notes you’re a statutory employee (box 13 of Form W-2), you’ll also report your income and expenses related to that income on Schedule C (or Schedule C-EZ). If you were both a statutory employee and had self-employment income, you’ll have to file two Schedule Cs — one for each income source.
Schedule C: Parts II, IV and V
Part II is where you’ll enter all the business-related expenses you incurred throughout the year. Schedule C lists some common expense categories, including advertising, insurance, interest, legal and professional fees, office expenses, rent, repairs and more. Enter the amount you spent for each category on Lines 8 through 26.
Here’s Part II.
Image: part2On Lines 28 through 32, you’ll calculate your net profit or loss from the business by adding up your expenses and subtracting the total amount from your income reported in Part I. If you used your home for business, you’ll include your home office deduction on Line 30, either by calculating the deduction using the Simplified Method Worksheet or attach Form 8829.
If any of your expenses don’t fit into the categories shown, you’ll list them separately in Part V and enter the total amount on Line 27a. Here’s part V.
Image: partvIf you take a deduction for car and truck expenses on Line 9 of Part II and aren’t required to file Form 4562 for your business, you’ll need to complete Part IV of Schedule C. This section provides details about your vehicle and the number of miles you drove for business, commuting and personal use during the tax year. Here’s Part IV.
Image: partIVWith that, your Schedule C is nearly complete. If your result is a positive number, you’ll take the net profit from Line 31 and enter it on Line 12 of Schedule 1 attached to your Form 1040. If the result is more than $400 or more, you’ll also need to complete Schedule SE to calculate your self-employment tax.
But if your business had a net loss for the year, you might need to do a little more work. Review the IRS Schedule C instructions for information and rules on how to report your losses.
What about Schedule C-EZ?
For tax years prior to 2019, there was a simpler version of Schedule C — Schedule C-EZ. Taxpayers could use the pared-down version of Schedule C if they met all the criteria for doing so, including the following:
- Your total business expenses were $5,000 or less
- You use the cash method of accounting
- Your business had no inventory at any time during the year
- Your business didn’t have a net loss
- You had only one business as a sole proprietor, qualified joint venture, or statutory employee
- No employees worked for you during the year
- You didn’t deduct expenses for business use of your home
- You have no unallowed prior-year passive activity losses from your business
- You’re not required to file Form 4562 to claim depreciation and amortization expenses for this business
The C-EZ is no longer available. Starting with the 2019 tax year, filers must use Schedule C.
Bottom line
Even seasoned entrepreneurs may find the IRS Schedule C daunting, and new business owners might be unsure which form they can use – Schedule C or the simpler Schedule C-EZ. Fortunately, the IRS instructions for Schedule C have in-depth definitions and explanations to help you make sense of anything you don’t understand.
If you do your taxes with an online tax preparation and filing service, completing Schedule C can be even simpler.
Of course, the really time-consuming part of completing Schedule C happens way before tax season: tracking your income and expenses. When you stay on top of your small business accounting throughout the year, filling out forms can be as easy as transferring numbers from your Profit and Loss Statement into the right boxes.
Jennifer Samuel, senior tax product specialist for Credit Karma, has more than a decade of experience in the tax preparation industry, including work as a tax analyst and tax preparation professional. She holds a bachelor’s degree in accounting from Saint Leo University. You can find her on LinkedIn.