What is Schedule C: Profit or Loss from Business (Form 1040)?
The IRS provides Schedule C, Profit or Loss from Business, which is a tax document that you need to submit with your Form 1040 to disclose your business's earnings and expenditures. Generally, the profit or loss indicated on Schedule C is viewed as self-employment income. In most cases, if you complete Schedule C, you'll also be required to fill out Schedule SE, Self-Employment Tax, to compute your Social Security and Medicare taxes based on your self-employment income. You must report this amount on Form 1040, Schedule 2 Part II, Other Taxes.
Who files a Schedule C tax form?
To report your earnings from self-employment as a sole proprietor or a single-member Limited Liability Company (LLC), you must complete and submit Schedule C. However, if you operate a C Corporation or S corporation, you wouldn't use Schedule C to report your business's income and expenses. As a self-employed individual, your business clients are required to send you 1099 forms such as 1099-NEC, which reflect the total amount paid to you during the tax year. Additionally, you may need to issue 1099s to any vendors or contractors you have paid using your business funds. These payments are usually included in your Schedule C as expenses along with other eligible business expenses.
What is a sole proprietorship?
A sole proprietorship is a type of business that an individual manages and operates, which isn't structured as a distinct legal entity apart from oneself, such as a partnership or corporation. Typically, there's no legal distinction between the individual and the business. The individual owns and operates the company alone, earns all of the profits, and bears all the losses and liabilities. Freelancers, gig workers, independent contractors, and other small business owners often work as sole proprietors.
Even if you only use your lawn mower to mow your neighbors' lawns for $10 per yard on weekends, you're likely operating as a sole proprietor and should disclose your business finances on Schedule C.
Does an LLC file a Schedule C?
You can also operate your own business as a single-member LLC. In that case, you’ll usually still need to complete Schedule C. It doesn't have to be a business with employees or an office, but it can be. If you run a single-member LLC, there’s no distinction between you and the LLC for tax purposes. Instead, whatever profits or losses produced by the LLC go directly onto your personal tax return. The IRS considers this a “Disregarded Entity.”
Regardless of whether you’re a sole proprietor or single-member LLC, the defining factor of both is that you're the boss, and there's no one writing you paychecks or withholding taxes from your pay.
Is Schedule C only for self-employed?
If you are an employee of a business and also self-employed, you may be required to submit a Schedule C when you earn income outside of your W-2 employment. However, you should not combine your W-2 income with your self-employed income on Schedule C, as your employer will report your W-2 income on Form W-2.
Schedule C is applicable when you're operating a business. In contrast, if you're earning some extra income without the intention of operating a business and generating a profit, it may be considered a hobby. In such cases, you should not report your income and expenses on Schedule C. Instead, you should typically report the income on Schedule 1, Part I, Additional Income, Line 8, "Other income." When the activity is classified as a hobby, you must report all of the income, but you cannot claim any of the expenses as tax deductions.
What info is on Schedule C?
Schedule C requires you to provide various details related to your trade or business. Some of the information you need to provide includes:
Business name and address
Description of the primary product, service, or profession offered by your business.
Accounting method utilized for your business (cash, accrual, or other).
Whether you have materially participated in the business or not.
If you acquired or started the business during the current tax year.
Detailed reporting of your business expenses, which may include expenses like advertising, insurance, legal and professional services, rent or lease payments, repairs and maintenance expenses, utilities, wages, and more.
If you encounter any confusion while completing Form 1040, we have created a helpful video that aims to address most of your inquiries.