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How To File Schedule C Form 1040 | Bench Accounting
How To File Schedule C Form 1040
By Rachel Smith on April 25, 2019
Schedule C is part of Form 1040. It’s used by sole proprietors to let the IRS know how much their business made or lost in the last year. The IRS uses the information in Schedule C to calculate how much taxable profit you made—and assess any taxes or refunds owing.
You can find the fillable form here: IRS Schedule C: Profit or Loss From Business
Do I need to file Schedule C?
If you are a sole proprietor, you’ll likely need to file Schedule C—and you’ll need to file a separate one for each business if you have more than one.
You’re a sole proprietor if:
Your business isn’t another legal business entity, such as a corporation or partnership
You don’t have a boss or manager to report to, who holds back a portion of your salary for taxes
The primary reason for your business activity is to make money
You conduct business regularly, and it isn’t just a hobby (more on that below)
If you have less than $5,000 of business expenses, you might be eligible to submit a simpler version—Schedule C-EZ. (Yes, that’s a genuine IRS pun). Schedule C-EZ is less complicated, relying only on total business receipts and expenses, but you can’t use Schedule C-EZ to claim vehicle expenses.
You might be able to file Schedule C-EZ if:
You only operate one sole proprietorship
You have less than $5,000 in business expenses
You are reporting a net profit
You don’t hold any business inventory—such as supplies, or parts to make a product you then sell
If this sounds like you, talk to your accountant about Schedule C-EZ. If not, don’t worry: Schedule C is only two pages long, and is among the simpler IRS forms.
Here’s what Schedule C looks like:
Before you fill it out, you’ll need:
An income statement for the tax year
Your balance sheet for the year
Receipts or statements for any business purchases—including smaller items, like food expenses, and big-ticket items like equipment, cars, or buildings
Although we’re going to walk you through the six sections of Schedule C, you’ll still need the official instructions to find the Principal Activity Code for your business.
Sections A-J
The top part of Schedule C isn’t labelled numerically, but instead has ten separate lettered boxes: A through J. Most of this is pretty self-explanatory, requiring basic information like your name and business address. Potentially confusing boxes include:
A-B: In Box A, enter a brief one-line description about the type of business you’re doing, and the relevant code (found in the IRS instructions).
F: Record your accounting method. Usually, small business owners use cash accounting. If you’re not sure which you’re using, check out our guide to the differences between cash and accrual accounting.
G: “Material participation” generally means if you worked in your business. If you did, check “Yes.” If you’re unsure, consult an expert.
H: Check the box if this is your first year in business.
I-J: If you paid subcontractors or individuals $600 or more for work in your business, you’ll need to file Form 1099. If you answer “Yes” to I, you must also answer “Yes” to J, and file a 1099.
Social Security Number (SSN): You must enter your SSN, even if you use an EIN for business purposes. If you do use an EIN, enter it in Box D.
Part 1—Income
This is where Schedule C starts to look less straightforward, and more like a tax form. Lines 3, 5 and 7 can be taken as instructions, but for the rest, here’s a quick translation.
The form says: Gross receipts or sales. See instructions for Line 1 and check the box if this income was reported to you on Form W-2 and the “statutory employee” box on that form was checked.
Translation: Total income, not including sales tax, goes here. This is your gross income—don’t deduct refunds or returns.
Statutory employees are independent contractors who are treated as employees, meaning their “employers” withhold taxes. They also use Schedule C, which is why they get a reference here. If you are both a sole proprietor and a statutory employee, you’ll need to fill in two Schedule Cs—one for each role.
If someone you worked for sent you a Form 1099-MISC (instead of a Form W-2), all that means is that you’re not considered an employee for tax purposes. Income from Form 1099-MISC should be included on Line 1.
The form says: Returns and allowances
Translation: This is where you put the total amount issued in refunds for the tax year.
The form says: Cost of goods sold (from Line 42)
Translation: You need to calculate the cost of goods sold, as reported on Line 42 (in Part 3 of Schedule C). Put a pin in this one until you get to Line 42, then come back and fill this in.
If you don’t sell goods and you didn’t subcontract any labor, enter 0 and move on.
The form says: Other income, including federal or state gasoline or fuel tax credit or refund (see instructions)
Translation: This is where you record any auxiliary income—such as interest from your business bank account, grants or awards, and tax credits for fuel. If you don’t have any other income, enter the gross income amount from Line 1.
Part 2—Expenses
Pro tip: Throughout the year, you might be tempted to go wild with business expenses, because more expenses mean less net profit (and therefore a lower tax burden). But you’re only going to save 15-30 cents per dollar through expense claims, so don’t take on unnecessary expenses just for the tax write-off—it isn’t worth it.
Most of Part 2 is self-explanatory, requesting the amounts spent on specific business activities—such as advertising, travel, meals, and pension plans. You should be able to find these numbers in your income statement. Below, we dive into the trickier segments.
The form says: Car and truck expenses (see instructions)
What you need to know: If you’re using your personal car for business, you have a choice: claim back the exact expenses, or take a mile deduction. Whichever you choose, you will have to provide evidence (usually receipts) to support your claim.
The form says: Depletion
What you need to know: Depletion is a niche case, used by businesses in mining, quarrying or timber industries. Business owners in these fields can claim a deduction to account for using up (depleting) some of their product in the course of business.
There are different rules for calculating depletion, depending on what material resource you are working with. If you plan on claiming a depletion deduction, talk to your accountant first.
The form says: Depreciation and Section 179 expense deduction (not included in Part 3)
What you need to know: Usually, you can’t deduct the full purchase cost of fixed assets—such as buildings, vehicles, or equipment—in one year. What you can claim is the depreciation deduction for that year, over several years. But some assets qualify for the Section 179 full deduction. This is a complex calculation, so get an accountant or tax professional to take care of this one for you.
The form says: Office expense
What you need to know: Line 18 is only for postage and office supplies, such as stationery. Other office expenses are reported in Part 5.
The form says: Expenses for business use of your home
What you need to know: Many freelancers work from home. That means part of your household bills—like heat and electricity—can be claimed as a business expense. The IRS has a very particular definition of what constitutes a home office, so read the instructions (C-9 to C-13) carefully to make sure you qualify.
Part 3—Cost of Goods Sold
If you sell products or subcontract, you’ll need to fill in Part 3. Most of this section is pretty straightforward, with clearly-labelled requests, such as the cost of materials or supplies. You can find most of this information on your income statement.
Line 33 is the only real outlier. This is where you explain how you valued your inventory. Most small businesses will use the Cost method (literally, the cost of purchase). If you’re using cash accounting, this is the only way to value your inventory. The other named option is Lower of Cost or Market—comparing the price you paid with the market value for the item, on a specific valuation date each year. This is far more complicated, less popular method.
Pro tip: When you fill in Line 42, don’t forget to go back to Line 4 and enter the same number.
Part 4—Information on Your Vehicle
Are you claiming expenses for a truck or car (Line 9)? Then you have to fill in Part 4.
You will need mileage records to make a claim. Don’t try to guess or estimate—you need evidence to back up your expense claim.
Part 5—Other Expenses
Just like it says on the form, this section is for any expenses you didn’t report on Lines 8-26 or Line 30. Remember to go back to Line 27a and enter the total of all lines, including anything in Part 5.
There are a few common mistakes that crop up time and again. Typos in names and Social Security Numbers, math errors, and missing the April 15th deadline are among the easily prevented. However, there are some other misunderstandings also might trip you up.
“I only need to file one Schedule C”
In the gig economy, many sole proprietors work several self-employed jobs. What they might not realize is, you must fill out a separate Schedule C for each distinct type of work. For example, if you are in freelance sales, selling multiple products, each sale is considered “related work”, and you only need to file one Schedule C to cover all work of that type. However, if you also drive an Uber (currently considered a form of self-employment in the United States), you would have to report your profits and losses from that business venture separately.
This also means keeping separate records for each role—including mileage records, office supplies, and fuel tax credits. If you are a married couple, each with a separate sole proprietorship, you can’t file on the same Schedule C—each individual is responsible for their own.
Further reading: The Uber & Lyft Driver’s Guide to Taxes
“I only earned X amount, so I don’t have to file”
You must report all income and losses from your sole proprietorship or single-member LLC by filing Schedule C. There is a minimum threshold for paying tax on your self-employment income ($400)—but no minimum for reporting any loss or profit on your business.
Unless you are filing Schedule C as a statutory employee, your self-employment income and business income are one and the same.
“I lost money, so my business qualifies as a ‘hobby’”
There is a common myth that if you don’t show a profit for two out of five years, your business is considered a hobby, and you don’t need to file a Schedule C. The truth is, it might—but it also might not.
Profit is only one factor in deciding if you’re running a business or charging for a hobby. Your intention to make a profit, keeping deliberate records, and the type of business you run, can all sway the IRS into classifying you as a honest-to-goodness business, not a hobby. If you’re in doubt, talk to a professional to see where you stand.
The lines, letters, numbers and boxes can make Schedule C seem a lot more taxing than it really is (pun intended). But once you get going, it’s more straightforward than it seems—and, of course, it always helps to have organized, accurate records to work with. Once you’re done, you won’t have to think about Schedule C for a whole year, but feel free to bookmark this guide for next April.