Schedule C (Form 1040)

Schedule C (Form 1040), titled Profit or Loss From Business (Sole Proprietorship), is the IRS form an individual uses to report the income and expenses of a business they run on their own. The IRS, on its About Schedule C (Form 1040) page, states that you “use Schedule C (Form 1040) to report income or loss from a business you operated or a profession you practiced as a sole proprietor.” The bottom line of the form, net profit or loss, carries to Form 1040 and also sets the base for self-employment tax. For independent contractors, Schedule C is the central tax form of self-employment.

What Schedule C Reports

Schedule C brings the whole business onto one form. Per the IRS, an activity qualifies as a business if the primary purpose is income or profit and the owner is involved in it “with continuity and regularity.” On the form, the owner lists:

1. Gross receipts, which include amounts reported to them on information returns such as Form 1099-NEC and Form 1099-K, plus any income not reported on a 1099.
2. Ordinary and necessary business expenses, by category, such as supplies, advertising, contract labor, and the business use of a vehicle or home.
3. The net profit or loss, which is gross receipts minus expenses.

The net result is the number that matters. It moves to Form 1040 as part of the owner’s total income, and it is the figure self-employment tax is built on.

Who Files Schedule C

A sole proprietor files Schedule C with their Form 1040. So does the owner of a domestic single-member LLC that is a disregarded entity for income tax and has not elected corporate treatment. Because the LLC is disregarded, its activity is reported directly on the owner’s return rather than on a separate business return, and Schedule C is the usual place that activity lands. A business with more than one owner does not use Schedule C. It files a partnership or corporate return instead.

Schedule C and Self-Employment Tax

The link between Schedule C and self-employment tax is direct. The net profit computed on Schedule C is the starting point for net earnings from self-employment, which are carried to Schedule SE to figure the tax. The IRS sets the self-employment tax rate at 15.3 percent and explains on its self-employment tax page that “the rate consists of two parts: 12.4 percent for social security (old-age, survivors, and disability insurance) and 2.9 percent for Medicare (hospital insurance).” This is why a contractor’s Schedule C net profit drives two taxes at once: income tax on Form 1040 and self-employment tax on Schedule SE.

Common Pitfalls

• Treating a 1099 as the tax form. A 1099 is an information return from the payer. Schedule C is where the contractor reports total income and subtracts expenses to reach net profit.
• Forgetting income with no 1099. Gross receipts include all business income, not only amounts a payer reported on a 1099.
• Overlooking self-employment tax. Schedule C net profit also feeds Schedule SE, so a profitable year carries a 15.3 percent self-employment tax on net earnings in addition to income tax.

Related Terms

• Disregarded Entity: the default classification of a single-member LLC whose activity is reported on the owner’s Schedule C.
• Form 1099-NEC: the information return whose amounts a contractor includes in Schedule C gross receipts.
• Form 1099-K: a payment-card and platform information return that also feeds Schedule C income.

Omnivoo Contract Management keeps a clean record of every contractor payment and year-end information return, so a US sole proprietor has accurate gross receipts to report on Schedule C.