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Schedule C (Form 1040): An Overview & Filing Instructions

When the new year rolls around, the Internal Revenue Service (IRS) expects you to file your tax return. Depending on the type of business you operate, there are different forms you’ll need to file along with your return.

If you earn income as a sole proprietor or single-member LLC, you’ll need to file a Schedule C tax form (Form 1040), Profit or Loss from Business, to report business income and expenses. 

Find out what you need to know about Schedule C, including what’s on it, how to fill it out, and when to file it. And, we’ll answer some common questions at the end of this guide.

  Written by Melissa Pedigo, CPA

What is a Schedule C tax form?

A Schedule C is an IRS form you use to report the profits or losses you make from your business during the tax year. 

The form includes information about your other income, credits, and deductions to calculate total taxable income and any additional tax you owe.

Here’s what Schedule C (Form 1040) looks like:

Schedule C Tax Form, First section, Part I (Income) and Part II (Expenses) Schedule C Tax Form, Part III (Costs of Goods Sold), Part IV (Information on your Vehicle) and Part V (Other Expenses)

Who needs to fill out a Schedule C form?

If you’re self-employed and earn an income as a sole proprietor or through a single-owner LLC, you must fill out a Schedule C form when filing your annual tax return. 

The IRS qualifies your activity as a business if: 

  • Its primary purpose is for income or profit, and
  • You’re continuously and regularly involved in the activity

Examples of individuals who will file Schedule C include:

  • Freelancers,
  • Independent contractors, 
  • Statutory employees, and 
  • Self-employed people 

Your business clients likely will send you a Form 1099-MISC or Form 1099-NEC, which reports the amounts they paid you for the tax year.

Remember that all of your business income is reportable and taxable. So even if you don’t receive 1099s from your customers, you still need to report the income.

And if you paid any contractors or vendors through your business, you may also need to send 1099s to them, and include these and other eligible business expenses on your Schedule C.

A Step-By-Step Guide to Filling out Schedule C

Whether you’re filling out a Schedule C form for the first or 30th time, getting all the information and records you need early is always a good idea to prepare and file your return faster.

Below is a breakdown of each step necessary to fill out Schedule C, starting with the structure of the form, the information included, and what to include in each section.

Basic structure of a Schedule C tax form

The IRS Schedule C tax form is split into: 

  • Informational section—Includes details about your business, including address and identification number.
  • Part I: Income—Total all your income and subtract your cost of goods sold to get your gross income. 
  • Part II: Expenses—Write off business expenses you paid during the year and deduct them from your gross income to get your net profit or loss.
  • Part III: Cost of Goods Sold—Add your beginning inventory value to merchandise, wages, and overhead costs, then deduct from the value of your closing inventory to get your COGS.
  • Part IV: Information on your vehicle—Give information about the vehicles you deduct expenses for in Part II.
  • Part V: Other expenses—Any business expenses that don’t fit in the categories listed in Part II and their totals.

What information do you need to fill out a Schedule C tax form?

Before filling out and filing your Schedule C, you’ll need the following documents:

  • Business name and address
  • Business type 
  • Principal product or professional service you offer
  • Balance sheet for the tax year
  • Employer identification number (EIN) or social security number (SSN)
  • Profit and loss statement
  • Statements showing asset purchases during the year
  • Inventory information for COGS
  • Information on motor vehicle, travel, home office expenses, and meals 
  • Your accounting method (cash, accrual, or other)
  • Your material participation in the business
  • Date you started the business
  • Detailed reports of your income 
  • Itemized reports of your expenses (utilities, wages, advertising, legal services, rental payments, repairs, and more)
  • Mileage details about motor vehicles you use in your business

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Schedule C Instructions

Below is a detailed breakdown of the information you need to fill out in each section of the Schedule C tax form.


Informational section

Information Section of Schedule Form 1040

Source: IRS.gov

In this first section, you include details about your business.

If you’re operating as a sole proprietor, you’ll enter your name on the top line labeled name of proprietor. And you’ll include your Social Security Number next to your name.

The other parts of this section are:

  1. Principal business or profession—Fill in the primary activity of your business. If you’re a freelance photographer, you could write ‘photography consultant’.
  2. Enter code from instructions—Flip to the end of the Instructions for Schedule C and find the six-digit code that corresponds to what you included on line A.
  3. Business name—If your sole proprietorship is using a doing business as (DBA) or you’re operating as a single-member LLC, enter that name here. Otherwise, leave it blank.
  4. Employer ID number (EIN)—If your LLC has an EIN, enter it here. If not, leave it blank. 
  5. Business address—Enter your company’s complete mailing address, including any office or suite number.
  6. Accounting method—Show which method of accounting you use. Most freelancers and small business owners use the cash method. It’s when you record revenue when you are paid. And you record expenses when you pay them.
  7. Material participation—This is important to know whether your business is creating passive income or losses. Generally, if you participated in the business’s primary activity for over 500 hours in the tax year, you materially participated.
  8. If you started or acquired the business during the tax year, tick this box.
  9. Filing Form 1099—If you paid certain businesses more than $600 in the tax year, you might need to provide a Form 1099 to them. Tick the correct box.
  10. Filing Form 1099—Tick the correct box on whether you will or won’t be filing Form 1099s.

Part I: Income

Part I of Schedule C Form 1040 (Income)

Source: IRS.gov

In this section, you’ll tally your business income and report the cost of goods sold (COGS) to calculate gross income. Gross income generally includes income from any source. 

The IRS expects you to report income from all sources, with few exceptions.

Other types of income you must report include:

  • Amounts reported on 1099 forms issued to you from your customers or others for whom you provided services
  • Interest from business bank accounts
  • The value of goods or services received via barter trade

Here’s what you’ll report line by line in Part I: Income:

  • Line 1: Gross receipts or sales—your total sales before accounting for any product returns or sales-related costs.
  • Line 2: Returns and allowances—total customer refunds for damaged or returned goods.
  • Line 3: Difference between total sales and returns and allowances.
  • Line 4: Cost of goods sold—the cost of production (you’ll enter this figure from Part III, line 42)
  • Line 5 (Gross profit): Deduct line 4 from line 3 to get the gross profit.
  • Line 6: Any income from other sources (you can get this from the Other Income section of your P&L statement).
  • Line 7 (Gross income): Sum of lines 5 and 6.

Part II: Expenses

Part II of Schedule C Form 1040 (Expenses)

Source: IRS.gov

Here, you’ll add up all your business expenses and deduct them from gross income to get your net profit or loss. This figure will go on your Form 1040 income tax return. 

You can write off a wide range of expenses paid during the year, from supplies to commissions, advertising costs, legal fees, and repairs and maintenance.

Some highlights of this section include the following:

  • Line 9: Car and truck costs—You can either take the IRS standard mileage rate or enter your actual gas, insurance, repairs and other expenses.
  • Line 11: Contract labor—If you produce and sell goods, report what you paid employees like your salesperson, bookkeeper, or receptionist here. Production worker wages will be reported in Part III as a part of COGS.
  • Line 12: Depletion—If your business owns and uses natural resources like timber, mining, or petroleum.
  • Line 13: Depreciation and Section 179 expense deduction—Depreciate or gradually deduct asset costs for things that last more than a year, like computers, furniture, or equipment.
  • Line 18: Office expense—Deduct office supplies and postage expenses.
  • Line 19: Pension and profit-sharing plans—Contributions made on employees’ behalf and fees paid for pension or profit-sharing plans. 
  • Line 21: Repairs and maintenance—Deduct minor repairs and maintenance to your office or building. 
  • Line 23: Taxes and licenses—Deduct things like real estate property taxes on business assets, business fees and permits, and federal and state unemployment tax paid on employee wages.
  • Line 24: Travel and meals—These include business travel expenses like lodging, tips, fax services, transportation, internet connection, and other incidental costs.
  • Line 26: Wages—Total wages and salary paid to employees during the tax year.
  • Line 27a: Other expenses—Any costs you didn’t report from Line 8 to Line 26
  • Line 28: Sum of all expenses from Line 8 to Line 27a. It should be equal to your P&L’s total expenses.
  • Line 30: Expenses for business use of your home—If you use part of your home exclusively and regularly for business, you qualify for this deduction. However, the home office must be in a separate area in your home only for business activities, and you use it on an ongoing basis.
  • Line 31: Net profit (or loss)—Taxable income from your business. 
  • Line 32: If your line 31 entry is negative, check either 32a (all investment at risk) or 32b (some investment is not at risk).

Include details of any expenses you included on Line 27a in Part V: Other Expenses of Schedule C.


Part III: Cost of Goods Sold

Part III of Schedule C Form 1040 (Cost of Goods Sold)

Source: IRS.gov

This part is for businesses that sell goods to customers. If you operate a service-based business, this section won’t apply.

You’ll report your: 

  • Inventory value at the beginning of the year (the same amount as what you reported for closing inventory on the previous year’s Schedule C) 
  • Merchandise costs, wages paid to workers (if in construction or manufacturing), and expenses for supplies and other overheads.

Deduct the value of your closing inventory from that total to get your COGS, and enter that amount in Part I to reduce gross income.

Here’s what to enter:

  • Line 33: Inventory method—Tick the box for how you value your inventory. Most small businesses use cost.
  • Line 35: Beginning inventory—Inventory on hand at the start of the tax year (this figure matches your previous year’s closing inventory.) Leave an explanation if the figures don’t match.
  • Line 36: Purchases—Total amount of purchased inventory minus any product used for non-business reasons.
  • Line 41: Ending inventory—Cost of inventory on hand at year-end.
  • Line 42: Cost of Goods Sold—total COGS you’ll enter on Part I, line 4.

Part IV: Information on your vehicle

Part IV of Schedule C Form 1040 (Information on Your Vehicle)

Source: IRS.gov

In this section, you’ll enter information about the vehicles you deduct expenses for in Part II. The IRS will use this information to review your vehicle deduction and determine its legitimacy. 

You must keep real-time records of all use of a personal vehicle for business purposes. The records must include the date and purpose of the trip, total round trip mileage, and the name of the client or supplier visited.


Part V: Other expenses

Part V of Schedule C Form 1040 (Other Information)Source: IRS.gov

This last section is to detail the expenses you included in Line 27a. List and report the total of these expenses, which include things like: 

  • Membership fees for professional institutions
  • Business publication subscriptions 
  • Credit card processing fees for customer transactions 

Note: If you’re filing your Schedule C tax form for 2022, make sure you do that by the April 17, 2023 deadline.

Make tax prep easier: Lili customers receive a prefilled Schedule C!

Schedule C Form - Fill Out & Send!

Complete your Schedule C form via the fillable pdf form below. After completing the form, select ‘Choose a Recipient’ and enter a recipient name and email address to which the completed form will be sent (max. one recipient can be added).

 

Disclaimer:

Lili customer support cannot answer questions or provide support for filling out the Schedule C form on this page.

Form progress cannot be saved – upon refreshing the webpage, the form will reset without saving any changes.

Make tax prep easier - Lili customers receive a prefilled Schedule C form!

Accurately summarizing your income and deductions can be difficult and time-consuming, and completing a Schedule C form is just one more task that needs to be completed during tax season.

With Lili’s Tax Optimizer tools, you’ll receive a prefilled 1040 Schedule C form based on the expenses you’ve already categorized (easily) with the Lili app, which you can use to file your taxes with the IRS quickly and painlessly. No need to deal with another tax form, or pay even more money to a CPA to prepare the form out for you. Save yourself time and money next tax season and sign up with Lili today!

Frequently Asked Questions

What is a sole proprietorship?
Does an LLC need to file a Schedule C?
Is Schedule C only for self-employed individuals?
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Can I put multiple businesses on one Schedule C?