Schedule C Filing: A Step-by-Step Guide for Independent Contractors
If you’re self-employed in the United States, there’s a good chance you’ll need to file Schedule C (Form 1040) with your taxes. According to the IRS, over 27.1 million sole proprietorships filed a Schedule C in 2020 alone, making it one of the most common tax forms for small business owners and independent contractors.
Unlike W-2 employees, self-employed individuals don’t have taxes automatically withheld from their paychecks, meaning you’re required to pay your own income and self-employment taxes. However, one benefit of filing Schedule C is that it allows you to deduct ordinary and necessary business expenses. This can potentially lower your tax liability.
In this guide, we’ll break down everything you need to know about Schedule C filing. From who needs to file it to how to report income, claim deductions, and make the most of tax-saving opportunities.
What is a Schedule C IRS form?
Schedule C, Profit or Loss from Business (Form 1040), is a tax form used by sole proprietors and single-member LLCs to report their business income and expenses to the IRS.
It determines how much profit or loss your business generated and calculates your taxable income, which is then reported on your personal tax return (Form 1040).
Why is Schedule C important?
Unlike W-2 employees, self-employed individuals don’t have taxes automatically withheld from their income. Filing Schedule C ensures that you:
- Report your income accurately: Avoid penalties for underreporting earnings
- Claim business deductions: Lower your tax liability by deducting eligible expenses
- Calculate net profit or loss: Determine if you owe additional taxes or qualify for tax credits
If your business made a profit, it’s subject to income tax and self-employment tax (15.3%). If your business had a loss, it may lower your taxable income and reduce what you owe.
Who files a Schedule C tax form?
You need to file Schedule C if:
- You’re self-employed, including freelancers, gig workers, and independent contractors
- You operate a sole proprietorship or single-member LLC
- You earned income from a business activity, even if it’s part-time or a side hustle
- You intend to make a profit from your business
You do not need to file Schedule C if you work as a W-2 employee, where your employer handles tax withholdings and provides a W-2 form at the end of the year.
What is a sole proprietorship? Does an LLC file a Schedule C?
Sole proprietorship
A sole proprietorship is the simplest type of business structure, where a single individual owns and operates a business without forming a separate legal entity.
In this setup:
- The business entity is not legally separate from the owner
- The owner reports all income and losses on their personal tax return
- The owner is personally liable for any business debts or legal issues
Since sole proprietors don’t receive a W-2, they use Schedule C to report their business earnings and expenses.
LLC
Single-member LLCs (limited liability companies) that have not elected to be taxed as an S-corp or C-corp must file Schedule C, just like sole proprietors.
However, if an LLC has multiple members, it’s considered a partnership by default and must file Form 1065 instead.
Key takeaway: If you run a single-member LLC, you’ll likely file Schedule C unless you elect to be taxed as a corporation.
What information is on a Schedule C?
When completing Schedule C, you’ll report:
- Business income: Your total earnings from all clients, including 1099-NEC income
- Expenses: Business costs such as advertising, supplies, home office expenses, and vehicle costs
- Cost of goods sold (COGS): If applicable, the direct costs of producing products
- Net profit or loss: Your total earnings after deducting expenses
Pro tip: Accurate record-keeping is essential for filing taxes correctly. Tools like Invoice Fly’s receipt scanner and expense tracking can help you organize and categorize business expenses throughout the year.
What are ordinary and necessary expenses?
The IRS allows you to deduct ordinary and necessary expenses that are directly related to running your business.
- Ordinary expenses: Common and accepted costs for your industry, trade and business (e.g., marketing, software, office supplies)
- Necessary expenses: Helpful and appropriate costs that aid your business operations (e.g., business insurance, travel)
Some common deductible expenses include:
- Advertising and marketing (social media ads, website costs)
- Office supplies and software (laptops, accounting software)
- Home office expenses (portion of rent, utilities)
- Travel and vehicle expenses (mileage, airfare, hotel stays)
How do you fill out a Schedule C form?
To fill out Schedule C, follow these steps:
- Enter business details: Business name, address, EIN (if applicable)
- Report gross income: Include all earnings from clients and contracts
- List deductible expenses: Enter business costs in the appropriate categories
- Calculate net profit or loss: Subtract expenses from total income
- Transfer the total: Report your net profit or loss on Form 1040
Pro tip: For easy tax filing, Invoice Fly’s invoice maker and reporting software can help track your business income and expenses.
How do I get a Schedule C?
You can download Schedule C (Form 1040) from the IRS website. Many tax preparation services also provide fillable Schedule C forms.
Do I report my 1099-NEC income on Schedule C?
Yes, if you receive Form 1099-NEC from clients, you must report that income on Schedule C as part of your business earnings. This form is issued to independent contractors who earn $600 or more from a single client during the tax year.
Since no taxes are withheld, you’re responsible for paying:
- Self-employment tax (15.3%): Covers Social Security and Medicare.
- Quarterly estimated taxes: To avoid IRS penalties.
- Business deductions: To reduce taxable income (office supplies, travel, etc.).
Key takeaway: A 1099-NEC is proof of income, while Schedule C is the form you file to report and deduct business expenses.
How does 1099-NEC income affect your taxes?
Unlike W-2 employees, self-employed individuals don’t have taxes withheld from their earnings. When you report your 1099-NEC income on Schedule C, the IRS considers this as self-employment income, meaning:
- You’re required to pay self-employment tax (15.3%), which covers Social Security and Medicare taxes.
- You may be able to deduct business expenses to lower your taxable income (e.g., internet costs, office supplies, marketing expenses).
- You may need to make quarterly estimated tax payments to avoid penalties.
What if I receive multiple 1099-NEC forms?
If you work with multiple clients, you might receive several 1099-NEC forms. You must report all 1099-NEC earnings on Schedule C, even if a client fails to send you the form.
The IRS receives copies of all 1099-NEC forms from businesses that hired you, so failing to report your income could trigger an audit or penalties.
Pro tip: Keep detailed records of all your payments, even if they fall below the $600 reporting threshold. Invoice Fly’s invoice maker and reporting software can help track all client payments, ensuring you report the correct amount.
Making the right choice for your tax filing
If you’re self-employed, filing Schedule C is a must to report your earnings and claim valuable tax deductions. While tax season can be stressful, using the right tools can simplify your filing process.
Invoice Fly’s invoice maker, expense tracking, and reporting software help independent contractors stay organized and track income year-round, making Schedule C filing easier.
Start managing your business finances effortlessly with Invoice Fly today.
Schedule C Filling FAQs
No. A W-2 is issued to employees, while Schedule C is used by self-employed individuals to report business income. If you receive a W-2, your employer has already withheld taxes from your paycheck.
No. A 1099-NEC is a form you receive from clients who paid you $600 or more for services.
Before 2019, some small businesses could use Schedule C-EZ, a simplified version of Schedule C. However, the IRS eliminated Schedule C-EZ, requiring all businesses to use Schedule C moving forward.
Yes. If you’re self-employed, meaning you run a business without an employer withholding taxes, you must file Schedule C to report your income and expenses. The IRS defines self-employment as:
- Owning and operating your own business (sole proprietor or single-member LLC)
- Working as a freelancer, consultant, or gig worker (e.g., designers, rideshare drivers, content creators)
- Providing services for multiple clients without being a W-2 employee
Since self-employed individuals don’t receive a paycheck with tax withholdings, Schedule C ensures that all business income is reported and taxed appropriately.
Some key things to remember include:
- If your business made a profit, you’ll pay income tax and self-employment tax.
- If your business had a loss, you might be able to reduce your taxable income, lowering your tax bill.
You can deduct eligible business expenses to offset your income and reduce what you owe.
Even if you have a full-time W-2 job, you must file Schedule C if you also earn self-employment income from side gigs, freelancing, or a small business.
Pro tip: If you’re self-employed, keeping accurate financial records is critical.
Invoice Fly’s client portal and expense tracking tools can help you manage invoices, track expenses, and streamline your tax filing process.
