Schedule C Explained: How Self-Employed People Report Business Income
February 25, 2026
What Is Schedule C?
Schedule C (Profit or Loss from Business) is the IRS form self-employed individuals, freelancers, sole proprietors, and single-member LLCs use to report business income and expenses. It attaches to your Form 1040. The net profit (or loss) from Schedule C flows to your 1040 as income and is subject to both income tax and self-employment tax.
Part I: Income
Line 1: Gross Receipts
Total revenue from your business before any expenses. This includes all 1099-NEC amounts plus any income not reported on 1099s (cash, Venmo business payments under $600, etc.). You must report all business income even if you didn't receive a 1099.
Line 2: Returns and Allowances
Refunds given to customers, discounts granted after the sale. Reduces gross receipts.
Line 4: Cost of Goods Sold (COGS)
For businesses selling physical products: cost of inventory sold. Detailed calculation on Part III. Service businesses typically have $0 here.
Line 7: Gross Income
Revenue minus COGS. This is the starting point for expense deductions.
Part II: Expenses — The Deduction Engine
Every legitimate business expense reduces your net profit and therefore reduces both income tax and self-employment tax. Key expense lines:
Line 8: Advertising
Online ads (Google, Facebook, Instagram), business cards, brochures, sponsored posts, website promotion. Fully deductible.
Line 9: Car and Truck Expenses
Either standard mileage (70¢/mile for 2025) or actual vehicle expenses × business percentage. Must maintain a mileage log. Cannot deduct commuting to a regular workplace.
Line 10: Commissions and Fees
Payments to subcontractors, sales commissions, referral fees. Payments of $600+ to individuals require you to issue them a 1099-NEC.
Line 11: Contract Labor
Payments to independent contractors for work performed for your business. Issue 1099-NEC for qualifying payments.
Line 13: Depreciation
Deduction for business assets (equipment, computers, furniture) that wear out over time. Section 179 allows immediate expensing of most business equipment in the year purchased rather than depreciating over multiple years.
Line 14: Employee Benefit Programs
Health insurance, retirement contributions, life insurance for employees (not yourself — self-employed health insurance is deducted elsewhere above the line on Schedule 1).
Line 15: Insurance (Other Than Health)
Business liability insurance, professional errors and omissions (E&O), commercial auto, business property insurance.
Line 17: Legal and Professional Services
Attorney fees for business matters, CPA fees, business consulting. Tax preparation fees for your business return (not personal).
Line 18: Office Expense
Printer paper, ink, postage, small office supplies. Distinguish from office furniture/equipment (those go to Line 13/Depreciation or Section 179).
Line 24a: Meals (50%)
Business meals with clients or business associates. Only 50% deductible. Requires: date, amount, business purpose, names of people present.
Line 25: Utilities
Business-dedicated phone line, business internet (if separate from personal). If sharing with personal use, only the business percentage is deductible here vs. home office calculation.
Line 30: Home Office Deduction
If you use a dedicated portion of your home exclusively and regularly for business. Simplified method: $5/SF (max 300 SF = $1,500 max). Regular method: actual home expenses × (office SF ÷ total home SF). Cannot create a Schedule C loss when using the regular method.
Line 31: Net Profit or Loss
Gross income minus all expenses. This flows to Form 1040 and Schedule SE (self-employment tax calculation). A net loss can offset other income (with limitations).
Parse Your 1040 and Schedule C
Upload your prior-year 1040 with Schedule C to 1040parser.com to extract all income and expense lines into structured data — useful for year-over-year comparison, financial planning, and tax strategy sessions with your accountant.