Your first Schedule C can feel like a test you didn’t study for. The form has 48 lines, multiple parts, and asks questions about methods and elections you’ve never heard of. Most online guides skim over the confusing parts or assume you already know what “cost of goods sold” means.
This walkthrough covers every section of Schedule C, line by line, with explanations of what goes where and why it matters. Whether you’re a freelancer filing for the first time or a sole proprietor who’s been winging it for years, this guide will help you fill out the form correctly.
What are the instructions for filing Schedule C?
Schedule C reports profit or loss from your sole proprietorship or single-member LLC. You’ll need your total business income (Line 1), cost of goods sold if applicable (Part III), business expenses by category (Part II), and home office deduction if you qualify (Line 30). The form calculates your net profit or loss on Line 31, which flows to your Form 1040 and determines both income tax and self-employment tax. Most sole proprietors will also need to file Schedule SE to calculate self-employment tax.
Key Takeaways
- You file Schedule C with Form 1040 – It’s not a separate tax return. Your profit flows to your personal return.
- Cash method is standard for most sole proprietors – You report income when received and expenses when paid.
- Part II lists expense categories – Use the right line for each expense. “Other expenses” catches anything that doesn’t fit.
- Part III is only for inventory – Service businesses skip this section entirely.
- Part IV is for vehicle information – Required if you claim vehicle expenses on Line 9.
- Line 31 is the bottom line – Your net profit (or loss) that determines your tax.
Table of Contents
Before You Start: What You’ll Need
Gather these documents before filling out Schedule C:
Income documentation:
- 1099-NEC forms received (non-employee compensation)
- 1099-K forms (payment processor income)
- Invoices and payment records
- Bank statements showing deposits
- Any other income records
Expense documentation:
- Receipts organized by category
- Bank and credit card statements
- Mileage log (if claiming vehicle expenses)
- Home office square footage (if claiming home office)
- Depreciation records for equipment
Business information:
- Business name and address
- Employer Identification Number (EIN) if you have one
- Principal business code (6-digit NAICS code)
Part I: Income (Lines 1-7)
Line 1: Gross Receipts or Sales
Enter your total business income before expenses. This includes:
- Payments from clients (1099-NEC and non-1099)
- 1099-K income from payment processors
- Cash payments
- Any other business income
Important: Include ALL income, not just what’s reported on 1099s. Clients aren’t required to issue 1099s for payments under $600, but that income is still taxable.
Line 2: Returns and Allowances
Enter refunds you gave to customers or allowances for damaged goods. Most service businesses leave this blank.
Line 3: Subtract Line 2 from Line 1
Self-explanatory. This is your adjusted gross receipts.
Line 4: Cost of Goods Sold
If you sell products, enter the amount from Line 42 (Part III, which we’ll cover below). Service businesses enter zero.
Line 5: Gross Profit
Line 3 minus Line 4. This is your income after cost of goods sold.
Line 6: Other Income
Enter business income not included in Line 1, such as:
- Interest on business accounts
- State or local tax refunds for business taxes
- Credit card rewards earned from business spending
- Scrap sales
Line 7: Gross Income
Line 5 plus Line 6. This is your total gross income before expenses.
Part II: Expenses (Lines 8-27)
This is where you reduce your taxable income. Every legitimate business expense belongs somewhere in this section.
Line 8: Advertising
Marketing and promotional expenses:
- Online advertising (Google Ads, Facebook, LinkedIn)
- Print advertising
- Business cards
- Website costs (hosting, design)
- Promotional materials
- Trade show expenses
Line 9: Car and Truck Expenses
Vehicle expenses for business use. You have two options:
Standard mileage rate: 72.5 cents per mile for 2026. Multiply business miles by the rate.
Actual expenses: Calculate total vehicle costs (gas, insurance, repairs, depreciation) and multiply by business use percentage.
You must choose one method consistently for each vehicle. If you claim Line 9, complete Part IV.
Line 10: Commissions and Fees
Payments to non-employees for services that generated income:
- Referral fees paid to others
- Agent or broker commissions
- Platform fees (Etsy, Amazon, Fiverr)
- Payment processing fees (Stripe, Square, PayPal)
Line 11: Contract Labor
Payments to independent contractors who performed services for your business. You should have issued 1099-NECs for payments of $600 or more per contractor.
Note: This is different from Line 10 (commissions). Contract labor is for services that helped operate your business, not for generating specific sales.
Line 12: Depletion
Only for businesses extracting natural resources. Most businesses skip this.
Line 13: Depreciation and Section 179
Equipment, furniture, computers, and other business assets you’re depreciating or expensing under Section 179.
Complete Form 4562 to calculate depreciation. Enter the total from that form here.
Common assets:
- Computers and electronics
- Office furniture
- Equipment and machinery
- Vehicles (with limitations)
Line 14: Employee Benefit Programs
Benefits you provided to employees (not yourself):
- Health insurance premiums
- Life insurance
- Dependent care assistance
- Other qualified benefit programs
Note: Your own health insurance is deducted elsewhere (Schedule 1, Line 17 as an adjustment to income).
Line 15: Insurance (Other Than Health)
Business insurance premiums:
- General liability insurance
- Professional liability/errors & omissions
- Business property insurance
- Business interruption insurance
- Workers’ compensation
Line 16a: Interest (Mortgage)
Business portion of mortgage interest if you own property used for business. This is separate from home office (Line 30).
Line 16b: Interest (Other)
Other business interest expenses:
- Business loan interest
- Business credit card interest
- Vehicle loan interest (if not using standard mileage)
- Equipment financing interest
Line 17: Legal and Professional Services
Professional fees for business services:
- Attorney fees
- CPA and accountant fees
- Bookkeeping services
- Consulting fees
- Professional dues
Line 18: Office Expense
Supplies and small office items:
- Office supplies (paper, pens, etc.)
- Postage and shipping
- Small equipment under $2,500 (can expense directly)
- Cleaning supplies
Line 19: Pension and Profit-Sharing Plans
Contributions to retirement plans for employees. Your own SEP-IRA or Solo 401(k) contributions are deducted on Schedule 1, not here.
Line 20a: Rent or Lease (Vehicles, Machinery, Equipment)
Lease payments for business vehicles and equipment. If using standard mileage for vehicles, don’t include the vehicle lease here.
Line 20b: Rent or Lease (Other Business Property)
Office rent, coworking space, storage units, or other rented property for business use.
Line 21: Repairs and Maintenance
Costs to maintain business property and equipment:
- Equipment repairs
- Computer repairs
- Vehicle repairs (if using actual expense method)
- Property maintenance (if you own business property)
Line 22: Supplies
Materials and supplies consumed in your business that aren’t inventory. For service businesses, this might include:
- Project materials
- Cleaning supplies
- Safety equipment
- Small tools
Line 23: Taxes and Licenses
Business-related taxes and license fees:
- Business licenses
- State and local taxes on business operations
- Employer portion of payroll taxes (if you have employees)
- Property tax on business assets
Note: Do NOT include self-employment tax here.
Line 24a: Travel
Travel expenses when away from home for business:
- Airfare
- Hotels
- Rental cars
- Taxi and rideshare
- Parking and tolls
“Away from home” means overnight or long enough to require rest.
Line 24b: Deductible Meals
Business meals at 50% (current rules). Include:
- Meals with clients or prospects
- Meals while traveling for business
- Meals at business conferences
Line 25: Utilities
If you have a business location separate from home:
- Electric
- Gas
- Water
- Phone lines
Home utilities are claimed through the home office deduction (Line 30), not here.
Line 26: Wages
Wages paid to employees (not contractors). Report gross wages before any withholding.
Line 27a: Other Expenses
Total of all other expenses not listed above. Itemize these on Part V (Page 2).
Common “other expenses”:
- Bank fees
- Business subscriptions and memberships
- Education and training
- Software subscriptions
- Phone and internet (business portion)
- Uniform costs
- Bad debts (if accrual basis)
Line 27b: Reserved for future use
Leave blank.
Line 28: Total Expenses
Add Lines 8 through 27a.
Line 29: Tentative Profit or Loss
Line 7 (Gross Income) minus Line 28 (Total Expenses).
Line 30: Business Use of Home
If you have a qualifying home office, enter the deduction here.
Simplified method: Square footage × $5, maximum 300 sq ft ($1,500)
Regular method: Complete Form 8829 and enter the result
Line 31: Net Profit or Loss
Line 29 minus Line 30. This is your bottom line.
If positive: You have a profit. This amount goes to Schedule 1 and is subject to both income tax and self-employment tax.
If negative: You have a loss. This reduces your other income (like W-2 wages) on your tax return, subject to limitations.
Part III: Cost of Goods Sold (Lines 33-42)
Service businesses skip this entire section. It only applies if you:
- Manufacture products
- Buy products for resale
- Sell products you create
Line 33: Inventory Method
Check the method you use:
- Cost – Most common, what you paid for inventory
- Lower of cost or market – Conservative, rarely used
- Other – Specify if using something else
Lines 35-42: Inventory Calculation
The formula is: Beginning Inventory + Purchases + Labor + Materials + Other Costs – Ending Inventory = Cost of Goods Sold
This requires tracking inventory throughout the year.
Part IV: Information on Your Vehicle (Lines 43-47)
Required if you claim vehicle expenses on Line 9.
Line 43: When Placed in Service
The date you started using the vehicle for business.
Line 44: Business vs. Personal Miles
Report total miles, business miles, commuting miles, and other miles. These should add up to total miles.
Line 45: Vehicle Available for Personal Use?
Answer Yes or No. If yes, you need to track business vs. personal use carefully.
Line 46: Another Vehicle Available?
If you have another personal vehicle, answer Yes. This supports that business use of the claimed vehicle is legitimate.
Line 47: Evidence to Support Deduction?
Do you have documentation (mileage log, receipts)? Answer Yes. If you answer No, your deduction could be challenged.
Part V: Other Expenses (Line 48)
Itemize expenses reported on Line 27a. List each expense type and amount.
Common items for Part V:
- Software subscriptions: $1,200
- Professional memberships: $450
- Education/training: $800
- Bank fees: $250
- Internet (business %): $600
Filing Tips and Common Mistakes
Mistake 1: Missing Income
The IRS receives copies of your 1099s. If you don’t report all income, you’ll receive a notice. Include all income even without a 1099.
Mistake 2: Personal Expenses as Business Expenses
The IRS looks for personal expenses disguised as business expenses. Meals with friends, personal travel, and clothing (unless true uniforms) don’t qualify.
Mistake 3: No Documentation
“I know I spent about $500 on supplies” doesn’t survive an audit. Keep receipts or at minimum bank/card statements with notes about business purpose.
Mistake 4: Mileage Without a Log
Vehicle deductions require records. Date, destination, business purpose, miles. Apps make this easy.
Mistake 5: Wrong Accounting Method
Most sole proprietors use cash basis (report income when received, expenses when paid). Accrual basis is complex. Don’t mix methods.
What Happens After Schedule C
Your Schedule C profit or loss flows to:
Schedule 1, Line 3: Business income/loss
Schedule SE: Self-employment tax calculation (if profit exceeds $400)
Form 1040: Total income for the year
If your profit exceeds $400, you’ll owe self-employment tax (15.3% on 92.35% of net earnings, up to Social Security limits).
Frequently Asked Questions
Do I need an EIN to file Schedule C?
No. You can use your Social Security Number. However, getting an EIN is free and protects your SSN on invoices and W-9s.
Can I file Schedule C if I have a regular job?
Yes. Self-employment income is in addition to W-2 income. You’ll file Schedule C along with your regular Form 1040.
What if I have multiple businesses?
File a separate Schedule C for each business activity. Each business should have its own records.
What’s the deadline?
Schedule C is due with your Form 1040: April 15 (or October 15 with extension). Estimated taxes are due quarterly.
Can I e-file Schedule C?
Yes. All major tax software supports Schedule C. The form transmits with your Form 1040.
Next Steps
Schedule C is the foundation of your tax return as a sole proprietor. Getting it right means capturing all legitimate deductions while accurately reporting income.
If your situation involves significant income, multiple revenue streams, or you’re unsure about any aspect of the form, professional preparation ensures accuracy and often finds deductions you’d miss.
Schedule a consultation to ensure your Schedule C is complete and optimized.