Schedule C (Form 1040) is filed by anyone who runs an unincorporated business or practices a profession on their own account, which the IRS groups into three categories: sole proprietors, single-member LLCs that have not elected corporate taxation, and statutory employees whose W-2 has box 13 checked.1Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) If your net earnings from that work reach $400, filing Schedule C also triggers self-employment tax.2Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
Sole Proprietors
The largest group of Schedule C filers is sole proprietors: individuals who earn money from a trade or profession by themselves without operating through a corporation or partnership. You do not need to register anything with a state to be one. Freelancers, independent contractors, and gig workers are sole proprietors for tax purposes as long as they are not working through another entity.1Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship)
Single-Member LLCs
A single-member LLC that has not elected to be taxed as a corporation files Schedule C the same way a sole proprietor does. The IRS calls these “disregarded entities,” meaning the business and the owner are one taxpaying unit for income tax purposes.3Internal Revenue Service. Single Member Limited Liability Companies If you want your single-member LLC taxed as a corporation, you have to file Form 8832 to make that election.4Internal Revenue Service. About Form 8832, Entity Classification Election A married couple that jointly owns an LLC in a community property state can also qualify to file as a disregarded entity rather than as a partnership.
Multi-member LLCs that have not made a corporate election do not use Schedule C. Neither do S corporations or C corporations, even those owned by a single person.
Statutory Employees
A narrow group of workers file Schedule C despite technically working for someone else. You are a statutory employee only if your W-2 has the “Statutory employee” box in box 13 checked. The IRS recognizes four categories:5Internal Revenue Service. Statutory Employees
- Commission drivers who distribute beverages (other than milk), meat, produce, or bakery products, or who pick up and deliver laundry or dry cleaning
- Full-time life insurance agents whose main work is selling life insurance or annuity contracts, primarily for one company
- Home workers who work at home on materials supplied by an employer and return the finished product
- Full-time traveling salespeople who turn in orders from wholesalers, retailers, or similar businesses on behalf of their employer
Statutory employees can deduct their work-related expenses on Schedule C, which regular W-2 employees cannot do.
When an Activity Counts as a Business
Earning money on the side does not automatically make you a Schedule C filer. The IRS requires that your primary purpose is earning income or profit and that you engage in the work with regularity and continuity.1Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) Occasional odd jobs or garage sales do not qualify.
When the IRS looks at whether an activity is a business or a hobby, it weighs factors like whether you keep business-like records, whether you depend on the income, how much time and effort you invest, and your history of profits and losses. As a benchmark, an activity that produces a profit in at least three out of five consecutive tax years (two out of seven for horse breeding, training, or racing) is presumed to be for-profit.6Office of the Law Revision Counsel. 26 USC 183 – Activities Not Engaged in for Profit Falling short does not automatically mean your work is a hobby, but it shifts the burden to you to show a real profit motive.
The distinction matters because hobby income is still taxable, but hobby expenses cannot be deducted on Schedule C. Treating a hobby as a business to generate losses that offset wages is something the IRS actively targets.
What Comes With Filing Schedule C
Self-Employment Tax
If your net earnings from self-employment reach $400, you also file Schedule SE and pay self-employment tax on top of income tax.2Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) The combined rate is 15.3 percent: 12.4 percent for Social Security and 2.9 percent for Medicare. You do not pay the tax on your full net profit; you first multiply net earnings by 92.35 percent, which mirrors the way employers calculate their share.7Internal Revenue Service. Topic No. 554, Self-Employment Tax
The Social Security portion applies only to earnings up to $184,500 for 2026.8Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet There is no cap on the Medicare portion, and an additional 0.9 percent Medicare tax applies to self-employment income above $200,000 for single filers ($250,000 for married filing jointly). You can deduct half of your self-employment tax on Schedule 1 when calculating your adjusted gross income, which lowers your income tax but not your self-employment tax itself.7Internal Revenue Service. Topic No. 554, Self-Employment Tax
Quarterly Estimated Payments
No employer is withholding taxes from your business income, so you are generally expected to pay as you go using Form 1040-ES. For tax year 2026, the four deadlines are April 15, 2026; June 15, 2026; September 15, 2026; and January 15, 2027.9Internal Revenue Service. Publication 509 (2025), Tax Calendars
To avoid an underpayment penalty, your total estimated payments plus any other withholding must equal at least the smaller of 90 percent of your 2026 tax or 100 percent of the tax shown on your 2025 return. If your 2025 adjusted gross income exceeded $150,000 ($75,000 if married filing separately), the prior-year safe harbor rises to 110 percent.10Internal Revenue Service. Form 1040-ES (2026), Estimated Tax for Individuals
Qualified Business Income Deduction
Schedule C filers can generally claim the qualified business income deduction under Section 199A, which allows a deduction of up to 20 percent of qualified business income. It is taken on your personal return, not on Schedule C itself.11Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income If your total taxable income for 2026 is below $201,750 ($403,500 for married filing jointly), you generally qualify for the full deduction. Above those thresholds, it phases out and becomes subject to caps based on W-2 wages paid or business property owned, with the phase-out complete at $276,750 ($553,500 joint).
Service-based businesses face stricter rules. If you work in health care, law, accounting, consulting, financial services, performing arts, or athletics, the IRS classifies your business as a “specified service trade or business.”12eCFR. 26 CFR 1.199A-5 – Specified Service Trades or Businesses and the Trade or Business of Performing Services as an Employee That classification is irrelevant below the income thresholds, but above them the deduction phases out entirely. The QBI deduction is currently set to expire after 2025 unless extended, so check current IRS guidance before relying on it for a 2026 return.
Business Losses
If your expenses exceed your income, you report a net loss on Line 31, and it generally flows through to your personal return to offset other income. For 2026, the excess business loss limitation caps how much of a net business loss you can use against non-business income at $256,000 ($512,000 for joint filers). Anything beyond becomes a net operating loss you carry forward, and a carried-forward NOL can offset only up to 80 percent of taxable income in any given year.
How and When to File
Schedule C is attached to your Form 1040. The filing deadline for most taxpayers is April 15. Form 4868 gives you an automatic six-month extension to file, but any tax you owe is still due on April 15.13Internal Revenue Service. Application for Automatic Extension of Time to File U.S. Individual Income Tax Return Your net profit or loss from Line 31 transfers to Schedule 1 (Form 1040), where it combines with your other income.14Internal Revenue Service. Instructions for Schedule C (Form 1040) If net self-employment earnings hit $400, Schedule SE goes in the same envelope.
Late filing runs 5 percent of unpaid tax per month up to 25 percent; late payment runs 0.5 percent per month, also capped at 25 percent.15Internal Revenue Service. Failure to File Penalty Filing on time even when you cannot pay avoids the more expensive of the two, and the IRS offers installment agreements if you owe more than you can pay at once.