Do I need to file a Schedule C? Profit or Loss from a Business
Taxpayers are sometimes unsure whether they need to complete Schedule C, Profit or Loss from a Business. This form is required for many Americans who don't consider themselves "business owners" in the traditional sense. Independent contractors, freelancers, statutory employees, sole proprietors, gig workers, single-member LLC owners, W-2 employees with a "side gig" and those involved in other non-W-2 employee work arrangements must all complete Schedule C.
Some common situations that mean you may need to complete this include:
- If you received a Form 1099-MISC with income reported for the tax filing year
- If you received Form 1099-NEC with income in box 1
- If you received a 1099-K
- If you are a statutory employee
You'll use the information generated on Schedule C to complete Schedule SE (to calculate the self-employment tax you owe) and on whatever version of Form 1040 you're filing. This will help you figure out how much of your self-employment income is taxable. If you are reporting your business income from a 1099-NEC that you have been given and your client paid you through Paypal or Venmo or a similar payment service, be careful and make sure you don’t over or under report your income because you will receive two forms: the 1099-NEC and the 1099-K. Besides reporting income, you'll also be able to claim deductions for the expenses you incurred in earning the money: advertising, transportation expenses, travel, supplies and materials, equipment and other costs related to the business activity that generated the income.
What if I didn't get Form 1099?
Generally speaking, if you received payments in cash, check or electronically for work you did and the person who paid you did not withhold taxes from that money, you must complete this even if you did not receive a Form 1099 for this income.
No self-employment tax is due on amounts below $400. However, you must still report the income. The IRS does not require you to file if your business made no profit and generated no loss during the year.
Business vs. hobby
But what if you're not sure whether the money you earned counts as business income or something else, like income gained through a hobby? The IRS says, "An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity. For example, a sporadic activity, not-for-profit activity, or a hobby does not qualify as a business."
Income generated through a hobby or other non-business activity should be reported on Form 1040, Schedule 1. It's important to note that reporting self-employment income as 'Other Income' on Form 1040 is not an acceptable substitute for completing Schedule C. Doing this fails to address the self-employment taxes owed on the income, which would lead to penalties and interest added to the amount originally owed in self-employment tax.
To read more about taxes on family small businesses, see our article on Husband & Wife Businesses.