How to Report 1099 Income on Schedule C

Receiving income as an independent contractor or freelancer introduces new tax reporting responsibilities. Clients often issue a Form 1099-NEC to document your nonemployee compensation, and unlike a standard Form W-2, no taxes are withheld from this income, meaning you are responsible for reporting it and paying the associated taxes. The primary mechanism for this is IRS Schedule C, Profit or Loss from Business, which attaches to your personal Form 1040 tax return.

Understanding Your Income Reporting Requirements

If you operate as a sole proprietor, you must report your business’s income and expenses. This applies to independent contractors, freelancers, and individuals with a side business run to make a profit. For tax purposes, you are considered a sole proprietor if you are the only owner of an unincorporated business, which is the simplest structure as the business is not a separate legal entity from the owner.

The primary document detailing your income is Form 1099-NEC, Nonemployee Compensation. Payers must issue this form if they paid you $600 or more for services during the year, and a copy is also sent to the IRS. You might also receive a Form 1099-MISC for other payments like rent or prizes, which are not subject to self-employment tax.

You must report all income you earn, regardless of whether you receive a 1099 form for it. This includes payments under the $600 threshold, cash payments, and transactions made through payment apps.

Information and Documents Needed for Schedule C

Business Information

You will need to gather basic information about your business, including:

• Your business name and address.
• Your Employer Identification Number (EIN) or Social Security Number.
• The six-digit code for your principal business activity from the IRS instructions for Schedule C.

Income Records

Compile all records of your business income for the tax year. This starts with gathering every Form 1099-NEC and Form 1099-MISC you have received. You must also collect records of all other business income, such as summaries from payment applications, bank deposit records, and copies of deposited checks.

Expense Documentation

Organize your expense records into categories that align with those on the form. For office supplies, this would include receipts and credit card statements showing purchases of items like paper and pens. For vehicle expenses, you need a detailed mileage log recording the date, purpose, and miles for each business trip, along with receipts for gas and maintenance. Other common categories include advertising costs, business travel, and insurance premiums, each requiring its own set of supporting documents like invoices and payment confirmations.

A Guide to Completing Schedule C

Part I – Income

Part I of Schedule C is where you report your business’s gross income. On Line 1, “Gross receipts or sales,” you will enter the total of all income your business received during the year. This figure is the sum of all Forms 1099-NEC you received, plus any other income from sales or services for which you did not receive a 1099; you should not subtract any expenses or refunds from this amount.

If you provided refunds to customers for returned goods, you report that amount on Line 2, “Returns and allowances.” The form then guides you to calculate your gross profit. If your business sells physical products, you must complete Part III to determine your cost of goods sold, which is then entered on Line 4. Subtracting the cost of goods sold from your initial income figure gives you your gross profit on Line 5.

Part II – Expenses

In Part II, you list your various business expenses, which are then subtracted from your gross income. The form provides specific lines for common expense categories, for example, Line 8 is for advertising costs, Line 9 is for car and truck expenses, Line 18 is for office expenses, and Line 22 is for supplies.

When claiming car and truck expenses on Line 9, you have two methods: the standard mileage rate or the actual expense method. The standard mileage rate is multiplied by your total business miles. The actual expense method involves totaling all your vehicle-related costs, such as gas, insurance, and repairs, and multiplying that by the percentage of time you used the vehicle for business.

Part III – Cost of Goods Sold

You only need to complete Part III if your business produces, purchases, or sells merchandise. This section calculates the direct costs associated with the goods you sold. The calculation begins with your inventory at the start of the year, adds the cost of purchases and labor, and then subtracts your inventory at the end of the year to arrive at the cost of goods sold on Line 42, which is then carried back to Part I.

Part IV – Information on Your Vehicle

If you claim car and truck expenses, you must provide additional details in Part IV. This section requires you to state when you placed the vehicle in service for business and to provide a breakdown of the total miles driven during the year for business, commuting, and other personal use. If you are required to file Form 4562, Depreciation and Amortization, for your vehicle, you will report this information there instead.

Part V – Other Expenses

Part V is a catch-all section for any ordinary and necessary business expenses that do not fit into the predefined categories in Part II. Here you would list costs such as business-related bank fees or subscriptions to professional journals. You list each type of expense separately and then enter the total on Line 27a, which is then included in your total expense calculation.

Calculating Net Profit and Self-Employment Tax

The final calculation on Schedule C is your net profit or loss on Line 31. This figure is determined by subtracting your total expenses (Line 28) and any expenses for business use of your home (Line 30) from your gross income (Line 7). This net profit or loss represents the taxable income from your business operations for the year.

The net profit or loss from Line 31 is transferred to Schedule 1 of your personal Form 1040. It is then combined with any other income you may have, such as wages from a job or investment income. A profit will increase your total taxable income, while a loss may decrease it.

If your net profit from your business is $400 or more, you are also required to calculate and pay self-employment tax. This is done using Schedule SE, Self-Employment Tax. The net profit from Schedule C’s Line 31 is the starting point for the Schedule SE calculation. This tax covers your Social Security and Medicare contributions, which are not withheld from your 1099 income as they are for employees.

The self-employment tax rate is 15.3% on your net earnings. This rate is composed of a 12.4% Social Security tax and a 2.9% Medicare tax. The Social Security tax only applies up to an annual income limit, which is adjusted for inflation each year, while the 2.9% Medicare tax applies to all of your net self-employment earnings.