Who Needs to File 1040 Schedule C?

Many professional athletes, as well as truckers, writers, and others, need to file 1040 Schedule C. Photo: Jim Epler, Flickr

The 1040 Schedule C tax form is a required part of life for anyone who is the sole proprietor of a business. Those who spend their lives as salaried workers may never need to think about or use the 1040 Schedule C, but millions of self-employed people will need to be quite familiar with it.

The basics

The 1040 Schedule C form is used by sole proprietors of a business to report the annual income or loss of their business. 

The form itself isn't terribly complicated. On it, you list the proprietor's name, address, and Social Security number, as well as the nature and name of the business. You'll also have to include the appropriate North American Industry Classification System, or NAICS, code for the type of business, which can be found on a list included in the form's instructions. For example, if you are an "independent artist, writer or performer," your NAICS code is 711510. It's important to record this required code as leaving it blank can draw the attention of the IRS, increasing the chance of an audit and perhaps slowing down your return's processing.

You also use 1040 Schedule C to list your income and expenses. As an example, a writer might include the total payments received during the year for writing services performed. His or her expenses might include office expenses, postage costs, subscriptions used for work, research materials, accounting services, telephone and Internet service, and various supplies. If you use part of your home for your business, you may be able to subtract home-office expenses, and the cost of business use of your vehicle can be deducted, too. Subtracting your expenses from your income gives you your business profit or loss. This number gets recorded on the main tax form, Form 1040, and also on Schedule SE, which is used to calculate your self-employment tax.

Photographers are typically independent contractors. Photo: Sophie Asia, Flickr

Who needs Schedule C?

Let's take a closer look at who needs  to file 1040 Schedule C and define some terms along the way. Basically, if you're self-employed, you will most likely have to use Schedule C. The IRS explains that, in its eyes, "You are self-employed if you carry on a trade or business as a sole proprietor or an independent contractor."

By "trade or business," it refers to any activity you are engaged in for the purpose of making money – even if you don't actually succeed at turning a profit and even if you are only engaged in the activity part-time. (So you might be a salaried employee at a company and also need to file Schedule C if you make money on the side in some way.)

A sole proprietor owns an unincorporated business without any co-owners. Such a person needs to use Schedule C. The IRS adds, "However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation."

An independent contractor, meanwhile, can be a doctor, nurse, lawyer, accountant, landscaper, lifeguard, hair stylist, professional athlete, truck driver, writer, professor, massage therapist, construction worker, or photographer, among many other possibilities. It's important to be careful with this designation, though, because these days many companies are using the services of people they classify as independent contractors, when a close examination of the situation might lead the IRS to classify them as employees. If the person or company paying you can dictate the result of your work but not the method you use to produce the work, then you're an independent contractor. So if you're expected to be at a workstation from 9 to 5 and to use a company's computer to write a report, you're likely an employee. If you just have to deliver the report and are expected to prepare it on your own time and with your own equipment, you're likely a contractor. 

Finally, a last major category of worker that needs to file Schedule C is the "statutory employee." A statutory employee is technically an independent contractor, but has work conditions that permit him or her to be treated as an employee for certain tax purposes. (The IRS offers more explanation and some key examples, such as life insurance agents, certain delivery people, and traveling salespeople.) Statutory employees are expected to file 1040 Schedule C.

Hair stylists and barbers will typically need to file Schedule C. Photo: Dale, Flickr

The Schedule C-EZ

It's worth noting that some people who have to file Schedule C might be able to file the simplified version of it, Schedule C-EZ, instead. You'll find more rules here, but in general, to qualify, you need to meet a lot of criteria, such as not having more than $5,000 in expenses, not taking any home-office deduction, not having any inventory throughout the year, and not reporting a loss.

The Schedule SE

Finally, know that self-employed folks have more than just Schedule C or C-EZ to deal with. If you earn more than $400 in net profit, you will also have to file Schedule SE, which calculates your self-employment tax.

All this might make it seem like it's prohibitively complicated to be self-employed. While it does involve more tax-prep work than if you're a simple, salaried worker, it can still be worth it. Many self-employed folks opt to hire tax preparers to deal with the paperwork.