Schedule C: Profit or Loss From Business

Schedule C is where you report your business's gross income and deductible expenses to figure out your net profit or loss. This net amount is then carried to your Form 1040.

Common Income Sources:

• Payments received from clients for services or goods.
• Form 1099-NEC (for nonemployee compensation).
• Form 1099-K (for payments received through third-party payment networks).
• Cash, checks, or electronic payments received directly.

Common Business Expenses:

You can deduct ordinary and necessary expenses for your business. Examples include:

• Advertising and marketing
• Supplies
• Business use of your home (calculate using Form 8829)
• Business vehicle expenses (Standard Mileage Rate or Actual Expenses)
• Insurance (Business, Health Insurance Premiums if qualified)
• Interest (on business loans)
• Legal and professional services
• Office expenses
• Rent or lease expenses
• Repairs and maintenance
• Travel, meals, and entertainment (subject to limits, e.g., 50% for most meals)
• Utilities and telephone
• Depreciation (for business assets like equipment)

Proper record-keeping is essential to support your income and expense figures.

Schedule SE: Self-Employment Tax

Self-employment tax is how you pay Social Security and Medicare taxes when you work for yourself. It is calculated on your net earnings from self-employment.

How SE Tax is Calculated:

SE tax is generally 15.3% on your *net earnings* up to an annual Social Security earnings limit, plus 2.9% on all net earnings for Medicare tax. However, the calculation starts with your Net Profit from Schedule C. You multiply your Net Profit by 92.35% to get your net earnings subject to SE tax.

For the 2025 tax year, the Social Security earnings limit is $174,000 (this limit can change annually). The 15.3% rate applies up to this limit, and the 2.9% Medicare rate applies to all net earnings.

You can deduct one-half of your self-employment tax in calculating your Adjusted Gross Income (AGI) on Form 1040. This is an important deduction!

Form 1040 & Other Deductions

Your Net Profit (or Loss) from Schedule C is reported on Line 3 of Schedule 1 (Form 1040), which feeds into your main Form 1040. The deduction for one-half of your Self-Employment tax is also reported on Schedule 1, Line 15.

Your business income contributes to your overall Adjusted Gross Income (AGI). Your income tax is then calculated based on your AGI, deductions (Standard or Itemized), and tax brackets.

Other Potential Deductions & Considerations for Sole Proprietors:

• Qualified Business Income (QBI) Deduction: Allows eligible self-employed individuals to deduct up to 20% of their qualified business income. This is a complex calculation with income limitations. (This tool does NOT calculate the QBI deduction).
• Deductible Health Insurance Premiums: You may be able to deduct premiums paid for health insurance for yourself, your spouse, and your dependents.
• Retirement Plan Contributions: Contributions to plans like SEP IRAs, Solo 401(k)s, or SIMPLE IRAs are often tax-deductible.
• Student Loan Interest Deduction
• Itemized vs. Standard Deduction: You'll choose whichever results in a larger deduction. Business expenses on Schedule C are separate from these; they reduce your business profit before it hits your Form 1040.

Consulting a tax professional is highly recommended to ensure you claim all eligible deductions and credits.

Estimated Taxes (Form 1040-ES)

The U.S. tax system is "pay-as-you-go." If you expect to owe at least $1,000 in taxes for the year (including income tax and self-employment tax), you generally need to make estimated tax payments throughout the year.

Estimated taxes are paid quarterly to the IRS using Form 1040-ES or through online payment methods.

Standard Quarterly Due Dates:

• Payment 1: April 15
• Payment 2: June 15
• Payment 3: September 15
• Payment 4: January 15 of the following year

If a due date falls on a weekend or holiday, the date is moved to the next business day. Failing to pay enough tax throughout the year (either through withholding or estimated payments) can result in penalties.

Figuring your estimated tax involves estimating your expected gross income, taxable income, deductions, credits, and self-employment tax for the year. Using tax software or working with a professional can help you calculate your required quarterly payments accurately.

Your Sole Proprietor Tax Filing Checklist

Use this as a high-level guide for the steps involved in filing your taxes as a Sole Proprietor. Mark items as you complete them. Your progress is saved in your browser.