Introduction
There is no separate "Form 1040 C." The official name is Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship). It reports income and expenses from a sole proprietorship or other qualifying business activity.
This guide is written for Australian-based freelancers, sole traders, founders, and foreign-owned businesses that may have US federal filing obligations. Schedule C is separate from any Australian tax return. Filing one does not replace or satisfy the other.
We cover eligibility, records, the Tax Year 2026 form, Parts I to V, how the result flows to Form 1040 and Schedule SE, common mistakes, and when to get advice. Income earned from 1 January to 31 December 2026 is reported in 2027.
This article is general information, not tax advice. Confirm your position with a qualified adviser.
Key Takeaways
- Schedule C generally suits eligible sole proprietors and single-member LLCs without a corporate tax election.
- Report all business income, not only amounts shown on Forms 1099.
- Keep cost of goods sold apart from operating expenses, and document every deduction.
- Net profit flows to Form 1040 and can trigger self-employment tax.
What Is Schedule C (Form 1040) and Who Needs to File It?
Schedule C (Form 1040) is the IRS form used to report profit or loss from a sole proprietorship or similar business. It calculates gross receipts, returns and allowances, cost of goods sold (COGS) where relevant, operating expenses, and the resulting net profit or loss.
Who may use it
- Sole proprietors, who own an unincorporated business alone
- Independent contractors, freelancers, and gig workers
- Owners of single-member LLCs, which are disregarded for income tax unless Form 8832 elects corporate treatment
Hobby activity is different. The IRS weighs nine factors, including businesslike records, profit intent, time and effort, and history of losses. No single factor decides it.
Separate businesses generally need separate Schedules C.
Cross-border clarification for Australian readers
Having an Australian business, US customers, or US payments does not automatically make Schedule C the right form. Several facts decide it:
- US citizens and resident aliens report worldwide income on Form 1040
- Nonresidents use Form 1040-NR where required, and Schedule C can attach to it
- Performing services in the US generally creates a US trade or business
- The US-Australia treaty may change the outcome, for example through its permanent establishment and 183-day tests for independent services
Verify residency, income source, entity classification, and treaty position with a qualified adviser before choosing a form.
Confirm the form version
The 2026 Schedule C is published, but the 2026 instructions are still in draft and not for filing. The IRS hub may still link 2025 instructions. Check the IRS Schedule C page for the current form and instructions before filing.
What to Gather Before Completing Schedule C
Business and taxpayer details
- Legal name and taxpayer identification number
- EIN, if you have one (sole proprietors can generally use an SSN unless they have employees, excise or employment tax filings, or a retirement plan)
- Business address and a description of the principal activity
- Six-digit business activity code (NAICS-based)
- Accounting method: cash (income when received) or accrual (income when earned)
Income records
Pull together invoices, bank deposits, card and cash receipts, payment-processor reports, Forms 1099-NEC, and Forms 1099-K.
Do not copy 1099 totals blindly. For 2026, the 1099-NEC payer threshold is $2,000, and the 1099-K threshold for third-party networks is over $20,000 and over 200 transactions. Forms can still arrive below those levels, and the absence of a form does not remove the duty to report. Reconcile every form against your books.
Expense and asset records
- Receipts, invoices, and bank and card statements
- Contractor documentation
- Mileage logs showing date, destination, purpose, and miles, recorded at or near the time
- Home-office measurements
- Asset purchase and depreciation records
- Inventory counts and COGS support
Quick clean-up
- Separate personal and business transactions
- Categorise expenses consistently
- Reconcile bank, card, and payment-platform accounts
- Review prior-year figures
- Identify related forms you may need
Keep records generally for three years, or six if omitted income exceeds 25% of reported gross income.
How to Complete Schedule C Parts I and II: Income and Business Expenses
Header lines A–J
Lines A to J cover your activity, business code, business name, EIN, address, accounting method, material participation, whether you started or acquired the business in 2026, and whether you made payments requiring Forms 1099. Check each field against the current form.
Part I: Income (lines 1 to 7)
- Line 1: gross receipts or sales
- Line 2: returns and allowances
- Line 3: line 1 minus line 2
- Line 4: cost of goods sold (COGS) from Part III, if applicable
- Line 5: gross profit
- Line 6: other income
- Line 7: gross income
Include income with no 1099. Handle refunds, chargebacks, payment-platform adjustments, and sales tax consistently with the instructions.
Part II: Expenses
Part II covers lines 8 to 27, including:
- Advertising, commissions and fees, contract labour
- Insurance (other than health), legal and professional services
- Office expenses, rent, repairs, supplies
- Taxes and licences, travel, meals, utilities, wages
Meals are generally 50% deductible.
Ordinary and necessary costs (avoid double-counting)
Ordinary means common and accepted in your trade. Necessary means helpful and appropriate. Keep these out of Part II:
- Personal expenses and owner draws
- Capital purchases, which generally enter asset basis
- Costs that belong in COGS
Complex claims
Some deductions need extra forms or calculations. Verify current limits before claiming.
- Vehicles: standard mileage or actual expenses
- Depreciation and Section 179: the 2026 Section 179 maximum is $2.56 million, with a phase-out starting at $4.09 million
- Home office: simplified method at $5 per square foot, up to 300 square feet, or the actual method on Form 8829
- Business interest, which has limits and exceptions
After the expense lines and any extra calculations, lines 28 to 31 total your expenses, show tentative profit or loss, apply the home-use deduction, and report net profit or loss. If you show a loss, lines 32a and 32b ask whether all investment is at risk; losses may be limited.
How to Complete Schedule C Parts III, IV, and V
Part III: cost of goods sold
Part III applies if you make, produce, or buy goods for resale. A service-only business may skip it. Eligible small businesses (average receipts of $32 million or less over the prior three years, no tax shelter) may have simpler inventory options.
COGS calculation (lines 35 to 42):
- Start with opening inventory
- Add purchases, less personal withdrawals
- Add direct labour, materials and supplies, and other direct costs
- Subtract closing inventory
The result is COGS, which carries to line 4 in Part I.
Line 33 asks how you value closing inventory: cost, lower of cost or market, or another method. Under US GAAP, FIFO, LIFO, and weighted average are permitted. Tax reporting has its own rules, so confirm the method with your adviser.
Hypothetical example:
- Candle seller: wax, jars, and wicks are COGS; shipping tape and office pens are Part II supplies
- Freelance designer: no inventory, so software subscriptions and contractor fees go in Part II
Figures here are illustrative only.
Part IV: vehicle information
Complete Part IV (lines 43 to 47) when claiming line 9 vehicle costs and you are not required to file Form 4562 for this business. It asks for:
- Date placed in service
- Business, commuting, and other miles
- Whether the vehicle is available for personal use
- Whether you have another vehicle
- Whether you have written evidence
Standard mileage rates for 2026 are 72.5 cents per mile for January to June and 76 cents per mile for July to December. For an owned car, you must choose the standard method in its first business-use year. You cannot claim both mileage and actual operating costs.
Part V: other expenses
Part V itemises ordinary and necessary costs that fit no pre-printed Part II line. The line 48 total carries to line 27b.
Exclude:
- Personal costs
- Capital equipment
- Permanent improvements
- Anything already deducted elsewhere
What Happens After Schedule C Is Complete?
Where the numbers go
Line 31 net profit flows to Schedule 1 (line 3) and Schedule SE (line 2). Schedule 1 totals feed Form 1040. Adjusted gross income is on line 11a of the 2026 draft Form 1040.
Form 4562 (depreciation) and Form 8829 (home office) apply only if you claim those deductions.
Self-employment tax and estimated payments
Self-employment tax is generally 15.3%: 12.4% Social Security plus 2.9% Medicare, applied to 92.35% of net earnings once they reach $400. The 2026 Social Security ceiling is $184,500.
Under the US-Australia totalization agreement, self-employed US citizens living in Australia are generally exempt from US Social Security contributions on that income. Keep a copy of the exemption letter with your records each year. This is separate from income tax.
Estimated payments are generally due 15 April, 15 June, 15 September 2026, and 15 January 2027 if you expect to owe $1,000 or more. Safe harbours are 90% of 2026 tax or 100% of 2025 tax (110% above certain income levels).
Filing and extensions
File electronically through IRS Free File, commercial software, or an approved professional. Paper filing is available where applicable.
- Most calendar-year returns are due 15 April 2027
- Form 4868 extends the filing date to 15 October 2027, not the payment date
- Taxpayers living and principally working abroad get an automatic two months, to 15 June 2027, but interest still runs from April
- Late payment penalty is generally 0.5% of unpaid tax per month, capped at 25%
Final accuracy checklist
- All income included, with 1099 totals reconciled
- No duplicate deductions
- COGS separated from operating expenses
- Personal-use portions allocated
- Mileage logs and inventory records complete
- Accounting method used consistently
- Related forms attached
- Supporting documents retained
Professional support
Records, US reporting, and multi-country operations get complicated fast. VJM Global offers accounting, tax compliance, and cross-border support, including US individual return preparation (Forms 1040 and 1040-NR) by a CPA team trained in US tax law. Confirm the exact scope of services before engaging.
Frequently Asked Questions
Who needs to file Schedule C?
Sole proprietors, single-member LLC owners without a corporate election, freelancers, and contractors typically file. Entity classification, residency, and current IRS rules determine the correct filing position.
What is Schedule C (Form 1040) used for?
It reports business income, expenses, COGS where applicable, and profit or loss. The result is included in your Form 1040 filing.
What do I need to report on Schedule C and where does that income go on Form 1040?
Report gross receipts, returns, COGS, deductible expenses, and net profit or loss. Line 31 flows to Schedule 1 and Schedule SE, then onto Form 1040.
What expenses can I deduct on Schedule C?
Ordinary and necessary costs such as advertising, insurance, professional fees, supplies, and travel. COGS, vehicles, home office, and depreciation have their own rules, and personal costs are not deductible.
How do I pay self-employment tax?
Self-employment tax is calculated on Schedule SE and paid with your return or through estimated payments. Check current rates and any totalization exemption.
What line is adjusted gross income (AGI) on Form 1040?
On the 2026 draft Form 1040, AGI is line 11a, so confirm against the final form. AGI is a broader total, not the same as Schedule C net profit.
