Get to know the authorGiven the flexibility and autonomy it offers, it’s no wonder that so many expats are small business owners, freelancers, independent contractors, or otherwise self-employed. But even though self-employment comes with benefits, it can complicate your tax obligations. Those with self-employment income are often subject to additional filing requirements, like Schedule C.
While it might all seem overwhelming, we’re here to break it down for you. As a dedicated tax firm for Americans abroad, we’ve helped plenty of US expats navigate the finer points of tax returns for self-employed individuals. Below, we’ll go over one of the most critical components — Schedule C — in detail.
Read on to learn how to accurately report your self-employment income and maximize business deductions with Schedule C.
What is IRS Form 1040 Schedule C?
Schedule C: Profit or Loss From Business is a supplement to Form 1040 used to report self-employment income and document qualified expenses.
Filling out this form completely and accurately is critical — mistakes can potentially lead to penalties, audits, and unduly high tax bills. Completing it carefully and correctly, on the other hand, can help minimize your tax liability and ensure you remain in good standing with the Internal Revenue Service (IRS).
Who needs to file Schedule C?
The Schedule C tax form is for those who earn self-employment income. This includes:
- Sole proprietorships: Individuals who run their own businesses but have not officially registered as such
- Single-member LLCs: Individuals who have registered their self-run businesses as a Limited Liability Company (LLC) and are the sole owners
- Note: Individuals who have registered their business as an S Corp or C Corp do not need to file Schedule C, even if they are sole owners
- Freelancers, independent contractors, & gig workers: Anyone who works for an organization without an official employment contract
- Tip: Anyone who earns more than $600 from a US-registered company receives a 1099-NEC, while full- and part-time employees for US-registered companies receive W-2s
- Those with a side hustle: Anyone who runs a business, or does business, outside of a traditional worker-employer relationship
Note:
Those who earn more than $400 in self-employment income must also file Schedule SE. This form will help you calculate self-employment taxes (aka Social Security and Medicare taxes).
How to File Schedule C, Step by Step
At the top of the document, you’ll fill out basic information like your name, Social Security Number (SSN), business name and address, and a few yes/no questions about your business.
Part I: Income
In this section, you’ll enter information about your income like gross receipts/sales, returns and allowances, the cost of goods sold (more on that in a bit), and other income. As you go through line by line, you’ll calculate your gross profit and gross income.
Keep in mind that you need to include all the self-employment income you’ve received, even if it didn’t appear on a 1099-NEC form. This might include payments for services rendered, product sales, commission, or tips, to name just a few. Maintaining detailed business records throughout the year will make your year-end tax filing easier.
Many self-employed individuals do so with bookkeeping software like QuickBooks, Xero, FreshBooks, or similar platforms. These tools automatically record transactions, which saves time and reduces the likelihood of errors compared to manual tracking. That said, it’s still a good idea to check in from time to time to ensure nothing slips through the cracks.
If your income is in any other currency than United States dollars, you will need to convert it into USD using a reliable converter. Wise offers a great online currency converter that takes historical exchange rates into account, allowing you to look up the exact value of a payment on the date you received it.
Part II: Expenses
In this section, you’ll enter any ordinary and necessary business-related expenses you’ve incurred.
Again, keeping track of your business expenses throughout the year will make it easier to fill out the Schedule C form come tax season. While bookkeeping software typically tracks expenses, it’s still best to hold onto copies of any receipts or invoices you receive for at least three years.
Most of the expense categories are fairly straightforward, but it’s worth making a few call-outs a in particular:
- You typically can’t immediately deduct the cost of assets and equipment, although you can deduct them over time as they depreciate
- To calculate your car and truck deduction, you can choose one of two methods (whichever is larger):
- Standard mileage rate: 65.5 cents per mile driven for business-related purposes as of 2023, plus parking fees and tolls if applicable
- Actual expenses: Deduct actual vehicle expenses incurred (gas, lease payments, insurance, maintenance, etc.) in proportion to how often you use the vehicle for business. For example, if you spend $1,200 on vehicle-related expenses and use the vehicle for business 20% of the time, you could deduct $240
- You can only claim home office expenses for spaces in your home that you use exclusively and regularly for business. Again, to calculate the deduction, you’ll use one of two methods:
- Simplified option: For tax year 2023, you can receive $5 per square foot of your home used for business purposes, up to 300 square feet (i.e. $1,500)
- Regular method: Deduct actual home expenses incurred (rent/mortgage, utilities, property taxes, homeowners insurance, etc.) in proportion to the square footage of your home office versus the rest of your home. If your total home-related expenses are $20,000 and your home office takes up 150 square feet in a 1,000 square-foot home (i.e. 15%), you could claim $3,000
- You can only deduct the cost of insurance policies held in the business’s name — not in your own. A few types of insurance commonly held in businesses’ names include liability insurance, business interruption insurance, and commercial property insurance, among others
Note:
While you can claim business expenses, you can’t claim personal expenses — so keep careful track of which category costs fall into. The best way to avoid confusing personal expenses and business expenses is usually by opening a dedicated business bank account.
Part III: Cost of Goods Sold
If your business involves producing or selling physical goods, you’ll use this section to report how much it cost to produce or purchase those goods that were sold. You can subtract these costs from your business income, which helps lower your overall taxable income.
To get your cost of goods sold (COGS), you generally:
- Take the value of your inventory at the beginning of the year, then
- Add the purchases you’ve made and costs you’ve incurred throughout the year (e.g. materials, labor, manufacturing costs), then
- Subtract the value of your inventory at the end of the year
This section walks you through that calculation step by step.
Part IV: Information on Your Vehicle
If you a) claimed car or truck expenses on line 9 of Part II and b) don’t need to file Form 4562: Depreciation and Amortization, you’ll need to complete this section.
Part IV requests some basic information on your vehicle, like when you placed it in service (meaning, started to use it for business purposes), how many miles you drove total, and a series of yes/no questions related to personal use and expense evidence.
Note:
To more accurately track your business-related vehicle use, consider using a mileage-tracking app like MileIQ or TripLog.
Part V: Other Expenses
In this section, you’ll list any expenses you’ve incurred that didn’t fit into any of the previously mentioned categories. The expense description will go in the left column, while the cost will go in the right column.
A few expenses that might fall into this category include:
- Dues for professional organizations or trade associations
- Bank fees
- Training and education costs
- Software subscriptions
- Subscriptions to industry-related publications
- Internet and phone bills
- Details on depreciation for assets and equipment
- Business travel costs (e.g. flights, accommodation, meals, etc.)
For additional information on anything mentioned above, don’t hesitate to reference the Schedule C instructions.
Get expert help with Schedule C & beyond
Schedule C is critical for any US expats with self-employment income. Not only does it keep you in compliance with the IRS — it also helps you maximize your deductions and reduce your taxable income. To accurately complete Schedule C, you’ll need to closely track your income and expenses throughout the year.
If you’re self-employed, odds are you’re already busy enough running your business on a day-to-day basis. Taking care of your tax and reporting obligations on top of that can feel overwhelming — especially when you’re dealing with the complexities of US expat taxes.
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