Schedule C is the federal tax form where sole proprietors and single-member LLCs report their business income and expenses. Your net Schedule C income is the number that drives your self-employment tax and income tax bills — making Schedule C bookkeeping one of the highest-return financial activities for self-employed individuals.
What Goes on Schedule C
Schedule C reports all business income and business expenses for your sole proprietorship or single-member LLC. Income includes all revenue from your business: payments from clients, sales of products, freelance income reported on 1099-NECs, and any other business receipts — even cash payments. Expenses include all ordinary and necessary costs of running your business.
Key Deductible Expenses to Track All Year
Advertising and marketing costs are fully deductible. This includes website costs, Google or Facebook ads, business cards, and promotional materials. Home office deduction allows you to deduct a portion of your home expenses based on the percentage of your home used exclusively and regularly for business. Track your home's square footage, utility bills, rent or mortgage interest, and homeowner's/renter's insurance.
Vehicle expenses are some of the largest deductions for sole proprietors. You can deduct either the standard mileage rate (70 cents per mile in 2025) or actual vehicle expenses (gas, insurance, registration, depreciation) based on business-use percentage. The standard mileage method requires a mileage log; the actual expense method requires receipts for all vehicle costs.
Health insurance premiums paid for yourself and your family are deductible as an adjustment to income (not on Schedule C directly, but on Form 1040 Schedule 1). This is a significant deduction many self-employed individuals miss.
Retirement contributions: As a sole proprietor, you can contribute to a SEP-IRA (up to 25% of net self-employment income), a Solo 401(k) (employee contributions up to $23,000 plus employer contributions), or a SIMPLE IRA. These contributions reduce both income tax and are calculated based on your Schedule C net income.
The Qualified Business Income (QBI) Deduction
For tax years 2018-2025, sole proprietors may qualify for the QBI deduction — up to 20% of qualified business income. This deduction phases out at higher income levels and is more limited for certain service businesses (law, accounting, consulting, financial services). Your bookkeeper should ensure your Schedule C income is accurately calculated, as the QBI deduction is directly tied to it.
Self-Employment Tax and the Deduction
Net Schedule C income is subject to self-employment tax at 15.3% on the first $168,600 (2025) and 2.9% above that. However, you can deduct 50% of self-employment tax paid as an adjustment to income — make sure your tax preparer is taking this deduction. For a business with $80,000 net income, this deduction saves approximately $565 in income tax.
Quarterly Estimated Tax Payments
As a sole proprietor, no employer is withholding taxes from your income. You must pay estimated taxes quarterly — typically due April 15, June 15, September 15, and January 15. The safe harbor rule: if you pay 100% of last year's tax liability (or 110% if last year's AGI exceeded $150,000) in equal quarterly installments, you avoid underpayment penalties. Your bookkeeper can help you calculate estimated payments based on year-to-date income.
Record Keeping Requirements
The IRS requires you to keep records supporting your Schedule C for at least 3 years after the filing date (6 years if you underreported income by more than 25%). Keep: bank statements, credit card statements, receipts for all expenses over $75, mileage logs, home office measurements and utility bills, and any contracts or agreements. Digital records are fully acceptable — scan receipts immediately and store them in cloud storage organized by tax year.
Minnesota Schedule C Considerations
Minnesota taxes sole proprietors on their federal adjusted gross income with certain state modifications. Minnesota does not conform to all federal deductions, so work with a MN tax professional to understand your state-specific obligations. MN self-employment income is reported on your MN Form M1.