Self-Employment Income

• The first Schedule C requirement is to determine whether you even need to file one with the IRS. The IRS treats your income as self-employment income if you operate your own business or work as an independent contractor. An independent contractor is different than an employee insofar as you generally provide services on a temporary basis or for limited purposes. Most importantly, you are an independent contractor if you receive a 1099-MISC at the end of each tax year rather than the W-2 that employees receive. Both business owners and independent contractors must report their net profit on a Schedule C attachment to their tax return in any year it's $400 or more.
  
  

Certain Rental Properties

• You need to file a Schedule C if you actively participate in renting property. If not, you can report the rental income and expenses on a Schedule E. There is no bright-line test for determining whether you actively participate in the rental business; however, if you provide daily services to tenants, dedicate a significant amount of time to managing the property leases, advertise to tenants and screen each potential tenant, you actively participate in renting property and should report the income like a business on Schedule C.
  
  

Accounting Method Choice

• Once you determine you need to file a Schedule C, you need to choose which method of accounting to use for your income. You can choose between the cash or accrual method to account for your self-employment income. If you use the cash method, you report income when you actually receive it and claim deductions when you pay for an expense. In contrast, the accrual method requires you to report taxable income in the year you earn it rather than the year you receive it. Similarly, the expenses you deduct under the accrual method need not be paid to be deductible. Rather, you claim the deduction in the year you become legally liable to pay it.
  
  

Calculating Net Profit

• A majority of the Schedule C form requires you to report each type of income you receive during the year in the first section, then all allowable business expenses in the second. The end result is your net profit from self-employment. You then transfer the net profit (or loss) figure to the first page of your personal tax return and combine it with other income you earn that doesn't relate to self-employment.