Schedule C - Profit or Loss from Business
Reporting Self-Employment Income and Single-Member LLCs on Schedule C
If you're self-employed or operate a business through a single-member Limited Liability Company (LLC), understanding how to report your income and expenses correctly is essential for staying compliant with U.S. tax law. Most individuals in this category will use Schedule C (Profit or Loss from Business), which is attached to their personal federal tax return, Form 1040.
This approach applies whether you’re running a small freelance operation or managing a more structured business. For Americans living abroad, Schedule C continues to play a central role in tax reporting, regardless of where the business is physically located.
How the IRS Views Single-Member LLCs
By default, a single-member LLC is considered a "disregarded entity" for federal tax purposes. This means that even though your LLC may be a legally distinct entity under state law, the IRS ignores that separation when it comes to income taxes. As a result, you are treated as a sole proprietor, and your business activities are reported directly on your personal return via Schedule C.
This default treatment simplifies tax filing by eliminating the need for a separate business return, but it also means that all profits from the LLC are passed through to you as the owner. You're responsible for paying income tax and self-employment tax on that income, regardless of whether the funds are actually withdrawn from the business.
Electing Corporate Taxation
There is, however, an alternative. If you prefer, you may elect to have your single-member LLC taxed as a corporation by filing Form 8832, known as the Entity Classification Election. Once this election is in place, the LLC is treated as a separate taxpayer, and its income and expenses are reported on a corporate tax return—either Form 1120 for a C Corporation or Form 1120-S for an S Corporation (if eligible and elected).
Choosing corporate treatment can offer tax planning advantages in certain cases, such as income deferral or reduced self-employment tax exposure, but it also introduces a higher level of administrative complexity. Once this election is made, you must maintain separate accounting records and file a standalone tax return for the entity.
Cash vs. Accrual Accounting: Choosing a Method
When you report business income and expenses on Schedule C, you must also select an accounting method—either the cash method or the accrual method. The method you choose determines when income is recognized and when expenses are deductible.
Under the cash method, you report income in the year it is actually received and deduct expenses in the year they are paid. This method is straightforward and commonly used by small business owners because it aligns with actual cash flow. If a client pays you in January for work performed in December, you report the income in the year it was received.
The accrual method, on the other hand, recognizes income when it is earned and expenses when they are incurred, regardless of when money changes hands. If you invoice a client in December but they don’t pay you until January, the income is still reported in the year the work was performed. Accrual accounting is often preferred by businesses with inventory or larger operations, as it provides a more accurate picture of financial performance.
Understanding What Counts as Income
For tax purposes, all amounts received in connection with your trade or business are considered gross income. This includes fees, commissions, payments received through bank transfers, checks, or digital platforms, and even non-cash compensation such as bartered goods or services.
If you receive payments reported on Form 1099-NEC or Form 1099-MISC, you must include those amounts on your Schedule C. However, even if no formal documentation is provided—such as with cash payments—the income must still be reported. The IRS expects business owners to keep detailed and accurate records, including invoices, receipts, and bank statements, to substantiate reported income.
Expenses You Cannot Deduct
While Schedule C allows for a wide range of legitimate business deductions, there are certain costs that are not deductible. These include federal income taxes, state and local income taxes, and estate or gift taxes. Additionally, personal expenses, even if indirectly related to your business, are not allowable deductions.
However, you are permitted to deduct half of your self-employment tax on your main Form 1040, which helps offset the burden of paying both the employer and employee share of Social Security and Medicare taxes.
Business Use of Home
If you use part of your home exclusively and regularly for business, you may be eligible to deduct certain home-related expenses. This deduction is claimed by filing Form 8829, which allocates a portion of home expenses—such as rent, mortgage interest, utilities, insurance, and maintenance—to your business.
Eligibility requires a clearly defined work area that is not used for any personal purpose. For example, using your dining table occasionally for business wouldn’t qualify, but a dedicated home office or studio would.
Calculating this deduction can be done using either the simplified method (based on square footage) or the actual expense method (based on a percentage of home use). Each has its advantages depending on your situation.
Filing Deadlines for U.S. Expats
If you are a U.S. citizen or green card holder living outside the United States, you benefit from an automatic two-month extension, giving you until June 15 to file your federal income tax return. This includes filing Schedule C as part of Form 1040.
Should you need additional time, you can request a further extension until October 15 by submitting Form 4868. It’s important to note, however, that this extension applies to filing your return—not to paying any tax due. Interest will still accrue from the standard April 15 deadline if taxes are unpaid.
Navigating International Self-Employment
Running a business as an expat introduces additional considerations. Depending on the nature and location of your business, you may also be subject to local taxes, VAT/GST rules, or reporting obligations in your country of residence. It’s crucial to ensure that your U.S. tax filings align with any foreign requirements and that you are not underreporting or double-reporting income.
In addition, certain international tax treaties or the Foreign Earned Income Exclusion (Form 2555) may impact your tax liability. However, business income reported on Schedule C often does not qualify for the exclusion unless specific conditions are met.
Moving Forward
Whether you are just starting out as a freelancer or managing a growing business through a single-member LLC, correctly reporting your income and understanding your filing obligations is essential. The rules can become particularly nuanced when your business operations extend across borders.
If you're uncertain about how to file Schedule C, whether to elect corporate treatment for your LLC, or how to apply U.S. tax rules in an international context, it’s wise to consult a qualified professional. Our team of expat-focused U.S. tax advisors can help you evaluate your options and ensure full compliance—while minimizing unnecessary tax exposure.
Feel free to reach out for personalized advice tailored to your self-employment journey, wherever in the world it takes you.
