Schedule C Instructions for Handmade Sellers — 2025 Tax Year Guide

Last updated: March 2026 — line numbers verified against the 2025 IRS Schedule C form.

Staring at a Schedule C for the first time is genuinely unsettling. The IRS form itself is two pages, but the accompanying instructions run to 20+ pages of dense tax language, and nothing in it sounds like it was written for someone who makes soap or sells handmade jewelry on Etsy.

Good news: once you know what each line is actually asking, this form is far less intimidating than it looks. We’ve broken it down section by section, in plain language, with maker-specific examples throughout.

TL;DR — Key Schedule C sections for makers:

• Part I (Lines 1–7): Your total income, minus refunds and COGS
• Part II (Lines 8–31): Business expenses — advertising, supplies, utilities, home office
• Part III (Lines 33–42): Cost of Goods Sold — your material costs calculated via inventory
• Part V (Line 48): Any other business expenses that don’t fit the standard categories

Need some Schedule C info fast? Jump to a section in our guide:

• What is the Schedule C?
• Who needs to file a Schedule C?
• Where do I download the Schedule C form?
• Business Details
• Part I: Income
• Part II: Expenses
• Part III: Cost of Goods Sold (COGS)
• Part IV: Information on your Vehicle
• Part V – Other Expenses
• Common Schedule C Mistakes for Handmade Sellers
• How do I submit my Schedule C?
• Schedule C Software

What is the Schedule C?

A Schedule C is a form that US-based sole proprietor businesses need to complete to report to the IRS the amount of money they made or lost that year.

The form’s instructions provide guidance on calculating taxable profit or loss, taking into account income and expenses, as well as deductions. Keep in mind that there are also other forms required for self-employment taxes, such as Form 1040-ES and Schedule SE.

To be formal about things, the full name of this form is Form 1040 Schedule C: Profit or Loss From Business (Sole Proprietorship).

Who needs to file a Schedule C?

If you sell handmade products as a sole proprietor — on Etsy, at craft fairs, through your own website, or anywhere else — and your net self-employment earnings are $400 or more for the year, you need to file a Schedule C.

That threshold catches most working makers. Even if you’re doing this part-time around a day job, the IRS expects a Schedule C if your craft business turns a profit of $400 or more.

Sole proprietors are the primary audience here. If you’ve set up an LLC that’s taxed as a sole proprietorship (which is the default for single-member LLCs), you’ll also use Schedule C. Partnerships and S-corps use different forms.

A quick disclaimer before we begin: laws and regulations change frequently. This information is for educational and informational purposes only and should not be construed as legal advice. Please consult a qualified tax professional with specific questions or concerns.

Where do I download the Schedule C form?

The first thing you will need to do is download the correct form. It is available directly from the IRS website here:

IRS: SCHEDULE C Profit or Loss From Business →

Tip: The Schedule C form is updated each year, so you’ll want to ensure you have the correct version — for the 2025 tax year — before completing it.

What does the Schedule C form look like?

The Schedule C form itself is only 2 pages long, though it has quite a lot of fields to fill out. The IRS also provides 20+ pages of accompanying documentation, which can be helpful for the finer details — but can quickly overwhelm with heavy tax jargon.

We’ll walk you through each section, line by line, so you know exactly how to complete it.

Business Details

The very first part of the form (lines A through to J) is mainly to help the IRS identify you and your business. Most of this part is fairly self-explanatory, apart from some slightly hairy questions about NAICS codes, EIN numbers, and accounting methods that we’ll cover in detail below.

The first line you’ll need to complete is the Name of proprietor. This is your personal name, not your business name (which gets asked for later). You’ll also want to enter your Social Security Number (SSN) in the field to the right.

The next line (A Principal business or profession, including product or service) is to provide details about your business type.

If you make your own products and sell at least some of them online, this will most likely be: Online retail of manufactured goods.

To the right of this section, is a space (B Enter code from instructions) where you’ll need to enter the NAICS code that best matches your business activities. There is a list of Principal Business or Professional Activity Codes in the Schedule C instructions for you to choose from.

As the codes cover all sorts of business activities, it can take some time to wade through this list. To make this easier, we’ve made you a handy summarised list of the most common NAICS codes for small manufacturers.

This next one should hopefully be a little less taxing: you’ll want to enter your business name into the field called C Business Name.

You should leave this blank if you don’t use a business name.

The field to the right of the business name is for your EIN (D Employer ID number (EIN)). An EIN is an Employer Identification Number (also known as a Federal Tax Identification Number) and is used to uniquely identify your business to the IRS. Important Note: This is not your SSN, as you will have already entered this above.

Most businesses will need an EIN for various reasons. To find out more, read our blog post here: What is my sales tax number (EIN)?

If you don’t have an EIN, you can leave this line blank.

We’ve made it to E already, and it’s another easy one! Business Address:

This field is for your business address — the place where your business is officially registered. Make sure to enter all details, including the zip code.

This next line (F Accounting method) is often the place where handmade sellers get a little stuck as it requires a little bit of Accounting 101 knowledge.

This can either be Cash or Accrual depending on how you account for your expenses and revenue.

Cash-based accounting essentially is where you record money in and out only when the payment is actually received; accrual-based accounting records income and expenses when invoices are raised. If you aren’t sure of which method you are using, it’s a good idea to ask your accountant, as they will be able to quickly answer this question for you.

Onward to the next question: G Did you “materially participate” in the operation of this business during (year)?

This basically asks in a strange legalese fashion if the income you have made in this year was directly from working on your business (i.e. the income wasn’t “passive” from activities like investments).

There are a couple of different criteria points to meet here, which can seem confusing, but it essentially boils down to making sure you have worked on your business for a significant period of time in the financial year (they say 500 hours or more, which is about 20 days in the year). As a handmade business, you’ll have most likely spent more than 20 days on your business, so you’ll most likely be marking this one as a Yes.

H: If you started or acquired this business during (year), check here: This one is fairly self-explanatory: if you started the business during this year or purchased it from someone else, make sure you check this box.

Almost there: 2 more to go. The next field (I: Did you make any payments in (year) that would require you to file Form(s) 1099?) is a little tricky, so it will need a bit of consideration.

This question essentially asks about any payments you may have made that they need to know about. Employee wage/contractor costs, nonemployee compensation, interest, rent, royalties, and pensions are the types of things that they are concerned about here.

This can also be a yes if you have paid out at least $20,000 to a single vendor in the course of the year. If you have paid a total of $20,000 in expenses but all to different vendors and have no other costs as above, then this would be No.

Also, if you have paid for contract help or paid rent and the total of this service is greater than $600, then you will need to ensure that you (or your contractor) complete 1099-NEC.

There is a follow-up question to this one immediately below it, and it is really just designed as a big hint to make sure you know you need to file the correct forms in this case.

J: If “Yes,” did you or will you file the required Forms 1099?

…and, like that, we are now done with the first section of the form!

Part I: Income

This is the section where you record your income for the year and is the start of the all-important “numbers and tallies bit” of the Schedule C Form.

Part I: Income is the section on your 1040 Schedule C Form where you record everything you have made (otherwise known as your income or revenue) for the year.

Line 1: Gross receipts or sales

This is your total income from all sales made during the year. If you sell on Etsy, Shopify, and at craft fairs, you add them all together here.

Line 2: Returns and allowances

Returns and allowances on Schedule C are the total refunds you paid back to customers during the year. Include both full refunds (where the customer returned the item) and partial refunds (a discount given after the sale for a defective or damaged product).

For Etsy sellers: if you issued a refund through Etsy’s system, the refunded amount is what goes here — not the original sale price. Seller-initiated discounts or price adjustments given after purchase also count as allowances.

Keep a simple record of your refunds as you go. Most Etsy and Shopify exports include refund data that you can total at year end.

Line 3: Subtract line 2 from line 1

This is really just a working number, used to ensure that you definitely aren’t including any of your refunded amounts in your total income.

Line 4: Cost of goods sold

This will be your Cost of Goods Sold total as calculated in Part III on the second page of the form. It’s best to skip this for now and return to this box once you have the numbers you need.

Line 5: Gross profit

Subtract your Cost of goods sold total (Line 4) from the amount on Line 3 to get your Gross Profit total.

Line 6: Other income

This is for income not directly related to the products you sell (e.g. advertising revenue on your blog, interest on funds in business bank accounts).

Line 7: Gross income

After adding other income (if any) on Line 6 to gross profit on Line 5, you’ll end up with gross income.

Part II: Expenses

The Part II: Expenses section of the Schedule C Form is the relatively “fun” bit — you’ll be listing out all of the claimable expenses you made for this year so you can deduct them from your taxable income.

You’ll want to ensure that you aren’t claiming any material costs here, as they should be included in Part III (Cost of Goods Sold) below. For more information about why it’s important to make this distinction, you’ll want to read our blog post here: Why claiming materials as expenses is a really bad idea for a craft business →

Line 8: Advertising

This is any form of advertising you have paid for directly linked to your business. Remember that this can also include any free products you have given to bloggers for reviews. Etsy Listing Fees can also be categorized as advertising if you wish (the only rule here is to make sure you don’t account for these also under Commissions and Fees below).

Line 9: Car and truck expenses

You can deduct the expenses of running your vehicles if they are essential to the running of your business. You have two ways of accounting for this expense: actual and standard mileage. If you have less than 5 vehicles and haven’t claimed in the past year using the actual method, then you can use standard mileage calculations. If you have been logging your expenses in Craftybase, you can use the actual method here.

Note: if you claim this expense, you’ll need to complete Part IV (Vehicle Information) later in the form.

Line 10: Commissions and fees

This is for any money you paid to other businesses or individuals for services.

This can be fees paid for market stalls, commission paid for items you have sent out on consignment, and any fees payable for online marketplaces like Etsy.

Line 11: Contract labor

You’ll need to account for this expense on this line if you hire people to help run your business on a contracted (non-employee) basis.

Line 13: Depreciation and section 179 expense deduction

Depreciation is required for business assets with a useful life of more than a year. There is no minimum guideline on how valuable the asset needs to be before you should try to claim using this method. However, a good rule of thumb is that assets below $100 in value are better expensed in supplies rather than depreciated.

Line 15: Insurance (other than health)

Any business insurance premiums you pay — liability insurance, property coverage for your studio equipment, etc. — go here. Health insurance for self-employed individuals is handled separately on Schedule 1 of your 1040.

Line 17: Legal and professional services

This can include the costs of your accountants, tax preparers, or any legal services you used for your business during the year.

Line 18: Office expense

The postage costs you incur in sending out your orders should be included here. Also, stationery and supplies for running your office (e.g. printers, ink, tape, stapler, pens). Anything likely to not be completely used up within a year should be included here.

Line 21: Repairs and maintenance

Any repairs on the equipment you use in the running of your business should be put here — for example, repairs to your sewing machine, kiln, or mixing equipment.

Line 22: Supplies (not included in Part III)

This should include any supplies you have on hand that you a) expect to use up completely within the year and b) are not directly used to produce your finished products.

These items will not be included as part of your Cost of Goods Sold, as that section should only include materials you directly use in your products. Shipping labels, paper, bubble wrap, and other packaging materials should be included here.

Also, any material that you do use in the production of your products that is difficult to inventory accurately can also be included here. Examples are glue and thread: measuring the exact amounts used of both of these materials is impractical in most cases and thus can be included here.

Line 23: Taxes and licenses

Any sales tax you pay at a state level, along with any licenses you need to pay to run your business, should be included.

Examples of expenses that can be claimed as part of this section include:

• Business licenses
• Estimated taxes
• Federal tax
• Sales tax
• State tax
• Property tax
• Trademarks and logo fees
• Software licensing and renewal fees
• DBA/Fictitious Business Name one-time filing fee
• Incorporation fees
• Business name search fees
• Copyright application and registration
• Domain name search fees
• Fees to draft, acquire or cancel a lease

Line 24a: Travel and Line 24b: Deductible meals

Different allowances for travel exist for certain circumstances, so it is best to check with your financial adviser first before logging and claiming these types of expenses. Generally, you need to ensure that any travel or meals you are claiming here are 100% related to the running of your business. Delivering a custom cake to a client would be an example of travel for business purposes, as would a trip to purchase supplies.

For meals, the IRS generally allows a 50% deduction. Keep receipts and note the business purpose.

Line 25: Utilities

Internet and telephone bills can be included here, if they are wholly for the running of your business. If your phone and internet are shared between personal and business use, you can only deduct the business-use portion.

Line 27a: Other expenses

These can include any expenses not covered in any of the other expense categories above. The figure here is pulled from Line 48 (Part V) on the second page.

Software you use to run your business can also be included here: Craftybase is business software and thus can be claimed in this allowance section.

If you haven’t included any of your online sales channel fees (PayPal / Etsy etc.) in the Commissions and fees category, then you can include them here instead.

Line 30: Expenses for business use of your home

If you have a dedicated space in your home used regularly and exclusively for your craft business — a spare room set up as a studio, for example — you may be able to deduct home office expenses here. There are two methods: the simplified method ($5 per square foot, up to 300 sq ft) or the regular method based on actual home expenses. Talk to your accountant if you’re not sure which applies to you.

Line 31: Net profit (or loss)

This is the bottom line for Part II. Take your gross income from Part I, subtract your total expenses, and the result is your net profit or loss from the business for the year.

Part III: Cost of Goods Sold (COGS)

You’ve made it to the best part: COGS! This is the part where most people filling out the Schedule C really struggle — but if you have your inventory situation sorted, it should be a (relative) piece of cake.

As part of this form, you’ll be able to claim your total material usage via your Cost of Goods Sold (Part III). If you are a business with relatively large inventory costs to produce products, this is an excellent way to ensure that your expenses can be maximized in line with the revenue you brought in during the year.

For a concrete example: if you sell candles on Etsy, your Cost of Goods Sold would include wax, wicks, fragrance oil, and dye — the materials that go directly into each candle. Your packaging and shipping supplies would go in Line 22 (Supplies) instead.

Before you start Part III, you’ll need two numbers: your beginning inventory value and your ending inventory value. If you’ve been tracking inventory properly throughout the year, this is straightforward. If not, our year-end inventory checklist walks you through how to get those figures together.

More details about how the COGS method works: How do I calculate my Cost of Goods Sold?

And for a helpful deep-dive on a related topic, see our guide on the difference between COGS and COGM.

Line 33: Method used to value closing inventory

This will usually be Cost. The cost method requires using either the FIFO, LIFO or Weighted Average method.

If you use Craftybase to help complete your Schedule C, we use the Weighted Average method to determine your totals.

Line 34: Was there any change in determining quantities, costs, or valuations?

This is to see if you have changed the way you account for your inventory, as this could have an impact on your opening and closing inventory tallies. If you haven’t made any changes to how you calculate your inventory, you’ll be marking this as ‘No’.

Line 35: Inventory at beginning of year

If you have completed a Schedule C last year, take the number from Line 41 of last year’s form and enter it here. If this is your first Schedule C, this will be zero.

Line 36: Purchases less cost of items withdrawn for personal use

This is the total of all purchases you made during the year. Ensure you remove any purchases made then removed from your inventory for personal use.

Line 37: Cost of labor (do not include any amounts paid to yourself)

If you have employed anyone to assist you with your craft business during the year, then you would account for this cost here. Remember that this cost is mainly for official employees (that will have a W-2). Contracted and casual workers should be instead factored into Part II, Line 11.

Read more about how you can factor in your internal labor costs to your pricing →

Line 38: Materials and supplies

This section is reserved for any materials and supplies not already included in your inventory totals above that are also not being claimed as supplies in Part II. Common usage of this section is for consumable hardware or chemicals used to produce your finished goods for sale.

Line 39: Other costs

This section is to provide a way of accounting for any other costs directly related to your products that don’t fit into the available categories above.

Line 40: Add lines 35 through 39

This is a work-in-progress step, so you’ll want to add together what you’ve entered in Lines 35 through 39 and write the total here.

Line 41: Inventory at end of year

This is the total amount of materials you have on hand at the end of the year, including materials that are already manufactured into finished products that have not been sold yet.

Line 42: Cost of goods sold

Take the total you have for Line 40 and subtract Line 41 from it to get your final Cost of Goods Sold figure. This is the number that flows back to Line 4 in Part I. Don’t forget to enter it there!

Part IV: Information on your Vehicle

You only need to complete this section if you have claimed Line 9 (Car and Truck Expenses).

Line 43: When did you place your vehicle in service for business purposes?

This is the date you started using your vehicle for business purposes.

Line 44: Miles driven during the year

• Line 44a: Enter the number of miles you used your vehicle for business.
• Line 44b: Enter the number of miles you used your vehicle to commute between work and home. If you work from home, this will be zero.
• Line 44c: Enter the number of miles you drove the vehicle for non-business or commuting purposes (i.e. for your own personal use).

Line 45: Was your vehicle available for personal use during off-duty hours?

If you also use your vehicle outside of business hours for personal use, you should check Yes here.

Line 46: Do you (or your spouse) have another vehicle available for personal use?

If you or your spouse also use another vehicle for personal trips, then you can check Yes here.

Line 47a/47b: Do you have evidence to support your deduction?

This asks if you have any records showing how you calculated the numbers above — and whether that evidence is written. Paper-based logbooks and expense-tracking applications like Craftybase are both good ways of ensuring you have enough proof to support your claim.

Part V – Other Expenses

This is the area where you can account for expenses that cannot be included elsewhere on your Schedule C. Bad debts and business startup costs are some examples of expenses that can be claimed here.

It’s best to speak to your taxation adviser here to see what you can claim in this section, as it depends on your circumstances.

Line 48: Total other expenses

This is where you could claim any other business expenses. For example, your Craftybase Inventory subscription would be included here. Remember to also enter the value in Line 27a (Other expenses) above.

Common Schedule C Mistakes for Handmade Sellers

Even experienced makers trip up in the same places year after year. Here are the ones worth watching for:

Putting material costs in Part II instead of Part III. It’s tempting to lump your wax, yarn, or resin in with office supplies and call it done. But that’s incorrect — raw materials that go into your finished products belong in COGS (Part III), not in Line 22 (Supplies). The distinction affects how your expenses match up to your revenue. Accounting software built for Etsy sellers can help you keep these categories straight automatically.

Skipping COGS entirely. Lots of makers — especially early-stage ones — skip Part III because it looks complicated. That’s leaving real money on the table. Your material costs are often your biggest expense category; not claiming them means paying more tax than you should.

Not separating business and personal use. Your home internet, your phone, your car — if they’re shared between personal and business, you can only deduct the business-use portion. Claiming 100% of a shared expense is the kind of thing that invites scrutiny.

Missing the home office deduction. If you have a space in your home used only for your craft business — even just a corner of a room — you may qualify. It’s worth asking your accountant whether you meet the “regular and exclusive use” test.

Getting commissions/fees wrong. Etsy charges both listing fees and transaction fees. Both are deductible, but make sure you claim them once — either under Line 10 (Commissions and fees) or Line 27a (Other expenses), not both.

How do I submit my Schedule C?

Now that you know how to complete your Schedule C, you’ll most likely want to know the next steps to filing it with the IRS.

The Schedule C is an additional form (aka a “Schedule”) which is submitted alongside your regular personal 1040 tax return. This occurs on a yearly (annual) basis, and is usually due on April 15 each year. For the 2025 tax year, that means April 15, 2026.

If you need more time, you can file for an automatic 6-month extension using Form 4868 — but note that an extension to file is not an extension to pay. If you owe taxes, estimated payments are still due by April 15.

Schedule C Software

Completing your Schedule C form manually can be a tedious task, especially if you are a small manufacturer — you’ll need to be able to calculate your COGS based on your inventory and purchases throughout the year.

Craftybase is COGS and inventory software that automatically tracks your material costs, calculates your opening and closing inventory values, and gives you the COGS number you need for Line 42 — without a spreadsheet in sight. You can start a 14-day free trial to see how much easier this tax filing can be.

If you sell on Etsy specifically, our guide to Etsy bookkeeping covers how to pull together all your income and expense data before you sit down with the form.

That’s it! You’ve now walked through all the steps for completing your Schedule C as a sole proprietor handmade seller. It’s a lot of lines, but none of them are as scary as they first look.

Remember to speak to your tax adviser if you are unsure of anything — especially for COGS calculations, home office deductions, and vehicle expenses, where the rules have the most nuance.

Disclaimer: This article is written solely as a guide and is not intended as a substitute for professional advice.

Always consult with a qualified tax professional before filing your taxes.