J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

40.2 Reporting Self-Employed Income

You file a separate Schedule C along with Form 1040 if you are a sole proprietor of a business or a professional in your own practice. If you do freelance work as an independent contractor, you are self-employed and use Schedule C. If you are an employee with a sideline business, report the self-employment income and expenses from that business on Schedule C. Do not file Schedule C if your business is operated through a partnership or corporation. See the guide to Schedule C in 40.6.

On Schedule C, you deduct your allowable business expenses from your business income. Net business profit (or loss) figured on Schedule C is entered on Line 12, Page 1 of Form 1040. Thus, business profit (or loss) is added to (or subtracted from) nonbusiness income on Form 1040 to compute adjusted gross income. This procedure gives you the chance to deduct your business expenses, whether you claim itemized deductions or nonbusiness deductions on Schedule A, such as charitable contributions, taxes, and medical expenses, or you claim the standard deduction where it exceeds your allowable itemized deductions (13.2).

You may be able to file a simplified schedule, Schedule C-EZ, if your income and expenses are below certain limits (40.6).

Passive loss restrictions.

Pay special attention to the passive loss restrictions discussed in Chapter 10. Generally, if you do not regularly and substantially participate in your business, losses are considered passive and are deductible ...