Start with total deposits and forms, then work down to net profit. Schedule C taxes net profit, not the gross amount on a 1099. The order is: gross receipts, less returns and allowances, less cost of goods sold (COGS), less ordinary and necessary expenses. Self-employment (SE) tax, federal income tax, and any state tax come after that.
Why a 1099-K total is not your taxable profit
Form 1099-K is an information return. It reports payments received through a payment card or a third-party settlement organization (TPSO). Federal law now requires a TPSO to file a 1099-K only when gross payments exceed $20,000 and the number of transactions exceeds 200. The One, Big, Beautiful Bill Act (OBBBA) reinstated that threshold retroactively. The IRS also notes that payment card transactions have no minimum threshold, and that a state may set a lower one (IRS Fact Sheet 2025-08; IRS FAQ news release).
The threshold decides whether a form is filed. It does not decide what is taxable. Business income is reportable whether or not you receive a form. A form you do receive can also include amounts that are not income to you, such as refunded sales, personal reimbursements, or money you passed through to someone else. Reconcile every 1099-K to your own records before it goes on Schedule C. The 1099-K Taxable Income Reconciliation Calculator and the article 1099-K gross payments are not the same as taxable profit cover that step in more detail.
From receipts to net profit: the Schedule C steps
The 2025 Schedule C and the Schedule C instructions lay out the sequence below. Confirm line numbers against the form for the year you file.
- Gross receipts (line 1). Include all business income, including amounts reported on any Form 1099. If you collect sales tax from buyers as the seller, Publication 334 says to include it in gross receipts. The related sales tax you remit is then handled as an expense.
- Returns and allowances (line 2). Enter cash or credit refunds, and price reductions given in place of a refund, as a positive number. These are customer refunds. They are not business expenses.
- COGS (line 4, from Part III). If you make or buy goods to sell, subtract the cost of the goods you sold. COGS is opening inventory plus purchases, labor, materials, and other costs, minus closing inventory (Publication 334). Whether you must keep inventory depends on your accounting method and on whether you qualify as a small business taxpayer.
- Ordinary and necessary expenses. Enter these in Part II. Platform fees and contract labor are two common examples. Keep an expense out of COGS if it is not a cost of producing or buying the goods.
- Net profit (line 31). Gross profit minus total expenses. A profit flows to Schedule 1 and Schedule SE (2025 Schedule C).
Classification stays with you. Whether a payment is income, a refund, a COGS item, or a personal expense depends on records the calculator cannot see. See also Schedule C net profit: receipts, returns, COGS, and expenses and the Schedule C Net Profit and Tax Calculator.
Where 92.35% fits into self-employment tax
Generally, SE tax applies to 92.35% of net earnings from self-employment. You usually owe it if those net earnings are $400 or more (IRS Topic 554). The rate is 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare (IRS self-employment tax page).
[ \text{Net earnings} = \text{Schedule C net profit ($)} \times 0.9235 ]
[ \text{SE tax} = 0.124 \times \min(\text{net earnings}, \text{wage base}) + 0.029 \times \text{net earnings} ]
- Wage base. The 12.4% part stops at an annual Social Security wage base. The base changes each year (the IRS page above states $168,600 for 2024), and it is shared with any W-2 wages you also earned. Look up the figure for the tax year you are filing on Schedule SE. Do not reuse another year's number.
- Additional Medicare Tax. An extra 0.9% can apply at higher incomes. The threshold depends on filing status, so check Form 8959 and its instructions.
- Half of SE tax is deductible. You deduct one-half of SE tax when figuring adjusted gross income on Form 1040 (IRS Topic 554). That deduction lowers income tax. It does not lower SE tax. See Self-employment tax: why 92.35% appears in the worksheet and the Self-Employment Tax Calculator.
Worked example: $95,000 in receipts
This is a hypothetical example. It does not describe any real filer. Every figure is an assumed input. The arithmetic was recomputed in code. Cents are shown for transparency. On a return you can round to whole dollars.
Assumptions: single-member business, no W-2 wages, SE net earnings well below the Social Security wage base for any recent year, and no Additional Medicare Tax. For the reserve, assume a 12% federal rate applied to the profit after the half-SE-tax deduction, and a 4% state rate applied to net profit. These rates are placeholders for illustration. They are not bracket calculations. They ignore the standard deduction, the qualified business income deduction, credits, and other income.
| Step | Amount |
|---|---|
| Form 1099-K payments | $92,000.00 |
| Other receipts with no form | $3,000.00 |
| Gross receipts (line 1) | $95,000.00 |
| Less returns and allowances | −$4,000.00 |
| Net receipts | $91,000.00 |
| Less COGS | −$28,000.00 |
| Gross profit | $63,000.00 |
| Less ordinary expenses (including $6,000 platform fees) | −$17,500.00 |
| Net profit | $45,500.00 |
| Net earnings: $45,500 × 0.9235 | $42,019.25 |
| Social Security part: × 12.4% | $5,210.39 |
| Medicare part: × 2.9% | $1,218.56 |
| SE tax | $6,428.95 |
| Half of SE tax (deduction) | $3,214.47 |
| Profit after half-SE deduction | $42,285.53 |
| Assumed federal income tax at 12% | $5,074.26 |
| Assumed state tax at 4% of net profit | $1,820.00 |
| Total set-aside | $13,323.21 |
| Cash left after the set-aside | $32,176.79 |
The set-aside is about 29.3% of net profit and about 14.0% of gross receipts. The first number comes from the assumed rates, so it is not a benchmark for anyone else. The gross figure is the one a 1099-K reader tends to anchor on, and the taxable base here is less than half of it.
The result is not a tax return, and actual liability will differ. Income tax depends on filing status, other income, deductions, credits, and the Tax Table or Tax Computation Worksheet. State rules vary widely. Your own records govern each input. The 1099 Take-Home and Tax Set-Aside Calculator runs this kind of estimate with your own inputs.
Estimated tax payments and the cash reserve
No employer withholds from 1099 income. Federal income tax and SE tax are generally paid during the year through estimated tax payments. Publication 505 explains who must pay and how to figure the amounts. Its worksheets also reduce earned income by the allowed SE tax deduction. Safe-harbor amounts and due dates are tax-year specific, so take them from the Publication 505 and Form 1040-ES for the year you are paying.
A reserve is a budgeting figure. It is neither a payment nor a tax liability. It also changes through the year as receipts, refunds, and expenses change. Rerun the steps when any of those inputs moves.
Other deductions that change net profit
- Home-office deduction. The regular and simplified methods produce different amounts. See Home-office deduction: regular vs simplified method.
- Self-employed health insurance. This deduction is limited, and it is taken on Schedule 1. It does not reduce SE tax. See Self-employed health insurance deduction limits.