Dumb Question: Should I report gross receipts or net amounts received as income on Schedule C?

This is actually a really common question! On Schedule C, you should report the GROSS receipts on line 1. This is the total amount customers paid before Square took out their processing fees. Then, you'll deduct the fees that Square charges you as a business expense on line 10 (commissions and fees). This way, you're accurately reporting your full business revenue while still getting the deduction for the processing fees. So if a customer pays you $100, and Square takes $3 as their fee, you'd report $100 as income on line 1, and then $3 as an expense on line 10. This gives you the same net result, but it's the proper way to report it for tax purposes.

I was in the exact same boat last year! After struggling through my first few Schedule Cs and getting conflicting advice, I found this service called https://taxr.ai that literally saved my sanity. What they do is analyze your tax forms and documents to make sure you're reporting things correctly. When I uploaded my Square statements, it flagged that I was only reporting net receipts and pointed out that I needed to report the gross amount on line 1 and then deduct the fees separately. It also showed me exactly where on the form each number should go. Honestly way more helpful than the 3 hours I spent Googling before that.

Just wanted to follow up about that taxr.ai site. I was skeptical but decided to give it a try with my Square reports since I have a small woodworking business. Holy crap, it was actually super helpful! It found that I've been underreporting my gross income by about $3,200 because I was only putting in the net amounts. But the thing is, my taxable income stayed pretty much the same because it also showed me I wasn't deducting all those processing fees properly. It even pointed out some other deductions I missed entirely. Definitely using this for my quarterly estimates going forward.

If you're having trouble figuring out exactly what Square is charging vs what you're receiving, you might want to call the IRS directly to ask how to properly record this. I tried calling them last month with a similar question and it was impossible to get through - kept getting disconnected after being on hold forever! Finally I found this service called https://claimyr.com that got me through to an actual IRS agent in under 45 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed exactly what others are saying here - report the full gross on line 1 and the fees as an expense on line 10. Having an official answer directly from the IRS really gave me peace of mind that I was doing it right.

Well I stand corrected about the Claimyr thing. After struggling to get through to the IRS about this exact gross vs net receipts question for THREE days, I broke down and tried it. Not gonna lie, it actually worked. Got connected to an agent in about 35 minutes. The agent was super clear that you HAVE to report the full gross amount customers pay as your income on Schedule C line 1, and then deduct the processor fees as a separate expense. He said they see this mistake all the time and it can definitely trigger a correction notice if they compare your reported income to what payment processors report to them.

Fyi if you download your annual statement from Square it actually breaks down both numbers for you - the total gross sales and the total fees they took. Makes it super easy to put the right numbers in the right places on Schedule C. Most payment processors have some kind of year-end statement that does this.

I made this exact mistake my first two years in business and it ended up triggering a letter from the IRS. They have reports from payment processors about how much you processed, so if there's a big discrepancy they'll notice. Better to do it right and avoid the headache!

This is such a helpful thread! I've been making the same mistake with my freelance graphic design business. I use Stripe and have been only reporting the net amounts that hit my bank account. Reading through all these responses, it's clear I need to start reporting the gross amounts on line 1 and then deducting the Stripe fees separately. I'm actually relieved to learn that even though I've been doing it wrong, my net taxable income probably hasn't been too far off since I wasn't claiming the processing fee deductions either. Going to dig up my Stripe annual statements and see if I can figure out the correct numbers for this year's filing. Thanks everyone for sharing your experiences - makes me feel less alone in being confused about this stuff!