If you sell homemade food and made any money doing it, the IRS treats your cottage food sales as self-employment income, which means you file a Schedule C with your regular tax return. The good news: Schedule C is one of the simpler IRS forms, and most cottage food vendors can fill it out in 30 to 60 minutes once they have their numbers ready. The bad news: most home bakers do not track their income or expenses during the year, which makes the form take ten times longer at tax time and leaves money on the table. Set up a basic system in January, and Schedule C becomes a quick paperwork task in April.
The short version: Cottage food sales are reported on Schedule C of your federal tax return. You report gross sales, subtract business expenses (ingredients, packaging, supplies, equipment, mileage, market fees), and the net profit becomes self-employment income subject to both income tax and self-employment tax (15.3 percent for Social Security and Medicare). Most cottage food vendors owe less than they expect because business expenses cut their taxable profit significantly. Track every receipt during the year, file Schedule C with your regular 1040, and pay quarterly estimated taxes if you expect to owe more than $1,000 for the year. You do not need an LLC, an EIN, or a separate business bank account to file Schedule C — but having all three makes the process easier.
Yes. The IRS requires you to report all income, including cash sales, regardless of whether you have a registered business. If you sold $400 or more in homemade food during the year, you must file a Schedule C with your tax return and pay self-employment tax on the profit. Even if you sold less than $400, you still have to report the income on your 1040 — you just do not owe self-employment tax on it.
Three thresholds to remember:
The IRS does not care whether you call yourself a "business" or a "hobby." If you sold cookies for money, that money is income. The only question is whether the IRS treats your activity as a business (Schedule C) or a hobby (other income, no expense deductions). Most cottage food vendors qualify as a business because they make sales repeatedly with a profit motive, even if it is part-time.
According to the IRS guidance on hobby vs. business classification, the agency looks at nine factors when deciding which category your activity falls into. The most important ones for a cottage food vendor are: do you depend on the income, do you operate in a business-like manner (records, separate accounts), and do you expect to make a profit. If you can say yes to any of these, you are running a business in the IRS's eyes — and that is a good thing because it lets you deduct expenses.
Schedule C is a one-page form (with a second page for cost-of-goods-sold details) that reports profit or loss from a sole proprietorship or single-member LLC. You attach it to your regular Form 1040. If you sold cottage food and you are not set up as an S-corp, partnership, or multi-member LLC, Schedule C is the right form for you.
Here is what Schedule C asks for:
Most cottage food vendors complete Parts I, II, and possibly IV. Part III only applies if you carry inventory across years (which most home bakers do not — you usually use ingredients within the same year you bought them).
The form is short. The math is straightforward. The hard part is having clean records of what you sold and what you spent.
For the year-round version of this — a daily tracking habit, monthly reconciliation, and the simplest tools to use — see our breakdown of how to track income and expenses for a cottage food business.
For the deeper picture of which expenses you can actually claim, our companion guide to tax deductions for home food vendors walks through every category that applies to a cottage food business with examples.
Your gross income on Schedule C is the total amount of money you received from cottage food sales during the year, before any expenses. This includes cash, Venmo, Zelle, Cash App, Square, online ordering, and any other payment method. The IRS expects you to report every dollar, not just the ones that hit a bank account.
Step-by-step income calculation:
Example calculation for a home baker:
Most home bakers underestimate their gross sales because they only track Venmo or Square, missing the cash payments and direct customer pickups. The IRS considers all of it income, and your bank statements alone are not a complete record.
The trick is to track sales as they happen, not at tax time. A simple spreadsheet with date, customer, amount, and payment method takes 30 seconds per sale and gives you a clean record at year-end. Vendors who try to reconstruct a year of sales in April routinely miss large chunks of their actual income, which sounds like a tax savings until the IRS asks for backup documentation that you cannot produce.
You can deduct any "ordinary and necessary" business expense that is reasonable for a cottage food operation. This is where most vendors leave money on the table — they forget that mileage, packaging, marketing, equipment, and even a portion of their home costs can all be deducted.
Common cottage food deductions:
Less obvious but legitimate deductions:
The combined effect of these deductions usually cuts a cottage food vendor's taxable profit by 30 to 60 percent compared to gross sales. A vendor with $14,000 in gross sales might end up with only $5,000 to $9,000 in taxable profit after deductions. That is the difference between a $2,200 tax bill and an $800 one.
A cottage food vendor with $10,000 in gross sales and typical expenses usually owes between $400 and $1,400 in federal taxes, depending on their other income, filing status, and how aggressively they track deductions. The exact number depends on three things: your net profit after deductions, your overall income tax bracket, and the self-employment tax rate.
Here is a typical example calculation:
| Item | Amount |
|---|---|
| Gross cottage food sales | $14,000 |
| Cost of ingredients | $4,200 |
| Packaging, supplies, mileage, fees | $2,300 |
| Net profit (Schedule C) | $7,500 |
| Self-employment tax (15.3% of $6,929 after deduction) | ~$1,060 |
| Income tax (varies by bracket — 12% bracket example) | ~$900 |
| Total federal tax owed | ~$1,960 |
The self-employment tax (Social Security and Medicare) is the biggest surprise for most first-time cottage food filers. It is 15.3 percent on top of regular income tax, and it applies to every dollar of net profit above $400. This is why vendors who fail to track expenses end up overpaying — every $100 in unclaimed deductions costs roughly $25 to $35 in extra tax.
If you have a regular W-2 job already paying into Social Security, the cottage food self-employment tax stacks on top of your existing payroll tax. There is a wage cap that adjusts annually for the Social Security portion (12.4 percent), but the Medicare portion (2.9 percent) has no cap.
The IRS resource center for self-employed individuals at the IRS Self-Employed Individuals Tax Center covers the full picture of how self-employment tax works, including who is required to pay quarterly estimates and how the calculation flows from Schedule C to Schedule SE to your 1040.
You need to pay quarterly estimated taxes if you expect to owe more than $1,000 in federal taxes for the year (after subtracting any tax already withheld from a W-2 job). Most cottage food vendors with $5,000 or more in net profit cross this threshold and need to make quarterly payments to avoid IRS underpayment penalties.
For the deeper dive on quarterly payments — exact deadlines, the 30 percent rule of thumb, IRS Direct Pay setup, and the penalty math — see our walkthrough of quarterly estimated taxes for food vendors.
Quarterly tax deadlines are:
The simplest way to estimate quarterly payments: take your projected annual net profit, multiply by 30 percent (covers SE tax + a typical income tax bracket), and divide by 4. That gives you a rough payment for each quarter.
Example:
You can pay quarterly estimates online through IRS Direct Pay, by mailing Form 1040-ES with a check, or through the IRS2Go mobile app. Most vendors set up Direct Pay once and use it for all four payments.
The penalty for not paying quarterly is small (usually 4 to 8 percent annualized on the amount you should have paid), but it adds up if you owe a lot in April. The bigger problem with skipping quarterly payments is the cash flow shock of writing one big check instead of four small ones.
The IRS requires you to keep records that support every line on your Schedule C for at least three years after you file. For most cottage food vendors, this means saving receipts, payment records, and a log of sales. Digital copies are fine — the IRS accepts photos, scans, or screenshots.
Records to keep:
The IRS expects "contemporaneous" records, meaning records created at the time of the activity, not reconstructed later. A spreadsheet entry from the day of a sale is much stronger evidence than a memory entered 11 months later. This is one of the reasons bookkeeping during the year matters more than the bookkeeping you do in April. The simplest way to keep contemporaneous records is to let your ordering system do it for you — a Homegrown storefront timestamps every order, every payment, and every customer in one list, so when April rolls around the entire sales side of your Schedule C is already filled in.
For the practical side of setting up a daily tracking system, our guide to bookkeeping for food vendors covers the simplest spreadsheet approach that works for most cottage food businesses, plus the apps that automate most of the work for under $20 per month. If you also collect sales tax at markets, our guide to sales tax at farmers markets covers the state-by-state side of things, which is separate from your federal Schedule C but still has to be tracked.
The difference is that Schedule C lets you deduct business expenses against your income, while hobby income is reported as "other income" on Form 1040 with no expense deductions allowed. For most cottage food vendors, the Schedule C path saves significantly more in taxes — but only if you actually qualify as a business in the IRS's eyes.
The IRS uses these criteria to distinguish a business from a hobby:
You do not have to meet all of these to qualify as a business. Most cottage food vendors who sell repeatedly, with the intent to make money, qualify even if they only do it part-time and only made $2,000 in their first year.
The benefit of being classified as a business is significant. A hobby vendor with $5,000 in sales and $3,000 in expenses pays tax on the full $5,000. A business vendor with the same numbers pays tax on only $2,000. That can be the difference between owing $1,000 and owing $400.
If you are unsure how to classify yourself, the safer path for most cottage food vendors is to file Schedule C as a business and keep good records. If your records show businesslike intent and you deduct only legitimate expenses, the IRS rarely reclassifies a vendor as a hobby.
Yes. The IRS requires you to report all income from cottage food sales, including cash payments, regardless of how small. Cash sales are taxed exactly the same as Venmo or Square sales. If you fail to report cash income and the IRS discovers it through an audit (often via lifestyle analysis or third-party reporting), you can face back taxes, penalties, and interest. The smart move is to log every sale as it happens.
No. You can file Schedule C as a sole proprietor using your Social Security number. An EIN (Employer Identification Number) is free from the IRS and only required if you have employees, file certain excise taxes, or want to keep your SSN off business documents. Many cottage food vendors get an EIN anyway because it makes opening a business bank account easier. For the question of whether you also need an LLC (which is separate from getting an EIN), our guide on whether you need an LLC to sell food from home covers when it makes sense for cottage food vendors and when it does not.
Probably not. The IRS home office deduction requires the space to be used "exclusively and regularly" for business. A kitchen used for both family meals and cottage food production usually does not qualify because it is not exclusive. A dedicated room used only for packaging, labeling, or storage might qualify. The deduction is calculated as a percentage of your home (square footage of business space divided by total square footage) applied to rent/mortgage, utilities, and insurance.
Most states with an income tax also tax self-employment income, including cottage food sales. Nine states have no income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming) so vendors there only owe federal tax. In states with income tax, the calculation usually flows from your federal Schedule C to your state return automatically.
You can file an amended return (Form 1040-X) to add a missing Schedule C if you catch the mistake later. If the IRS catches it first through an audit or third-party reporting, you may owe back taxes, late filing penalties, late payment penalties, and interest. The total cost of an unreported Schedule C can be 25 to 50 percent more than just filing it correctly the first time.
Yes, in most cases. If your cottage food business had more expenses than income, the loss can offset other income on your 1040 (such as W-2 wages from a day job). This is one of the biggest advantages of being classified as a business — losses are real tax savings. The IRS scrutinizes ongoing losses closely, so be prepared to show businesslike effort if you claim losses for multiple years in a row.
For your first year, hiring a CPA or enrolled agent for $150 to $400 is usually worth it. They will set up your Schedule C correctly, identify deductions you missed, and explain how to track records for the following year. After year one, most cottage food vendors can file on their own with tax software (TurboTax Self-Employed, FreeTaxUSA, or H&R Block Self-Employed) for $50 to $120.
If you want to automate the tracking side so April becomes a copy-paste exercise, our comparison of the best bookkeeping apps for cottage food vendors covers the free and paid tools that work for home bakers.
The single biggest tax mistake cottage food vendors make is waiting until April to look at their numbers. By then, half the receipts are gone, the cash sales are forgotten, and the deductions you could have claimed are invisible. The fix is simple: track every sale as it happens. A Homegrown storefront at $10 per month captures every order, payment, and customer name automatically — which means by the time tax season arrives, your entire year of sales is already in one clean list, and your Schedule C takes 30 minutes instead of three days. The storefront pays for itself in deduction recovery alone, before you even count the time savings.
