What happens to a freelancer's Schedule C income if they die during the year?

The tax year splits into two pieces. Income the freelancer actually or constructively received before death — cash in hand, checks deposited, a card payment processed — goes on their own final Schedule C, filed as part of their final Form 1040 by the executor or surviving spouse, and is subject to both income tax and self-employment tax as usual. Money the business had earned but not yet collected at the moment of death — outstanding invoices, unpaid commissions — is not reported on that final Schedule C at all. It becomes Income in Respect of a Decedent (IRD) under 26 U.S.C. §691 instead, taxed to whoever actually collects it, in whatever year they collect it.

Does self-employment tax apply to money collected after death?

No. This is the detail that trips people up. Section 691(a)(3) says IRD keeps the same character it would have had if the decedent had lived to collect it — so unpaid invoices from a freelance business are still ordinary business income, not investment income, when the estate or heir eventually receives them. But self-employment tax is a completely separate requirement: IRC §1402(a) taxes net earnings only from a trade or business "carried on by such individual," and the IRS has confirmed (Revenue Ruling 59-162) that income collected by someone other than the person who did the work doesn't meet that test. The result is money that stays taxable as ordinary income but escapes the 15.3% self-employment tax entirely — §691 says nothing about self-employment tax one way or the other, because the SE-tax exemption comes from an independent rule, not from §691 itself.

Who reports the unpaid invoices, and where?

Whoever actually has the legal right to collect the money — typically the estate (reported on the estate's Form 1041, if the invoices were formally assigned to the estate) or an heir who collects directly (reported as other income on that heir's own Form 1040). It does not go on the decedent's final return, and it is not reported on a Schedule C at all, since a sole proprietorship isn't a separate legal entity that can survive its owner and keep filing its own business schedule.

What happens to depreciated business equipment when the owner dies?

No depreciation recapture is triggered by the transfer itself — IRC §1245(b)(2) specifically exempts a transfer at death from recapture. Instead, whoever inherits the equipment gets a stepped-up basis equal to its fair market value on the date of death under §1014, generally higher than the decedent's remaining depreciated basis, and starts a fresh depreciation schedule if they continue using it in a business. The one exception: if the transferred item is itself IRD, such as an installment note the decedent was owed, the recapture history follows it rather than resetting.

Can a surviving spouse who continues the freelance business use the decedent's unused net operating loss?

No. A net operating loss belongs to the individual taxpayer who generated it, and it doesn't carry over to a new taxpayer — not the estate, and not a surviving spouse who starts running the same kind of business under their own name and EIN afterward. The only place a decedent's unused NOL can be used is on the decedent's own final return, which can include a surviving spouse's income for that year if they file a joint final return. If it isn't fully absorbed there, it simply expires. A spouse who picks up the business is starting a legally new sole proprietorship, with a fresh depreciation clock and no inherited loss carryforward.

Schedule C When a Freelancer Dies: The Final Return, IRD, and the Business

Published: August 22, 2026 · Reading time: 9 min

TL;DR: When a self-employed taxpayer dies mid-year, the tax year splits in two. Income already received before death goes on the decedent's own final Schedule C — taxed normally, including self-employment tax. Money the business had earned but not yet collected — unpaid invoices, pending commissions — becomes Income in Respect of a Decedent (IRD) under §691, taxed as ordinary income to whoever actually collects it, but exempt from self-employment tax because §1402(a) requires the business to be "carried on by such individual," and the person collecting it isn't the person who did the work. Depreciated equipment gets a stepped-up basis with no recapture; any leftover NOL simply expires rather than carrying to an heir.

Most Schedule C guidance assumes the freelancer filing it is still around to file next year's, too. Death breaks that assumption in a specific, mechanical way: a sole proprietorship isn't a separate legal entity, so it can't outlive its owner and keep filing its own return. What happens to the income, the equipment, and the paperwork depends on exactly when money was received relative to the date of death — and getting that timing wrong is easy to do under pressure, at exactly the moment an executor or surviving spouse has the least bandwidth to research it.

Splitting the Year: Received vs. Earned-but-Unpaid

The dividing line is simple to state and easy to misapply: what had the decedent actually or constructively received before death?

Received before death → goes on the decedent's own final Schedule C, filed with their final Form 1040 (covering January 1 through the date of death), reported using the decedent's regular accounting method.
Earned but not yet received before death → does not go on the final Schedule C at all. It becomes Income in Respect of a Decedent.

IRS Publication 559 states the rule for the final return directly: "Include self-employment income actually or constructively received or accrued, depending on the decedent's accounting method." For a cash-basis freelancer — the overwhelming majority of sole proprietors — that means invoiced-but-unpaid work sits outside the final Schedule C entirely, no matter how much of the underlying work was finished before death.

What Income in Respect of a Decedent Actually Means

IRD is Publication 559's own term for "income the decedent earned or accrued but had not yet received before death." It is not a Schedule C concept — it's reported as ordinary income wherever it lands: on the estate's Form 1041 if the estate collects it, or directly on an heir's Form 1040 if they collect it themselves (common when there's no formal probate estate and a surviving spouse simply follows up with clients).

Two things make IRD behave differently from an ordinary continuation of the business:

It keeps its original character. Under 26 U.S.C. §691(a)(3), the right to IRD "shall be considered... to have the character which it would have had in the hands of the decedent if the decedent had lived and received such amount." Freelance income stays ordinary business-type income when someone else collects it — it doesn't get recharacterized as a gift, an inheritance, or investment income.
It is taxed to whoever actually collects it, in the year they collect it — not retroactively folded into the decedent's final return, and not deferred until an estate closes.

The Detail Everyone Misses: No Self-Employment Tax on IRD

Because §691(a)(3) preserves IRD's character as business income, it's tempting to assume it's still subject to the 15.3% self-employment tax the same income would have carried had the decedent lived to collect it. It isn't — and §691 doesn't actually say it is. Self-employment tax comes from a completely separate statute, IRC §1402(a), which taxes net earnings from a trade or business only when that business is "carried on by such individual." The IRS confirmed how this applies to a decedent's collections in Revenue Ruling 59-162: renewal commissions paid to a deceased salesman's widow were ordinary income to her under §691, but the ruling held they "did not have the same nature in the hands of his widow because they were not derived from a trade or business carried on by her."

In practice: the person collecting a deceased freelancer's outstanding invoices didn't do the underlying work and isn't carrying on the business by simply following up on old billing — so the money is taxable as ordinary income, but it is not subject to self-employment tax, even though the identical dollars would have carried a 15.3% SE-tax bill had the freelancer lived to collect them.

Depreciated Equipment: Stepped-Up Basis, No Recapture

Business equipment doesn't trigger depreciation recapture just because its owner died. IRC §1245(b)(2) carves death out of recapture explicitly: "Except as provided in section 691..., subsection (a) [recapture] shall not apply to a transfer at death." Whoever inherits the equipment instead gets a stepped-up basis equal to its fair market value on the date of death, under the general inherited-property basis rule of §1014 — typically well above whatever depreciated basis the decedent was carrying. If the heir puts the equipment back into business use, depreciation starts fresh from that new, higher basis.

The one carve-out in that same sentence matters if the estate holds an installment note or similar deferred-payment right from selling business assets before death: that specific item is itself IRD, and its recapture history travels with it rather than resetting — a narrower exception than the general "no recapture at death" rule might suggest.

Any Unused Loss Simply Expires

A net operating loss belongs to the individual who generated it. It has no mechanism to transfer to an estate or to a surviving spouse who restarts the same kind of business under their own name. If the decedent had an unused NOL going into their year of death, it can only offset income on the decedent's own final return — which, filing jointly, can include the surviving spouse's income for that same year — and whatever isn't absorbed there is gone. A spouse who continues the freelance work afterward is, for tax purposes, starting a brand-new sole proprietorship: no inherited NOL, no inherited depreciation schedule, just a fresh start from the stepped-up basis of whatever equipment came with it.

Worked Example: A Freelance Designer Who Dies Mid-Year

A cash-basis freelance graphic designer, sole proprietor, no employees, dies on July 15, 2026.

Income already collected, January 1 – July 15: $42,000 from paid invoices. This goes on the decedent's final Schedule C, filed with the final joint Form 1040 for 2026.

	Amount
Schedule C net profit (final return)	$42,000.00
Net earnings from self-employment (× 92.35%)	$38,787.00
Self-employment tax (15.3%, well under the 2026 Social Security wage base)	$5,934.41
Deductible half of SE tax	$2,967.21

Outstanding invoices at death: $8,500 billed but unpaid. Not on the final Schedule C — this is IRD.

The surviving spouse, sole heir with no formal probate estate, collects the full $8,500 in August 2026.
She reports it as other income on her own 2026 Form 1040 — not on any Schedule C, since she isn't the one who did the work.
Ordinary income under §691(a)(3): yes. Subject to self-employment tax: no, per Rev. Rul. 59-162 — a real SE-tax difference of about $1,201.01 ($8,500 × 92.35% × 15.3%) that this same income would have carried had the designer lived to collect it herself.

Business equipment: a camera/computer rig purchased three years earlier for $6,000, with an adjusted basis of $1,800 after depreciation and a fair market value of $2,500 on the date of death.

No recapture on the final return (§1245(b)(2)).
The spouse inherits it with a stepped-up basis of $2,500 under §1014 — $700 higher than the decedent's own remaining basis — and, if she restarts the design business under her own EIN, begins depreciating it fresh from that figure.

Unused NOL: $3,000 carried from a slow prior year.

Usable only against income on the decedent's own final 2026 joint return.
Does not carry forward to any return the spouse files afterward, even if she continues the identical freelance work.

Form 1310: in this scenario, not required — the surviving spouse is filing an original joint return for the year of death, one of the situations Publication 559 lists as not needing the form even if a refund is due.

When Form 1310 Is Required

IRS Publication 559 lists the situations where "you're claiming a refund" and Form 1310 can be skipped:

You're a surviving spouse filing an original or amended joint return with the decedent, or
You're a court-appointed or certified personal representative filing the decedent's original return, with a copy of the court certificate attached.

Outside those two situations — most commonly, a personal representative filing a refund claim on an amended return (Form 1040-X), even with a previously filed court certificate on record — Form 1310 is required before the IRS will issue the refund.

Practical Checklist for an Executor or Surviving Spouse

Pin down the exact date of death and pull every record of payments received before vs. after that date — the split determines which return each dollar lands on.
File the decedent's final Schedule C covering income received through the date of death, computing SE tax normally on that portion.
Track everything still owed to the business separately as IRD — don't fold it into the final Schedule C, and don't assume it's SE-tax-free by default; confirm the collecting party genuinely isn't "carrying on" the business themselves.
Get a date-of-death fair market value for any significant depreciable equipment before it's sold, donated, or put back into service, to establish the stepped-up basis correctly.
Check whether the decedent has an unused NOL and whether a final joint return can absorb it — it has no life afterward.
Confirm whether Form 1310 applies before filing for any refund, based on who is filing and in what capacity.

Authoritative References

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This guide is general education for U.S. freelancers and their families, covering the 2026 tax year. It is not personalized tax, legal, or estate-planning advice. How income, depreciated property, and any loss carryforward should be handled for a specific decedent's final return depends on facts a CPA, EA, or estate attorney should review.

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