| The purpose of this article is to help you | | | | The other big mistake is to report independent |
| understand the purpose of Schedule C, Line 26, | | | | contractor payments on Line 26. If you have |
| Wages. Whether or not you have employees, if | | | | people that provide services to your business as |
| you are a Sole Proprietor, it is critical that you | | | | independent contractors, report those payments |
| properly deduct expenses related to | | | | on Schedule C, Line 11, Contract labor. And if |
| compensation. | | | | these people are truly independent contractors, |
| The purpose of Schedule C, Line 26 is to deduct | | | | there should be a written contract between the |
| employee compensation. The IRS has labeled this | | | | two of you. Furthermore, if you pay a contractor |
| line "Wages", but employee compensation includes | | | | $600 or more in a calendar year, you are required |
| not only wages paid to hourly employees, but also | | | | to issue him/her a Form 1099-MISC to report the |
| salaries, commissions and bonuses paid to | | | | total annual amount of non-employee |
| employees. The key here is this: whatever you | | | | compensation. |
| pay your employees should be reported on this | | | | One final comment: if you report any employee |
| line. | | | | compensation on Line 26, you must file several |
| With that in mind, let's discuss what should not be | | | | employee-related payroll tax returns on a regular |
| reported on Line 26. First, never report payments | | | | basis. The most common federal payroll tax |
| to yourself, the Sole Proprietor. The owner of a | | | | forms include Form 941 (quarterly), Form 940 |
| Sole Proprietorship is never considered to be an | | | | (annually) and Forms W-2 and W-3 (annually). You |
| employee of the business. Any payments you | | | | may also be required to file payroll tax returns at |
| make to yourself out of the business (sometimes | | | | the state level for state unemployment tax and |
| called "draw") are considered a withdrawal of | | | | worker's compensation insurance, so be sure to |
| profit, not employee compensation. | | | | check with your state for details on that. |