When completing your Schedule C, it's important to report payments to workers in the correct expense category. Whether you use Contract Labor or Wages depends on whether the worker is an independent contractor or an employee.
Use Contract Labor for Independent Contractors
Contract Labor is used for individuals you pay to perform work for your business who are not your employees.
Examples include:
- Subcontractors
- Freelancers
- Independent contractors
- Consultants
- Other non-employees who provide services to your business
If you paid a contractor and were required to issue an information return, the reporting form depends on the tax year:
- For tax years before 2020, nonemployee compensation was generally reported on Form 1099-MISC.
- For tax years 2020 and later, nonemployee compensation is generally reported on Form 1099-NEC.
Payments reported as contract labor are entered as a business expense on Schedule C and may reduce your net profit and self-employment tax.
Use Wages for Employees
The Wages expense category is used when you pay individuals who are your employees.
Generally, an employee:
- Receives a Form W-2
- Has payroll taxes withheld from their paycheck
- Is subject to your direction and control regarding how the work is performed
If you're reporting compensation paid to a W-2 employee, those amounts should be entered under the Wages expense section rather than Contract Labor.