Deducting Employee Wages on Schedule C
In short: Wages paid to employees are fully deductible business expenses reported on Schedule C, Line 26, though you must exclude your own owner's draw and any wages already included in the cost of goods sold.
What Qualifies as Deductible Employee Wages
Wages paid to actual employees for services rendered to your business are fully deductible on your tax return. When you file your taxes for 2026, you report these gross compensation amounts on Line 26 of Schedule C. This includes hourly pay, salaries, bonuses, and commissions paid directly to your W-2 workers. It is vital to separate these payroll expenses from your own personal withdrawals, as a sole proprietor cannot pay a deductible wage to themselves. An owner's draw simply shifts equity and has no effect on your Schedule C net income calculations.
Where to Report Wages, Payroll Taxes, and Benefits
Accurate tax reporting requires separating payroll components into their designated line items rather than lumping everything together. While employee wages go on Line 26, employer payroll taxes belong on Line 23 of Schedule C. Employee benefits, such as health insurance or retirement contributions you fund on their behalf, generally find their home on Line 14. Furthermore, you must ensure you do not double-dip by including wages that are already captured within the cost of goods sold on your return. Following IRS Pub 15 and Pub 535 guidelines helps prevent costly misclassifications.
Recordkeeping and Proper Tax Documentation
Maintaining detailed payroll records is essential for substantiating your deductions if the IRS ever reviews your return. Keep precise logs of all compensation disbursed, payroll tax filings, and benefit disbursements throughout the year. For the 2026 tax year, remember that independent contractor reporting thresholds have shifted, with the 1099-NEC threshold set at $2,000. Utilizing tools like Proofly helps you organize your broader business receipts and expenses so that your financial documents remain orderly and ready when tax preparation time arrives.
Related
What the Proofly receipt scanner does — and doesn’t
Does
- Reads merchant, date, line items, tax and payment method from a photo, with a confidence meter so you can correct it before saving
- Keeps personal and per-company receipts separate
- Maps business expenses to Schedule C lines (meals already at 50%)
- Exports an audit pack: every receipt image plus a ledger, as PDF, and CSV for QuickBooks or Xero
- Has a manual mileage log priced at the IRS rate for each trip’s date
Doesn’t
- File your taxes or give tax advice
- Sync live with QuickBooks or Xero (it’s CSV export)
- Pull transactions from your bank automatically
- Track your drives by GPS
- Guarantee how an audit turns out
Frequently asked questions
Can I deduct my own owner's draw as a wage expense?
No. As a sole proprietor or single-member LLC owner, you cannot pay yourself a deductible wage. An owner's draw is a withdrawal of equity, not an operational expense on Schedule C.
Where do employer-paid payroll taxes go on Schedule C?
Employer payroll taxes are reported on Line 23 of Schedule C, separate from the actual gross wages paid to employees, which are reported on Line 26.
What guidance covers employee wage deductions?
The IRS provides specific rules regarding employment taxes and business deductions in IRS Pub 15 and Pub 535.
Can I include wages that are already part of the cost of goods sold?
No. You must not include wages that have already been captured in the cost of goods sold to avoid double-counting deductions on your tax return.
Sources
This guide summarizes IRS guidance as of October 28, 2026 for planning purposes. It isn’t tax advice — confirm your situation with IRS.gov or a qualified tax professional.