On Schedule C, Line 26 is designated for reporting "Salaries and wages" paid to employees during the tax year. This amount must be reduced by any applicable employment tax credits, such as the Work Opportunity Credit (Form 5884), Empowerment Zone Employment Credit (Form 8844), Credit for Employer Differential Wage Payments (Form 8932), and the Employer Credit for Paid Family and Medical Leave (Form 8994). However, you should not reduce your deduction for any portion of a credit that was passed through to you from a pass-through entity.
Key Rules for Line 26
Reduction for Credits:
You must reduce your wage deduction by the amount of wages used to calculate employment credits, such as:
- Work Opportunity Credit (Form 5884)
- Empowerment Zone Employment Credit (Form 8844)
- Credit for Employer Differential Wage Payments (Form 8932)
- Employer Credit for Paid Family and Medical Leave (Form 8994)
If a credit is passed through from a partnership or S corporation, the wage adjustment is generally handled at the entity level and should not be duplicated on Schedule C.
- Exclude Self-Payments:
Do not include amounts paid to yourself. Sole proprietors do not receive wages; instead, business profit is reported as self-employment income.
- Avoid Double Deductions:
Do not include wages that are already deducted elsewhere (for example, in cost of goods sold or other expense categories).
- Fringe Benefits:
Taxable fringe benefits provided to employees are generally included in wages and are deductible. However, you must ensure that related expenses are not deducted more than once in different categories.
- Reporting Requirements:
You are generally required to issue Form W-2 to each employee and comply with payroll tax requirements, including withholding and paying Social Security, Medicare, and federal unemployment (FUTA) taxes.
Related Guidance
- Contract labor (Line 11): Payments to independent contractors (not employees) should be reported on Line 11, not Line 26. You must file Form 1099-NEC for payments of $600 or more.
- Statutory employees: If you received income as a statutory employee (e.g., full-time life insurance agents, certain drivers), report that income on Schedule C, Line 1, and check the box. You do not owe self-employment tax on this income, as Social Security and Medicare taxes were withheld.
Source:
Schedule C Instructions (2025)
Disclaimer: Always verify details with the current IRS Form and Instructions, as well as your state’s Department of Revenue. Tax rules may vary by jurisdiction and individual circumstances. For complex situations, consult a CPA or tax attorney.