If I bring in help on certain days for my business instead of officially hiring someone, how should labor expenses be categorized on my taxes?

by Elizabeth W. Kidd, CPA | Oct 16, 2018
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We have a family-owned party decoration business that is registered as a single-member LLC. During the busy months, we are thinking about getting some labor help on certain days without actually hiring someone because we are not always busy. How should labor expenses be categorized when we file taxes?

Under federal tax law, a person performing tasks for a business is either an employee or an independent contractor. Generally, if the business controls the manner in which the tasks are performed and provides the supplies necessary to perform the tasks, the person is an employee. If the person controls the performance of the task and is “in the business” of performing the task for multiple businesses, the person is an independent contractor. 

Determination of status may be somewhat different for state purposes, such as unemployment compensation or worker’s compensation.

If the “labor help” you are proposing to obtain is an employee, the costs would be reported as employee wages. You would include these wages in your reporting of other payroll costs both for payroll tax returns and on your personal Schedule C. If the “labor help” is an independent contractor, you would issue a 1099 if the payments meet the reporting requirement and report the payments on Line 11 of your Schedule C.

Employment taxation and employment law are complicated issues. You should consult with your attorney and tax adviser to minimize your risk in these areas.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Elizabeth W. Kidd, CPA, is a retired accounting instructor in Erie, Pa.

 
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