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

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.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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