26 — Wages Updated for tax year 2025

What this line means

Total wages, salaries, and other compensation you paid to employees during the year. This is the gross amount before withholding — the full amount on the employee’s W-2 box 1. Do not include amounts paid to independent contractors (those go on line 11) or your own draws or salary as a sole proprietor (sole proprietors do not pay themselves a salary — you take draws from business profits).

Does this apply to you?

• You have W-2 employees who work in your business
• You hired part-time, seasonal, or temporary employees
• You pay your spouse or children as employees of your business
• You paid bonuses, commissions, or other compensation to employees

Easy to overlook

Hiring your children can shift income to a lower bracket If you hire your child (under 18) to do legitimate work in your sole proprietorship, their wages are exempt from Social Security and Medicare taxes, and you deduct the wages on line 26. The child can earn up to the standard deduction amount ($15,750 in 2025) essentially tax-free. This is one of the most effective tax strategies for family businesses, and most sole proprietors do not use it. ¹ [SOURCE: IRS Schedule C instructions — Line 26]

You cannot put yourself on payroll as a sole proprietor Unlike S-corps and C-corps, sole proprietors do not pay themselves a salary. Your compensation is the net profit on line 31. Taking a “draw” from your business bank account is not a wage — it is a distribution of profit. Do not include your draws on line 26. If you want to pay yourself a salary, you need to change your business structure. ² [SOURCE: IRS Employment Tax Audit Guide]

Watch out for this

Classifying workers as independent contractors when they are actually employees to avoid payroll taxes. If you control when, where, and how someone does their work, they are an employee — regardless of what you call them in a contract. The IRS imposes severe penalties for misclassification, including back payroll taxes, interest, and penalties.

Related lines on your return

• Line 11 — Schedule C — Contract labor; payments to non-employees go there
• Line 14 — Schedule C — Employee benefit programs; benefits on top of wages go there
• Line 19 — Schedule C — Pension plans; employer retirement contributions for employees go there