Wages
Paying employees? Deduct their salaries here. The cardinal rule: you can never deduct a salary paid to yourself as a sole proprietor.
A guide by Taxstra Tax & Accounting — CPA-led tax strategy for business owners
Line 26 is for gross wages and salaries paid to W-2 employees — people who receive a Form W-2 at year-end. It does not include what you pay yourself, payments to independent contractors, or the employer side of payroll taxes. Those go on separate lines. Getting this right keeps the IRS from questioning your payroll tax compliance.
The Golden Rule: You Cannot Be Your Own Employee
This catches a lot of new business owners off guard. You might pay yourself $8,000 a month from the business checking account. That is an owner's draw — a distribution of profit. It is not a deductible expense, and it does not appear on Line 26. Your entire net profit is subject to self-employment tax and income tax regardless.
| Payment Type | Deductible? | Where It Goes |
|---|---|---|
| Owner's Draw | Not deductible | Not reported on Line 26 |
| W-2 Employee Wages | Fully deductible | Gross wages on Line 26 |
| Child's Wages (< 18, sole prop) | Fully deductible | No FICA owed on the wages |
| Freelancer / 1099 Contractor | Fully deductible | Goes on Line 11, not Line 26 |
| Employer FICA Match | Fully deductible | Goes on Line 23 (Taxes) |
Strategy: Hiring Your Children
One of the most powerful and underused tax strategies for family-owned businesses is putting your minor children on payroll. Done correctly, it is fully legal and creates a meaningful tax benefit at every income level.
The Benefits
- Wages are fully tax-deductible to you
- No FICA taxes owed if child is under 18 in a sole proprietorship
- Child pays $0 federal income tax up to the standard deduction
- Child can fund a Roth IRA with earned wages
The Requirements
- Work must be real and age-appropriate
- Pay must be reasonable for the work performed
- Hours and tasks must be documented (timesheets)
- Must comply with applicable child labor laws
Common Mistakes on Line 26
Including Payroll Taxes in the Wages Figure
Line 26 is for gross wages only — the amount you pay employees before any withholding. Do not include the employer's matching share of Social Security and Medicare here. That 7.65% employer match belongs on Line 23 (Taxes and Licenses). Mixing them up overstates wages and can trigger payroll tax questions.
Listing Contractors as Employees
Independent contractors (freelancers, 1099-NEC recipients) go on Line 11 (Contract Labor), not Line 26. The distinction matters to the IRS because W-2 employees generate payroll tax obligations — FICA matching, FUTA, state unemployment. Contractors do not. Mixing them signals you may have misclassified workers, which can trigger a worker-classification audit.
When You Should Consider Going on Payroll
Once your Schedule C net profit consistently exceeds roughly $50,000–$60,000 per year, an S-Corp election often makes sense. Here is the key difference: as a sole proprietor, 100% of your net profit is subject to self-employment tax (15.3% on the first$176,100 for 2025, 2.9% above that). As an S-Corp owner, you take a reasonable salary and pay SE tax only on the salary — the remaining profit passes through as a distribution free of FICA taxes.
This is one of the highest-leverage planning decisions for self-employed professionals. If your Schedule C profit is growing, it is worth running the numbers now rather than after another year of unnecessary SE tax.
Frequently Asked Questions
Next Steps
Filing it yourself is fine — optimizing it is where the money is
Getting the form right keeps you out of trouble. The strategies below are what actually lower the bill.
Do You Need a Tax Strategist?
Once you are running payroll, the planning opportunities multiply — and so do the mistakes. Here is what a year-round strategist actually does.
S-Corp Reasonable Salary
Wondering why you can't put your own pay on Line 26? As an S-Corp you can — and the salary you set is what drives your FICA savings.
Paying a team means you've outgrown DIY tax prep.
Free 30-minute call with a Taxstra CPA — no pressure, just the math for your situation.
Should You Be on Payroll?
A Taxstra CPA can model the sole proprietor vs. S-Corp math for your specific income level and tell you exactly when the switch pays off.
Find Out What You're Overpaying in Taxes
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