Cost of Goods (labor) for photo editing service

[Wannabe]

For a single member photography business, I occasionally use 3rd party photo editing service before delivering prints to some clients. Will the payments to the photo editing service be entered in Turbotax as Cost of Labor (Line 37 in Sch C and hence Cost of labor) or Contract labor (Line 11 in Sch C).

And related note, a higher CoGs affects Gross profit. Is there any tax implication of that?

Thank you

[DavidS127 · Accepted solution]

Unless you have a good reason or strong desire to track your work inventory, it may be less confusing for you to steer clear of using the Cost of Goods Sold section. 

But, if you already use that Cost of Goods Sold section to keep track of the cost of the producing your finished products so you can know the "gross margin", the Cost of Goods Sold section is fine.  But, I would recommend the "Other Costs" line 39, because this is not labor from your employees or from a contract employee (but rather a service business you are hiring).

If you don't use the Cost of Goods Sold section, Contract labor is one place to report these expenses, particularly if this is a person that acts as a contract laborer for your business.  Or, you could add a specific "Outside Services" or "Photo Editing Service" in the Other Expenses section.  Whichever "classification" makes more sense to you is fine.  Note that if you are paying a person (not a corporation) for contract labor, you may have a 1099-MISC filing requirement.

From a "bottom line" standpoint, it doesn't matter which category you use (Cost of Goods Sold or some other expense line).  The cost will be deducted from your income either way.