Wages paid goes on line 26 of the sch C. See line 26 instructions here. The w2 wages in box 1 includes tips. Take your total wages transmitted, line 1 and enter on line 26. The tips came in and the tips went out. They passed through your records and into the employees hands.
The IRS: About Form W-2, Wage and Tax Statement states:
Box 1—Wages, tips, other compensation.
Show the total taxable wages, tips, and other compensation that you paid to your employee during the year.
Side answer: The w2 instructions cover instructions on handling incorrect w2s. Including, filing a new form 941 if additional taxes are due. Click here.
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