Do I include the amount I paid a contract worker in my business income, and deduct the amount as an expense? When I do this, I only get back $1 K of the $5K I paid them.

[VolvoGirl]

Yes you want to claim all your expenses.  It is not a 1 to 1 Deduction.  It lowers your Net Profit on Schedule C so you pay less income tax and less self employment tax on it.  You never get back all your deductions and expenses.

[sariley73]

I guess wages seems like they should be a 1 to 1 deduction, since they're making it and I'm not.

[VolvoGirl]

Well they are a 100% Deduction.  I didn't say that very good. It just doesn't directly reduce the tax by the same amount.  You just get a percentage back.  You are paying about 15% self employment tax on you Profit so adding expenses only saves the 15%.

[Coleen3 · Accepted solution]

If you paid someone for working for you, you don't include it in income. It is not income, it is an expense.

[sariley73]

So, I don't include that amount in my self-employed income and then expense it in the Contract Labor part? I deduct the amount from my income and still expense it in the Contract Labor part?

[Coleen3]

You neither add it to or subtract it from your income. Enter your income, what you made, as income. Deduct your expenses afterward.

[VolvoGirl]

Depends,  you have to report all your income.  But you don't enter this expense as both income and expense.  

[sariley73]

I guess I meant business receivables, as opposed to my income.

[Coleen3]

What is the difference in your mind? If you were paid, or you earned, or you received payment in the amount of $10k, that is what you enter as income.