Cost of Labor or Wages?

[Yardley CPA]

I have a Schedule C Landscape Business as a client.  This was a return that was extended and I've begun working on it.  When I prepare the Schedule C, I list employee payroll as "Cost of Labor" in the Cost of Goods Sold section.  Want to make sure they should not be listed as "Wages" in Part II Expenses section.  The business does not offer any benefits or 401K, just payroll...so I'm wondering if the payroll should really be listed as wages? 

Thank you!

[Jack from Ohio]

Payroll = Wages = W-2 forms issued = proper withholding = 941 with appropriate payments.  It is NOT COGS.

The person probably issued 1099s instead of W-2.  The IRS has made misclassification of workers a big issue lately.

[rfassett]

Yardley,

Yours is a good question.  If you are attempting to prepare a return pursuant to GAAP and/or Section 263A, you would allocate those expenses that are directly attributable to the production of income as COGS - and wages is one of those items that would be allocated. The reality, in the big scheme of things for most Schedule C type businesses, it is six of one; half dozen of the other - in my humble opinion.

[kcjenkins]

I would list it as wages, so that the C matches with the 941's and 940.  I use Cost of Labor for legitimate subs not employees.

 

[Abby Normal]

I don't think it really matters, but as a landscaping business is mostly a service business, I would tend not to use cost of goods sold at all, unless they have inventory.

[Randall]

If using COGS, I use other and list it as contract labor for 1099 subs.

[Yardley CPA]

Thanks for your replies.  Based on your feedback, it sounds like they should be listed as wages within Part II of the Schedule C and not in the COGS section.  I'll place them there (fingers crossed it doesn't raise anyone's eyebrows at the IRS since I placed them in COGS last year.)

So here's another question, also listed on the Schedule C, Part II Expenses is "Contract Labor" on line 11.  It was on this line that I was going to include the amount paid to the one subcontractor that the Landscaper uses (we did issue a 1099 to that person).  Would that be correct?

Thanks again for everyone chiming in!

[SaraEA]

I agree with jm.  A service business doesn't usually sell goods.  Think about an accounting office--sure we print off a copy of a tax return and put it in a nice folder, but what we really sell is the service of preparing the return.  Paper and folders are just office expenses.  If your client buys and then applies fertilizers, grub control, etc., and charges the client separately for it, I could see COGS.  If not, I'd put those expenses under supplies.  The labor is definitely W2, with the exception of the one contractor.

[rfassett]

Here is the IRS's take on the question.

http://www.irs.gov/publications/p334/ch06.html

 

 

[Abby Normal]

Here is the IRS's take on the question.

http://www.irs.gov/publications/p334/ch06.html

 

 

Thanks! I searched for that yesterday but couldn't find it.

[Catherine]

Thanks! I searched for that yesterday but couldn't find it.

They hide when you look for them.  They come out of hiding *only* when  you give up and call for help.  It's happened to me so often that if I can't find something right off, I start thinking that the best use of my search time might be to put out an apb to the forum.

[Abby Normal]

I gave up after not finding it in the Sch C instructions. Who knew they'd bury in chapter 6 of some damn publication?