Employer payroll taxes are deductible on Schedule C, but your own self-employment tax is not. The employer-side Social Security, Medicare, and unemployment taxes you pay on your workers’ wages go on Line 23 (Taxes and Licenses) as ordinary business expenses. Self-employment tax, which covers your own Social Security and Medicare contributions as a sole proprietor, is handled elsewhere on your return and never belongs on Schedule C. Confusing the two either costs you a legitimate deduction or triggers an IRS notice for one you can’t take.
Which Employer Payroll Taxes Qualify
If you have employees, the taxes you owe on top of their wages are deductible under the general rule allowing expenses paid in carrying on a trade or business.1Office of the Law Revision Counsel. 26 U.S.C. 162 – Trade or Business Expenses Four categories cover almost everything a sole proprietor will encounter:
- Employer share of Social Security tax: 6.2% of each employee’s wages, up to a taxable wage base of $184,500 for 2026. Once an employee’s earnings hit that cap, you stop owing Social Security tax on their wages for the rest of the year.2Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates3Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
- Employer share of Medicare tax: 1.45% of each employee’s total wages with no cap.2Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
- Federal unemployment tax (FUTA): a base rate of 6.0% on the first $7,000 of each employee’s annual wages. Most employers get a credit of up to 5.4% for paying state unemployment tax, which brings the effective federal rate down to 0.6%.4Internal Revenue Service. Topic No. 759, Form 940 – Employers Annual Federal Unemployment (FUTA) Tax Return
- State unemployment insurance (SUI): a rate your state assigns based on industry and claims history. These contributions are deductible on your federal return as business taxes.5Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040)
Local employer payroll taxes imposed by a city or county are deductible on the same basis. One tax that does not fit here is the 0.9% Additional Medicare Tax on employee wages above $200,000. That one falls on the employee only, with no employer match, so there is nothing on that piece for you to deduct.6Internal Revenue Service. Questions and Answers for the Additional Medicare Tax You still have to withhold it, but the cost is not yours.
The rule throughout is that only the employer’s share is a deduction on Line 23. Amounts you withhold from employee paychecks for income tax and their half of FICA are the employees’ money, not yours. Those are already captured inside the gross wages figure you deduct on Line 26.
Why Self-Employment Tax Is Not a Schedule C Deduction
Your own contributions as a sole proprietor work differently from the taxes on your workers. You pay self-employment tax at a combined 15.3% on your net earnings, covering both halves of Social Security and Medicare.7Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) You compute it on Schedule SE, which uses the net profit from Schedule C as its starting point.
Self-employment tax is not a business expense. You cannot subtract it on Schedule C. Instead, you deduct 50% of your self-employment tax on Schedule 1, Line 15 of Form 1040, which reduces your adjusted gross income.8Internal Revenue Service. Schedule 1 (Form 1040)7Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) That 50% deduction mirrors the break incorporated employers get for their FICA match. It lowers your income tax. It does not reduce your self-employment tax or your Schedule C net profit.
The Schedule C instructions are explicit: do not deduct federal income taxes or your self-employment tax on Line 23.5Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040) Putting self-employment tax there inflates your deductions and is exactly the kind of error that generates automated IRS correction notices.
Where Payroll Taxes Go on Schedule C
Line 23, “Taxes and Licenses,” is the correct home for your employer payroll taxes. The IRS instructions specifically list your employer-matching Social Security and Medicare taxes, federal unemployment tax, and state unemployment insurance contributions.5Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040) The same line also covers other business-related taxes such as real estate and personal property taxes on business assets, sales taxes you pay as a seller, and regulatory license fees.
Three lines on Schedule C touch worker costs, and mixing them up is one of the more common filing errors:
- Line 11 (Contract Labor): what you paid independent contractors for services to your business. No payroll tax obligation attaches; the contractor handles their own self-employment tax.
- Line 23 (Taxes and Licenses): your employer-side payroll taxes (FICA match, FUTA, SUI) plus other deductible business taxes and fees.
- Line 26 (Wages): gross wages paid to employees, already inclusive of the amounts you withheld for their income tax and their share of FICA.
Filing software handles the transfers from Schedule C to Schedule 1, Form 1040, and Schedule SE, but verifying that Line 23 contains only employer-side taxes, and not withheld employee amounts, is worth the two minutes.
Family-Employee Exemptions That Change the Numbers
Employing your spouse or children in a sole proprietorship can shrink the payroll tax you owe, which means it also shrinks what you deduct on Line 23.
Wages you pay your spouse are subject to income tax withholding and Social Security and Medicare taxes like any other employee, but they are exempt from FUTA.9Internal Revenue Service. Married Couples in Business At an effective FUTA rate of 0.6% on the first $7,000, the savings are modest, but real.
Children get broader treatment. Wages paid to a child under 18 who works in a parent’s sole proprietorship are exempt from Social Security and Medicare taxes entirely. Wages paid to a child under 21 are exempt from FUTA.10Internal Revenue Service. Family Employees These exemptions apply only when the business is a sole proprietorship, or a partnership in which both partners are the child’s parents. If the business is a corporation, or a non-parent partner is involved, standard payroll taxes apply at every age.
The wages still have to be reasonable compensation for actual work. Paying an eight-year-old $50,000 to “help around the office” invites the kind of scrutiny that erases whatever tax benefit you thought you had.
Payroll Penalties Are Never Deductible
Late deposits carry escalating penalties: 2% of the undeposited amount if the deposit is 1 to 5 days late, 5% if 6 to 15 days late, 10% if more than 15 days late, and 15% if the tax is still unpaid 10 days after the IRS sends a delinquency notice.11Office of the Law Revision Counsel. 26 U.S.C. 6656 – Failure to Make Deposit of Taxes
None of those penalties are deductible. Federal law prohibits deducting fines or penalties paid to a government entity.1Office of the Law Revision Counsel. 26 U.S.C. 162 – Trade or Business Expenses When you reconcile payroll at year-end, keep any penalty amounts out of the Line 23 total. The underlying tax stays deductible; the penalty on top of it does not.
Records That Support the Line 23 Number
Your deduction is only as defensible as your documentation. Most sole proprietors use the cash method, meaning you deduct payroll taxes in the year you actually pay them, not when the liability accrues.12Internal Revenue Service. Publication 334 (2025), Tax Guide for Small Business A fourth-quarter 2025 deposit made in January 2026 is a 2026 deduction.
Two federal forms provide the numbers. Form 941, filed quarterly, breaks out Social Security and Medicare taxes paid, showing both the employer and employee portions for each quarter; only the employer-matching amounts belong on Line 23.13Internal Revenue Service. About Form 941, Employers Quarterly Federal Tax Return Form 940, filed annually, reports your FUTA liability.4Internal Revenue Service. Topic No. 759, Form 940 – Employers Annual Federal Unemployment (FUTA) Tax Return
Cross-check both forms against your bank records showing actual deposit dates and amounts, and keep your state unemployment statements alongside them. If the IRS questions the figure on Line 23, they will want the forms, the deposit confirmations, and the bank statements telling the same story. The time to reconcile them is before you file.