Pub 334

You can generally deduct salaries, wages, and fringe benefits you pay to your employees for their services on Schedule C. You can also deduct amounts you pay for your employees to employee benefit programs.

You can deduct salaries or wages if they are:

1. Ordinary and necessary
2. Reasonable
3. For services performed, and
4. Paid or incurred.

You cannot deduct your own salary or any personal withdrawals you make from your business. You are not an employee of the business.

Caution. If you had employees during the year, you must use Schedule C. You cannot use Schedule C-EZ.

Some of the payments you may be able to deduct are:

• Bonuses
• Gifts of nominal value, such as turkeys and hams
• Employee achievement awards that meet certain requirements
• Loans or advances that you do not expect the employee to repay if they are for personal services actually performed
• Vacation pay
• Compensation for sickness and injury
• Cost of furnishing meals and lodging to employees
• Reimbursements for employee business expenses
• Educational expenses
• Moving expenses
• A capital asset or business asset that you transfer to one of your employees as payment for services.

Fringe benefits. A fringe benefit is a form of pay provided to any person for the performance of services by that person. You can deduct the cost of fringe benefits you provide. However, you must include in your employees' pay the value of fringe benefits you provide unless the benefits are specifically excluded from income by law or the employee pays for them. The following are examples of fringe benefits:

• The use of a car
• A flight on an airplane
• A vacation
• A discount on property or services
• A membership in a country club or other social club
• A ticket to an entertainment or sporting event.

For information on the rules that apply to fringe benefits, see chapter 4 in Publication 535. That chapter explains how to value fringe benefits and determine whether fringe benefits are excludable from your employees' incomes.

Employee benefit programs. You can generally deduct amounts you spend on employee benefit programs as a business expense. You can also exclude from an employee's income the value of part or all of the benefits you provide. Employee benefit programs include the following.

• Adoption assistance
• Cafeteria plans
• Dependent care assistance
• Educational assistance
• Group-term life insurance
• Group health plans (including medical savings accounts)
• Welfare benefit funds

Adoption assistance program. An adoption assistance program is a separate written plan you set up to provide adoption assistance to your employees. You can deduct the cost of an adoption assistance program you provide for your employees on Schedule C.

Up to $5,000 ($6,000 for a special-needs child) you pay or incur under an adoption assistance program for an employee's qualified adoption expenses is excludable from the employee's gross income. For more information on this exclusion, including the definitions of the terms "special needs child" and "qualified adoption expenses," see Publication 968, Tax Benefits for Adoption.

Medical savings accounts. You may be able to open a medical savings account (MSA) for yourself and each of your employees if you had on average 50 or fewer employees in either of the 2 preceding calendar years and have a high-deductible health plan. You can deduct the contributions you make to MSAs for yourself and your employees. You open the MSA with a trustee or custodian, such as a bank or insurance company. For more information about MSAs, get Publication 969.

Pub 535

You can generally deduct the cost of providing fringe benefits on the "employee benefit programs" line of your business income tax return. However, you must be able to show that your cost for each employee represents current pay and that the total of this cost plus your other pay to the employee was reasonable.

You can generally exclude a limited amount of the cost of providing these benefits to an employee from his or her wages as you withhold, pay, and report employment taxes.