How to report fashion seamstress payments - Contract labor expense or cost of labour on Schedule C?

Thanks for the explanation! So if I use a pattern cutter who comes to my studio once a week and I pay them hourly, is that also contract labor? Or would that be different since they work at my location on a regular schedule?

The distinction isn't about location but about the worker's status. If your pattern cutter is operating as an independent contractor (controls their own schedule, uses their own tools, can work for other businesses, etc.), then yes, they would also be contract labor on line 11. If they work set hours that you control, use your equipment exclusively, and you direct how they perform their work in detail, they might actually be classified as an employee instead of a contractor. In that case, you would need to handle payroll taxes and they wouldn't be on Schedule C at all.

How accurate is it though? I've tried tax software before that gave me completely wrong advice about my Etsy business expenses. Does this actually understand the difference between materials and labor?

I'm curious - does taxr.ai handle 1099 preparation too? I have about 5 different contractors I need to issue 1099s for, and I'm dreading the process.

It's surprisingly accurate - I was skeptical at first too. It correctly identified my material purchases as Cost of Goods Sold and separated out the labor components. It even flagged when I had miscategorized something in my own records, which saved me from a potential audit. For 1099 preparation, yes it does help with that too. It identifies which contractors need 1099s based on payment thresholds and helps organize all the information you need to issue them correctly. Made the whole process much less stressful for me this year.

Wait so they just get you through the phone queue faster? How does that even work? Sounds like paying to cut in line which doesn't seem legit.

This sounds like a scam. No way the IRS would allow a service to let people jump the queue. I've been on hold with them for hours before, and that's just how it is.

They don't cut in line - they use an automated system that handles the waiting for you. Their system navigates the IRS phone tree and waits on hold, then calls you when they've reached a representative. It's completely legitimate. They're just using technology to solve the hold time problem. It really does work - I was skeptical too until a friend in my industry recommended it. The time I saved was worth it since I could keep working on other things instead of sitting with my phone on speaker for hours.

Thanks for the reminder about the 1099-NEC! I did get her W-9 information, but I wasn't 100% sure about the $600 threshold. Do I need to issue the 1099 for payments made just for labor, or does it also apply if some of her invoices included materials she purchased?

The $600 threshold applies to the total payments to that contractor during the year, regardless of whether it's for labor, materials, or a combination. If your seamstress includes materials in her invoices and you pay her directly for everything as a lump sum, the entire amount counts toward the $600 threshold. Some contractors will separately itemize materials and labor on their invoices, but for 1099 purposes, you're reporting the total amount paid to that person or business during the tax year.

This is actually a common misunderstanding. While it seems logical to put seamstress costs in COGS since they're making your products, the IRS is very specific about this distinction. Contract labor (like independent seamstresses) goes on line 11, while Cost of Goods Sold is primarily for materials and inventory-related costs.