Where to report seamstress piece work on Schedule C - Contract labor or cost of labor?

This is a common question for small businesses with contractors. Based on what you've described, your seamstress is definitely a contractor (not an employee) since she works independently, sends invoices, uses her own equipment, and works from her location. On Schedule C, you should report these payments on Line 11 "Contract labor." This is specifically for payments to independent contractors who provide services to your business. Since she's doing piece work related to your product creation, this is the appropriate category. Just make sure that if you paid her $600 or more during the year, you need to issue her a 1099-NEC by the filing deadline (usually January 31st). The IRS will expect to see those payments reported there.

After spending way too many hours trying to figure out where to put my contractor expenses on Schedule C, I found this tool called taxr.ai (https://taxr.ai) that actually reviewed my tax situation and explained exactly where my contractor expenses should go! I also had a contractor who made parts of my products (I make custom furniture) and was totally confused whether to put it under contract labor in Part II or cost of labor in Part III. The tool analyzed my specific business model and explained that since my contractor was directly involved in creating my product inventory, I should classify it under Cost of Labor in Part III of Schedule C. Saved me so much stress trying to figure it out myself!

I tried that taxr.ai site after reading about it here and WOW what a difference! I uploaded my previous year's Schedule C where I had been putting my seamstress payments under "Contract labor" and the analysis showed I should have been using "Cost of labor" under COGS since she's directly creating my inventory products. It even showed me that this classification would potentially be more advantageous in case of an audit because it properly reflects the nature of the expense. Honestly feel so much more confident filing this year. They also had this feature where they explained exactly what documentation I should keep for these expenses, which I had NO idea about before!

For anyone struggling to get answers from the IRS about Schedule C questions, I had a similar issue last year and found Claimyr (https://claimyr.com). I was completely stuck on whether to classify my manufacturing contractors as contract labor or cost of goods sold. After waiting on hold with the IRS for HOURS over multiple days, I tried Claimyr and they got me connected to an actual IRS agent in about 15 minutes. The agent walked me through exactly how to classify my piece-work contractors based on my specific business model. They have a demo video here: https://youtu.be/_kiP6q8DX5c if you want to see how it works. Never going back to waiting on hold for hours again!

Okay I have to eat my words. After being super skeptical about Claimyr, I tried it when I was desperate to figure out my Schedule C contractor situation before filing deadline. I'd been calling the IRS for THREE DAYS trying to get through. Used Claimyr and got connected to an IRS representative in about 20 minutes. The agent confirmed that for my clothing design business, the seamstresses who make my products should indeed be classified under "Cost of Labor" in Part III rather than "Contract Labor" since they're directly producing my inventory. She explained that Contract Labor is more for services that support the business (like accounting or marketing) rather than direct product creation. Totally worth it and saved me from potentially misclassifying a significant expense!

Just to add another perspective, I've been filing Schedule C for my clothing business for 5 years now. The distinction really comes down to how central the contractor's work is to your product. For piece work that directly creates your inventory, "Cost of Labor" in Part III (COGS) makes the most sense. This is especially true if you're tracking inventory. If you use accrual accounting, this becomes even more important because you want costs matched to when the related products sell. For services that support your business but don't directly create product (like designers, photographers, website developers), that's when you use "Contract Labor" in Part II.

Make sure you're keeping good records of all those invoices! I got audited last year for my Schedule C and they specifically looked at my contractor payments. You need: 1) All invoices 2) Proof of payment 3) Business purpose documented 4) 1099-NEC copies Also don't forget you need her taxpayer ID (usually SSN) to file the 1099-NEC. If you didn't collect a W-9 form when you started working with her, get one asap!