You can generally deduct on Schedule C the pay you give your employees for the services they perform for your business. The pay may be in cash, property, or services.

To be deductible, your employees' pay must be an ordinary and necessary expense and you must pay or incur it in the tax year. In addition, the pay must meet both the following tests.

• The pay must be reasonable.
• The pay must be for services performed.

Chapter 2 in Publication 535 explains and defines these requirements.

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

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

Kinds of pay. Some of the ways you may provide pay to your employees are listed below. For an explanation of each of these items, see chapter 2 in Publication 535.

• Awards.
• Bonuses.
• Education expenses.
• Fringe benefits (discussed later).
• Loans or advances you do not expect the employee to repay if they are for personal services actually performed.
• Property you transfer to an employee as payment for services.
• Reimbursements for employee business expenses.
• Sick pay.
• Vacation pay.

Fringe benefits. A fringe benefit is a form of pay provided to any person for the performance of services by that person. The following are examples of fringe benefits.

• Benefits under qualified employee benefit programs.
• Meals and lodging.
• The use of a car.
• Flights on airplanes.
• Discounts on property or services.
• Memberships in country clubs or other social clubs.
• Tickets to entertainment or sporting events.

Employee benefit programs include the following.

• Accident and health plans.
• Adoption assistance.
• Cafeteria plans.
• Dependent care assistance.
• Educational assistance.
• Group-term life insurance coverage.
• Welfare benefit funds.

You can generally deduct the cost of fringe benefits you provide on your Schedule C in whatever category the cost falls. For example, if you allow an employee to use a car or other property you lease, deduct the cost of the lease as a rent or lease expense. If you own the property, include your deduction for its cost or other basis as a section 179 deduction or a depreciation deduction.

You may be able to exclude all or part of the fringe benefits you provide from your employees' wages. For more information about fringe benefits and the exclusion of benefits, see Publication 15-B, Employer's Tax Guide to Fringe Benefits.

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