What this line means
The cost of labor directly involved in manufacturing or producing the goods you sell. This includes wages paid to workers who physically make, assemble, or process your products. It does not include your own labor, and it does not include wages for employees who perform administrative, sales, or delivery tasks — those go on line 26 (wages paid).
Does this apply to you?
- You pay workers to manufacture, assemble, or produce the goods you sell
- You hire temporary labor specifically for production tasks
- You pay contract workers for hands-on product creation — sewing, woodworking, food preparation
- You operate a workshop or small factory with production employees
Easy to overlook
Your own labor is never included here As a sole proprietor, you cannot deduct the value of your own work. Even if you spend 40 hours a week making products, you do not include any amount for your own labor on line 37. Your compensation comes from the net profit of the business, not from a labor deduction. 1 IRS Publication 334 — Tax Guide for Small Business
Only production labor belongs here — not all wages Wages for salespeople, delivery drivers, office staff, and other non-production employees go on line 26 (wages), not line 37. Only wages for workers who directly handle the creation of your products belong in cost of goods sold. Misclassifying administrative wages as production labor distorts your gross profit margin. 2 IRS Schedule C instructions — Part III, Line 37
Watch out for this
Putting all employee wages on line 37 instead of splitting them between line 37 (production labor) and line 26 (other wages). A furniture maker who employs both a carpenter and a bookkeeper should put the carpenter’s wages on line 37 and the bookkeeper’s wages on line 26.
Footnotes
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IRS Publication 334, Tax Guide for Small Business. https://www.irs.gov/pub/irs-pdf/p334.pdf ↩
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IRS Schedule C (Form 1040) Instructions, Part III, Line 37. https://www.irs.gov/instructions/i1040sc ↩