How do I record as a deduction W-2 wages paid to my employee through a PEO?

There does not appear to be a consensus on how to handle this. Is the PEO handing you one invoice for all the employees, bundling their wages, employment taxes, benefits, and the PEO's own fees into one number?

In that case, I believe that you could report this as an ordinary and necessary business expense under contract labor (line 11 on Schedule C, but, of course, I don't know what kind of return you are filing).

Or you could break out the "wages" and employment taxes and benefits for each employee and put them in the associated lines as if they were real employees and then deduct the PEO fees as a miscellaneous expense, but that may involve more work that is easily done.

Whatever you do, document it well.