Double Secret Deduction of Statutory Employee
Most every tax professional knows that the 2% miscellaneous itemized deduction was repealed at the end of 2017. We have made many suggestions to try to salvage the deduction including employer use of accountable plans, direct employer payment of work related expenses, utilizing charitable contributions for teachers and more.
One of the most unusual treatment involves an employer reclassification of the employee’s status from the conventional common law W-2 employee to a statutory employee. The employer has no additional cost, although the employee must meet some work-type rules. The first advantage is that when an employee is treated as a statutory employee they still receive a W-2 and the employer still pays ½ of the FICA and Medicare. Here is where the statutory employee gets a second extra tax benefit.
A statutory employee reports their W-2 income on Schedule C as trade or business income, even though the employer pays ½ of the FICA and Medicare. The big benefit here is that the employee then gets to deduct all of their professional expenses on Schedule C, in full, and avoid the repeal of the 2% itemized deduction limit.
But what is the double secret deduction you talk about in the title of this newsletter? By moving the W-2 to Schedule C as a trade or business, we believe that the statutory employee will also qualify for the 20% QBI deduction on the net income reflected on Schedule C.
The statutory employee decision is made by the employer and must be so indicated on the employee’s W-2 Box 13. Regs. Sec. 31.3121(d)-1(d)(3) explains in greater detail the application of the section to the four categories. The 4 types of statutory employees are:
A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.
2. A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.
3. An individual who works at home on materials or goods that you supply and that must be returned to you or to a person
you name, if you also furnish specifications for the work to be done.
4. A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers,
contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise
for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson's
principal business activity.
In summary statutory employees receive the following benefits:
Employer pays ½ of FICA and Medicare,
Income is reported via W-2 on Schedule C,
Expenses are deducted on Schedule C,
Schedule C net is trade or business income qualifying for the 20% QBI deduction,
Independent pension plans may be established.