Chapter 11 Individuals as Employees and ProprietorsEmployee vs. Self EmployedBusiness expenses for self-employed persons are deductible for AGI (Above the Line)oReported on Schedule CUnreimbursed business expenses for employees are generally deductible from AGI (Below the Line) subject to 2% of AGI floor.oReported on Form 2106 & Schedule AEmployee vs. Independent ContractorsIndependent contractors sell services to the public, and are considered self-employed. Therefore they are deemed to run a trade or business. All trade or business expenses are deductible above the line.The following criteria should be considered when determining if an individual is an employee or self-employed.oDoes the individual work for many clients, or just one?oDoes the individual make services available to the public?oDoes the individual determine work house and schedules?oDoes the individual received payments from one firm, or many firms?Employees receive a W-2 and have wagesoTheir business expenses are seldom deductible and, if they are, they are below the line and subject to limitationsIndependent contractors receive a 1099 Trade or Business ExpensesBusiness expenses are generally deductible without limitation when the following criteria is met.oRelated to carrying on trade or business activity – taxpayer must demonstrate commitment to and substantial involvement in the activity and must have a legitimate profit motive.oOrdinary and necessary – commonly incurred by other businesses (not necessarily your own) and appropriate for a particular businessoReasonable in amount. This is of main concern to closely held corporations, particularly regarding officers’ salaries. One way to substantiate reasonableness is by presenting documentation of similar expenses by comparable businesses.
