Chapter 11 Individuals as Employees and Proprietors - Chapter 11 Individuals as Employees and Proprietors Employee vs. Self Employed Business expenses

Chapter 11 Individuals as Employees and Proprietors Employee vs. Self Employed Business expenses for self-employed persons are deductible for AGI (Above the Line) oReported on Schedule C Unreimbursed business expenses for employees are generally deductible from AGI (Below the Line) subject to 2% of AGI floor. oReported on Form 2106 & Schedule A Employee vs. Independent Contractors Independent 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 wages oTheir business expenses are seldom deductible and, if they are, they are below the line and subject to limitations Independent contractors receive a 1099 Trade or Business Expenses Business 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 business oReasonable 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.