Chapter 11 Individuals as Employees and Proprietors -...

Chapter 11 Individuals as Employees and Proprietors
Employee vs. Self Employed
 Business expenses for self-employed persons are deductible for AGI (Above the Line)
o Reported on Schedule C
 Unreimbursed business expenses for employees are generally deductible from AGI
(Below the Line) subject to 2% of AGI floor.
o Reported 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.
o Does the individual work for many clients, or just one?
o Does the individual make services available to the public?
o Does the individual determine work house and schedules?
o Does the individual received payments from one firm, or many firms?
 Employees receive a W-2 and have wages
o Their 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.
o Related 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.
o Ordinary and necessary – commonly incurred by other businesses (not
necessarily your own) and appropriate for a particular business
o Reasonable 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.