Statutory Employee and 1099

[Albe]

I have a client who is a statutory employee doing insurance and mutual fund sales. His employer gives him a W2 (approx $75K) marked statutory for all income earned on insurance sales and form 1099-Misc Nonemployee compensation (Approx $17K) for all income earned on mutual fund sales. Total business related expenses total approximately $30K and there is no way to differentiate them between insurance sales and mututal fund sales.

My first instinct is to prepare two Schedule C's, one for the statutory income (not subject to SE) and one for the 1099 income (subject to SE) and allocate the expenses based on the percentage of income. I believe this is the correct treatment of such a situation.

However, just to spur some discussion, I had an interesting thought. If this taxpayer received all income on form 1099 ($92K) and deducted all expenses, he would pay SE on $62K. Under his current situation, he (along with the employer) pay SS and Medicare on the $75K on the statutory W2, as well as the client paying SE tax personally on the net 1099 income of about $12K. Doesn't this seem like the government is getting extra tax? Is there any justification for putting all the income and expenses on one schedule C not subject to SE as a statutory employee and the only SS and Medicare that gets paid is on the W2 income.

I know this is reaching, but I thought it might provide an interesting discussion anyway.

[Matt Sova]

Splitting

No facts to back this up, just off the top of my head. If there are some expenses directly related to the 1099 income I would put 100% of those on the regular Schedule C. All others I would split as a percentage of income. I do see where you are going though, claim 17k in expenses on the 1099 Sch C and the rest on the Stat Emp Sch C to reduce the SE tax. I don't think you can do that. Maybe someone else has some legal cites they can chime in with.

[Bees Knees]

However, just to spur some discussion, I had an interesting thought. If this taxpayer received all income on form 1099 ($92K) and deducted all expenses, he would pay SE on $62K. Under his current situation, he (along with the employer) pay SS and Medicare on the $75K on the statutory W2, as well as the client paying SE tax personally on the net 1099 income of about $12K. Doesn't this seem like the government is getting extra tax? Is there any justification for putting all the income and expenses on one schedule C not subject to SE as a statutory employee and the only SS and Medicare that gets paid is on the W2 income.

You could say that for any taxpayer that is both an employee and self employed.

John works for Company A and earns $75K. He also has a side line self employment business and earns $12K. His legitimate business deductions that belong on Form 2106 get wasted because of the 2% AGI limit. So why can't he throw them all on the Schedule C, since if he was self employed for all of his income, all of his deductions would then reduce his SS and medicare tax.

You can't do it just because it seems unfair the government gets more SS and Medicare tax out of employees than self employed.

[Bees Knees]

BTW, before 1987, employee business expenses were fully deductible on the front of the 1040. There was no 2% AGI limitation prior to 1987.

The reason for the change was an attempt to simplify the tax code. For some reason, employees were not viewed as needing the deductions the same as self employed taxpayers, and that by lowering the tax rates and increasing the standard deduction, employees should not also be allowed to deduct all of their expenses anymore.

It seems like a foolish argument today, but that was their reasoning back then. Anytime Congress tries to simplify things, they make a mess out of it.

Fairness in the tax code is irrelevant. Don't ever try to twist the law under the assumption that the government is unfairly getting too much money because of some stupid rule like the 2% AGI limitation. Trying to argue tax law using logic will get you nowhere.

[Matt Sova]

Best. Line. Ever

Trying to argue tax law using logic will get you nowhere.

That is the best line I think I have ever heard. Or, I am just really tired and do not get out much.