QBI and Statutory Employees

[tpert]

I have a client who is usually one of the first returns of the year and who is a statutory employee. Since his income and expenses are reported on Schedule C, I am assuming that he (a salesman) will still be allowed to deduct his business expenses, but it occurred to me that he might also be eligible for the QBI deduction. Does anyone know for sure and can you point me to some reference to support yes or no?

Thanks.

[DaveinTexas]

I’ve seen no guidance on this particular issue, but a statutory employee is not self employed, per IRC 3121(d)(3), they are considered employees. Another giveaway is the employer is required to withhold employment taxes (if certain functions of the job are met).

If the client is an employee, by statute, they are not considered self employed. And, there are a few court cases that reiterate the fact that an employer can’t simply check the box on the W2 to qualify the worker as a statutory employee. And, vice versa, an independent contractor can be classified improperly; one that should be a statutory employee.

I know the confusion lies in the filing of the Schedule C, but look to the W2 to determine the status, still considered a safe harbor. And, the employee might try (improperly) to change the worker’s status to a Non Employee (and have them a 1099) so the worker would qualify to take the QBID, but again, this might be improper.

There are are some technical corrections to be made in the TCJA, maybe this will be one of them. Still, a safe bet says, don’t take the QBID for a statutory employee. Better to file an amended return later down the road and claim the QBID than to be hit with an accuracy penalty if the deduction is improper.

[TaxGuyBill]

Right now, the Proposed Regulation §1.199A-5 says:


(3) Trade or business of performing services as an employee. The trade or business of performing services as an employee is not a trade or business for purposes of section 199A and the regulations thereunder. Therefore, no items of income, gain, loss, or deduction from the trade or business of performing services as an employee constitute QBI within the meaning of section 199A and §1.199A-3. No taxpayer may claim a section 199A deduction for wage income, regardless of the amount of taxable income.


The prologue to the Proposed Regulation refer to the definitions of employee, including the Regulations of §3121(d) (as DaveInTexas pointed out, includes Statutory Employees).

https://www.irs.gov/pub/irs-drop/reg-107892-18.pdf#page=70

[New York Enrolled Agent]

One item of note: IRS Notice 2018-64 states that Forms W-2 given to statutory employees are not W-2 wages for Section 199A wage limitations. Some commentators think that insurance agents will qualify as they were specifically not excluded as an SSTB. I suppose IRS will give guidance.

[Dude]

Most insurance agents are limited to promoting and selling certain products thus they are not truly "independent". This is the argument used when statutory employee status was desired way back when un-reimbursed employee expenses were allowed to be deducted (last year). Now with the elimination of this deduction and the birth of 199A the same people who insisted they were employees are now going to try to claim they are actually independent contractors. My guess is the IRS is going to consider statutory employees of insurance companies employees: it is the easiest way for them to proceed until specific guidance or a court case determines them to be independent contractors.

[Burke]

Most insurance agents I have done taxes for (and it is a lot) who are statutory employees of one company, also act as independent contractors for many others. Some of them are also W-2 employees as well, for yet another company. I always do 2 Sche C's, one for the statutory income and one for the 1099 income, and prorate expenses between the two, sometimes even prorating three ways if a W-2 is involved. This is for expenses not attributable to any one entity. All directly attributable expenses are entered on the corresponding Sche C. The TP should be eligible to deduct the QBI for the Sche C for an independent contractor.

[ValRose]

Although I agree with the discussion here...
Draft form of Publication 535 recently came out on IRS draft page, giving their instructs on 199A. Statutory seems to be ok to CLAIM Sec 199A per this draft (but NOT for the business who paid them to claim as wages as part of their 199A deduction)...
Page 2 says:
Services performed as an employee excluded from qualified trades or businesses. The trade or business of performing services as an employee is not a trade or business for purposes of section 199A. Therefore, any amounts reported in box 1 of Form W-2, other than amounts reported in box 1 where the "Statutory Employee" box in box 13 is checked, are not QBI. For more information on whether you are an employee or an independent contractor, see Pub. 15-A, Employer's Supplemental Tax Guide, and Pub. 1779, Independent Contractor or Employee.

Having shared that, IRS pubs are not law, and this is a draft version..

[tpert]

Although I agree with the discussion here...
Draft form of Publication 535 recently came out on IRS draft page, giving their instructs on 199A. Statutory seems to be ok to CLAIM Sec 199A per this draft (but NOT for the business who paid them to claim as wages as part of their 199A deduction)...
Page 2 says:
Services performed as an employee excluded from qualified trades or businesses. The trade or business of performing services as an employee is not a trade or business for purposes of section 199A. Therefore, any amounts reported in box 1 of Form W-2, other than amounts reported in box 1 where the "Statutory Employee" box in box 13 is checked, are not QBI. For more information on whether you are an employee or an independent contractor, see Pub. 15-A, Employer's Supplemental Tax Guide, and Pub. 1779, Independent Contractor or Employee.

Having shared that, IRS pubs are not law, and this is a draft version..

So, I am assuming that you agree with the comment from Dave in Texas who says, "don’t take the QBID for a statutory employee" but you quote a document saying it seems to be okay for a statutory employee to CLAIM Sec 199A. Would you help me by clarifying what you mean by being able to "CLAIM Sec 199A" (your caps) but not use this same income for QBID? I really do not understand the distinction. Thanks.

[Dude]

Sounds like the prevailing logic is to use 199A for income earned as a non statutory employee but not for income reported on a statutory employee w-2. The only surprise for me here would be running into a large amount of insurance agents who work as both statutory and independent contractors. I thought they would have non compete clauses that would prevent them from selling other lines.

[Burke]

Usually they are allowed to sell other lines of insurance that the company who employs them as a statutory employee does not offer. A statutory employee is almost always a life insurance agent. An independent contractor can sell anything he is licensed for, including health, accident, disability, property-casualty, annuities, etc. etc.

[dtlee]

I am leaning towards treating income as a statutory employee as eligible for QBI.

Regarding insurance agents as both statutory employees and independent contractors, there are many who work for one particular company for one particular line of insurance who offer other financial services and other insurance products as an independent contractor. Even with a non-compete agreement, there are still companies who do not offer all financial products where it may be possible for an individual to offer a product from another vendor without violating the agreement.