Statutory Employee and 1099

[think2much]

My client is a financial advisor. He gets a statutory employee W-2 as well as a 1099 from the same company he works at. The statutory employee W-2 is for insurance sales, and the 1099 is for financial planning fees and mutual fund commisions, etc. He says it's impossible to attribute his expenses to specific types of income. Therefore, I plan to prorate most expenses between the 2 Sch C's based on the split of statutory employee vs 1099 income.

I'm not sure how to deal with the following expenses:
1) Payroll -- He hires his own admin assistant and issues her a regular W-2. Is it okay to allocate some of that to the statutory employee Sch C? Specifically, can a statutory employee be an employer himself?

2)Depreciation -- His equipment is 100% used for business but I'm not sure I can take 100% sec 179 deduction... Let's say we split the business use of the equipment 60% and 40% between the 2 Sch C's. I can write-off the 60% as sec 179 on one Sch C but will have to depreciate the 40% on the other Sch C (>50% required for 179), right??? Sounds unfair and cumbersome to me. Would anyone of you handle this differently?

Thanks in advance for sharing your ideas.

[Bees Knees]

1) I don’t know the answer, but to me an employee cannot also be an employer. The Schedule C filing is merely a procedural issue that allows statutory employees to deduct expenses without subjecting them to the 2% AGI limitation on Schedule A. It does not mean they are a self employed business. In fact, under the statute, they are employees. Therefore any expenses paid to hire employees is 100% a function of the self employment business.

In fact, I would guess that if this person was not engaged in the financial planning side of the business and only sold insurance as a statutory employee, he would not hire an employee as an administrative assistant. Therefore, I would allocate 100% of the cost of payroll to the non-statutory employee side.

2) Section 179 deduction limitation is based on the joint 1040 return and includes all income. So you can, for example, have a Schedule C business showing a loss and still elect Section 179 treatment if there is profit from a second Schedule C, or even a W-2 job. You net all income and losses from all businesses together, and then apply the 179 limit to the net amount.

That wasn’t your question, but the same principle applies to business use. If you use the same piece of equipment in one activity 60% of the time, and 40% of the time in a second activity, assuming both activities are business use, the equipment is considered used for business 100% of the time, and therefore, 100% of the cost qualifies for Section 179.

All activities are combined on the 1040 for purposes of applying the Section 179 rules for any one piece of equipment.

[think2much]

still not sure

Thanks, Bees Knees, for sharing your thoughts.

1) I didn't think a statutory employee could be an employer either. But this quote from the IRS website got me wondering:
"Statutory employees under IRC section 3121(d)(3) are not employees for the purpose of deducting trade or business expenses. Therefore, they may deduct their expenses on Schedule C rather than as miscellaneous itemized deductions. Rev. Rul. 90-93, 1990-2 C.B. 33." http://www.irs.gov/pub/irs-utl/emporind.pdf
If a statutory employee is an employee for FICA purposes but not an employee for deducting expenses, then maybe he can be an employer and deduct wages on the statutory employee Sch C?
Also, would your answer be different knowing that part of his admin assistant's job is to process paperwork for the insurance sales that generate the stat employee income?

2) The equipment in question are used solely by the admin assistant but for both activities. If I decide to allocate all the assistant's wages to the 1099 Sch C, should I allocate all the sec 179 deduction to that Sch C as well?

[Bees Knees]

Well again, what employee do you know would go out and hire an employee to help do his or her job? Its just not done.

Code Section 3121(d)(3) says nothing about them not being an employee for purposes of deducting expenses. In fact, the code goes on to say “the contract of service contemplates that substantially all of such services are to be performed personally by such individual…”

In other words, if the statutory employee hires another person to help do the work, he or she is no longer a statutory employee.

As I said before, the provision to deduct expenses on Schedule C is not something written in the code. It does not mean this person is an employee for income purposes but self employed for expense purposes. The provision is merely a convenient way to allow them to deduct expenses without being subject to the 2% AGI limitation. If memory serves me correctly, way back in the 1980’s all employees could deduct unreimbursed expenses on the front of the 1040. When they changed the rule and put them on Schedule A, subject to the 2% AGI limit, there was an exception for statutory employees (I don’t know why). Rather than IRS having to come up with a special form for them to deduct expenses on the front of the 1040, IRS said just stick them on Schedule C. Its easier for us just to add a box on the Schedule C than make up a new form…or something like that. But again, it did not mean the statutory employee was sort of a hybrid employee/non-employee.

[BOB W]

I've been deducting payroll on a schedule C "Statutory Employee" for many years now because my interpetation was fica and med were the only issues that separated a w-2 from a 1099, all else was a business expense.

You may want to allocate your common expenses based of the current year percentage of sales. In the end the total net profit (for taxes) of all businesses doesn't matter. Although for internal financial review, a proper allocation would give a clearer operational picture of each business.

[JON]

More than one Schedule C

will be netted. Why could not "Statutory employees" have an employee. If it needs them he needs them. It is the American way the more employeed the better the economy. However, soon we will all be working for the the government. The largest employer by far.

[think2much]

I've been deducting payroll on a schedule C "Statutory Employee" for many years now because my interpetation was fica and med were the only issues that separated a w-2 from a 1099, all else was a business expense.

You may want to allocate your common expenses based of the current year percentage of sales. In the end the total net profit (for taxes) of all businesses doesn't matter. Although for internal financial review, a proper allocation would give a clearer operational picture of each business.

It's not just a matter for internal financial review. The SE tax on the statutory employee W-2 is already paid. The more expenses allocated to the 1099 Sch C, the lower the SE tax on the return. However, the IRS does not allow the shifting of expenses for the purpose of lowering SE tax:
"If statutory employees also have earnings from self-employment, they may not use expenses from services as a statutory employee to reduce net earnings from self-employment for purposes of SECA, IRC section 1402(a). This is because services as a statutory employee do not constitute thecarrying on of a trade or business for purposes of SECA. Statutory employees are required to file a Schedule C for services performed as a statutory employee separate from a Schedule C that reports net earningsfrom self-employment." http://www.irs.gov/pub/irs-utl/emporind.pdf

[think2much]

So confusing...

Bees Knee, if I'm understanding you correctly, what you're saying is that a statutory employee is an employee, period. The filing of Sch C is just the workaround the IRS devised to allow a statutory employee to claim deductions without the 2% AGI limitation.

But the IRS's own training material says: "Remember, the worker can be a statutory employee only if the worker is an independent contractor under the common law standard." and "Except for full-time life insurance salespersons, statutory employees under IRC section 3121(d)(3) remain independent contractors for employee benefit
purposes." This seems to indicate that a statutory employee is an independent contractor first and foremost. Or am I interpreting these quotes out of context?

As for the requirement for the statutory employee to personally perform substantially all the work, does having clerical help fail that test?

[Bees Knees]

A statutory employee is an employee because the code says he is. Not because of some IRS training manual. Congress was asked to resolve the independent contractor vs. employee controversy in cases where it seemed you could go either way on it, and that is what they came up with.

As for hiring an employee to do clerical work, I don’t know. In what other profession do employees hire employees to help them be better employees?

Lets say you are a full-time life insurance salesman. You do nothing else. What do you need to hire clerical help for? Doesn’t the life insurance company pretty much do all that for you?

Now lets add some independent work along with the life insurance product. Maybe some auto insurance sales, health insurance, and some financial products. You now have multiple companies you represent along with multiple forms that need to be filled out, all with different formats. You start to get overloaded with paperwork, so you hire clerical help. Sure, the clerical help includes some stuff with the life insurance work. But that is not the reason the clerical help was hired.

The law requires that you allocate expenses between your statutory employee Schedule C and your self employment Schedule C. Allocating based on revenue from each is one way to do it. Another way to do it is to figure out what expense was for what activity. You would not have hired that employee if it weren’t for the self employment activity. Thus, you allocate the cost of the employee to the self employment Schedule C.

[veritas]

My client is a financial advisor. He gets a statutory employee W-2 as well as a 1099 from the same company he works at. The statutory employee W-2 is for insurance sales, and the 1099 is for financial planning fees and mutual fund commisions, etc. He says it's impossible to attribute his expenses to specific types of income. Therefore, I plan to prorate most expenses between the 2 Sch C's based on the split of statutory employee vs 1099 income.

I'm not sure how to deal with the following expenses:
1) Payroll -- He hires his own admin assistant and issues her a regular W-2. Is it okay to allocate some of that to the statutory employee Sch C? Specifically, can a statutory employee be an employer himself?

2)Depreciation -- His equipment is 100% used for business but I'm not sure I can take 100% sec 179 deduction... Let's say we split the business use of the equipment 60% and 40% between the 2 Sch C's. I can write-off the 60% as sec 179 on one Sch C but will have to depreciate the 40% on the other Sch C (>50% required for 179), right??? Sounds unfair and cumbersome to me. Would anyone of you handle this differently?

Thanks in advance for sharing your ideas.

Probably the statutory portion of his business is life insurance/annuities. The 1099 is for commissions on securites.

I would probably allocate most expenses based on income from the two sources. Some expenses can be traced specifically such as licensing.