What are the advantages to being
classified as a 'statutory employee'?

(Revised November 2012)

If you (as part of your job) travel or use an automobile to call on customers (and your employer does not reimburse you), classification as a 'statutory employee' will probably save you on both federal and state income taxes. In most situations, employee business expenses cannot be deducted directly against your gross income -- they are usually treated as miscellaneous itemized deductions, which include items such as investment expenses and tax preparation fees. These types of expenses are only deductible if you itemize. Taking employee business expenses as a 'miscellaneous itemized deduction' (rather than a direct deduction against gross income) usually results in less tax savings because:
  • As a 'miscellaneous itemized deduction' the total of these expenses is reduced by 2% of your total income. For example, if your miscellaneous deductions total $10,000, and your total income is $50,000, only $9,000 of your total miscellaneous deductions is deductible. 
     
  • Many states, including Illinois and Indiana, tax your total income and give no allowances for any itemized deductions allowed on your federal income tax return.
     
  • High-income individuals could end up in an alternative minimum tax situation. If this happens, you may not receive any tax benefit for your employee business expenses.
If you are classified as a statutory employee, your employee business expenses do not have to be deducted as a 'miscellaneous itemized deduction.' Instead, your employee business expenses can be deducted against your salary income. There are four categories of statutory employees:
  1. An agent driver or commission driver who distributes certain types of grocery products or laundry.
  2. A full-time life insurance salesman.
  3. Certain types of home workers.
  4. Certain types of full-time traveling or city salesmen who sell merchandise for either sale or resale of supplies for use in their customers' businesses. Also, your customers must be wholesalers, retailers, contractors, hotels, restaurants or other similar types of establishments.

If your employer considers you to be a 'statutory employee,' the statutory employee box will be marked off on your W-2. If this box is not marked and you feel that qualify as a 'statutory employee,' you need to talk to your employer about filing an amended W-2 for you.

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