Statutory Employee - what are the advantages?
(Revised December 2005)

Before acting on any topics on this website,
you need to consult with your tax advisor

If you 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 both Federal and state income taxes.  

In most situations, employee business expenses cannot be deducted directly against your gross income. Employee business expenses are generally treated as miscellaneous itemized deductions. Miscellaneous deductions 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.  

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 are 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. And

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's business.  Also, your customers have to fall within one of the following categories: : wholesalers, retailers, contractors, hotels, restaurants or a similar type of establishment.

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 for "statutory employee", you need to talk to your employer about filing an amended W-2 for you.  

If you have any questions concerning this topic, you need to c onsult  with your tax advisor.  If you are one of our clients, either call us at (708) 647-1045 or send us a secure Email by  pressing here.

Back to table of contents