An employer is entitled to deduct amounts paid as reasonable compensation to its employees.1 Therefore, whether an individual is classified as an employee or as an independent contractor is important to an employer in determining whether or not that employer is entitled to deduct amounts paid to that individual as compensation.
If an individual is properly classified as an independent contractor, the individual is entitled to deduct business-related expenses without regard to the 2 percent floor on miscellaneous itemized deductions (see Q 8528) that would otherwise apply (note that all miscellaneous itemized deductions subject to the 2 percent floor were suspended for 2018-2025). Conversely, the business expense deductions of an employee are limited based on whether or not the employee is reimbursed for the expense.2
1. IRC § 162.