Tax Facts

8725 / How are employment expenses treated differently based on whether a taxpayer is an employee or an independent contractor?

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.

Tax Facts Premium Tools
Calculators
100+ calculators specifically designed to help you easily assist clients with specific planning situations and calculations.
Practice Guidance
Designed to help you discover new ways for which to build and maintain client relationships.
Concepts Illustrated
Specifically designed to help you easily assist clients with specific planning situations and calculations.
Tax Facts Archives
Access to the entire library of Tax Facts dating back to 2012 allowing you to look up the exact tax figures from prior years.