8732 / Is a life insurance agent typically an employee or an independent contractor? How does this classification impact the agent’s ability to deduct business expenses?

The amount of the deduction for a life insurance agent’s expenses is directly related to the agent’s status either as an independent contractor or an employee. Typically, whether an insurance agent is considered an independent contractor or an employee is determined on the basis of all the facts and circumstances involved. The IRS uses the same 20 factors discussed in Q 8723 in determining an individual’s status as employee or self-employed person.¹

Under the common law rules, most life insurance agents are self-employed individuals, and this is their status generally for tax purposes. Thus, in the usual case, a life insurance agent reports income as an independent contractor, using Schedule C of Form 1040 for business income and deductions. This means that he may deduct most of his business expenses directly from gross income.²

However, even a life insurance agent who is an employee under the common law rules may be permitted to deduct certain business expenses directly from gross income. This rule is limited to those expenses for which reimbursement has been included in the agent’s gross income. Work expenses which are not fully reimbursed are generally deductible as miscellaneous itemized deductions; thus, they are permitted only to the extent that the aggregate exceeds 2 percent of adjusted gross income.³ (Note that these deductions are not available for 2018-2025.)