1099 or W-2 - Which Worker Does the TCJA Favor?

TCJA - 1099 or W-2

If you accumulate a lot of business expenses to earn a living, your filing status can make the difference between getting to deduct those costs on your tax return or not. If you cannot offset your earnings by the costs required to generate that income, you will have to pay higher income taxes. The dust is just beginning to settle on the new Tax Cuts and Jobs Act ("TCJA"), and taxpayers are trying to wrap their heads around how the tax changes will affect their bottom line. “Independent contractor” versus “employee” status has been a point of contention in the world of taxes for the last 20 years because the IRS treats the deductibility of business expenses for these two categories differently. TCJA contains new rules about deductions, so you might need the assistance of an experienced tax preparation attorney to understand what your best options are.

Beginning January 1, 2018, and ending December 31, 2025, TCJA will not allow you to take any Schedule A miscellaneous itemized deductions as an employee. The previous rule allowed an employee claiming business deductions to deduct only the sum of such expenses that exceeded two percent of the employee’s adjusted gross income, unless the employee had to pay the Alternative Minimum Tax (AMT), in which case the employee did not get to deduct any business deductions.

1099 or W-2 - Who Gets Hit by the Changes to Miscellaneous Deductions in the TCJA?

People who get paid as employees are the targets of the tax code change. If you receive a W-2 instead of a 1099, the IRS will presume you are an employee, not an independent contractor, and are thus unable to deduct your business expenses. Even if you are paid on commission and have to put a significant amount of your personal resources into the pursuit of making sales, the IRS will try to pigeon-hole you as an employee.

If you are self-employed or an independent contractor, you get to deduct all allowable business expenses on your Schedule C. These business expenses do not fall within the category of a miscellaneous itemized deduction, so they escape the new TCJA rule.

What Can You Do If You Are a W-2 Employee with Significant Business Expenses?

The good news is that some people have fought the IRS about their filing status and won. An insurance agent discovered that agents at another insurance company paid about $10,000 less in taxes than he did because the other firm considered their agents as independent contractors, not employees. The agent amended his tax return, changed his status from employee to independent contractor, and claimed his business expenses. The IRS disagreed, and the case went to court, where the agent won.

In that case, the agent received a W-2. His company provided paid vacation, pension benefits, 401(k) matching, errors and omissions malpractice coverage, and paid his insurance licensing fees, a portion of his group life insurance, and most of his health insurance.

Not all people who have tried to change their filing status from employee to independent contractor have won their cases against the IRS. When your company monitors your daily activity and exercises a lot of control over you, the court is likely to consider you an employee, not an independent contractor.

If you have questions about how the new tax bill will affect your company, schedule a consult with taxation attorney Stephen Thienel today. Mr. Thienel has decades of experience assisting clients with their tax planning needs throughout, Maryland, Virginia, and the District of Columbia.