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The incredible benefits of being a Statutory Employee

by: Anthony Parent   2017-11-28

Have you ever looked closely at your W-2 and see box 13, “Statutory Employee” and wonder what it means? In this article I’ll explain this unique status and why it can be really important — I’ll be using a real life example of a client of ours who came to us with six years of unfiled returns. Effectively paralyzed by the number; too afraid to file as it looked like he would owe $800,000.

Now first, for someone to owe $800,000 in back taxes, interest in penalties, obviously that person would have to be making a decent income. And that was true for our client, “Rick.”  Rick was in financial sales and averaged about $500,000 a year in income.

 

But here comes the problem. In order to make that income, Rick flew all around the Northeast to meet with clients. And by flying I mean going to the airport, and getting into his Cessna 210 and flying to a client anywhere between Maine and Washington, DC. 

 

 

These flying expenses he documented and he kept a diary so he would not include his personal use. Business use of his aircraft with fuel, FBO charges, insurance, averaged about $150,000 per year. These were expenses his employer did not reimburse. Rick knew he employer would not reimburse him for his flying expenses, but he figured he would at least get the deduction on his Schedule A for unreimbursed business expenses.

 

But then he found out something surprising. And by surprising I mean bad.

 

Rick saw that his tax software limited his Schedule A deductions. He wondered if something was wrong. I explained to him that there are phase-outs — that Congress believed that certain high income earners should not be able to deduct fully their Schedule A deductions because reasons. Ultimately the value of Rick’s big deductions “Phased-out” as his income increased, resulting in a tax bill not in line what he truly brought home.  

 

And also, with high Schedule A deductions, the federal Alternative Minimum Tax (AMT) may kick in. And it did for Rick. The AMT made a bad tax bill worse — Rick legitimately had $150,000 in business expenses but thanks ot the tax code ad his high income, they became worth less and less.

 

But then there was some good news. The “Statutory Employee” box was checked.

 

Why is the checked Statutory Employee box so significant?

 

This meant that we could put all of Rick’s unreimbursed business expenses onto a Schedule C. This is key as Schedule C deductions are NOT subject to any phase-outs nor will they trigger the dreaded AMT (which is subject to repeal of the 2017 Tax Reform package).  What this meant for Rick is that instead of a tax bill of $800,000, it came down to $300,000. Still a big bill, but that was more in line with what he expected to pay and most of the money put aside.

 

In Rick’s case a checked box was worth $500,000.

 

What to do if you think you should be classified a Statutory Employee but the W-2 box 13 box is not checked?

 

So what if Rick was not classified as a Statutory Employee by his employer? Would he have been stuck paying $800,000? Maybe not.  We have found a way to claim Statutory Employee status when an employer does not check Box 13. But that is a story for another day.

 


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