Statutory employees and the QBI deduction.

Author:Dingman, Brian M.
Position:Qualified business income

A little-noticed consequence of the proposed regulations on the 20% qualified business income (QBI) deduction introduced by the legislation known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, is that so-called statutory employees may be able to claim the deduction.

One of the requirements of being a qualified trade or business for purposes of claiming the QBI deduction is that the taxpayer must not be in the trade or business of performing services as an employee (Sec. 199A(d)(l)(B)). Prop. Regs. Sec. 1.199A-5(d)(l) further specifies that "income from the trade or business of performing services as an employee refers to all wages ... and other income earned in a capacity as an employee, including payments described in [Regs. Sec.] 1.6041-2(a)(l) (other than payments to individuals described in Sec. 3121(d)(3)) and [Regs. Sec.] 1.6041-2(b)(l)" (emphasis added).

Payments described in Regs. Sec. 1.6041-2(a) (1) are generally those required to be reported on Form W-2, Wage and Tax Statement. Payments described in Regs. Sec. 1.6041-2(b)(l) are those distributed or made available to beneficiaries of certain employee trusts or annuity plans.

Individuals described in Sec. 3121(d)(3) are statutory employees. Since payments to them are not included in income from the trade or business of performing services as an employee, it appears that these payments may be includible in QBI and that statutory employees are eligible to claim the deduction if they meet all other requirements. Payments to statutory employees also are not considered W-2 wages for purposes of the W-2 wage limitation on the deduction, which further suggests the payments are QBI (see Prop. Regs. Sec. 1.199A-2(b)(2) and Notice 2018-64, [section]3).

Statutory employees are defined as those in four specific vocations:

* Drivers who earn commissions by distributing meats, produce, or bakery items, beverages other than milk, or laundry or dry-cleaning services;

* Full-time life insurance salespeople;

* Home workers performing services on materials owned by their employer; and

* Traveling salespeople soliciting orders of merchandise for resale or use in business operations.

Statutory employees are unique in that they are often considered self-employed, although their income is reported on Form W-2. A consequence of this income-reporting requirement is that statutory employees have Social Security and Medicare contributions made on their behalf by an employer and are not subject to...

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