Category: Compensation & Employee Benefits
Subject: Expenses Allowable Against FICA Taxable Income
Title: Statutory Employees
IRC Sections: 3121
Filename: 1057.html
Date Produced: 10/97

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Background

Taxpayer is a full-time insurance sales person and treated as a statutory employee under Section 3121(d)(3). Taxpayer reports expenses related to the business on Schedule C.

Taxpayer's employer has withheld FICA tax on the full amount of commissions the taxpayer received.

Issue

Is there any way to reduce the amount of FICA tax to take into account the taxpayer's expenses of earning these commissions?

Answer

No, the taxpayer is subject to FICA taxes on the gross amount of commissions received from the insurance company/employer.

Discussion

IRC Section 3121(d)(3) treats certain full-time insurance sale people as employees for purposes of FICA taxes. This is the case even though these individuals are not employees under the rules of common law. Accordingly, wages paid to such individuals are subject to FICA tax just as the wages of any employee. Because the statutory employee is effectively self employed for all other purposes, any expenses related to the statutory employee's earnings are reported on Schedule C.

FICA tax is imposed on the full amount of an employee's wages. There is no reduction allowed for any associated expenses. The employer-employee relationship is normally such that the employer bears most if not all the expenses related to an employee's services. In this instance, of course, that is clearly not the case. No matter, there is no special definition of wages for a statutory employee nor is there any other rule that would take into account their business expenses. The general rule apparently applies: IRC Section 3121(a) defines the term "wages" as all remuneration for employment.

I can find no clue that there was any intention at all on the part of Congress to provided any special rule for the expenses of a statutory employee. Absent any kind of special rule allowing reduction of FICA with respect to business expenses, it is clear that the taxpayer in this case must bear the burden of FICA tax on the entire amount of commission income received from the insurance company/employer.