Statutory Employees

Pennsylvania generally does not recognize statutory employee income as business income if the income is reported on a W-2. A statutory employee must report the income from a W-2 as compensation for PA personal income tax purposes and the business expenses must be included on PA Schedule UE. While most expenses are allowable for reporting purposes on PA Schedule UE, the business expenses included on a federal Schedule C must be examined to determine if there are any nonallowable expenses for PA Schedule UE purposes. For example, dues to fraternal organizations, professional societies, Chambers of commerce or recreational club memberships and dues and subscriptions to publication including trade, and profressional must be removed from federal expenses. The allowable expenses may then be claimed on PA Schedule UE.

To claim the allowable expenses, it is suggested that the total amount of allowable expenses be claimed as Miscellaneous Expenses in Part C of PA Schedule UE. A breakdown of the expenses must be included by a separate statement showing the description and amount of the expenses or by including a separate PA Schedule C to report the expenses. The description, “See PA Schedule C for List of Expenses” should be included on the Miscellaneous Expenses line in Part C of PA Schedule UE.

If using a PA Schedule C to report the expenses, the PA Schedule C should be completed with the name of the taxpayer in the name of the owner space, the taxpayer’s Social Security number and “Statutory Employee Schedule UE Expenses” on Line A. All other information requested on Lines C though I and 1 through 5 in Section I is not required.

Typically with statutory employees, income is reported to them via two methods or documents - a federal Form W-2 and a federal Form 1099-MISC. In some cases, a portion of the income not included on a W-2 is also not reported on a 1099-MISC when the income is below the required federal reporting threshold. However, such income is still required to be included by a taxpayer. If the income is reported to the taxpayer using both methods, the taxpayer may elect to include the income not reported on a W-2 as business income on PA-40 Schedule C or as compensation on Part B of PA Schedule W-2S.

If the income not reported on a W-2 is elected to be reported as business income, the expenses must be reported on a pro-rata basis between the PA Schedule UE (usually on a PA Schedule C) and on a separate PA Schedule C that reports the income not included on the W-2. If the income and expenses for each are not determined using separate accounting, the expenses may be allocated based upon the percentage of the income for each method of income reported to the taxpayer to the total income. In such cases, all expenses included on a federal Schedule C must be allocated between the two reporting methods. If an expense is nonallowable for PA Schedule UE purposes, it must still be allocated to that portion of the income. However, the expense is not to be included with the total expenses for the income reported as compensation.

The PA Schedule C reporting the income not reported as compensation (and all its related expenses) should have all the lines completed at the top of the schedule Lines A through I and 1 through 5, Section I. The main business activity would be included as the type of business, such as Insurance Sales.