Independent contractor converted to W-2 from 1099 due to CA labor law change; can I claim expenses?

[tk94110]

I was working as a software consultant at a consulting company in 2020.

I was on 1099 in January but because of the labor law change in California, my client was forced to classify me as a W-2 employee starting February. Nothing else changed; I was using my own computer to perform the contract. Can people in the situation like me still claim business expenses? Or I can't just because I

am classified as a W-2 employee at all?

[rjs]

The tax reform that was passed in 2017 eliminated the deduction for job-related expenses for W-2 employees for 2018 through 2025. You could still deduct business expenses that you incurred in January, when you were an independent contractor.

[tk94110]

Thank you.

On a related issue, in 2019 tax return, I could claim the premium as a business expense.

Now, for this year, I was asked for how long I am in business (or something like that). After this W-2 gig ended in July, I could not find a new project but I continued the sales activities. As an evidence, I did get a project this January. Although I did not have any income from my business since February, can I claim the premium as a business expense since I continued business activities?

[npierson7 · Accepted solution]

Yes, you can deduct your business expenses if you had some business income in the beginning of the year and continued your business activities later in the year, even if your income wasn't consistent. 

[rjs]

---

@tk94110 wrote:

On a related issue, in 2019 tax return, I could claim the premium as a business expense.

Now, for this year, I was asked for how long I am in business (or something like that). After this W-2 gig ended in July, I could not find a new project but I continued the sales activities. As an evidence, I did get a project this January. Although I did not have any income from my business since February, can I claim the premium as a business expense since I continued business activities?

---

What premium are you talking about? Do mean health insurance premiums? Health insurance premiums for yourself and your family are not a business expense. TurboTax causes some confusion about this by having you enter self-employed health insurance premiums on the same screen as business expenses. But the health insurance premiums are used for the self-employed health insurance deduction, which is an adjustment on Schedule 1, not a business expense on Schedule C.

You can't claim the self-employed health insurance deduction for premiums that you paid for any month in which you were eligible for employer-subsidized health insurance. Essentially all employer-provided health insurance is subsidized, so if you were eligible for health insurance from your employer during the months that you were a W-2 employee, whether or not you actually took the employer's insurance, you cannot use the premiums for those months for the self-employed health insurance deduction. You could claim the premiums for the other months, including the months that you had no work. But the self-employed health insurance deduction is limited to your net business income minus the deduction for half of your self-employment tax. Since you had only one month of business income, this will severely limit the amount of premiums for which you can claim the self-employed health insurance deduction.

If you itemize deductions, any health insurance premiums that you cannot use for the self-employed health insurance deduction can be included in your medical expenses on Schedule A.

[tk94110]

I am on Obamacare. This client that was forced to classify me as W-2 employee by the labor law did not give me any benefits (except for paid sick-leave as mandated by a local ordinance). I was covered by an Obamacare plan for the whole time of 2020.

[rjs]

---

@tk94110 wrote:

I am on Obamacare. This client that was forced to classify me as W-2 employee by the labor law did not give me any benefits (except for paid sick-leave as mandated by a local ordinance). I was covered by an Obamacare plan for the whole time of 2020.

---

So you can claim the self-employed health insurance deduction for the Obamacare premiums that you paid, but only up to your net self-employment income minus the deduction for half the self-employment tax. And you can only use the premium amount that you actually paid yourself, not the portion that was paid by the Premium Tax Credit.

There is a tricky interaction between the self-employed health insurance deduction and the Premium Tax Credit. TurboTax will guide you through it. But if you are also allocating the Form 1095-A between you and someone else who is not on your tax return, TurboTax does not support shared policy allocation of a Form 1095-A together with the self-employed health insurance deduction.

[tk94110]

---

@rjs wrote:

---

But if you are also allocating the Form 1095-A between you and someone else who is not on your tax return, TurboTax does not support shared policy allocation of a Form 1095-A together with the self-employed health insurance deduction.

---

Thank you for reminding me! I think I fell into that trap and I decided not to use the business deduction after all.