Difference Between Schedule C and Form 2106

Question about taxes from a reader:”Can I use either a Schedule C or a Form 2106 for my business expenses?”

My answer is:  Generally speaking, no.  The two forms are used for different purposes.  Schedule C is for reporting profit or loss from a Sole Proprietorship.  That means that you are working for yourself.  Are you contracting for somebody?  Are you getting a 1099 at the end of the year instead of a W-2?  If you are getting a W-2, you are considered an employee and you cannot use the Schedule C.

Form 2106, Employee Business Expenses, can only be used if you have business expenses relating to your job that you weren’t reimbursed for. You might be able to use this form if you are receiving a W-2 and working as an employee for somebody.

In both cases, please check with your tax professional or at the very least visit the irs web site for more information on Schedule C and Form 2106.

Here as an example though on a tax return when both forms could be used:

If you are working as a Sole Proprietorship and you are married and your wife is working as an employee for somebody else,  there might be a chance that you could file a Schedule C for your income and expenses and your wife could file a Form 2106 to cover her expenses that she wasn’t reimbursed for. 

There are specific explanations for what expenses are allowed and what might be disallowed so please make sure that you go through all the instructions on the forms. There are also certain types of employees call statutory employees who receive W-2s but are treated a little differently at tax time.

A statutory employee is either a full-time traveling or city salesperson who solicits orders from wholesalers, restaurants, or similar establishments on behalf of a principal, a full-time life insurance agent whose principal business activity is selling life insurance and/or annuity contracts for one life insurance company, an agent-driver or commission-driver engaged in distributing meat, vegetables, bakery goods, beverages (other than milk), or laundry or dry cleaning services; or possibly a home worker performing work on material or goods furnished by the employer.

An employer should indicate on the worker’s Form W-2 whether the worker is classified as a statutory employee. Statutory employees report their wages, income, and allowable expenses on Schedule C (or Schedule C-EZ), Form 1040. Statutory employees are not liable for self-employment tax because their employers must treat them as employees for social security tax purposes.

Double check to see if there are state taxes what applies to your specific state as well.  You may want to remember that if the expenses are out of line with whatever particular business you are applying them to that a red flag may be triggered and you either may be audited or at least have some questions that may need to be answered.

That being said, if you have legitimate expenses, please take them, but do so correctly!

Kim Greenblatt


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