Businesses use Schedule C to declare their income and deductible expenses, including compensation paid to employees and independent contractors. When making these calculations, keep in mind the definition of "statutory employee," as it affects the payment of payroll taxes and the employee's own ability to deduct job-related expenses.

Statutory Employee

An employee who is allowed to deduct expenses on Schedule C, Business Income or Loss, is a statutory employee, although he or she still receives a W-2 from an employer. For any statutory employee, the employer must pay all of of the required payroll taxes, including Social Security and Medicare, to the Internal Revenue Service. On Schedule C, Line 26, the employer declares all employee wages, salaries and other compensation. The employee -- often a commissioned sales rep or agent -- also files a Schedule C to declare his own income and expenses and can take the usual deductions, including transportation, advertising and job-related uniform costs.

Statutory and Self-Employment Income

On Form W-2, the employer checks Box 13 to notify the IRS that an employee is considered a statutory employee. The IRS allows employers to treat several categories of workers as statutory employees: This includes drivers paid on commission, insurance sales agents, a home-based worker for whom you furnish materials and full-time traveling sales agents. Self-employment income is not the same as statutory employment income. For the latter, an employer must file and pay payroll taxes. Individuals working as independent contractors, and not as statutory employees, receive a record of their earnings on a form 1099-MISC. They must file Schedule C as well as Schedule SE to figure self-employment tax, which includes both Social Security and Medicare.