What Is Revenue Ruling 84-32 for Insurance Agents?

The Tax Treatment of Personal Commissions

A tax question for insurance professionals is how to handle commissions on policies they purchase for their own life or property. The tax consequences of these transactions are established through court rulings and guidance from the Internal Revenue Service. This guidance interprets existing tax code provisions that define gross income.

The conclusion, supported by the court case Ostheimer v. United States and IRS Revenue Ruling 55-273, is that the commission an insurance agent receives on a policy they purchase for themselves constitutes gross income. The reasoning is that the amount is not a simple reduction in the policy’s purchase price or a non-taxable discount. Instead, the commission is viewed as compensation for services rendered, even though the agent is also the policyholder.

From the insurance company’s perspective, the payment transaction is identical whether the agent sells the policy to a third party or to themselves. The company pays a set commission for the service of placing the policy, which establishes that the agent has earned compensation. This interpretation prevents the commission from being treated as a tax-free price reduction.

Tax Treatment and Reporting Requirements

The classification of the commission as gross income creates specific reporting responsibilities. This income is considered earnings from the agent’s trade or business. An independent contractor agent must report this commission income on Schedule C (Form 1040), Profit or Loss from Business, and include it with all other business revenues.

A consequence of reporting this commission on Schedule C is its exposure to self-employment tax. This tax, calculated on Form SE, Self-Employment Tax, covers Social Security and Medicare taxes for individuals who work for themselves. For 2025, the self-employment tax rate is 15.3%, which consists of 12.4% for Social Security up to an annual income limit of $176,100 and 2.9% for Medicare with no income limit. This means the commission income increases the agent’s net earnings from self-employment and their tax liability.

The insurance company that pays the commission will issue a Form 1099-NEC, Nonemployee Compensation, to the agent. This form reports the total commissions paid to the agent during the year, including the commission from the personal policy. The agent uses the information from Form 1099-NEC to complete their Schedule C, ensuring all compensation is reported to the IRS.

Scope of Applicability

The principles outlined here are most relevant to insurance agents who operate as independent contractors. These are individuals who are self-employed and run their own business, rather than being classified as employees. The tax treatment detailed aligns with the framework for how independent contractors report income and pay taxes.

The situation differs for agents who are statutory employees of an insurance company. While the commission might still be considered income, its reporting and tax withholding would be handled through the company’s payroll system, appearing on a Form W-2. The compensation structure for an employee agent might treat such commissions differently than for an independent contractor.

Although a common example is a life insurance agent purchasing a policy on their own life, the principle is applied more broadly. The logic extends to commissions earned on other types of insurance policies an agent might purchase for personal use. This can include property and casualty insurance for a home or automobile, or a personal liability policy. The concept is that the commission is compensation for placing the policy, regardless of the policy type.