I have been self employed for many years with 100% of my work from my home office. Most (but not all) of my work passes through a contracting firm that acts as a "middle-man" between me and the final client. I invoice this contractor, and the contractor invoices the client plus a markup on my labor.

This contracting company has recently stated that all contractors (including me) will have to be W2 employees instead of 1099. Due to my significant home office expenses and tax deductions, I needed to be listed as a Statutory Employee on the W2. At first they agreed that I could (and should) be listed as a Statutory employee, but today they have stated that they are not able to list me as a statutory employee.

QUESTION 1: What would this do to my ability to claim significant home office expenses on my Schedule C? My expenses would exceed the remaining 1099 income entered on Schedule C. (My deductions are much higher than a typical home office.)

QUESTION 2: Is there some reason they can't list me as Statutory, or did they just say this to avoid complications? They hired an outside firm to handle their payroll (previously I was paid by in-house invoicing).