Statutory Employee

What is a “statutory employee”? 

A statutory employee refers to an individual who is neither a common-law employee nor an independent contractor in the strictest sense. Statutory employees are a mix of both. If you find this a little bit confusing, let’s get into the details. 

A statutory employee is an independent contractor but is treated as an employee in terms of some tax withholding purposes. What do we mean, exactly? Employers of statutory employees withhold their share of Social Security and Medicare taxes from their wages. Similarly, employers also pay the employer’s contribution of Social Security and Medicare. However, those are the only components that are withheld. Employers of statutory employers do not withhold federal, local, or state income taxes from their wages. 

For employees and payroll taxes, employers withhold:

• Social Security – Yes
• Medicare – Yes
• Income taxes – Yes

For statutory employees and payroll taxes, employer withhold:

• Social Security – Yes
• Medicare – Yes
• Income taxes – NO

Remember, all statutory employees are independent contractors but not all independent contractors are statutory employees. 

According to the Internal Revenue Service (IRS), employers can only withhold Social Security and Medicare taxes from wages of statutory employees only if they meet the following criteria:

• The work or services of the statutory employee should be personally rendered or done by them;
• The statutory employee must not have a large investment in the tools, property, and equipment used to perform their work;
• And, the work of the statutory employee must continuously be for the same employer. 

Please note that statutory employees do not have a large investment in the equipment and tools used for work. However, they can use their personal car for transportation in performing their work.

Who can be considered as a statutory employee? 

The IRS provides four specific categories of independent contractors who can be considered statutory employees:

• A person who works at home on goods and materials that are provided or supplied by the employer. The employer must be the one to decide how the work is performed. Also, the materials and goods must be returned to the employer or to a person that the employer has chosen. 
• A full-time life insurance agent whose principal business activity is selling life insurance or annuity contracts for a life insurance provider. 
• An agent- or a commission-based driver who distributes beverages (except for milk), meat, vegetables, fruit, or bakery products or a driver whose job is to pick and deliver laundry or dry cleaning. 
• A full-time traveling or city salesperson who takes orders from restaurants, wholesalers, and other similar establishments on behalf of their employer. The products or goods sold must be merchandise intended for resale in the buyer’s business operation such as food for a restaurant.

What are some reminders for statutory employees? 

As in all workers, statutory employees and their status must be made clear by the employer before starting employment. A service contract is generally needed and signed. Both employer and worker must agree with the worker having a statutory employee status. The employer needs to indicate this statutory classification status on the worker’s Form W-2. Statutory employees receive a Form W-2 which indicates their statutory employee status. 

Because of their work classification, statutory employees may deduct work-related expenses on Schedule C form instead of Schedule A form. Unlike in Schedule A, expenses that are reported using Schedule C are not subject to a 2% adjusted gross income threshold. This provides greater tax benefits as it will lead to a bigger tax deduction for business expenses.  

In terms of receiving benefits, statutory employees only need to pay the employee share of Social Security and Medicare. Employers are responsible for paying the employer’s contributions for these taxes. However, other benefits such as retirement plans, insurance, paid time off, and other employer-sponsored benefits are not generally given to statutory employees. These are typically given to common-law employees. 

What is the difference between a statutory employee and a statutory nonemployee? 

A statutory nonemployee refers to another status set by the Internal Revenue Service (IRS) for direct sellers, licensed real estate agents, and certain companion sitters. The primary difference between statutory nonemployees and statutory employees is that employers do not need to withhold Social Security and Medicare taxes from the wages of statutory nonemployees. When it comes to tax purposes, statutory nonemployees are considered and treated as self-employed individuals.