What is a 'Statutory Employee'

A statutory employee is an independent contractor that is treated as an employee for tax withholding purposes if they meet certain conditions. Employers are not permitted to withhold taxes for most independent contractors, but statutory employees differ in that they exist in a place between employee and independent contractor. This class of employee may deduct work-related expenses on Schedule C instead of Schedule A. Statutory employees are usually salespeople or other employees who work on commission, but may also individuals who provide services while using a company's tools or resources. "Statutory" refers to Internal Revenue Service (IRS) classification of such workers as subject to tax withholding by statute under its common-law rules.

Breaking Down 'Statutory Employee'

Employers must withhold Social Security and Medicare taxes from the paychecks of statutory employees if tall of the three following conditions are met.

  • The service contract states or implies that substantially all the services are to be performed personally by them.
  • They do not have a substantial investment in the equipment and property used to perform the services (other than an investment in transportation facilities).
  • The services are performed on a continuing basis for the same payer.

Statutory Employee Examples

A statutory employee is an individual who falls under any one of the following categories as specified by the IRS:

  • A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.
  • A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.
  • An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.
  • A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson's principal business activity.

Statutory employees are granted a greater tax deduction for their business expenses than other employees, because Schedule C expenses are not subject to the 2% adjusted-gross-income threshold like expenses on Schedule A. For more, see IRS Publication 15-A Employer's Supplemental Tax Guide, which defines what employees are compared to independent contractors as it regards tax withholding rules.

RELATED TERMS
  1. IRS Publication 15-A - Employer's ...

    IRS Publication 15-A is the publication that provides employers ...
  2. Key Employee

    A key employee is a staffer who is a stakeholder with a decision-making ...
  3. Retention Tax

    A retention tax is any tax withheld from an employee's paycheck ...
  4. Statutory Liability

    Statutory liability is a legal term for someone being held responsible ...
  5. Excess Employer Withholding

    Excess Employer Withholding is extra money that has been withheld ...
  6. IRS Publication 531

    IRS Publication 531 is a document published by the IRS that details ...
Related Articles
  1. Taxes

    Have Household Help? Don't Get In Tax Trouble

    Hiring household workers can be a complicated process. Know what the government requires so you can prevent penalties and problems down the road.
  2. Financial Advisor

    Life Insurance Plans to Help Your Small Business Retain Employees

    How to use and design cash value life insurance plans as an incentive to help attract and retain key employees.
  3. Insurance

    Life Insurance as a Bonus Plan for Key Employees

    A Section 162 plan is a life insurance plan provided by an employer to key employees.
  4. Taxes

    The Purpose of the W-9 Form

    The W-9 form provides key data your clients need if you're an independent contractor. Just be sure you're not really an employee who should fill out a W-4.
  5. Taxes

    When you should change your withholding tax

    When there are major changes in your life, you should adjust your withholding to ensure you aren't paying too much in taxes.
  6. Taxes

    Prospects for Tax Reform

    Similarities to previous plans, both Republican and Democratic, would seem to give reform legislation a fair chance of success.
  7. Taxes

    Are You Paying Too Much in Taxes?

    Overpaying taxes amounts to an interest-free loan to the government. Here are some ways to avoid that scenario.
  8. Retirement

    Is a SIMPLE IRA Right for Your Small Business?

    Here's how small businesses can benefit from offering a SIMPLE IRA to their employees.
  9. Financial Advisor

    Beware Of Company Stock In Qualified Plans

    While owning company stock in a qualified plan does have a few advantages, it can also pose some substantial risks to employees.
  10. Retirement

    Is Your 401(k) Administrator Competent?

    The more that employees know about their employee 401(k) plans, the better. But what doesn't your administrator know?
Trading Center