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 are not considered an employee or an independent contractor in a strict sense. As a result, statutory employees may receive both W-2s and 1099s from their employer.

Key Takeaways

  • A statutory employee is an independent contractor who is considered an employee for tax withholding purposes if they meet certain conditions.
  • This typically means they will receive a W-2 but are otherwise not considered full employees.
  • A statutory employee typically receives certain tax benefits that 1099 employees would also enjoy.

Understanding Statutory Employees

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 they may also be individuals who provide services while using a company's tools or resources.

"Statutory" refers to the Internal Revenue Service (IRS) classification of workers who are subject to tax withholding by statute under its common law rules.

Employers must withhold Social Security and Medicare taxes from the paychecks of statutory employees if all 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.

A statutory employee is not an individual who has made a substantial investment in the equipment used in the performance of the services, other than transportation equipment, such as a personal car for transport in the performance of the services. Statutory employee rules also do not apply if the services are rendered in a single transaction that is not part of a continuing relationship.

There are no statistics that show the number of taxpayers who file as statutory employees.

Examples of Statutory Employees

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 a driver 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 as are expenses on Schedule A.

For more, see IRS Publication 15-A Employer's Supplemental Tax Guide, which defines employees compared to independent contractors with respect to tax withholding rules.