What Is a Statutory Employee? Criteria, Taxation, and Example

What Is a Statutory Employee?

The term statutory employee refers to an independent contractor who is treated as an employee for tax withholding purposes. A worker is considered a statutory employee as long as the employer and individual pay their share of Medicare and Social Security taxes and meet certain criteria.

The employee is also allowed to file claims for expenses incurred while on the job. individuals who fall into this category include drivers and full-time insurance sales agents. Statutory employees receive form W-2 from their employer in order to file their annual tax returns.

Key Takeaways

  • A statutory employee is an independent contractor who is considered an employee for tax withholding purposes.
  • An individual must meet certain criteria to be considered a statutory employee.
  • Statutory employees can also deduct work-related expenses on Schedule C when they file their annual tax returns.
  • Employers send statutory employees W-2s instead of 1099-MISCs.
  • Companies that want to hire statutory employees offer them contracts, payment terms, and must obtain a W-9 instead of a W-4.

Understanding Statutory Employees

The category statutory employee refers to an Internal Revenue Service (IRS) classification of workers who are subject to tax withholding by statute under its common law rules. While employers are not permitted to withhold taxes for most independent contractors, they can for an employee who meets the following criteria:

  • The employee performs virtually all of the services as stated or implied by the employment contract.
  • The employee has no major investment interest in company equipment/property used to perform the services.
  • The employee performs the services continually for the same employer.

Anyone who falls into this employee class may also deduct work-related expenses on Schedule C instead of Schedule A when they file their annual tax returns. 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.

Statutory employees generally don't qualify for the same benefits offered by employers to their full-time workers. For instance, an individual who falls into this category may not be eligible for retirement benefits, health insurance coverage, or vacation pay. Statutory employees who receive these benefits may be considered regular employees.

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

Statutory Employee Criteria

According to the IRS, the following individuals fall under the category of statutory employee:

  • Drivers who deliver food and beverages (other than milk), dry cleaning, or laundry
  • People who sell life insurance or annuity contracts on a full-time basis for the same insurance company
  • People who work from home and use supplies that are borrowed from their employers
  • Traveling salespeople who work full-time for and liaise orders with wholesalers, retailers, contractors, or other establishments for one company.

If you're uncertain of whether you're considered an independent contractor or a statutory employee, you can get more details from the IRS by accessing Publication 15-A Employer's Supplemental Tax Guide. This document defines employees compared to independent contractors with respect to tax-withholding rules.

Statutory employees are often considered to be a blend of employee and business.

Statutory Employee Tax Information

A statutory employee is anyone who pays half of the contribution to Medicare and Social Security. These two taxes are collectively known as Federal Insurance Contributions Act (FICA) taxes and are divided as follows:

  • Social Security contributions: 6.2% for the employer and the employee for a total of 12.4%.
  • Medicare contributions: 1.45% is contributed by the employer and the employee for a total of 2.9%.

This brings the total of all FICA tax contributions to 15.3%.

As noted above, This class of employees receives a W-2 from their employer, who checks off Box 13. They do not receive Form 1099-MISC as this document is sent to independent contractors.

Statutory employees are able to deduct their expenses the same way a business would—on a Schedule C. This form allows individuals to report their income along with eligible expenses, such as advertising, office expenses, travel, and taxes.

They are also responsible for paying their own income taxes every year, which means that employers do not withhold federal, state, or local income taxes. As such, these employees should be prepared to make regular tax installments of a lump-sum payment when taxes are due.

Hiring and Paying a Statutory Employee

Hiring a statutory employee isn't any different than hiring any other employee. An employer offers the individual a contract with employment and payment terms. There are slight differences when it comes to the way these employees are paid compared to traditional employees. Employers generally pay these individuals in any form, such as commissions, by piece, or specific wages.

Employees have to fill out Form W-9: Request for Taxpayer Identification Number and Certification rather than a Form W-4: Employee's Withholding Certificate. A W-9 confirms the employee's personal information and taxpayer identification number (TIN), which is generally someone's Social Security number (SSN).

Statutory Employee vs. Independent Contractor

As noted earlier, statutory employees typically work for one company, which makes them a little different from independent contractors. These individuals offer their services to businesses and other people. They are often self-employed. As such, they are fully responsible to pay their own income taxes to the federal, state, and local governments, along with the full amount due for FICA taxes.

People who fall under the independent contractor category include dentists, plumbers, electricians, other tradespeople, and building contractors. Freelancers in certain industries may also be deemed independent contractors, such as journalists and hairstylists.

Are Statutory Employees Eligible for Benefits?

Statutory employees are not eligible for the same benefits that regular employees receive. This includes anything related to health care, retirement, or vacation time.

Can a Statutory Employee Contribute to a SEP?

A statutory employee can contribute to a simplified employee pension (SEP) plan as long as their employer offers one and are over the age of 21, worked for the last three years out of five, and earned at least $600 in the last calendar year.

Do Statutory Employees Get W-2s?

Statutory employees receive a W-2 at the same time other employees do, which is at the end of January. These are required in order for individuals to file their annual tax returns. Unlike other employees, though, the W-2s of statutory employees have Box 13 checked off.

What Are the Benefits of Being a Statutory Employee?

There are certain perks to working as a statutory employee. Receiving a W-2 means that some of their taxes are already paid for by the employer—notably the FICA taxes. This means that these employees aren't subject to self-employment taxes that independent contractors must pay. However, they are still responsible for income taxes. These employees can also deduct the expenses they incur related to their employment.

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