Including statutory employees in your roster can be a benefit for both the employee and the employer. Statutory employees are a category of employee that fits an Internal Revenue Service (IRS) Classification.
This classification determines how the employee’s taxes are withheld. Including statutory employees in your roster can be a benefit for both the employee and the employer.
Key Takeaways
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A statutory employee is an independent contractor who fits some predefined criteria established by the IRS.
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Statutory employees receive some tax breaks because their employer pays part of their FICA taxes.
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Statutory employees can deduct qualifying expenses by using Schedule C and not Schedule A.
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Statutory employees receive a W-2 at the end of the year with box 13 checked. Independent contractors receive a 1099 form.
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Employers do not have to give statutory employees the same benefits that they give their regular employees.
What Is a Statutory Employee?
A statutory employee is an independent contractor who the company treats like an employee in regard to tax withholdings. In normal situations, an independent contractor is responsible for paying their own Medicare and Social Security taxes. When someone is a statutory employee, the company and the employee pay their share of these taxes.
Another benefit for people who are statutory employees is that they can file claims for expenses incurred on the job.
Statutory employees will receive a W-2 tax form to file their returns. Independent contractors who are not statutory employees receive a 1099 form.
Statutory Employee Requirements
Not every independent contractor can be a statutory employee; in fact, in many situations, employers are not permitted to withhold taxes for independent contractors. The following criteria must be met to be considered a statutory employee.
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The employee performs all or virtually all of the services in the employment contract.
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The employee has no major investment interest in the company, equipment, or property used to perform the services.
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The employee performs the services continually for the same employer.
The IRS further breaks down the statutory employee criteria to single out people that fit the following as potential statutory employees.
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Drivers who deliver food and beverages (other than milk), dry cleaning, or laundry
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A full-time life insurance agent whose principal business is selling life insurance and/or annuity contracts for one insurance agency
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A person who works at home on materials or goods supplied by the employer and returned to the employer according to their specifications
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A full-time salesperson works on behalf of an employer to turn in orders from wholesalers, retailers, contractors, and operators of hotels, restaurants, or similar establishments. The goods must be merchandise for retail or supplies used in the buyer’s business operation.
Tax Implications for Statutory Employees
In a traditional independent contractor situation, the employer does not withhold taxes for Social Security or Medicare. These two taxes together are known as the Federal Insurance Contributions Act (FICA) taxes.
If an employee meets the qualifications of a statutory employee, the employer can withhold these taxes, and there’s a division of payment for them. An independent contractor pays the full amount, but a statutory employee gets the following breakdown.
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Social Security contributions are paid at 6.2% by both employee and employer, for a total of 12.4%
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Medicare contributions are paid at 1.45% by the employer, and the employee pays 2.9%.
These FICA taxes total 15.3% of tax contributions. Being a statutory employee can save an individual quite a lot in tax payments.
Statutory Employees and Deductions
Another important part of paying taxes is declaring deductions for business expenses. Independent contractors are required to deduct expenses on Schedule A when they file their taxes.
Statutory employees can use Schedule C. This is better because statutory employees are then given a greater tax deduction for their business expenses as Schedule A filers have a 2% adjusted gross income threshold.
Tax Forms for Statutory Employees
Independent contractors will receive a 1099 tax form from their employer(s). Statutory employees will be given a W-2 form, just as they would if they were regular employees. In addition, the statutory employee will file a Schedule C rather than a Schedule A for deductions.
Another key tax form to pay attention to is the W-9. This is a form that independent contractors complete that confirm their personal information and their tax ID number or their social security number.
Regular employees in a company will submit a W-4 to tell employers how much to withhold from their paycheck for taxes; independent contractors and statutory employees do not fill out a W-4.
How Statutory Employees Are Not Like Regular Employees
While statutory employees are treated like regular employees when it comes to FICA tax withholdings, they don’t have their local, state, and federal income taxes withheld. These employees are still responsible for making these payments. Typically, they should be paid in quarterly installments or risk a fine for not paying in a timely fashion.
Statutory employees don’t qualify for the same benefits as regular employees. Most companies don’t offer statutory employees paid vacations, retirement benefits, health insurance, or paid sick days. If they receive these benefits, the government will consider them regular employees.
Hiring a Statutory Employee vs. Hiring an Independent Contractor
A big distinction between a statutory employee and an independent contractor is if they’re hired on a full-time basis or if you are the only company they work for. Many independent contractors offer their services to several companies, and they’re considered self-employed. This means they pay their own income and FICA taxes.
If your company is hiring a statutory employee, you’ll have to ensure that they fit the IRS requirements. You will not have to offer them the same benefits as regular employees but will be paying your portion of their FICA taxes and giving them a W-2 tax form at the end of the year. In box 13 of the W-2, there will be a check for statutory employees.
Benefits for Statutory Employees
People who are statutory employees benefit because a portion of their FICA taxes will be paid by the employer. This also means that they aren’t subject to the self-employment taxes that independent contractors pay. Finally, they can deduct their expenses on Schedule C and receive a higher deduction for these expenses.
Statutory Employees FAQ
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Can any contract employee be a statutory employee?
No, statutory employees fit a narrow definition established by the IRS. Statutory employees are drivers who distribute specified items and full-time life insurance salespeople who primarily sell for one company.
Someone who works at home on products supplied to that individual, or a full-time salesperson with many defined stipulations on what they can be selling and how those goods are used.
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If I’m a statutory employee, do I get regular benefits from my employer?
No, statutory employees do not qualify for regular benefits. If your employer provides you with regular benefits, they are misclassifying your employment status, which can lead to legal problems with the IRS.
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What taxes is an employer required to pay for statutory employees?
If you employ a statutory employee, you’ll be required to pay your portion of their FICA taxes or their Social Security and Medicare. You’ll also withhold their portion of those taxes from their paychecks. Other taxes, such as income taxes, will be their responsibility entirely, and you do not have to withhold them.
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What tax form do I send to my statutory employees?
Statutory employees receive a W-2 tax form at the end of the year. This will be completed as it would for a regular employee, except you will check box 13, which states that that employee is a statutory employee.
The employee must also use a Schedule C to report their qualifying expenses as deductions. You do not need to provide this for them, but this may be a question you’re asked.
Choosing Between a Contractor and an Employee?
Author
Kristin Kizer
Kristin Kizer is an award-winning writer, television and documentary producer, and content specialist who has worked on a wide variety of written, broadcast, and electronic publications. A former writer/producer for The Discovery Channel, she is now a freelance writer and delighted to be sharing her talents and time with the wonderful Zippia audience.
