What is a statutory employee?
A statutory employee is designated by the United States IRS as a unique type of employee somewhere between an independent contractor and a standard employee. You can think of statutory employees as having more freedom than a common law employee but less control than an independent contractor. An individual must agree to this standing with their employer upon hiring and sign a service contract outlining the conditions.
Like with a common law employee, the employer is not required to withhold income taxes from a statutory employee’s earnings. However, they are required to withhold Medicare and Social Security tax from their wages.
Statutory employees must meet the following criteria:
- They commit to or imply that they personally perform the services
- They don’t have a significant investment in the company equipment/property that is used to perform the services
- They perform the services on a continuing basis for the same employer
Types of statutory employees include:
- Drivers who deliver food and beverages (other than milk), meat, vegetables, fruits, dry cleaning, or laundry
- People who sell life insurance or annuity contracts on a full-time basis for a single insurance company
- People who work from home using materials and/or goods supplied by the employer that must be returned
- Traveling salespeople who work full time and are responsible for orders from wholesalers, retailers, contractors, hotel operators, restaurants, etc.
Why should HR leaders care about statutory employees?
Statutory employment may be appealing to people for several reasons. In fact, many view statutory employment as offering the best of both employment statuses. Some of the statutory employee’s taxes are already paid for by their employer, meaning they aren’t subject to self-employment taxes like independent contractors. They can also deduct work-related expenses from their taxes. Additionally, they have a greater degree of independence than common law employees.
However, statutory employees are not eligible for certain benefits like health care, retirement, and vacation time. Hiring people as statutory employees rather than common law employees can save the employer significant administrative time and money.
What can HR leaders do to manage statutory employees properly?
It can be a bit confusing to keep track of all of the different special conditions that statutory employees receive, so we’ve prepared a quick reference cheat sheet you can check below:
Which form do they receive for yearly income taxes? A W-2 form with Box 13 checked for “Statutory Employee”.
What form do they use for tax deductions? Schedule C
Can they contribute to a Simplified Employee Pension Plan? Yes, if they meet these three requirements:
- The employee is 21 or older
- The employee has worked for the employer for at least three years out of the last five
- The employee made at least $600 in wages within the calendar year
Do they receive benefits? No.
Who pays Medicare and Social Security taxes? Half is paid by the employer and half by the statutory employee.
Do employers need to withhold federal, state, or local income taxes? No.
What type of form does the employee fill out upon hiring? Form W-9: Request for Taxpayer Identification Number and Certification.
Recommended For Further Reading
Why should statutory employees be a part of the modern HR strategy?
Statutory employment is a unique designation that may appeal to people due to its relative freedom and certain advantageous tax conditions. It may also benefit employers who want to save costs on benefits. Employers need to be aware of this designation and how it works in case a situation arises in which you and a professional mutually decide that this is the best option for their employment.