Statutory Employees - Hiring, Pay, and Taxes
Are you a statutory employee, or does your business have statutory employees? A statutory employee is a person in business as a separate company from the hiring company. But a statutory employee is treated as an employee for employment tax purposes.
What Defines a Statutory Employee
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. (Sometimes this person is called a "piece worker.")
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.
What is a Statutory Non-employee?
The IRS also has a category of employee called "statutory nonemployees." Currently, only three types of workers are considered in this category: direct sellers, licensed real estate agents, and certain companion sitters.
Real estate agents and direct sellers are considered to be self-employed for tax purposes if substantially all of their services are related to direct sales.
Companion sitters who aren't employed by a service are also considered to be self-employed.
Benefits of Statutory Employee Status
For workers who qualify as statutory employees, the tax situation may be confusing, but it has benefits. Basically, for tax purposes, a statutory employee:
- Is treated like an employee for Social Security/Medicare tax purposes, but
- Is treated like an independent contractor for income tax purposes.
This means that the worker must pay his or her own income taxes (and may need to pay estimated taxes), but the employer is contributing to the FICA taxes, which means a lower FICA tax payment.
How Do I Hire a Statutory Employee? What Documents are Required?
If you are considering hiring a statutory employee, you should have a contract with that employee, spelling out the nature of the working relationship and the employment status of this individual. Taxes that must be paid should also be described.
Because you don't withhold income taxes from a statutory employee, the person doesn't need to complete a W-4 form. But a Form W-9 must be completed to verify the person's tax identification number.
How Do I Pay a Statutory Employee? What Taxes Must Be Withheld?
How the worker is paid depends upon the specifics of the work.
Some, like agents or salespeople, may be paid a commission. Others, like the piece worker, may be paid by the piece. The payment method doesn't bear on the worker's tax status.
The statutory employee is responsible for paying his or her own income taxes; these are not withheld from the worker's paycheck. This is similar to independent contractors, who must pay self-employment taxes on work income.
Whether you are required to withhold FICA taxes (Social Security/Medicare taxes) from these workers depends on three questions, which reflect the worker's status as an employee:
Personal Services: If the service contract with that employee states that substantially all the services are to be performed personally by them.
Investment in Equipment or Property: If the worker doesn't have a substantial investment in the equipment and property used to perform the services. For example, if the piece worker is given the equipment to perform the piecework tasks and he or she doesn't have to purchase the equipment.
Single Payer: If the services are performed on a continual basis for a single payer.
How Do Statutory Employees Pay Income Taxes?
The employer provides the statutory employee NOT with a 1099-MISC, but with a Form W-2 that has the "Statutory Employee" option checked in Box 13.
Then, the statutory employee files a Schedule C as an independent contractor, which means he or she may deduct business expenses (including mileage expenses) and may have a business profit or loss. Income taxes must be paid on these profits, or losses may be used to offset other income.