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 is a Statutory Employee?
A statutory employee is a cross between an independent contractor and an employee. The IRS classifies only four different categories of an employee who can be considered statutory:
- 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.
This article discusses the difference between the two different kinds of workers: Employees and Independent Contractors.
What Is a Statutory Non-Employee?
The IRS also has a category of workers 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.
How Do I Hire a Statutory Employee? What Documents Do I Need?
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. Include a list of taxes that the statutory employee must pay.
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 have anything to do with the worker's tax status.
Basically, for tax purposes, a statutory employee:
- Is treated as an employee for Social Security/Medicare tax purposes
- Is treated as an independent contractor for income tax purposes
The employer must withhold the worker's share of FICA taxes (Social Security/Medicare taxes) from their payments if all three of these conditions are met:
- 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.
A statutory employee who is a driver or full-time salesperson (as described above) is considered an employee for federal unemployment tax (FUTA) purposes, and the employer must pay FUTA tax on this employee's payments.
How Do Statutory Employees Pay Income Taxes?
If the employer doesn't have to withhold the person's share of FICA taxes from payment, the statutory employee must pay their share of these taxes (the employer paying its share separately). The statutory employee must also pay their own federal and state income taxes.
Statutory employees who must pay income taxes and their share of FICA taxes individually may need to make quarterly estimated tax payments during the year, to avoid penalties for underpayment of taxes.
Employment taxes. The employer provides the statutory employee with a Form W-2 that shows the amount of payments to the person as "other compensation" in box 1. Social Security and Medicare wages and withholding are included in the usual boxes. The "Statutory Employee" option must be checked in Box 13.
The statutory employee enters the payments from form W-2 on their income tax return on Schedule C, and they can deduct business expenses from these payments.
If the person had other self-employment income, they must file two Schedule C forms, one as a statutory employee and the other for other self-employment income.
If the person's share of FICA taxes was withheld, they don't owe self-employment tax on that amount.
Self-employment tax. In addition, if the person didn't have income tax withheld on statutory employee income, they must Schedule SE to report income tax liability and Social Security/Medicare tax not withheld and payable from wages and tips from Form W-2.