What is a Statutory Employee & Legal Considerations

Discover more about the term statutory employee. 

If you're wondering what statutory employee means, you're not alone.

Overview: Statutory Employees

There are so many complications and categorizations to remember when it comes to payroll taxes that many professionals need to be made aware of the term's actual meaning.

Most businesses usually hire independent contractors or common-law employees. Usually, workers in the US qualify to work as either one or the other.

However, you may need to hire a statutory employee and pay them correctly. 

This article will explore the concept of a statutory employee and the required qualifications.

The IRS (Internal Revenue Service) provides examples of statutory employees, and we will discuss their benefits. Additionally, we will guide you through the process of correctly paying these employees and completing their W-2 forms smoothly.

Note: If you are looking for Global Payroll solutions for your business, you can contact us for customized solutions.

Who is eligible as a Statutory Employee?

To be eligible for statutory employment status, persons must meet the following requirements:

The employee must perform all of the tasks on their own.

The IRS refers to this as "facilities," and "statutory" workers must not spend a lot of money on the equipment and space needed to do their jobs.

A single employer must guarantee that employees fulfill their tasks on a long-term and continuous basis. If not, the categorization of independent contractors should be used instead of statutory employees.

Who is Included as a Statutory Employee?

According to the IRS, statutory employees are available in various industries, but specific circumstances must align with their classification. They need to fall within one of four categories, according to the IRS.

1) Drivers in this gig distribute beverages (except milk), meat, vegetables, fruits, and bakery items. They also handle delivery and pickup for laundry/dry cleaning services on a commission basis.

2) Agents dedicate themselves to providing customized, comprehensive coverage that meets the unique needs of every potential client.

3) Home-based workers receive supplies and materials from their employer, which they should promptly return once they finish their work. They can give them back directly to the employer or hand them over to another designated person in charge of collection.

4) Traveling salespeople, also known as statutory employees, are responsible for submitting orders from wholesalers, retailers, hotel operators, restaurants, contractors, or organizations. Their main task is to sell goods or supplies needed by other businesses. Employers with sales staff can refer to the IRS guide on supplemental wages for guidance.

Statutory employees handle critical tasks, though their roles are optional to the business's primary functions. Based on their type of work, employers may or may not offer them a permanent position.

Let's walk through the legal requirements of statutory employees. Also, you can read our blog on what is accounts payable.

Legal Requirement of a Statutory Employee:

Statutory employees are in a unique position between traditional employees and independent contractors. Here, we will outline the requirements that define a statutory employee based on their work.

1. Work Performed Under a Contract:

The worker and the company reach an agreement, which may not be a formal contract, outlining the scope of work, payment terms, and other relevant details. It signifies their understanding without being overly official or fancy; it simply outlines what a requirement is and how much will be estimated in the budget, as well as other important considerations.

2. Work Performed Under a Specific Capacity:

The employer engages the employee to execute a specialized assignment or aid in their efforts instead of assimilating them into the overall labour force. The employee is tasked with a restricted scope of responsibilities or held accountable for their readiness for diverse undertakings.

3. Work Performed Under a Single Employer:

Typically, statutory employees primarily devote their efforts to a singular organization and may infrequently acquire independent contracts. Their main livelihood stems from the employer who deems them as designated statutory personnel.

4. Work Performed Using Tools and Equipment Provided by the Employer:

Generally, employers provide the necessary tools and equipment for statutory employees to complete their tasks, demonstrating the employer's control over the work process.

5. Work Performed with a Significant Investment in the Equipment Used:

The IRS considers other factors as well, although traditionally statutory employees wouldn't make significant investments in the equipment they use for the job. This criterion is often the opposite of the previous one. If the other criteria are the same, a statutory employee might still be classified as such even if they provide some of their tools.

Overview of the Taxation of Statutory Employees and Employers

Statutory employees are individuals who meet specific criteria outlined by the IRS. Unlike regular W-2 employees, they are treated as self-employed for Social Security and Medicare taxes but still enjoy certain benefits like workers' compensation coverage. 

These individuals disclose their earnings through the filing of Schedule C—Profit or Loss from Business, similar to independent contractors. 

However, unlike the latter, who incur self-employment taxation on their net profits, being classified as statutory employees grants them the privilege of paying only half of the standard 15.3% self-employment tax, with the remaining portion being covered by their employer through payroll taxes.

Careful consideration is essential when comprehending taxation for statutory employees in the US, as it encompasses elements of both traditional employment and independent contracting.

Taxation For Employers:

Employers don't withhold income taxes from statutory employee wages when hiring in the US. 

The employer must retain and remit Social Security and Medicare taxes (FICA) on behalf of the employee. 

Often, the employer assumes half of these levies while the employee bears an equal portion, akin to that taken by standard employees.

Employers commonly disclose statutory employee income on a Form W-2 rather than utilizing a 1099-MISC due to its specific applicability to self-employed individuals.

Taxation For Employees

They must pay income taxes on their earnings when they submit their tax return. 

This obligation arises, and it is imperative to maintain order and fulfill it expeditiously.

Unlike typical employees, they do not have income taxes deducted throughout the year, necessitating quarterly estimated tax payments to evade penalties.

Let's talk about the Benefits of Statutory Employees:

Statutory Employees Receive Significant Benefits, Including:

First, they are exempt from self-employment tax. Unlike independent contractors, who have to pay this tax covering "Social Security and Medicare," statutory employees don't need to worry about it because their employer already deducts these taxes for them.

Second, statutory employees enjoy the benefit of deducting business-related expenses on their tax return. These include "office supplies, equipment depreciation (if there is a significant investment), and travel costs related to their work."

Another advantage is that statutory employees can deduct these expenses directly on their tax return—such as "office supplies, equipment depreciation (for substantial investments), and travel costs associated with their job."

A perk for individuals classified as statutory employees is the ability to write off business expenses on their tax forms, such as office supplies, equipment depreciation (if they have made a sizable investment), and job-related travel expenses.

Here's a table summarizing the critical tax differences:

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