Statutory Employee

The Internal Revenue Service (IRS) defines a statutory employee as a worker whose status is a hybrid between a traditional employee and an independent contractor. The classification of a statutory employee arises from provisions within federal tax laws outlined specifically by the IRS. Statutory employees are handled differently for employment tax purposes. A statutory employee works for an organization, but the employer is not responsible for withholding federal income taxes from the worker’s earnings. However, statutory employees are still subject to Medicare and Social Security taxes. 

 

Because of their unique classification, statutory employees can use Schedule C (Form 1040) to deduct work-related expenses. Typically, this deduction is unavailable to regular employees. Statutory employees perform services specified by a contract explicitly stating the worker will not be treated as an independent contractor for tax purposes. 

 

Statutory employees are differentiated from regular employees by these key characteristics:

 

• How they are paid: While statutory employees are issued a W-2 form, the employer does not withhold income taxes. Statutory employees are responsible for paying their income taxes to the IRS. 

• The specific nature of the duties they perform: Statutory employees often perform work outside the typical course of the organization’s trade. 

• Business expenses deductions: Statutory employees can apply business expenses as deductions on their federal tax returns.

 

To qualify as a statutory employee, workers must meet these three criteria.

 

1. All work must be performed personally by the employee.

2. The employee cannot have a large investment in the property, supplies, or tools they use to perform their work.

3. Their work has to be on a continuing basis for one employer. 

 

Statutory Employee Examples

In most cases, statutory employees work for a company through written service contracts. The IRS specified these four worker categories that can be considered statutory employees if certain conditions are met:

 

• Driver-salesperson: This type of statutory employee is paid on commission and delivers products such as beverages (excluding milk), vegetables, meats, fruits, dry cleaning, or laundry for an employer. 

• Home workers: These individuals work from home on goods or materials provided by an employer. These goods and materials must be returned to a designated person or the employer upon completion. 

• Full-time life insurance sales agents: These statutory employees sell annuity contracts or life insurance for primarily one life insurance company. Although they work full-time, their earnings are usually commission-based.

• City or traveling salespersons: Salespersons who work full-time hours and solicit orders from restaurants, wholesalers, retailers, hotel operators, and similar businesses may be considered statutory employees because they perform the majority of their work away from the employer's place of business.