Most of the time, workers are generally placed into one of two categories: employees or independent contractors. But did you know there is actually a third type of employee, known as a statutory employee?
Though it’s an employee classification that sometimes flies under the radar of business owners, it can be a good idea to understand what they are and the type of work they perform. Even though they’re less common, there could come a time (and place) when they are important to your company’s needs. But what exactly is a statutory employee, and how can you tell if a worker qualifies as one?
In this guide for employers, we’ll define what a statutory employee is, discuss some tax considerations, and find out more about the types of roles they’re usually responsible for.
Simply put, a statutory employee is someone who, according to the Internal Revenue Service (IRS), is an employee for tax purposes but is considered an independent contractor by common law rules. A worker is classified as a statutory employee if they pay their half of Medicare and Social Security taxes (in addition to their employer).
Now that we understand more about what a statutory employee is, let’s find out about the different job categories that fall under this designation, according to Uncle Sam.
According to the IRS, there are four different categories of employees that may be defined as statutory. Here is a breakdown of each one:
So now that we have a better understanding of who qualifies as a statutory employee according to the IRS, let’s see how the specifics match up with one of the more common types of workers that employers come across.
As a general rule, independent contractors perform a job for multiple companies, while a statutory employee works independently for a single company. This area can become a little confusing to some employers who may not know exactly how to classify a worker, but one simple way to clear up any misunderstanding is to answer this question:
Does the worker only perform duties for my company, or do they perform the same duties for multiple companies?
Another thing to consider is how much control you exercise over a worker.
For instance, do you determine how the work gets completed and when it should be done, or does the worker set their own schedule?
If all of this talk about worker classification is making your head spin, there may be some changes on the horizon to keep an eye out for. Specifically, the U.S. Department of Labor (DOL) is looking into methods that might make it easier to determine whether a worker is an employee or an independent contractor, but the regulations have been temporarily put on hold until a special review has been completed. That said, as more information becomes available from the DOL, we’ll add the updates to this article. For now you an read some of the proposed rules on the Office of the Federal Register, which was posted in October 2022.
Again, according to the IRS, three conditions must apply for an employee to be considered statutory:
If these three conditions are not met, the worker should be classified differently.
Though we spelled out some specific criteria (and broader job descriptions defined by the IRS), how can you be sure exactly what statutory employees are or whether any of your employees would qualify? Here are a few examples.
Now that we’ve gone over some specific examples, let’s take a closer look at how withholding works for statutory employees.
Working with statutory employees can make tax withholding a little more complex, but here are some points to keep in mind.
Finally, at year-end, you must provide any statutory employees you worked with a W-2 and keep in mind that “Box 13 – Statutory Employee” needs to be checked off.
The W-2 should include the total amount of wages paid to the statutory employee as well as the amount of Social Security and Medicare taxes withheld for the year. Remember that sending your statutory employees a 1099-NEC, which is the form that independent contractors receive, is not required.
Statutory employees are eligible to receive a couple of tax benefits. For example. they are allowed to file Schedule C so they’re able to deduct eligible expenses such as travel, advertising, and office expenses related to their job that they could not deduct if they were an employee.
Another advantage is that as a statutory employee, they only need to pay half of the FICA taxes due. If they were an independent contractor, they would be responsible for both the employer and employee portion of FICA.
Keep in mind that it is not necessary to send a 1099-NEC — the form that independent contractors receive — to your statutory employees.
While there are some tax benefits statutory employees can take advantage of, generally they are not eligible for any of the benefits received by regular employees including:
That being said, statutory employees are eligible to contribute to a Simplified Employee Pension Plan or SEP, if an employer offers it.
Depending on the nature of your business or the type of services you offer, hiring statutory employees (and understanding the trickier aspects of working with them) might not be an item you need to have on your “to-do” list. Though the chances may be slim, if you come across a scenario where hiring a statutory employee is the right fit to perform a certain task or work for your business, it’s important to have the correct processes in place to manage statutory employees properly.
This article is provided for informational purposes only and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors for formal consultation.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.