What is a Statutory employee? Criteria, taxation, and example

A statutory employee is a freelancer treated as an employee for tax purposes, meeting specific criteria for Social Security and Medicare. These workers receive W-2 forms, allowing tax deductions for job-related expenses, but typically lack regular employee benefits.

By Brad Nakase, Attorney

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Introduction

A freelancer who is regarded as a staff member for the purposes of tax withholding is referred to as a statutory employee. If an employee meets certain requirements and both the company and the employee pay the correct amount of Social Security and Medicare taxes, he/she is classified as a statutory employee.

Additionally, the employee may submit claims for costs spent while doing job-related duties. Sales insurance agents (full-time) and drivers are examples of people who fit into this group. To submit their yearly tax returns, statutory employees must get a W-2 form from their employer.

Important Lessons

  • A self-employed individual who is subject to tax withholding is referred to as a statutory employee.
  • For someone to be classified as a statutory employee, they must fulfill specific requirements.
  • Under Schedule C of their annual returns for taxes, a statutory employee is also allowed to deduct costs relevant to their jobs.
  • W-2s are sent by employers to statutory employees in place of 1099-MISCs.
  • Businesses that wish to recruit statutory workers must provide them with contracts, and terms of payment, and get a W-9 rather than a W-4.

Who Fits the Definition of a Statutory Employee?

Professionals who are liable to tax withholding by legislation under the common law regulations of the IRS (Internal Revenue Service) are classified as statutory employees. Employers may choose to withhold taxes from most freelance workers, but only if an employee satisfies the following requirements:

  • The employee essentially completes each of the tasks specified in the employment agreement or those suggested by it.
  • The employee does not own any significant stake in the corporate assets or equipment that is used to carry out the services.
  • The worker consistently provides the services to the same company.

If a worker in this category files their yearly tax returns, they can subtract work-related costs on Schedule C rather than Schedule A. A higher tax deduction for business expenditures is given to statutory employees than to other employees since Schedule C expenditures are not capped at 2% of adjusted gross earnings, unlike Schedule A expenses.

In general, statutory employees are not entitled to similar benefits that firms provide to their permanent staff. One who fits within this category, for example, might not be qualified for health insurance, vacation compensation, or retirement benefits. Benefit recipients who are statutory workers might be regarded as regular employees.

What Are the Requirements for Statutory Workers?

The IRS states that the following people are considered statutory employees:

  • Deliverers of laundry, dry cleaning, and other non-dairy food and drink
  • Individuals who work full-time in annuity or life insurance sales for the same insurance firm
  • People who utilize employer-borrowed materials when working from home
  • Traveling sales representatives who work entirely for a single business and coordinate orders with contractors, distributors, retailers, and other businesses

You can obtain more information through the IRS by referring to Publication 15-A Employer’s Supplemental Tax Guide if you’re not sure whether you’re regarded as a self-employed worker or a statutory employee. In terms of tax-withholding regulations, this document distinguishes between employees and independent contractors.

Important: Statutory workers are frequently seen as a hybrid of employees and businesses.

Information Regarding Statutory Employee Taxes

Anyone who contributes half of the Social Security and Medicare taxes is considered a statutory employee. Together, these two levies are referred to as FICA (Federal Insurance Contributions Act) taxes, and they are split as follows:

  • Employee and employer contributions to Social Security comprise 12.4% (6.2% each).
  • Medicare contributions: An employee and their employer both contribute 1.45%, for an aggregate of 2.9%.

As a result, the total amount of FICA tax contributions is 15.3%.

As was already mentioned, the employer of this type of worker checks Box 13 on a W-2 form that they receive. Since this form is provided to freelance workers, they are not given Form 1099-MISC.

Statutory employees may claim a Schedule C deduction for their expenditures in the same manner as a corporation. People can use this form to declare earnings as well as allowable costs including taxes, travel, office expenses, and advertising.

Employers cannot deduct income taxes—federal, state, or local—because they are additionally in charge of paying their individual income taxes annually. As a result, when taxes become due, these workers should be ready to pay a lump sum amount or in installments.

Employing and Compensating a Statutory Employee

Employing a statutory worker is just like employing any other worker. An offer for work and terms of payment is made to the person by the employer. Comparing these workers’ pay to that of regular employees, there are a few minor variations. Usually, employers give these people income in any way they choose, including commissions, piece rates, or set salaries.

W-9 Form: Request for Taxpayer Identification Number and Certification, must be completed by employees in lieu of W-4 Form: Employee’s Withholding Certificate. An employee’s TIN (taxpayer identification number), which is essentially their SSN (Social Security number), and personal information is verified using a W-9 form.

Independent Contractor vs. Statutory Employee

Statutory workers differ slightly from independent contractors in that, as previously said, they usually work for a single company. These people serve both corporations and private clients with their services. They do freelance work a lot. As a result, they bear full responsibility for paying all state, local, federal, and federal income taxes as well as the entire amount owed for FICA taxes.

Building contractors, other craftsmen, electricians, plumbers, and dentists are examples of independent contractors. Some professions, like journalism and hairstyling, may also classify independent contractors.

Are Benefits Available to Statutory Employees?

The same perks available to regular workers are not applicable to statutory employees. Anything pertaining to retirement, vacation time, or health care falls under this category.

Is it possible for a Statutory Employee to Make a SEP Contribution?

Provided that the company offers a SEP (simplified employee pension) plan, the statutory employee must be over 21, have worked for a minimum of 3 years in the last 5 years, and have earned a minimum of $600 in the previous year in order to be eligible to contribute to one.

Do Statutory Workers Receive W-2s?

Statutory workers get their W-2 at the conclusion of January, the same period as regular workers. For people who file their yearly tax returns, these are necessary. But statutory employees’ W-2s have Box 13 ticked off, unlike regular employees.

What Are the Advantages As a Statutory Employee?

Operating as a statutory employee has some benefits. In particular, the FICA taxes have been paid by the company if they receive a W-2. This indicates that these workers are exempt from paying any self-employed taxes owed by independent contractors. Nonetheless, income taxes remain their responsibility. In addition, these workers are able to write off the costs they spend on their jobs.

The Final Word

Statutory employees can include, among others, food delivery motorists life insurance representatives, traveling salespeople, and persons who operate from home with equipment they borrow from their company. A Statutory employee is considered an employee for the purposes of tax withholding, as he/she is a type of independent contractor.

To be regarded as a statutory employee, one must meet certain requirements. For example, Social Security and Medicare taxes are paid by both the company and the worker. Instead of independent contractors filing 1099-MISCs, they file W-2 forms with their yearly tax returns.

Statutory employees usually aren’t eligible for benefits like health insurance, although they do have some advantages, for example, tax deductions on spending connected to their jobs.

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