What Is A Statutory Employee? Definition And Overview In 2022

by Management 02 June 2021

What Is A Statutory Employee

To learn what is a statutory employee, you must know that he or she is not an individual who has made a significant investment in the equipment used in the performance of the services, other than transportation equipment, such as a personal car for service delivery. A statutory employee is a person who works for a firm other than the one that hired them. 

A statutory employee, on the other hand, is treated as an employee for the purposes of employment taxes. Many employers that do not have statutory employees are unsure about this classification. However, you may need to hire a statutory employee at some point of time. In this article, we will deeply look into gathering knowledge about a statutory employee and its various aspects. 

What Is A Statutory Employee? 

An independent contractor who qualifies for employment treatment can be explained as what is a statutory employee. If the person meets specific qualifications, they are classified as an employee for tax withholding reasons. Most independent contractors are not allowed to be taxed by their employers. 

However, statutory employees are not regarded as employees or independent contractors in the literal sense. Independent contractors owe twice as much in Social Security and Medicare taxes as employees. In the form of self-employment tax, independent contractors need to pay off these taxes. 

Both the employee and employer portions are covered by the self-employment tax to pay off Social Security and Medicare taxes. Employees are only liable for the portion of Social Security and Medicare taxes that pertain to them. Independent contractors who are allowed to be treated as employees for payroll tax purposes are known as statutory employees.

What Is A Statutory Non-Employee?

Statutory nonemployees are a type of working-class defined by the IRS. It is quite important to know when you are learning about what is a statutory employee. This category currently only includes three types of workers that are licensed real estate agents, direct sellers, and certain companion sitters. 

If substantially all of a real estate agent’s or direct seller’s services are related to direct sales, they are considered self-employed for tax purposes. Self-employed companion sitters include those who are not employed by a service.

Who Are Considered Statutory Employees?

Now that you know what is a statutory employee you must also learn that all statutory employees are considered as independent contractors. However, not all independent contractors cannot be named as statutory employees. 

The IRS expects employers to determine a very particular group of independent contractors as statutory employees. A statutory employee is an individual who falls under any one of the following categories as specified by the IRS:

1. Home-Based Workers 

It is a person who works from home on materials or items that you provide. You must return the materials to you or someone you choose. You must also specify how the work should be completed.

2. Life Insurance Sales Agents 

A full-time life insurance sales agent whose primary job function is to sell life insurance or annuity contracts or both for one or more life insurance companies.

3. Agent Or Commission-Based Drivers 

A driver who gathers as well as delivers dry cleaning or laundry and distributes non-milky beverages, meat, vegetables, fruit, or bakery products. The driver must be a representative for you or be compensated on commission.

4. Traveling Or City Salesperson 

A city or full-time traveling salesperson whose primary job function is to represent you. Orders from contractors, retailers, wholesalers, or operators of hotels, restaurants, and other similar businesses are delivered to you by the salesperson. Furthermore, the things sold must be for resale or supplies for use in the buyer’s business.

How To Hire A Statutory Employee?

If you’re thinking of hiring a statutory employee, make sure you have a contract in place that spells out the nature of the working relationship as well as the employee’s employment status. It is essential to learn about this major aspect of what is a statutory employee. 

Include a list of the taxes the statutory employee is responsible for. A statutory employee does not require to fill out a W-4 form because you do not withhold income taxes from them. They must, however, complete Form W-9 to validate their tax ID number when hired.

How To Pay Off A Statutory Employee?

Understanding how to pay is a part of knowing what is a statutory employee. The manner in which the worker is compensated is determined by the nature of the work. A commission may be paid to some people, such as agents or salespeople. 

Others, such as the piece worker, may be compensated on a per-piece basis. The worker’s tax status has nothing to do with the payment method. Social Security and Medicare taxes can be withheld from the wages of statutory employees if all three of the following are true:

  1. The lone exception is transportation facilities when the statutory employee has a significant interest in the equipment and property they utilize to execute the services.
  2. The service contract specifies or indicates that the worker performs all services substantially and personally.
  3. The statutory employee works for the same employer on a regular basis. 

What Are The Few Advantages of Being A Statutory Employee?

  • Statutory employees are entitled to larger tax deductions since they file Schedule C rather than Schedule A.
  • Only the employee component of Social Security and Medicare taxes are paid by statutory workers.
  • If they lose their work, any statutory employees may qualify for unemployment benefits.

Final Thoughts

Statutory employees are entitled to a higher tax deduction for business costs than non-statutory employees. From the standpoint of the employer, statutory employees fall between employees and independent contractors. I hope you were able to get a clear overview of what is a statutory employee now. 

You must conduct payroll whether you have employees, statutory workers, or both. They can profit from both the advantages of being an employee and the perks of being an independent contractor.

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