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Statutory Employee: What you need to know?

What to know if you are a Statutory employee? What to know if you are an employer of a statutory employee?

The nature of your work dictates how you will pay your taxes, how much is deducted from you, and what are benefits you can get in your job. This will help you identify your rights and responsibilities as a worker. You probably know about being a regular employee and those who are self-employed. But what do you know about the other type, the statutory employees?

Understanding Statutory employees

Statutory employees are not the type that can get a permanent position. These are the type of employees that is like an independent contractor but considered as an employee in terms of tax withholdings. Being treated as both affects the withholding tax that is involved in this type of employment status.

Understanding Statutory employees

These are identified by the Internal Revenue Services (IRS) into a specific group. Remember that statutory employees are identified as independent contractors, but not all independent contractors are considered statutory employees. These groups are earning commission or using the resources of the business. These are the jobs identified by the IRS are:

  • Driver or agent drivers: Delivers beverages (other than milk) or meat, fruit, vegetable, or bakery products. It also includes someone who picks up and delivers laundry. It is considered that the driver is your agent, or the driver is paid on commission.
  • Life insurance sales agent: A full-time employee selling life insurance or contracts, or both.
  • Home-based workers: Works at home on materials or goods that you supply. Materials that must be sent to you or a person provided the specifications for the work to be done.
  • Traveling or city salesperson: A full-time employee who works on your behalf and turns in orders to you from retailers, wholesalers, operators, or contractors of restaurants, hotels, or similar establishments. The supplies sold for resale or supplies are for the business operation. The job should be performed by the salesperson.

What to know if you are a Statutory employee

The minority of employees are known to be statutory employees but if you belong in this specific group, you have to be aware of how to file your taxes based on your employment status. Having this understanding will help you know the nature of your job and the taxes you pay is based largely on your earnings.

Here are some questions you should ask yourself and should know if you are a statutory employee.

Do I receive a 1099-MISC or W-2 form?

Most of the independent contractors receive 1099-MISC forms each year, but as a statutory employee, you do not need this. You will receive a W-2 form. A W-2 form, known as a Wage and Tax statement, reports your annual wages and the amount withheld from your paychecks.

The employment status as a statutory employee is marked on box 13. You should also take note that you should report your earnings to Schedule C to report your allowable expenses together with your income. It includes your business expenses and has it deducted as your business-related travels.

Can I have a contribution to Simplified Employee Pension Plan (SEP)?

Most of the self-employed people qualify to contribute to this. A statutory employee can also contribute to Simplified Employee Pension Plan if the employer offers it. The three requirements for SEP include:

  • For those ages 21 years old or older.
  • You have worked for the employer for at least three years out of the last 5.
  • You have made within the calendar year at least $600 in wages.

What benefits could I receive?

Being a statutory employee, Social Services taxes and Medicare are withheld. Your employer pays half of it. However, as a statutory employee, you do not receive those benefits that a common-law employee is receiving. These mostly are health insurances, vacation leave or time, or a 401(k) plan.

These differences identify you as a statutory employee. Though you are not receiving the benefits of a common-law employee, you still have the perks of being treated as an independent contractor and a common-law employee. You are an independent contractor in terms of income tax purposes and a common-law employee for Medicare and Social Services taxes.

What is the tax implication of being a Statutory employee?

As mentioned, being treated both as an independent contractor and a common-law employee has an advantage. If considering FICA taxes, you are an employee. Thus, in terms of Medicare and Social Services taxes, your employer is paying their portion of the tax. It makes your total tax bill have a lower result.

In terms of being treated as an independent contractor, you need to track and monitor your business expenses accurately for the whole year. It is to write off unreimbursed business expenses. It also has the advantage of lowering your tax responsibility at the end of the year. You have to make sure that the expenses are eligible for deduction.

What to know if you are an employer of a statutory employee

There is a difference between having a statutory employee to a common-law employee. Besides the taxes, the process and papers to fill out are different. It is expected as an employer to know your responsibility of having the services of a statutory employee.

Here are some of the tips and information you need to understand as an employer of a statutory employee.

The taxes for a Statutory employee

If you are the employer, you are not required to withhold federal income taxes from their wages, but you are required to withhold Medicare and social services taxes. Withholding taxes regarding Medicare and social services taxes from their wages however need the meet three conditions:

  • That is their service contract, the all the services are performed by them.
  • In performing the services, no substantial investment in equipment and property is utilized other than for transportation such as cars or trucks.
  • The services performed are continuingly.

If the statutory employee is classified as a driver or a full-time salesperson, that employee is considered for Federal Unemployment tax (FUTA) purposes. The employer must pay this tax on the statutory employee’s payment.

Hiring Statutory employees

The contract should explain the job, working relationship, and employment status of the individual. It also includes all the taxes that the employee should pay. The employer does not need to withhold the income tax. A W-4 form is not necessary; W-9 is essential for verification of the tax ID number.

Filling out a W-2 form for Statutory employees

A W-2 form is a paper you need to fill out and give to your statutory employees. Here is a guide on what to fill out in the W-2 form:

  • In Box 13, mark the box that says, Statutory employee.
  • Box 1 includes the taxable income, wages, salary, bonuses, and tips. Here you should specify the amount you paid the employee.
  • Box 3 and 5 show the earnings you are subject to pay for Medicare and Social Services taxes. You should input here the amount you withheld for both taxes.
  • Send this form to your employee before January 31 each year.
  • The statutory employee should fill out the personal tax return and attach Schedule C to form 1040.

Knowing about statutory employees and the nature of their job is intricate for an employee or employer. This helps you understand the nature of their employment status, as well as the unique rights and responsibilities that you should enact and apply in your work life.

A diversity and inclusion focused employer is a way to understand if an employer values employees and provide equity.

Statutory Employee FAQs

Do Statutory employees receive a 1099-MISC or W-2 form?

Most of the independent contractors receive 1099-MISC forms each year, but as a statutory employee, you do not need this. You will receive a W-2 form. A W-2 form, known as a Wage and Tax statement, reports your annual wages and the amount withheld from your paychecks.

Can a Statutory Employee have a contribution to Simplified Employee Pension Plan (SEP)?

Most of the self-employed people qualify to contribute to this. A statutory employee can also contribute to Simplified Employee Pension Plan if the employer offers it. The three requirements for SEP include:

  • For those ages 21 years old or older.
  • You have worked for the employer for at least three years out of the last 5.
  • You have made within the calendar year at least $600 in wages.

What benefits can a Statutory Employee receive?

Being a statutory employee, Social Services taxes and Medicare are withheld. Your employer pays half of it. However, as a statutory employee, you do not receive those benefits that a common-law employee is receiving. These mostly are health insurances, vacation leave or time, or a 401(k) plan.

What should a Statutory Employee know about Tax in the United States?

Being treated both as an independent contractor and a common-law employee has an advantage. If considering FICA taxes, you are an employee. Thus, in terms of Medicare and Social Services taxes, your employer is paying their portion of the tax. It makes your total tax bill have a lower result.

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About the author

Jess Man

Jessica is the Editor-in-Chief and Senior Diversity Advisor at Diversity Social. Jessica has over 10 years of working with and advising employers to be more diverse and create an inclusive working environment.
Jessica's experience spans private and non-profit sectors in multiple industries.
Jessica's expertise experience is beyond Diversity & Inclusion, she is also a certified professional IT recruiter in Data & Analytics, Database administration, Artificial Intelligence area.