They are considered employees for tax purposes, even though they may exhibit some characteristics of independent contractors. This unique classification ensures accurate income and Social Security tax deductions while providing certain benefits to these professionals.
So, what is a statutory employee? The IRS established specific criteria to help identify statutory employees.
1. They must be performing services in one of these four categories:
a. A full-time life insurance salesperson working primarily for one company.
b. An agent-driver or commission-driver distributing meat, vegetable, fruit, or bakery products.
c. A home worker performing work on materials or goods furnished by the employer that will be returned to the employer or a designee.
d. A traveling or city salesperson soliciting orders for merchandise, wares, or other products on behalf of the employer.
2. A substantial amount of the services are being performed personally by the worker.
3. The worker does not have a substantial investment in the equipment and property used to perform the services.
4. The services must be performed consistently for the same employer.
Since statutory employees are a bit of a unicorn, they also have their own set of tax implications that set them apart.
1. Social Security and Medicare Taxes: Just like traditional employees, statutory employees have Social Security and Medicare taxes withheld. However, income tax isn’t withheld from their wages, so they need to make estimated tax payments.
2. Expense Deductions: Unlike regular employees, statutory employees can deduct business expenses directly on Schedule C of their tax return. This helps lower their taxable income and potentially qualify for certain tax credits.
3. Self-Employment Tax: Statutory employees don’t have to pay self-employment tax since their Social Security and Medicare taxes are already withheld by the employer.
4. Reporting: Employers need to report wages paid to statutory employees on Form W-2. And don’t forget, the employer should check the “Statutory Employee” box in Box 13 of the form.
The statutory employee classification serves as a middle ground between traditional employees and independent contractors, with distinct tax implications and benefits. Understanding this classification can help both employers and workers navigate their responsibilities and entitlements, ensuring compliance with IRS guidelines and a smoother tax filing experience.