Statutory employee

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A statutory employee is an independent contractor under IRS common law that is treated as an employee, by statute, for tax withholdings. For a standard independent contractor, an employer cannot withhold taxes, as this would change the independent contractor relationship into an employer-employee relationship. Statutory employees are also permitted to deduct work-related expenses on Schedule C instead of Schedule A in the United States tax system. As a result, they are allowed a greater tax deduction for business expenses than standard employees, as Schedule C expenses are not subject to the 2% adjusted gross income threshold as seen with Schedule A.^[1]

Criteria

To be considered a statutory employee, all three of the following conditions must apply:^[1]

Services must be personally performed by them.
They do not have substantial investment in the equipment and property used to perform the services.
The services are performed on a continuing basis for the same payer.

Some examples of employees that may be considered statutory are as follows:^[1]

A driver distributing non-dairy beverages, meat, vegetable, fruit, or baked goods; or who picks up laundry, if he acts as an agent or is paid by commission.
A life insurance agent whose main business is life insurance and annuity for one company.
Someone who works from home on materials an employer supplies, that must be returned and for which the employer gives work specifications.
A traveling salesperson who turns in orders from wholesalers, retailers, contractors, hotels, or restaurants, either for resale or business use. Work performed must be the principal business activity of the employee.

Advantages over standard employee

Statutory employees occupy an intermediate position between employees and independent contractors from the perspective of the employer. Statutory employees are less expensive to hire than regular employees because the employer does not have to pay unemployment taxes. However, they are more expensive to hire than independent contractors because Social Security and Medicare taxes must be paid on wages in the form of FICA tax.^[1] Statutory employees pay FICA tax through their employer, and so do not pay self-employment tax; despite this, they must report expenses, income and wage.^[2]

Similar to independent contractors, statutory employees may deduct business expense from W-2 earnings.^[2]

References

1 2 3 4 "Statutory Employees". IRS.gov. Retrieved Jan 9, 2015.
1 2 Brabec, Barbara (Nov 26, 2014). How to Maximize Schedule C Deductions & Cut Self-Employment Taxes to the BONE -. Barbara Brabec Productions. p. 107. ISBN 978-0985633318.

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Statutory employee

Criteria

Advantages over standard employee

See also

References

Further reading