Many businesses owners are familiar with independent contractors and employees carrying out the work needed for their business. Whether if it’s one-time projects or steady, consistent operations, businesses rely on both kinds of workers to get the job done. An interesting and uncommon category of employees who walk the line between the standard employee and independent contractor is the statutory employee. Employees by “statute”, employers do not have to withhold federal income tax on these employees. The statutory employee may also have access to additional tax deduction benefits individually. However, the worker must meet finely-specified criteria to be considered statutory employees.
Statutory Employee Categories
Laid out in Publication 15-A, statutory employee status applies if it falls within 4 distinct categories and also meets the 3 conditions in regards to social security & Medicare taxes.
The 4 categories of employees that may be considered statutory employees are:
- Drivers who distribute beverages or grocery products, or drivers who pick up and deliver laundry, if the driver is an agent paid on commission.
- Full time life insurance sales agents whose principal business activity is selling life insurance or annuity contracts or both, primarily for one company.
- Individuals who works at home on materials or goods supplied by an employer and must be returned or to a designated person, if furnishing specifications for the work to be done
- Full-time traveling salesperson who works on an employer’s behalf and orders from wholesalers, retailers, contractors, or operators of hotels, restaurants, and similar establishments. Goods must be sold for resale or supplies for the buyer’s business operations and must be the salesperson’s principal business activity.
Payroll Tax Considerations
FICA taxes, aka SS & medicare taxes, must be withheld if all 3 conditions apply for the aforementioned categories of statutory employees:
- Service contract states or implies that substantially all services are to be performed personally by the statutory employee
- The employee does not have a substantial investment in the equipment and property used to perform the services (other than an investment in facilities for transportation like a car or truck)
- Services are performed on a continuing basis for the employer
FUTA taxes also apply to the business if the employee is considered as a statutory employee. However, it is worth noting federal income tax is not withheld for statutory employees, so businesses may find some advantage in not having to withhold for income tax from statutory employees. Statutory employees receive a W-2 form and are noted as “statutory employee” in check box 13. Additionally the statutory has access to using Schedule C and its wider array of deductions, as opposed to schedule A like most individual tax filers as well as not being subject to the 2% AGI threshold of Schedule A.
Statutory employees are unique cases that can come up in running a business. Having a knowledgeable team to understand and address these situations help free up owners to their main goal, growing their business! MiklosCPA strives to be that team and has helped many small and emerging businesses with their accounting and tax needs. Schedule a call with us to learn how we may help your business. Also, check us out on our social media pages for additional tax tidbits and interesting info.