Tap to Read ➤

Who is a Statutory Employee?

Buzzle Staff
A statutory employee is someone who works on a commission or contract basis, but can be treated as a regular employee by statute. This allows him to be eligible for certain tax benefits. This Story tells you about the concept of statutory employees.
Quick Fact
In the entertainment industry, an independent contractor, whose contract states that his works will be considered as "works made for hire" (whereby their ownership rights remain with the company), is deemed as a statutory employee.
According to the IRS, there are 4 categories of employees; namely, common-law employee, statutory employee, non-statutory employee, and independent contractor. The classification is dependent on the services provided.
Statutory employees are exempt from certain taxes by statute. It can be said that they fall between independent contractors and regular employees. The paragraphs below will elaborate on this concept and some related terms.
The Concept
  • A statutory employee may work for a regular employer on a periodic or commission basis or may be into business himself.
  • Such individuals follow a different protocol for filing taxes and are eligible for special deductions.
  • Tax deductions are the very reason they are classified as regular employees.
  • Examples of such employees include private businessmen, insurance agents, traveling salesmen, commission drivers, food/beverage delivery drivers, freelancers, work-from-home business people, etc.
  • Such people are primarily into private businesses themselves; however, they work for a single company/firm.
  • Ideally, independent contractors are also independently paid for their work, but they are slightly different from statutory employees. They file for the taxes and handle any related formalities themselves; the employer is not liable to withhold taxes on them.
  • In case of statutory employees, even though they might be commission-based or working as agents, the employer has to pay taxes on his salary and treat him like a regular worker. Keep in mind though, that the employee does not file for self-employment tax.

As per law, an individual qualifies to be a statutory employee if he falls under any of the following categories:

▲ An insurance agent who sells insurance policies and other contracts; however, who works only for one company
▲ A home business person who supplies products/services that may be returned only to her or a person she specifies

▲ A driver who drives vehicles that distribute meat, vegetables, baked goodies, beverages (no milk), etc. He could also drive the laundry truck and be paid on commission.
▲ A salesman who travels often and supplies his employer with ideas from and contacts of wholesalers, retailers, manufacturers, etc. The goods bartered must be used in the employer's business. The salesperson, however, must supply his services solely to one company/firm.
Tax Deductions
As already mentioned, statutory employees qualify for extra tax deductions.

In fact, they state their expenses on Schedule C instead of Schedule A.

Expenses on Schedule A are subject to 2% of their adjusted gross income. This does not happen on Schedule C.
Whatever the employee earns is reported on line 1 of Schedule C as his income. It may also be reported on Schedule C-EZ.

This income must not be confused with what the employee earns from other private businesses (self-employment income). A separate Schedule C must be filed for that income.
If any of the three conditions mentioned below are satisfied, the employer needs to withhold Social Security and Medicare taxes (FICA taxes) from the income of a statutory employee:
▲ All services must be performed personally by the employee. This has to be stated in the contract.

▲ They do not have to invest anything (except for travel expenses) in the raw material or other products used to provide the services.

▲ The services continue for a period for the same employer.
Thus, statutory employees pay FICA taxes via the employer. However, they have to separately report their self-employment income and expenses.
Statutory Employee on Form W-2
  • Although the employer withholds FICA taxes, he cannot do the same for federal taxes.
  • The employee has to furnish Form W-2 (Wage and Tax Statement).
  • Only if the 'Statutory Employee' option is checked on W-2, can the employee claim for business expenses on Schedule C. This has to be done by the employer (a W-2 form is filled by the employer).

  • To enter your income and expenses, you can go to the Federal Q & A on your TaxAct Return. Then you can go to Income and Expense for Statutory Employees.
  • Through this, you can fill Schedule C, complete the questionnaire, and review the information.
  • Your income will be listed in box 1 of the W-2 form. This information has to be filled on line 1 of Schedule C.
  • A statutory employee receives commissions, sick pay, maternity leave, paid vacations, maintenance expenses, travel expenses, etc.
  • Statutory employee benefits are almost the same as regular benefits.
  • He will not report any itemized deductions, since he does not fill up Schedule A.
Legal Considerations
  • It is sometimes difficult to classify individuals as statutory employees or independent contractors.
  • Since independent contractors are more convenient to deal with, employers may list down statutory employees as independent contractors. This can get very complicated for the employer if the tax authorities find out about the same.
  • If individuals are doubtful about what category of employees they are to be classified under, they can take help from a tax professional or a corporate lawyer.
  • They will make sure you are put under the most suitable category and will also help you handle your tax affairs efficiently.
  • Employers who wantonly classify employees in the wrong category may be guilty under the law and may be subject to heavy penalties.
Irrespective of whether you are a regular, statutory, or non-statutory employee, you have to make sure you remain an honest citizen.
You may be able to hide from the clutches of the law for a while, but eventually, you will be caught if you do not follow the stated rules and regulations. Therefore, be a lawful citizen; do not fall prey to illegal tactics to reduce taxes.