Statutory employees

What you Need to Know about Statutory Employees

In April 24, 2019

You may have wondered what that little box for statutory employees is on IRS Form W-2. You are not alone in this – many employers are unsure what statutory employee classification is. But as an employer, you should learn what a statutory employee is as you may someday need to hire one. 

A statutory employee is essentially an independent contractor and an employee defined. The role is defined as an independent contractor who is qualified to be treated as an employee. This means employers are to withhold the employee portion of Medicare and Social Security tax from the wages of a statutory employee. Employers are also to contribute the employer portion of Medicare and Social Security taxes. The biggest difference between a regular employee and statutory employee is that the statutory employee remains an independent contractor who basically works for himself.

Another difference is that employers need not withhold federal, state or local income taxes from the wages of a statutory employee and employers do not need to handle payroll taxes for independent contractors. 

Independent contractors pay double what employees owe for Medicare and Social Security taxes and they pay both in the form of self-employment taxes and pay them themselves while employees are only responsible for the employee portion of Medicare and Social Security taxes. 

Who qualifies as a statutory employee?

Statutory employees are independent contractors – and only a specific group of them. According to the IRS, independent contractors who are qualified to be classified as statutory employees must be any of the following:

  • Life insurance sales agents
  • Agent or commission-based drivers
  • Traveling or city salesperson
  • Home-based workers

When to Withhold Taxes for a Statutory Employee

  • The statutory employee has no substantial investment in the property and equipment used to perform the services they are hired to do for your business.
  • The worker performs the services continually for your business.
  • The service contract implies that the statutory employee performs all of the services personally and substantially.

Employers need to withhold Medicare and Social Security taxes from a statutory employee’s wages if each of the three conditions are met:

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