Statutory Employee Examples and Tips for Management

By Indeed Editorial Team

Published July 13, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

As a manager, you may be responsible for supervising many different kinds of employees, depending on your industry and department. The IRS has a few different designations for employees for accurate tax withholding processes, and one designation is the statutory employee. Understanding what this employee designation is can make you a more informed manager and help you better supervise and support these employees. In this article, we define what a statutory employee is, provide a few examples of statutory employees, cover tips to effectively manage statutory employees and answer some frequently asked questions to help you learn more about this IRS designation.

What is a statutory employee?

A statutory employee is an independent contractor that an organization treats as an employee for tax withholding purposes when they meet specific conditions. These employees complete work for an organization using the organization's own supplies, tools, equipment and other resources. Employers withhold Social Security and Medicare taxes from statutory employees' pay if the employees' work meets the following requirements:

  • The service contract for the employee states or implies that the employee performs all the services primarily on their own.

  • The employee doesn't make a significant investment in equipment, tools, property or other resources to complete the services, with the exception of transportation to and from working locations.

  • The employee performs the same services on a continuing basis, not just once, for the same employer or payer.

These employees receive a W-2 from their employer and can receive tax benefits that 1099 employees (contractors) get, like tax deductions for business expenses. For tax purposes, a statutory employee is treated as an employee for Social Security and Medicare taxes, also known as FICA taxes, and is treated as an independent contractor when it comes to income taxes.

Related: Contractors: Definition and Different Types

Statutory employee examples

Here are some examples of employees who are considered statutory employees:

  • Driver: You may employ an agent or commission-based driver who distributes non-milk beverages, meat, vegetables, fruit or bakery goods or one who picks up and delivers laundry or dry cleaning. These employees would likely qualify for statutory employee status.

  • Insurance salesperson: An employee who is a full-time life insurance salesperson who primarily sells life insurance or annuity contracts, or both, for one company is often considered a statutory employee.

  • Home worker: Also known as a piece worker or home-based worker, this employee works at home to produce materials or goods that your organization supplies to consumers. The materials or items must be returned to you or someone you designate to retrieve these items, and you dictate how the work must be done.

  • Traveling salesperson: If you hire a full-time traveling or city salesperson whose primary business is selling on behalf of your organization, then this employee would likely qualify as a statutory employee. These employees turn in orders to your organization from wholesale companies, retailers, contractors, hotels, resorts, restaurants or other similar companies that then resell those goods or use the materials to produce their own goods.

Related: Top 11 Types of Sales Jobs: Which One Is Right for You?

Tips for managing statutory employees

Use the following tips to set up and manage statutory employees and the financial requirements that come with having these employees:

Meet with a tax professional

As a manager, you can consult the organization's human resources department or tax accountant to learn more about statutory employees and ask questions about filing the correct paperwork and following all of the rules regarding shifts, hours and work types.

If your organization outsources payroll services to a third party, you can also contact that service's representatives to make sure you and your statutory employee follow all the regulations.

Write a contract

After hiring a statutory employee, provide a contract that outlines the employee-employer relationship and the responsibilities that you both have in that relationship. You are likely to get a contract from your organization's human resources or payroll department, but if you have to write the contract yourself, be sure to consult a lawyer to draft the contract.

Determine the pay method

While drafting the contract, work with the employee and your HR department to determine whether you will pay the employee on commission, per piece or another system. How you pay this employee may depend on the type of services they provide. For example, if you hire a salesperson as a statutory employee, you would likely pay them on commission, which is a common form of payment for salespeople. If you hire a home worker, you may pay them per piece they produce.

Make sure that you clearly outline the payment method in the contract so that both you and your employee both agree to it. This can help establish trust and understanding early in the professional relationship.

Make sure to withhold the right amount of taxes

If you are managing the statutory employee's taxes, set up a system where you withhold a portion of their pay to account for FICA taxes and pay them to the IRS throughout the year. This process allows you to pay over time as opposed to all at once. Consult the IRS regulations on statutory employees or a tax professional to ensure that you take out enough for FICA taxes.

Inform the statutory employee withholds FICA taxes

Since statutory must also pay a portion of FICA taxes, inform your employee that they should also set aside money from each paycheck to account for these taxes. This can help them avoid a tax bill when they go to file their taxes. You can outline this idea in the employment contract so they review it before accepting employment and verify that they understand their responsibility.

Manage the employee's shifts and working hours

Review IRS tax codes to ensure that you only give your statutory employee the right number of hours to remain compliant with regulations. One of the easiest ways to manage shifts and hours is by using a scheduling tool with a time tracker and a labor cost control feature. This can help you manage your statutory employee's schedule and submit these hours for payroll.

Related: How To Be a Good Manager

Frequently asked questions about statutory employees

Here are some FAQs about statutory employees to help you better understand this designation:

What is a statutory nonemployee?

Statutory nonemployee is another tax designation from the IRS that is specifically for employees who are technically self-employed but may work with an organization. Only three types of professionals fit into this category: direct sellers, licensed real estate agents and companion sitters who aren't employed by a service agency.

How documents do you need to hire a statutory employee?

If you want to hire a statutory employee for your team or organization, you must create a contract with that employee that outlines the working relationship in terms of the continuing services they'll provide, the resources your organization will provide them to complete their services and their designation as a statutory employee. You can also include a list of taxes that they must pay as a statutory employee.

While they won't need to complete a W-4, they should complete a W-9 and provide their tax ID number.

How do you pay a statutory employee and correctly withhold taxes?

You can pay statutory employees in any form, such as by commission, per piece or per service, regardless of the tax status. Much like independent contractors, statutory employees pay their own income taxes. That means they must fill out a W-9 instead of a W-4, which regular full-time employees fill out. Unlike independent contractors, statutory employees get a W-2 rather than a 1099.

To determine whether you should withhold FICA taxes, check whether the employee's work meets the three criteria of them performing the services on their own, using the organization's resources as opposed their own and being paid by the same person for the same service. In addition to FICA taxes, you may also need to withhold taxes under state and city regulations.

Related: Understanding the W-2 Form

What are the benefits of being a statutory employee?

Here are some benefits of being a statutory employee:

  • Statutory employees only have to pay for the employee portion of FICA taxes, unlike independent contractors who must withhold all of their required taxes.

  • These employees file Schedule C instead of Schedule A, which makes them eligible for larger tax deductions.

  • In certain situations, statutory employees may be eligible to receive unemployment insurance if they lose their jobs.

Knowing why professionals may want to work with a statutory employee designation can help you better support them during their time working with you.

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