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Statutory employee criteria

Employee vs. statutory employee

Self-employed independent contractor vs. statutory employee

Employee misclassification leads to penalties

What is a statutory employee

In the United States, a statutory employee is an independent contractor who’s treated as an employee for tax purposes.

Specifically, statutory employees are independent contractors under common law rules but employees for federal tax purposes.

Statutory employee criteria

For such an arrangement to be possible, an independent contractor must meet specific criteria. The independent contractor must:

  • Be engaged with the same employer in a continuum for a more extended period

  • Deliver all the work specified in the contract independently

  • Not have made a substantial investment in the equipment they use to get the job done

As defined by the IRS, workers eligible to be statutory employees include:

  • Home workers who use supplies borrowed from an employer

  • Commission drivers delivering food (meat, vegetables, bakery products) and beverages (except milk), laundry, or dry cleaning

  • An individual working as a full-time life insurance sales agent for the same life insurance company

  • Full-time traveling salespeople or a city salesperson collecting orders from wholesalers, retailers, hotel and restaurant operators for the same employer

  • Insurance agents selling life insurance and annuity contracts on behalf of a company (selling company goods being the salesperson's principal business activity)

An additional category is ''statutory nonemployees.'' The IRS treats these workers like the inverse of statutory employees: they are employees under common law but considered contractors for federal income tax purposes.

Employee vs. statutory employee

The main differences between employees and statutory employees is how they perform the work, get paid, and control their working schedule.

According to the IRS, if you (an employer) determine what, when, and how your team members do their work, you must treat them as an employee (common-law employee).

On the other hand, statutory employees have more control over their working schedules. They follow their own schedule and usually do not work on the business’s premises, but might use gear borrowed from the employer. Still, to fall under the category of statutory employee, they must meet the criteria explained above.

Employees and statutory employees are treated equally for specific tax withholding purposes. For both categories, the employer must withhold income taxes to pay the employer's share of their FICA taxes (Medicare and Social Security taxes) and FUTA taxes (unemployment taxes).

Also, employers must file a W-2 form for both types of employees. Given that a statutory employee is still an independent contractor, they must also report their income and expenses on Schedule C. Regular employees, on the other hand, must report their income on a Form 1040 (Schedule A).

Self-employed independent contractor vs. statutory employee

Unlike statutory employees who work for one company on a continuing basis, a self-employed independent contractor usually works for several clients on a project basis. In addition, statutory employees work with equipment borrowed from an employer, while self-employed independent contractors often invest and use their gear.

Employers withhold and pay the employer share of a statutory employee's Medicare and Social Security taxes, but they are not required to do that for a self-employed independent contractor. Instead, self-employed independent contractors must report their income and expenses using Schedule C and pay self-employed income taxes.

Note that every employer who pays over $600 to an independent contractor in a year must file a 1099-MISC form.

Employee misclassification leads to penalties

If you are satisfied with an independent contractor's or statutory employee's performance, you can offer to hire them as regular employees. However, regardless of their status, you must always correctly classify the people you work with.

Some employers try to avoid particular employee-related tax requirements by misclassifying employees and treating them as independent contractors. However, employee misclassification, when identified, can lead to severe penalties, even lawsuits.

If you have trouble classifying individuals you collaborate with, check out our guide on the tests employers use to determine whether they should treat workers as employees or independent contractors. You can also fill out Form SS-8 to request the IRS to help you make a determination.

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