Glossary of Human Resources Management and Employee Benefit Terms
A statutory employee is defined by the law as an employee who works for a business, but the employer is not required to withhold taxes from their earnings. However, the employer is required to withhold Medicare and Social Security tax from their wages.
This type of employee is usually considered to be someone with less control over their work than an independent contractor, but with more freedom over their work than a common law employee. They are somewhat like an independent contractor who is treated as an employee in regards to certain tax withholdings.
Statutory employees can also deduct work-related expenses on an IRS Schedule C form instead of a Schedule A form. Expenses reported on a Schedule C form do not have the same 2 percent adjusted gross income threshold as a Schedule A form. This allows the statutory employee a larger tax deduction of business expenses compared to those who use a Schedule A form.
A statutory employee must agree to this standing with their employer upon being hired. The employee will need to sign a service contract. This type of employee should not be confused with a statutory nonemployee, a category which includes direct sellers and real estate agents.
An employee must meet three separate criteria to be considered as statutory. First, all work must be done by the employee personally. Second, the person cannot have a large investment in the tools and property they use to do their work. Lastly, their work must be for one employer on a continuing basis.
People who fall under the category of statutory employee could perform a number of jobs. For example, a person who works from home using borrowed supplies from an employer could be a statutory employee. A driver who distributes food and also picks up laundry for commission pay could be considered a statutory employee. Another example of a statutory employee could be a traveling salesperson or someone in insurance sales.
Typically, statutory employees make their own investment in their work facility. They usually do not perform a crucial role in the company and may not have a permanent position within the company.
Though some employees may seem to be in a gray area when it comes to their employee designation, ultimately, any employee who has received a W2 form with Box 13 checked for “Statutory Employee” will be considered as such by the government.
Most independent contractors receive a 1099-MISC form each year as a statement of what they were paid the previous year, but a statutory employee does not. Instead, a statutory employee will receive a W-2 form that has Box 13 checked for “Statutory Employee.” The employee will file a Schedule C during tax season if they want to deduct business expenses like mileage from business-related travel.
Most self-employed individuals can qualify for a SEP, also known as a Simplified Employee Pension Plan. Statutory employees are included under this category, meaning they can contribute to a SEP if their employer offers the plan, and if they meet these three requirements:
The employee is 21 or older.
The employee has worked for the employer at least 3 years out of the last 5.
The employee made at least $600 in wages within the calendar year.
Employers usually pay half of Medicare and Social Security taxes for statutory employees. But generally, most statutory employees do not receive traditional benefits from their employer. Employees receiving benefits like health insurance, vacation time, or a 401(k) plan are usually considered common law employees.
The more benefits a worker gets from their employer, the more likely they are to be a typical common law employee. Statutory employees do have the perk of being treated like an independent contractor for income tax purposes, while still being treated like a common law employee for Social Security and Medicare tax purposes.
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