Statutory Employee

HR Glossary for HR Professionals

Glossary of the most common HR terms and acronyms to assist professionals navigating the ever-growing and ever-changing world of HR terminology.

Statutory Employee

What is a Statutory Employee?

A statutory employee is an individual who works for a business as an independent contractor but, for tax withholding purposes, is treated as if they were an employee by statute. 

While the employer is not required to withhold taxes from their earnings, they are required to do so for Medicare and Social Security deductions.

What Makes Someone a Statutory Employee?

According to the IRS, an individual is considered a statutory employee if they fall under one of the following four categories:

  1. A driver who distributes beverages or food products, delivers laundry or dry cleaning, or is an agent or paid by commission.
  2. A life insurance agent working full-time who primarily sells life insurance or annuity contracts for a single company.
  3. An individual who works at home on projects that are supplied by and must be returned to a customer or client, so long as specifications are provided by the client.
  4. A full-time traveling or city salesperson who works on behalf of an employer to turn in orders from wholesalers, restaurants, hotels, and other similar establishments.

What Taxes Are Withheld for Statutory Employees?

In general, Medicare and Social Security payments are deducted from statutory employees’ wages under the following conditions: 

  • The contract states or implies that the service will be completed by the statutory employee.
  • Services are performed continuously. 
  • The statutory employee doesn’t have a significant investment in the equipment and/or property used to perform or offer the services.

As Investopedia notes, the result is that these individuals may receive both a W-2 and a 1099 from their employer. 

In addition, states may also add other stipulations regarding the nature of relevant withholdings.

Statutory Employee vs. Independent Contractor: What’s the Difference?

The difference between a statutory employee and an independent contractor lies in employment taxation on an individual’s wages. 

Unless a person meets one of the above requirements (see “What Constitutes a Statutory Employee?”), they are considered an independent contractor and employers do not need to withhold Medicare and Social Security deductions from their wages.

According to Investopedia, the result is that a statutory employee may receive both a W-2 and a 1099 from their employer. 

In addition, states may also add other stipulations regarding the nature of statutory employee withholdings.

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