Statutory Employee

What is a statutory employee?

A statutory employee is a worker who is technically self-employed but is treated by the IRS as an official employee for tax purposes. Statutory employees have often been considered to be hybrid workers, as they’re partially employees, but also partial independent contractors. As long as the employer and employee both pay their share of Medicare and Social Security taxes, then it is valid to consider them a statutory employee. 

Overall, statutory employees receive some of the tax benefits of self-employment, such as deductions, while also getting the payroll tax simplicity of being an employee. But they take on more risk and expenses than regular employees by not having access to typical employee benefits.

Statutory employee benefits

Here are several benefits to working as a statutory employee:

• Statutory employees have half of their Social Security and Medicare (FICA) taxes paid by their employers. 
• Statutory employees can deduct their work-related expenses (transportation, equipment, supplies etc.) directly on a Schedule C (or Schedule C-EZ) form instead of a Schedule A form. By reporting expenses on Schedule C, they can often claim a larger deduction for their business expenses than if these expenses were itemized on Schedule A, due to the absence of the 2% threshold.
• Statutory employees can receive some of the benefits of being an employee while simultaneously having the flexibility of being an independent contractor.
• In most cases, statutory employees can set their own hours and work location, which is not something that all traditional employees can do.

Statutory vs. statutory nonemployee

Statutory employees are treated as employees by the IRS for tax purposes. Their income is reported on a W-2 and taxes are withheld from their paycheck. On the other hand, non-statutory employees are strictly self-employed individuals who do not receive any of the benefits that conventional or statutory employees do. Non-statutory employees don’t receive a W-2 form, and the employer does not pay half of their FICA taxes as they do for statutory employees. Some examples of non-statutory employees are:

• Direct sellers
• Licensed real estate agents
• Certain companion sitters.

Statutory employee vs. independent contractor

While there are some similarities between statutory employees and independent contractors, these two work arrangements are not the same. Statutory employees typically only work for one company, they use equipment borrowed from the employer, and they have income taxes withheld by their employer.

On the other hand, independent contractors often work for multiple employers simultaneously, they provide their own tools and equipment, and don’t receive W-2 forms, being fully responsible for paying their own taxes. Some examples of independent contractors are: freelance writers, dentists, ride-share drivers like Uber, accountants, and building constructors.

Statutory employee examples

The IRS has specific guidelines regarding who can be considered a statutory employee. The following workers are examples of statutory employees:

• Full time life insurance sales agents: This include agents selling life insurance or annuity contracts, primarily for one life insurance company.
• Homeworkers: This includes people who work from home and use supplies that are borrowed from their employers.
• Full-time traveling or city salesperson: To qualify, they must solicit orders from wholesalers, retails, contractors, or operators of hotels, restaurants, or similar. The merchandise sold must be for resale or supplies for the business. 
• Agent driver or commission driver: These are drivers who deliver food (meat, vegetables, fruit, bakery products) and beverages (except milk), laundry or dry cleaning.

Do statutory employees get a W-2?

Like regular employees, statutory employees are provided a W-2 form at the end of January. The only difference is that statutory employees have Box 13 checked off, indicating that the person isn’t a regular employee. In addition to receiving a W-2 form, statutory employees can claim business-related expenses on a statutory employee schedule C.

Do statutory employees get employee benefits?

In general, most statutory employees don’t get traditional employee benefits from the employer. This includes health insurance, retirement plans, 401(k) plans, or other benefits that regular employees receive. Employers are also not required to provide this type of employee with paid vacation, sick leave etc. However, some choose to offer basic benefits to attract talent.

HR tip

Hiring statutory employees can provide advantages for HR in terms of cost savings and flexibility. These employees can fill specialized roles without the company having to incur into the costs and responsibilities associated with permanent staff. By integrating statutory employees into the organization, HR can adapt to fluctuating market demands, ensure compliance with tax laws, and add valuable expertise to their teams without the long-term commitments of traditional employment.

For informational purposes only: This HR Glossary entry is only intended for general information purposes and does not constitute professional advice. Always consult with a qualified professional for accurate, complete and current information.