What is a statutory employee?

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Statutory employee

A statutory employee is an independent contractor who is treated as an employee for certain employment tax purposes. 

Who qualifies as a statutory employee?

An independent contractor must meet specific criteria and fall into one of four categories outlined by the Internal Revenue Service (IRS) to qualify as a statutory employee. Both categories and criteria are outlined below:

Categories

  • Drivers who distribute meat, beverages other than milk, vegetables, fruit, bakery products, laundry, or dry cleaning and who earn a commission.
  • Full-time insurance salespeople who sell life insurance or annuity contracts, primarily for one life insurance company.
  • Home-based workers who use materials supplied by an employer and work on them based on specifications provided by the employer.
  • Full-time traveling salespeople who solicit orders from wholesalers, retailers, contractors, or operators of hotels or restaurants. The orders must be used for sales in their business operations and this must be the salesperson’s principal business activity.

Criteria

If an independent contractor meets one of the above, they must also meet these criteria:

  1. Substantially all of the services are performed by the independent contractor themselves (this can be stated or implied in their contract).
  2. They haven’t invested substantially in the equipment or products they use to perform the work.
  3. They perform work on a continuing basis for the same company.

Find out more about these categories and criteria on the IRS website.

How do statutory employees differ from independent contractors?

If an independent contractor meets the three criteria above and falls into one of the above four categories, then the employer needs to treat them as an employee for Medicare and Social Security tax purposes. Find out more about statutory employees on the IRS website.

Classifying workers correctly

Misclassifying employees can lead to paying hefty fines, back wages, and other penalties. To help you avoid any confusion, check out our worker misclassification analyzer.

Disclaimer: This article and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.

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