Flexible working environments have shifted from being a nice-to-have to an essential part of modern business. Understanding the nuances of worker classifications, like statutory employees, can help organizations manage their people effectively while staying compliant and driving growth.
Unlike traditional employees and independent contractors, statutory employees sit in a unique category with their own rules for taxes and benefits. This classification can influence everything from payroll processes to benefits eligibility.
In this article, we’ll unpack what it means to be a statutory employee, explore the advantages for individuals and businesses, and explain how this classification can support a more dynamic and flexible workforce.
What is a statutory employee?
The United States Inland Revenue Service (IRS) describes a statutory employee as a unique type of agreement, somewhere between an independent contractor and a standard salaried team member. You can think of statutory employees as having more freedom than a common law employee but less control than an independent contractor. Upon hiring, a person must agree to this standing with their employer and sign a service contract outlining the conditions.
Like with a common law employee, an employer isn’t required to withhold income taxes from a statutory employee’s earnings. However, they’re required to withhold Medicare and Social Security from their wages.
Who qualifies as a statutory employee?
Statutory employees must meet the following criteria:
- They commit to or imply that they perform the services personally
- They don’t have a significant investment in the equipment or property the company uses to perform the services
- They perform the services continuingly for the same employer
Statutory employee examples
- Delivery drivers for specific products: This category includes drivers transporting food and beverages (excluding milk), meat, vegetables, fruits, dry cleaning, or laundry. These individuals often work full-time for a particular employer. While they may set their own schedules, they rely on their employers for daily tasks.
- Life insurance or annuity sales agents: Full-time salespeople who work for a single insurance company selling life insurance or annuity contracts. The role may also include using employer-provided materials and customer lists, which adds a level of employer oversight that meets statutory employee criteria.
- Home-based workers using employer-supplied materials: Professionals who work from home but use employer-provided materials or goods, especially when they return those materials, qualify as statutory employees. This classification helps clarify tax obligations and benefits for people who operate outside the traditional workplace but are closely tied to the employer’s supply chain.
- Full-time traveling sales representatives: This category includes salespeople who work full-time to secure orders from wholesalers, retailers, contractors, hotels, restaurants, or similar establishments. Unlike independent sales reps who represent multiple companies, statutory sales reps usually work with a single employer and are responsible for a specific territory or client base.
Why do HR leaders care about statutory employees?
Many view statutory employment as offering the best of both employment statuses. Some of the statutory employee’s taxes are already paid for by their employer, meaning they aren’t subject to self-employment taxes like independent contractors. They can also deduct work-related expenses from their taxes. Additionally, they have a greater degree of independence than common law employees.
However, statutory employees aren’t eligible for certain benefits like health care, retirement, and vacation time. Hiring people as statutory employees rather than common law employees can save the employer significant administrative time and money.
Statutory employee considerations
It can be a bit confusing to keep track of all of the different special conditions that statutory employees receive, so we’ve prepared a quick reference cheat sheet you can check below:
Taxes for statutory employees
Do statutory employees receive a W2?
Yes, statutory employees receive a W-2 form for tax reporting purposes, just like regular team members. However, their W-2 will have Box 13 checked to indicate their “Statutory Employee” status. This designation signals their unique tax obligations, including eligibility to deduct certain business expenses, distinguishing them from their traditional colleagues.
What form do statutory employees use for tax deductions?
Statutory employees can deduct work-related expenses using Schedule C (profit or loss from business). Statutory employees can reduce their taxable income through deductions for business expenses related to their work—an option unavailable to salaried team members.
Can statutory employees contribute to a Simplified Employee Pension (SEP) plan?
Yes, statutory employees can contribute to a SEP plan: A retirement savings option is usually available to self-employed individuals and small business employees. To qualify, they must:
- Be 21 years or older
- Have worked for the employer for at least three of the last five years
- Have earned at least $600 in wages from the employer in the current calendar year
SEP plans are popular among statutory employees, as they can save for retirement with pre-tax contributions and put down a valuable layer of financial security.
What are the standard statutory employee benefits?
Statutory employees occupy a middle ground in terms of benefits. Unlike traditional team members, they generally don’t receive health insurance, paid time off, or retirement benefits from their employer.
However, because they’re classified under a special status, they gain certain tax-related benefits and the ability to deduct business expenses, which can offset some of the costs associated with self-managed benefits.
Do statutory employees get health insurance?
No, statutory employees don’t usually receive health insurance through their employer. Since they fall into a hybrid employment category, statutory employees are responsible for securing their own health coverage, just like independent contractors.
Statutory employees can offset these costs by deducting work-related expenses from their taxes.
Who pays Medicare and Social Security taxes?
Employer and statutory employees pay 50% of Medicare and Social Security contributions. This shared contribution structure is similar to regular employees.
Do employers need to withhold federal, state, or local income taxes?
No, employers don’t withhold federal, state, or local income taxes for statutory employees. Employees can make estimated quarterly tax payments to meet their tax obligations.
What type of form does the employee fill out upon hiring?
Statutory employees can complete Form W-9 (Request for Taxpayer Identification Number and Certification) once they join the team. This form allows the employer to report the statutory employee’s earnings to the IRS without withholding income taxes. Form W-9 means statutory employees can certify their taxpayer information and acknowledge their tax responsibilities, setting them apart from traditional employees who complete Form W-4.
Hiring a statutory employee
How can employers determine if a role qualifies for statutory employee status?
Statutory employees tend to perform consistent work for the same employer, have little to no financial investment in their work tools or materials, and personally complete their assigned services. If you’re unsure whether a candidate qualifies as a statutory employee, check out the IRS’s Publication 15-A tax guide for employers.
What kind of employment contract do you need for statutory employees?
An employment contract for statutory employees outlines their job duties, performance expectations, and the unique tax status they’ll operate under. Include their eligibility to deduct certain expenses and benefits the employer might offer. You may also specify whether they can work for other companies at the same time.
How do HR teams onboard statutory employees?
HR teams can simplify the onboarding process for statutory employees by clearly outlining their tax obligations and benefits. While statutory employees may not receive the full suite of benefits traditional employees do, HR can help them understand their tax responsibilities, such as estimated payments and which expenses they can deduct. HR can share documents and forms like Form W-9, Schedule C guidance, and other employer-specific materials on secure HR software.
For roles that require physical materials—such as product samples, assembly kits, or company-specific resources—HR or operations teams can mail kits directly to the person’s location with tracked shipping. HR professionals can also arrange periodic check-ins to confirm they have the necessary resources and address any logistical needs.
What forms do statutory employees need to complete beyond Form W-9?
Beyond the initial Form W-9, statutory employees may need to complete Form 1040-ES to make estimated tax payments throughout the year. For those who qualify for business expense deductions, completing Schedule C when filing their taxes helps them accurately report these deductions.
What should statutory employees know about their tax responsibilities?
Employers can help their people understand:
- Unique tax responsibilities: Communicate the specifics of statutory employees’ tax setup, especially regarding Medicare, Social Security contributions, and the need to file income taxes independently
- Quarterly tax payments: Highlight the importance of making quarterly tax payments so statutory employees avoid surprises during tax season
- Specific deductions: Outline the business expenses they can deduct according to Schedule C
- Standard benefits: Remind statutory employees they don’t get standard benefits like health insurance or retirement plans from their employer, so they should plan for these independently
- Proactive support: Tell statutory employees they can come to you for ad-hoc questions throughout their time with the organization
Paying a statutory employee
Are statutory employees paid like regular employees?
Yes, statutory employees are generally paid through an employer’s payroll system, similar to regular employees. While statutory employees have different tax withholdings most leading HR payroll software accommodate regular pay intervals and compliance.
Can statutory employees receive bonuses or commissions?
Yes, statutory employees can receive bonuses or commissions, depending on the terms of their employment contract. Since statutory employees often perform sales or delivery roles, performance-based bonuses or commissions might be a common part of their compensation structure.
Are statutory employees eligible for overtime pay?
Statutory employees aren’t usually eligible for overtime pay since they don’t have the same Fair Labor Standards Act (FLSA) protections as standard employees. However, this can vary depending on the job’s nature and state-specific labor laws.
What payroll records should employers keep for statutory employees?
Employers normally keep detailed payroll records including information on:
- Pay rates
- Hours worked (if applicable)
- Bonuses
- Commissions
- Medicare and Social Security withholdings
- Employer contributions
Differences between statutory employees and independent contractors
To keep your team happy and everybody on the right side of the law, it’s important to know the fine differences between statutory employees and independent contractors.
- Statutory employees have Medicare and Social Security taxes partially withheld by their employer but handle income tax payments independently. They work for a single employer in IRS-defined roles and can deduct work-related expenses, but don’t qualify for traditional benefits like health insurance.
- Independent contractors manage all tax responsibilities themselves and have more flexibility in business expenses. They work autonomously and are fully responsible for financial planning and benefits like health insurance and retirement savings.
Why should statutory employees be a part of the modern HR strategy?
Statutory employment is a unique designation that may appeal to people due to its relative freedom and certain advantageous tax conditions. It may also benefit employers who want to save costs on benefits. Employers need to be aware of this designation and how it works in case a situation arises in which you and a professional mutually decide that this is the best option for their employment.
Statutory employee FAQs
Are there tax benefits for statutory employees?
Yes, statutory employees enjoy unique tax advantages. While they aren’t considered fully independent contractors, they can still deduct business expenses from their taxes. They also don’t have to worry about self-employment taxes on Medicare and Social Security. Their employer handles half of those contributions, which can translate to significant savings.
Are statutory employees eligible for insurance benefits?
Normally, statutory employees aren’t eligible for traditional benefits like health insurance, retirement plans, or paid time off from their employers. This designation means that while they have greater tax flexibility, they must plan independently for these benefits. However, some statutory employees might get benefits if their contract with the employer specifically includes them, although it’s less common.
Recommended For Further Reading
What are statutory nonemployees?
Statutory nonemployees represent the opposite end of the employment spectrum from statutory employees. Independent workers who fall under a specific IRS category, like direct sellers or licensed real estate agents, are fully responsible for their taxes. They don’t receive benefits, tax contributions, or wage protections from an employer, operating instead as independent businesses with minimal regulatory oversight from the hiring organization. They’re very similar to independent contractors but only fall into three categories: direct sellers such as for MLM companies, licensed real estate agents, and companion sitters or caregivers.
What is the difference between a common law employee and a statutory employee?
The primary distinction between common law and statutory employees is control and tax treatment.
- Common law employees work under the close direction of their employer, who manages their taxes and provides benefits like health insurance
- Statutory employees enjoy more autonomy and some contractor-like tax advantages—such as expense deductions—but without the full independence of an actual contractor
This balance allows employers to meet flexible organizational needs while fulfilling their tax obligations.
