When a business hires someone for work in an uncontrolled environment, they may be considered an independent contractor and receive a 1099 under the common law. There are many factors that can dictate if your worker is an independent contractor, and not an employee (see W2 vs 1099 test).
Workers considered and treated as independent contractors (for a variety of reasons) can potentially be considered a statutory employee.
Definition of statutory employee
A statutory employee is a mix between an independent contractor and an employee. They are a person/business that is a separate company from the hiring company, but they are treated as an employee for employment tax purposes.
A statutory employee needs to fall into these four categories created by the IRS:
- A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.
- A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.
- An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done. (Sometimes this person is called a “piece worker.”)
- A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson’s principal business activity.
How are they taxed?
Statutory Employees are taxed on Social Security and Medicare (FICA), but for income tax purposes, they are treated like an independent contractor and no income tax is withheld. This means the employer needs to also contribute their portion of FICA for these worker’s wages.
How Do I Hire a Statutory Employee? What Documents are Required?
For legal protection, an employer should have a contract with that employee. This contract should spell out the nature of the working relationship and the employment status of this individual. Journey advises employers in these situations consult with their attorney to properly create a legal agreement between these two parties.
The employee does not need a W-4 form, because the employer is not withholding income taxes. With that being said, the employer does need to receive a Form W-9 to verify the worker’s Tax Identification Number.
How Do I Pay a Statutory Employee?
Statutory Employees may be paid a commission or, like a piece worker, may be paid by the piece. The payment method doesn’t bear on the worker’s tax status.
Whether you are required to withhold FICA taxes (Social Security/Medicare taxes) from these workers depends on three questions, which reflect the worker’s status as an employee:
- Personal Services. If the service contract with that employee states that substantially all the services are to be performed personally by them.
- Investment in Equipment or Property. If the worker doesn’t have a substantial investment in the equipment and property used to perform the services. For example, if the piece worker is given the equipment to perform the piece work tasks and he or she doesn’t have to purchase the equipment.
- Single Payer. If the services are performed on a continual basis for a single payer.
Does the employer provide a 1099 or W2?
The employer provides a form W-2 that has the “Statutory Employee” option checked in Box 13.
How does the employee file their taxes?
The statutory employee will need to file as a Schedule C/Independent Contractor. This allows them to deduct business expenses, which means they may have a business profit or loss. Journey highly recommends statutory employees in these situations find a trusted CPA to help file their taxes properly.