Statutory Employee

What Does Statutory Employee Mean?

Statutory employees are independent contractors who are treated as employees when it comes to tax withholding if they meet certain conditions.

Employers are generally not allowed to withhold taxes for the majority of independent contractors. Since statutory employees are neither considered independent contractors nor employees, slightly different rules apply. In the case of statutory employees, employers are required to withhold Medicare and Social Security taxes.

The simplest way to look at it is to think of a statutory employee as an independent contractor who’s considered an employee when it comes to tax.

Statutory employees often work on a commission basis – a good example is salespeople.

Who Qualifies as a Statutory Employee?

In order for someone to qualify as a statutory employee, they must meet three criteria. These are that all work must be completed personally by the employee, they cannot have a substantial investment in the equipment and property required for their work, and the work must be performed for the same employer on an ongoing basis.

Some examples of statutory employees according to the IRS are:

• A driver who distributes bakery products, fruit, meat, and vegetables. The IRS also mentions dry cleaning and laundry in this classification.
• A traveling salesperson – as long as the goods are “products for resale or supplies for use in your business operation”
• A full-time life insurance agent

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See our full list of over 50 Small Business Terms here. 

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