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Global Work Glossary

Who qualifies as a statutory employee?

In the United States, a statutory employee is an independent contractor who is treated as an employee for tax purposes by the Internal Revenue Service (IRS). While they are independent contractors under common law rules, they are considered employees for federal tax purposes. Here's an overview of statutory employees, including their criteria, differences from regular employees and independent contractors, tax implications, and the importance of proper classification:

Criteria for Statutory Employees:

For a worker to be considered a statutory employee, they must meet specific criteria, including:

  • Engaging with the same employer in a continuous manner.
  • Delivering all work specified in the contract independently.
  • Not having made a substantial investment in the equipment used for the job.

Categories of Statutory Employees:

The IRS identifies certain types of workers as statutory employees, including:

  • Home workers using supplies borrowed from an employer.
  • Commission drivers delivering specific goods.
  • Full-time life insurance sales agents for a single company.
  • Traveling or city salespeople collecting orders for the same employer.
  • Insurance agents selling life insurance and annuity contracts on behalf of a company.

Differences from Regular Employees:

  • Statutory employees have more control over their working schedules compared to regular employees.
  • They may follow their own schedules and typically do not work on the employer's premises but may use equipment borrowed from the employer.

Tax Implications for Statutory Employees:

  • Employers must withhold income taxes and pay the employer's share of FICA (Medicare and Social Security) taxes and FUTA (unemployment) taxes for statutory employees.
  • Statutory employees receive a W-2 form from their employer, and they must report their income and expenses on Schedule C as independent contractors.
  • Proper classification and tax withholding procedures are crucial to comply with IRS regulations.

Differences from Self-Employed Independent Contractors:

  • Unlike statutory employees, self-employed independent contractors typically work for multiple clients on a project basis.
  • Statutory employees work with equipment borrowed from the employer, while independent contractors often invest in and use their own equipment.

Importance of Proper Classification:

  • Employers must accurately classify workers as employees or independent contractors to avoid penalties and legal repercussions.
  • Misclassification of workers can lead to severe penalties and lawsuits, highlighting the importance of adhering to IRS guidelines.
  • Employers can utilize tests and IRS resources to determine proper classification and seek assistance if needed.
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