If you’ve ever taken a good look at your form W-2, you’ve probably found yourself wondering about who qualifies as a “statutory employee.”
It’s listed right there on your form, with a checkbox at box 13 next to the fairly well-known box for retirement plans. But it’s rare that you see it checked, so… what the heck is a statutory employee?
A statutory employee is kind of a hybrid classification. Workers who are considered independent contractors under common law can still be treated as employees by statute (hence the name statutory employees) for employment tax purposes. To qualify, the worker must fall into one of the following categories:
- 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 acts as an 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 on specs supplied by a company and which must be returned to a location specified by that company (like a typist, for example); or
- A full-time traveling or city salesperson who, as his or her principal business, turns in orders to a company or employer from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments for use in business operations.
If a worker can be placed into one of those classifications, then Social Security and Medicare taxes must be withheld from wages if all three of the following conditions apply:
- The service contract states or implies that substantially all the services are to be performed personally by the worker;
- The worker does not have a substantial investment in the equipment and property used to perform the services (other than an investment in transportation facilities); and
- The services are performed on a continuing basis for the same payer.
Because this classification is a bit of a hybrid, income will be reported on a Schedule C even though your employer should give you a form W-2 showing that payroll taxes have been withheld (weird, right?). And since you’re subject to withholding, you won’t file a Schedule SE for self-employment taxes. However, to keep the IRS from getting confused, you’ll need to check off the box at Part I on your Schedule C showing that you’re a statutory employee.
With the exception of those payroll taxes, you’ll treat your income the same as you would for regular ol’ Schedule C purposes. In a nutshell, this allows taxpayers who qualify to get the benefit of Schedule C deductions rather than having to itemize on a Schedule A. You would also treat other expenses, such as health insurance premiums, as self-employed expenses rather than Schedule A expenses (be forewarned, however, that there are some restrictions that apply to statutory employees when it comes to health insurance, so ask your tax pro for more details).
The situation is a bit more tricky if you have more than one business. If that’s the case, use a separate Schedule C for each piece. Otherwise, you’ll have a difficult time explaining why *some* of your wages are subject to SE and some are not.
Keep in mind that the definition of statutory employee is pretty narrow… but if you qualify, you can benefit from the best of both worlds: independent contractor and employee. Not a bad deal.
