Statutory Employee

A statutory employee is a worker who falls between the classifications of a traditional employee and an independent contractor. The IRS designates certain independent contractors as statutory employees for tax purposes. This means the employer must withhold Social Security and Medicare taxes, but not federal income tax.

Statutory Employee Criteria

According to the IRS, a worker may be classified as a statutory employee if they meet all three of the following conditions:

• They perform services under a contract that states they will personally do the work.
• They do most of the work at the employer’s place of business.
• They use tools or materials provided by the employer.

In addition to these conditions, the worker must fit into one of four specific categories:

1. Agent or commission-based driver
2. Life insurance sales agent
3. Home-based worker using company-provided materials
4. Full-time traveling or city salesperson

How Statutory Employees Are Taxed

Unlike independent contractors, statutory employees have FICA taxes (Social Security and Medicare) withheld by the employer. However, federal income taxes are not withheld—the employee is responsible for managing that portion when filing taxes.

Statutory employees receive Form W‑2, with the “Statutory Employee” box (Box 13) checked. They also file Schedule C to report income and claim deductions, similar to self-employed workers.

Benefits for Statutory Employees

• Eligibility to deduct business-related expenses on Schedule C
• Potential for employer-provided benefits, depending on the organization
• Hybrid classification allows for partial tax benefits and expense write-offs

Employer Responsibilities

Employers are required to:

• Withhold and match FICA contributions
• Issue a W‑2 with the correct statutory employee designation
• Refrain from withholding federal income tax unless agreed otherwise

Proper classification is essential to ensure legal compliance and avoid IRS penalties. Misclassifying a worker can result in back taxes and fines.