Freelancer or Employee: What is a Statutory Employee?

Statutory Employee

The designation of a statutory employee can feel complicated, as they aren’t exactly a common law employee, but they also don’t fit squarely into the category of independent contractors. 

If you’re looking to learn more about how to manage non-payroll workers of all kinds, set a time to speak with one of our workforce experts to hear more about Fiverr Enterprise. 

To learn all about statutory employees, their tax implications, rights and benefits, and how HR and Procurement leaders can best manage these kinds of workers, keep on reading! 

Criteria for Statutory Employees

A statutory employee is an independent contractor that qualifies as an employee for certain tax and benefit considerations. 

Before we get into the tax implications, it’s important to understand how the IRS defines a statutory employee. There are very specific classifications for who counts as an employee, who is a freelancer, and who is a statutory employee. The common thread between all statutory employees is that while they may seem like an independent contractor, they either work on commission for your business, or deal closely with your products and materials. 

The final status is reserved for: 

  • Drivers who work on commission or work as agents: Even more specifically, these drivers need to work in the distribution of meat, fruit and vegetables and bakery products, or drinks which are not milk. Drivers that deliver laundry or dry cleaning products are also included in this category. 
  • Life insurance agents: If your employee’s principal business practice is selling life insurance and annuity contracts, with the majority of the work coming from your business, they would also be a statutory employee. 
  • Workers that use your materials at home: Many employees work from home, but that doesn’t make them statutory employees. However, if you have control over how the work is done, and you provide all the materials and goods to be returned to the business, this worker is likely to be covered by the classification. 
  • Traveling salespeople: If a salesperson works primarily for your business, selling merchandise either for resale or for the buyer’s business, they are a statutory employee of your company. 

Statutory Employee Tax Implications

It’s important to know which workers count as statutory employees for tax purposes. 

An independent contractor handles their own tax, Social Security, and Medicare contributions via self-employment taxes. With an employee — an employer is fully responsible for withholding payroll taxes as well as FICA taxes. In contrast, a statutory employee falls somewhere in between. 

While you do not need to withhold income tax from statutory employees wages, as the employer you will usually need to withhold Social Security tax and Medicare tax from their salary. If you’re not sure, ask yourself the following three questions: 

  1. Does your service contract state or even imply that the worker personally performs all the services? 
  2. Does your business have a substantial investment in all the equipment or materials the employee uses to perform their services, as opposed to the worker?
  3. Does the employee continually perform the same services for you as their main employer? 

If you answer yes to all of these questions, you’ll need to withhold Social Security and Medicare taxes at the end of the payroll cycle. 

Rights and Benefits of Statutory Employees

The idea behind statutory employees is to protect both individuals and the government. The number of independent contractors and self-employed workers is growing year on year, and many checks and balances have been put in place to help to ensure that employers aren’t treating employees like independent contractors to avoid tax obligations. Statutory employment is one of these checks and balances. 

For the statutory employee, the employer contributing Medicare and Social Security taxes often reduces their own tax burden, without impacting a lot of the flexibility and autonomy that comes with being a freelancer. Statutory employees often still work on their own schedule for example. They can also deduct work-related expenses from their tax burden using a Schedule C form 1040, which employees cannot do. 

Unlike independent contractors, in certain situations statutory employees can also qualify for unemployment benefits.

What Can You Manage Statutory Employees Properly?

Statutory employees are a category that often gets forgotten when working with a diverse workforce. Here’s a checklist that can help teams get it right. 

  • Don’t worry about income tax: Just like an independent contractor, statutory employees need to withhold and report their own income tax. Don’t give them a W-4, they will be using a W-9. 
  • Make sure you have a W-2: While your other freelancers will be filling out a 1099-MISC, statutory employees will complete a W-2 form. Check box #13 on the W-2, which shows intent to enter a statutory employment relationship. 
  • Fill out W-2 correctly: You’ll need to put statutory employees’ earnings in box 1 on the W-2 form, and add earnings which are subject to Medicare and Social Security withholdings in boxes 3 and 5. 
  • Mark your calendar: By January 31st, W-2s need to be sent to statutory employees. When your employees file their taxes, they’ll need to include their Schedule C form 1099 document, with any deductions for business expenses included within. 

Fiverr Enterprise Can Support Your Business with Classification, Documentation and Compliance 

Statutory employees can help businesses to cut down on certain overheads, and be a necessary part of a thriving workforce. However, the last thing you want is to open the business up to misclassification risk or compliance headaches when designating workers as employees, independent contractors, or statutory employees. 

Fiverr Enterprise automates and customizes the legal and tax compliance process of hiring non-payroll workers to your specific business context, so that your teams aren’t weighed down by paperwork. 

We help classify your workers accurately so that there’s no risk of misclassification, then collect the right tax forms on your behalf, complete any necessary background checks, and get every worker onboarded and continually monitored, so there’s never any compliance risk. 

If at any point legal documents aren’t valid, or the nature of the employer/freelancer relationship changes, you’re the first to know, allowing you to take quick action. 

Interested in seeing how an all-on-one platform for freelancer management works in practice? Book in a 30-min call with one of our workforce experts.