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Category: W2's

W-2 - What is a Statutory Employee?

If workers are independent contractors under the common law rules, such workers may be treated as employees by statute (statutory employees) for certain employment tax purposes if they fall within any of the following four categories and meet the three conditions described under Social Security and Medicare taxes, below.

  1. 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 is your agent or is paid on commission.
  2. 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.
  3. An individual who works at home on materials and goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.
  4. A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer's business operation. The work performed for you must be the salesperson's principal business activity.

Withhold Social Security and Medicare taxes from the wages of statutory employees if all three of the following conditions apply.

  1. Their service contract states or implies that substantially all the services are to be performed personally by them.
  2. They do not have a substantial investment in the equipment and property used to perform the services (other than an investment in transportation facilities).
  3. The services are performed on a continuing basis for the same payer.

In addition, for an exempt organization, the most common employees in the category of "statutory employee" are its officers.

The employer should indicate on the worker's Form W-2 whether the worker is classified as a statutory employee in box 13. Statutory employees report their wages, income, and allowable expenses on Schedule C (or Schedule C-EZ), along with filing federal Form 1040. Statutory employees are not liable for self-employment tax because their employers must treat them as employees for social security tax purposes.