Understanding your employment status is important when it comes time to file your taxes. The taxes you are expected to pay will be based largely on how you earn your money. If you happen to fall into a category known as statutory employees, your taxes will reflect the unique nature of your employment. Simply put, a statutory employee is an independent contractor who is considered an employee for tax purposes.
What does it mean to be a statutory employee?
As a statutory employee, you are treated as a traditional employee in terms of FICA taxes, but you are seen as an independent contractor from an income tax perspective. While a limited number of people fall into the statutory employee category each year, those who do land in this group need to know exactly how to file in order to optimize their return.
As a statutory employee, your tax status is a blend of a traditional employee and a business owner. Traditional employees typically have their income tax withheld by their employer. In contrast, statutory employees are not subject to income tax withholding. This unique status can allow statutory employees to enjoy benefits of both worlds, including the ability to claim certain work-related deductions while still being eligible for some employer-provided benefits.
Who is considered a statutory employee?
The conditions to be considered a statutory employee are rather narrow. In fact, there are just four categories of workers who qualify as statutory employees under the current tax code:
- 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.
- A full-time life insurance sales agent whose principal business activity is selling life insurance, annuity contracts, or both, primarily for one life insurance company.
- 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.
- A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, 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.
As you can see, these categories will apply to only a small minority of workers in the United States. Those who are included will need to know how to file their taxes properly based on this unique employment status.
Statutory employee vs. independent contractor
The main difference between a statutory employee and an independent contractor is the relationship with their employer. Statutory employees typically work for one company, meaning they are on a more direct payroll and have specific responsibilities defined by that employer. In contrast, independent contractors operate as self-employed individuals who may provide services to multiple clients or businesses.
What is non-employee compensation?
It is just as it sounds — money earned outside of a typical employer/employee relationship. People in this situation may need to pay quarterly estimated taxes (and any relevant state or local taxes, as well). You will not receive a W-2 at the end of the year, but you may receive a 1099 depending on the nature of the business.
So, what does all this have to do with statutory employees? Like an employee, your employer is responsible for withholding Social Security and Medicare taxes. But like a business owner, you will be responsible for reporting your earnings on Schedule C, where you will also be able to deduct certain business-related expenses.
Do statutory employees receive a W-2?
Unlike an independent contractor, a statutory employee will still receive a W-2 at the end of the year. A statutory employee W-2 is slightly different from one issued to a standard, common law employee.
It is marked to indicate the employee’s status as a statutory employee, as seen by a check in Box 13. When you receive this type of W-2, it is important that your earnings are reported on Schedule C, where you will be able to report allowable expenses along with your income.
General tax implications for statutory employees
If you work as a true independent contractor, you are responsible for all of the FICA taxes related to your income. That means you don’t have any help from an employer with regard to Social Security and Medicare taxes—you must pay the full share.
This is why self-employed filers are often surprised at their first income tax bill after deciding to work independently. When FICA taxes are added to standard income taxes, the overall tax bill can be rather significant.
As a statutory employee, your employer is paying their share of FICA taxes, and your overall tax bill will be lower as a result.
Since you are still considered an independent contractor for income tax purposes, you can also write off unreimbursed employee business expenses. While each case will vary depending on specifics, it is likely that your tax responsibility will be lower at the end of the year as a statutory employee as opposed to a fully independent contractor.
You will need to track your business expenses accurately throughout the year and confirm that the expenses you deduct are eligible for deduction. This process will be simple in some cases, but those with complex deductions may be wise to consult with a tax professional before filing. Accounting for unreimbursed employee expenses correctly can go a long way toward helping you reduce your tax liability.
Tax deductions for statutory employees
Statutory employees can deduct eligible business expenses when they file – similar to a self-employed individual. These expenses may include advertising, office supplies, and travel. Deductible expenses include those considered “necessary and ordinary” to earn income. Here are some self-employed tax deductions with examples to help you understand what you can claim.
Know your employee classification and tax filing status
Are you a W-2 statutory employee, or will you be provided with a 1099 instead? The answer to that question makes a significant difference in how you will file your taxes and how your income and employment status are treated. You shouldn’t wait around to receive your tax forms to find out how you have been classified.
To fill out Schedule C correctly as a statutory employee, you will need all revenues and expenses tracked precisely. If you know you’ll need to report unreimbursed employee expenses, you can track them more carefully right from the start.
Frequently asked questions about statutory employment
How do I know if I am a statutory employee?
If you aren’t sure of your employment status, your W-2 can provide clarity. Statutory employees will have box 13 checked on Form W-2 to indicate this status.
Can a statutory employee collect unemployment? Statutory employees may be eligible to receive unemployment insurance/compensation if they lose their jobs. For more information, contact your state’s department of revenue.
How to file taxes as a statutory employee?
As a statutory employee, you’re classified as an independent contractor for tax purposes. But just because you’re considered self-employed, doesn’t mean you have to be on your own come tax time.
TaxSlayer Self-Employed makes it easy to navigate your unique tax situation and get guidance from a tax professional every step of the way. You can get started for free today!
Are statutory employees eligible for benefits?
Employers usually cover half of Medicare and Social Security taxes, but statutory employees don’t usually get health insurance, vacation time, 401k plans, and other benefits reserved for common law employees.
TaxSlayer can help you file your statutory employee taxes
TaxSlayer makes it easy to file your individual income tax return online, whether you are self-employed, traditionally employed, or somewhere in between. If you’re ready to start filing your taxes, create a free TaxSlayer account and begin entering your tax info in just a few clicks.
