Statutory Employee: Definition and Examples
Published April 26, 2023
There are several types of workers as far as employment classification is concerned. These types may vary according to their relationship to the company’s owner or the employer. One particular category that most people don’t know is a statutory employee—a type of worker with particularly unique circumstances.
Today, we’ll explore what it means for a worker to be a statutory employee, its differences from regular employees, and its benefits, among many other things. Let’s start with the statutory employee meaning.
What Is a Statutory Employee?
A statutory employee is a worker subject to tax withholding, meaning a portion of their wages is taken out of their paycheck. It’s then sent directly to the appropriate government body to cover their tax liabilities.
The term is defined by the Internal Revenue Service (IRS) in the US, and though they have tax liabilities like most employees in the country, these liabilities work quite differently from the traditional worker.
Differences Between Statutory Employees and Regular Employees
There are four main differences between a statutory employee and a regular employee.
Let’s take a look at each one:
1. Tax Withholding
As stated earlier, the main difference between these two types of employees is how their taxes work.
For your reference, an employer is typically the person responsible for withholding the taxes of their employees and sending them to the IRS on their behalf. The taxes they withhold would include the following:
- State income taxes
- Federal income taxes
- Medicare taxes
- Social security taxes
Meanwhile, if an employer has a statutory employee, they would only be responsible for withholding Medicare and social security taxes. They’re not obliged to handle the statutory employee’s state and federal income taxes. However, it’s important to keep in mind that the employee would still have to file it.
2. Benefits
The traditional employee can enjoy a couple of benefits from their company. These may include:
- Paid time off
- Retirement plans
- Health insurance
Unfortunately, a statutory employee isn’t eligible for these benefits since they’re not a worker of the company in the traditional sense.
3. Employment Status
When a person gets a job, the state would consider them employed, and with this status comes several protections and benefits outside of the company granted certain employment laws, such as the following:
- Minimum wage laws
- Anti-discrimination laws
- Workers’ compensation
As you might imagine, a statutory employee isn’t eligible for these protections. That means, unlike regular employees, it isn’t illegal for the employer to pay them a salary much lower than the minimum. Similarly, if they’re injured due to a mistake from the company, they’re not eligible for workers’ comp.
4. Management
It’s common for employers to monitor their regular employees closely. They would have control over the employee’s tasks and work schedules. A statutory employee operates differently as they have quite a high degree of freedom at work. You can think of them as independent contractors in that regard.
These are what sets apart a traditional employee from a statutory employee. As you can see, there are pros and cons to this classification, but there are certain benefits that most people may not know.
Benefits of Statutory Employee Classification
In addition to freedom, the statutory employee classification may also offer the following benefits:
Simpler Tax Reports
This is more so a benefit for the employer than the employee. Since the employer won’t have to deal with the state and federal taxes of the statutory employee, their tax reporting would be much less of a hassle.
Tax Deductions
Tax deductions can come in many forms, and it just so happens that certain tax deductions are not available to regular employees but are fully accessible to statutory employees.
For instance, if the statutory employee is considered self-employed, they might be able to deduct business expenses from their taxes. Examples of these include home office and travel expenses.
Employment Benefits
Though there are several disadvantages to not having employment status, as mentioned in the previous section, there are also advantages that come from having the “self-employed” status.
These include tax-advantaged retirement plans and savings accounts that are only available for self-employed individuals, which statutory employees are. Some examples of these are:
- Simplified Employee Pension (SEP)
- Solo 401(k) Plan
- Health Savings Account (HSA)
- Self-Employment Tax Deduction
Needless to say, though the statutory employee classification comes with more disadvantages than advantages, there are, in fact, a couple of other benefits to this classification. However, they’re not due to the statutory employee classification directly but from the self-employment status of such employees.
Examples of a Statutory Employee
If your circumstances at work don’t resemble that of a traditional employee, then it makes sense to think you’re actually a statutory employee. That thought might have become justified, especially now that you know more about it. But keep in mind that not all non-traditional employees are statutory employees.
There are specific examples, or what companies would call “types,” of statutory employees. And you would only ever be eligible for the benefits of this work classification if you belong to these examples.
- Drivers who distribute goods or other things to or from the employer’s location
- Employees whose workplace is their employer’s home, e.g., nannies and housekeepers
- Insurance salespeople who engage in the sale of annuity contracts and life insurance
- Other kinds of salespeople that typically work outside of their employer’s place of business
- Delivery agents who work based on commission, not unlike the traditional pizza delivery workers
There are cases where people outside of this dome are considered statutory employees. A pizza delivery worker, for instance, can be a statutory employee if their contract states explicitly so. It would also be the case if they’re paid based on the number of deliveries they may make within a period of time and not hourly.
The Bottom Line
Whether you’re an employer or an employee, understanding the inner workings of the statutory employee classification can be handy. That’s especially true if your company, or the company you’re working for, is a business that consists of statutory employees.
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About The Author
Lenard Arceo is an experienced writer who enjoys learning to coding as a hobby. He has spent many years blogging about a vast array of topics and has helped many reputable websites grow their audience over the years.