What is a statutory employee? Definition, criteria, and tax implications

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Business owners commonly interact with multiple types of employees over the lifespan of their company. Both traditional employees and independent contractors are fairly straightforward to work with, but what happens when you start mixing the two? A statutory employee is a hybrid between both, and a worker must meet specific criteria in order to become one.

So what is a statutory employee? Below we’ll discuss the definition, criteria, and tax implications of having a statutory employee on your payroll.

What is a statutory employee?

A statutory employee is an independent contractor that a company treats as a salaried employee for tax purposes. Because Medicare and Social Security are the only taxes employers are required to withold from their earnings, statutory employees are able to write off employment expenses. Contrary to traditional employees, employers are not required to offer statutory employees benefits or cover the costs of tools needed to perform their work.

The employer of a statutory employee will pay their portion of taxes, 7.65%, which is half of the total FICA taxes of 15.3%. We’ll go into more detail about this in the sections below. FICA taxes are a combination of Social Security and Medicare taxes that both the employee and employer contribute to.

Criteria and examples of a statutory employee

The Internal revenue service has specific criteria that qualify somebody as a statutory employee. Here are the exact specifications from the IRS statutory employee website page:

Tax implications of a statutory employee

As we briefly touched on before, statutory employees have the same benefit as traditional employees, the tax break. The Federal Insurance Contribution Act , also known as FICA taxes, is made up of two contribution types:

This makes total FICA taxes 15.3%. If you are an independent contractor, you are responsible for paying the entire 15.3% come tax time. Statutory employees and regular employees are only responsible for half (6.2%), with the other half covered by the corporation they work for.

Advantages and disadvantages of a statutory employee

Statutory employees are seen as beneficiaries of extra perks that independent contractors don’t normally see. However, there are still some cons to being classified as a statutory employee.

Pros

Statutory employees have two advantages over traditional employees that are guaranteed by law. Any other perks provided are based on their employer’s company policy. Here are the pros:

Cons

Although they hold the title of “employee,” statutory employees are still bound by independent contractor restrictions in some aspects. Here are the cons:

Not eligible for benefits: As with an independent contractor, statutory employees are omitted from receiving traditional employee benefits. These include 401(k) contributions, paid time off, and health insurance.

Statutory employees vs. other types of employees

To break down the differences even further, let’s look at three classifications and compare the similarities and differences between them. We’ll look at the statutory employee compared to a traditional employee, then an independent contractor, and finally a statutory non-employee.

Statutory employee vs. traditional employee

Statutory employees and traditional employees are the same in that they both receive W-2s and receive a tax deduction on FICA taxes. However, traditional employees qualify for benefits such as health insurance, while statutory employees don’t. To offset these benefits, statutory employees can write off some of their business-related expenses while traditional employees can’t.

Venn diagram of Statutory employee vs. traditional employee.

Statutory employee vs. independent contractor

Statutory employees and independent contractors are the same in that they both receive business-related expense reductions. This means that they can write off a percentage of their business expenses.

These business expenses include mileage, a home office, cell phone, and vehicle expenses, to name a few. However, statutory employees receive a W-2 as well as a 50% tax reduction in FICA taxes. Independent contractors are responsible for the full 15.3% FICA and will receive a 1099 at the beginning of the year.

Venn diagram of statutory employee vs. independent contractor.

Statutory employee vs. statutory non-employee

Statutory employees and statutory non-employees work a bit differently. A statutory non-employee is categorized as an independent contractor. You’ll notice in the diagram below that their similarities and differences match the independent contractor comparison exactly. The criteria to qualify as a statutory non-employee is what should be focused on. This includes:

Venn diagram of statutory employee vs. statutory non-employee.

The status of a statutory employee

Once you understand the foundational differences between statutory and non-statutory employees, you’ll see that there isn’t much to worry about in terms of hiring and payment.

However, if you’re feeling confused about the taxes and accounting portion of the process, a tax expert may be able to help. For your next steps, make sure you’re using proper bookkeeping techniques to keep your books current for the end-of-year tax time.

Frequently asked questions about statutory employees and their best answers. Features an image of a woman with a check and a green bag with a dollar sign on the front.

Statutory employee FAQ

What are the hiring requirements for a statutory employee?

Hiring requirements for a statutory employee are the same as the hiring requirements for a standard employee. The statutory employee gets an employment contract as well as payment terms and conditions.

The employer then collects a W-9 from the statutory employee that verifies their name, address, and tax identification number.

How do I know if I'm a statutory employee on my W-2?

Once you receive your W-2, it will look nearly identical in format to that of a standard employee. The indicator of a statutory employee is a small box checked near the bottom labeled “box 13.”

Do statutory employees get benefits?

Statutory employees enjoy the benefits of receiving partial tax credits as well as the ability to write off portions of their business-related expenses. Statutory employees, however, do not receive full employment benefits such as health insurance, 401(k) contributions, and paid time off (PTO).

Can a statutory employee contribute to a SEP?

A simplified employee pension (SEP) is an individual retirement account separate from a 401(k). Here are the criteria f or contributing if you are a statutory employee:

  1. The employer has to offer it; otherwise, you have to get a traditional IRA.
  2. The employee must be over the age of 21.
  3. The employee must be an employee for three out of the last five years.
  4. The employee must have earned at least $600 in the last calendar year.
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