When it comes to hiring employees, it is important to know the specifics of different types of employees because it impacts taxes and other legal topics. It is your responsibility to report what kind of employees you have working for you, common-law employees, statutory employees or statutory non-employees. Therefore, it´s important you know the differences between these and also the impacts of being one or another. Here is some basic info for you as an employer to take into account:
Statutory employees are employees that are placed between “normal” employees (or “common law” employees) and independent contractors. The difference is important for both state and federal income reporting and calculation of tax purposes. The reason the distinction is made is that statutory employees have special employment circumstances that require different income reporting rules so that their gross income is fairly determined. Statutory employees are employees defined by statute that fall within four specific categories.
The first category could be a driver that delivers meats, vegetables, bakery products or beverages other than milk. Or a driver that is acting as the employer´s agent for a commission and picks up and brings laundry or dry cleaning. The second category could be full-time insurance or annuity contract salesmen working for one life insurance company. The third category would be workers who work from home on materials supplied by, and under specifications supplied by, the employer and who also delivers the output to this employer or someone determined by his employer. And the fourth category of statutory employees would be a full-time traveling salesperson who gets orders from retailers, wholesalers, contractors or operators of hotels, restaurants or similar establishments and turns them to their employer.
Statutory employees are special workers because their wages are not subject to federal income tax withholding, but they are subject to social security, Medicare and unemployment taxes. Under common law test, they would be independent contractors by definition, but they can be treated by statute to avoid paying federal income tax.
In order to qualify as a statutory worker, the work or service must be done personally by the statutory employee and said employee can´t have a substantial investment in equipment or property used in the performance of the job. Also, the work or service must be done on a continuing basis for the same employer.
On the other hand, there are statutory non-employees who do qualify as independent contractors under the common law test and are treated as self-employed for federal tax purposes, including income tax, social security tax and Medicare taxes. Examples of statutory nonemployees are direct sellers (also newspaper and shopping news distributors fall in this category), qualified real estate agents, and certain companion sitters, caregivers that are qualified to prepare meals, do light housekeeping and offer help with laundry and other errands.
For statutory non-employees to be exempt from all withholding taxes their services must be performed under a written contract that states they will not be treated as a regular employee and their payment will be directly related to the sales they make and not to the hours worked.
As an employer, it is your responsibility to determine correctly whether an employee is common-law, statutory or statutory non-employee. You will have to report the employee´s status to the Internal Revenue Service (IRS) with a W-2 Form. Statutory employees are subject to Federal Insurance Contributions Act (FICA) and Medicare tax withholding like an employee, but they need to report their deductible unreimbursed business expenses on the IRS schedule C just like independent contractors do.
Do you have any tips on this topic? We would love to read about it in the comments section!