A statutory employee is a worker who is classified as an employee by statute. These statutes detail working conditions that can only be done by employees. Even if the employer classifies the worker as an independent contractor, the law treats the worker as an employee. Employers of statutory employees must withhold certain taxes. The workers may receive protections and benefits.
What is a statutory employee?
A statutory employee is a worker who performs a job that a federal or state statute says can only be done by an employee. Workers who perform the types of jobs detailed in these statutes will be treated as employees for certain purposes, but not for others.
Under federal law, workers are eligible to be statutory employees if they perform the following 4 types of jobs and are not already considered employees under common law rules:
- drivers who distribute certain types of foods and services,
- full-time life insurance sales agents whose principal business activity is selling life insurance or annuity contracts, primarily for one life insurance company,
- people who work from home, but who use supplies borrowed from their employers, and
- certain traveling or city salespeople.1
For a worker to be a statutory employee, though, these 3 additional requirements must be met:
- the contract states or implies that the worker will personally perform the services,
- the worker does not have a substantial investment in the facilities used to perform the work, other than a vehicle, and
- the work is performed on a continuing basis for the same payer.2
Drivers can be considered statutory employees if they are agent-drivers or commission-drivers and distribute any of the following goods or services for their employer:
- meat products,
- vegetable products,
- fruit products,
- bakery products,
- beverages other than milk, or
- laundry or dry-cleaning services.3
Traveling salespeople can be statutory employees if they work full-time on the employer’s behalf and solicit orders from the following types of clients:
- hotel operators, or
These orders must be for either:
- merchandise for resale, or
- supplies for use in the client’s business operations.5
What is the difference between a statutory employee and other workers?
When a worker is a statutory employee, the employer has an obligation to withhold certain payroll taxes. Statutory employees can deduct certain expenses from their income tax. Workers who are statutory employees may also be entitled to more legal protections and benefits than independent contractors.
Employers are legally obligated to withhold certain taxes from a statutory employee’s wages. Under federal law, employers must withhold Medicare and Social Security taxes from the wages of their statutory employees. This is done by withholding the employment taxes under the Federal Insurance Contributions Act, also known as FICA taxes. Certain states require employers to withhold other taxes, as well. Employers do this tax withholding on the statutory employee’s W-2 form.
This is another difference between statutory employees and independent contractors. Independent contractors are paid using 1099-MISC forms from the Internal Revenue Service (IRS). Statutory employees receive W-2 forms just like normal employees. However, Box 13 on Form W-2 will be checked off, marking the worker as a statutory employee.
Because these FICA taxes are paid by the employer, it means that statutory employees are not subject to self-employment taxes like independent contractors.
Statutory employees can also deduct their work-related expenses. These business expenses are generally things like:
- mileage for business travel, and
- vehicle maintenance and depreciation.
Normal, common law employees deduct these expenses on Schedule A on their tax returns. Statutory employees, however, deduct them on Schedule C, even though they are not considered self-employed. This means that statutory employees have a lower adjusted gross income threshold to meet. This allows for a larger tax deduction.
In some states, statutory employees may be entitled to certain workplace benefits and protections, like health insurance and unemployment benefits. However, this is not a requirement under federal law.
This combination of benefits and obligations puts statutory employees between common law employees and independent contractors. Statutory employees have more freedom than normal employees, but less than independent contractors. Employers have to withhold more taxes from statutory employees than from independent contractors, but less than is required for normal employees.
Is this different from a statutory employer?
A statutory employee is different from a statutory employer. Statutory employees are in a worker classification that is between employees and independent contractors. Statutory employers are companies that hire contractors and then become liable for workers’ compensation coverage if the contractor’s employer fails to provide it.
While the titles are very similar, their meanings are very different.
What is the law in California?
In California, state law mirrors federal law for determining who is a statutory employee, but also adds several types of work. Additionally, the obligations and benefits that come with the classification are very different.
Just like under federal law, California workers may be statutory employees if they work as:
- drivers distributing:
- bakery products,
- beverages other than milk, or
- laundry or dry-cleaning services;
- full-time traveling salespeople taking and soliciting orders for supplies or resale merchandise from:
- hotels, or
- home workers who perform services from their residence, but who borrow the goods or materials they need from their employer.6
These workers are statutory employees if they also:
- have to personally perform the work under their service contract,
- do not have a substantial investment in the facilities needed to do the work, other than a vehicle, and
- perform services that are ongoing, and not in the nature of a single transaction.7
However, California employment law also says that the following workers are statutory employees:
- an officer of a corporation, other than the director,8
- artists or authors in the movie, television, or radio industry whose:
- employer can control the performance of their services,
- product is considered “work for hire,” and
- collective bargaining agreement lists them as an employee;9
- any member of a non-partnership limited liability company (LLC) that is treated as a corporation for federal income tax purposes,10 and
- unlicensed contractors performing construction work that requires a license.11
California law also changes the types of taxes that have to be withheld from statutory employees. They are:
- Medicare taxes,
- Social Security taxes,
- California unemployment taxes,
- state disability insurance (SDI), and
- employment training tax (ETT).
In some cases, state personal income tax (PIT) may need to be withheld.12
However, statutory employees in California also enjoy numerous benefits and legal protections, including:
- protection from workplace discrimination under the California Fair Employment and Housing Act (FEHA),
- minimum wage protections by the California Labor Code,
- employment training benefits,
- unemployment benefits,
- disability insurance, and
- paid family leave benefits.
- 26 USC 3121(d)(3).
- 26 USC 3121(d)(3)(A).
- 26 USC 3121(d)(3)(D).
- California Unemployment Insurance Code 621(c)(2).
- California Unemployment Insurance Code 621(a) and 622.
- California Unemployment Insurance Code 601.5.
- California Unemployment Insurance Code 621(f) and 623.
- California Unemployment Insurance Code 621.5 UIC.
- California Unemployment Insurance Code 13004, 13004.5, and 13009.