Why does my W-2 say I am a statutory employee? What is a statutory employee?
If your W-2 says you are a statutory employee, this means the IRS has classified you as such because you are in between the classification of an independent contractor and a common law employee. So, who qualifies as a statutory employee? Per the IRS, independent contractors who are agent or commission-based drivers; life insurance sales agents; home-based workers; or traveling or city salespersons all qualify.
For example, a full-time life insurance sales agent whose business activity is selling life insurance for one life insurance company is a statutory employee. This is because their contract likely states that the individual themselves will personally perform the business of selling life insurance or annuity contracts; the employee does not have a substantial investment in the equipment used to perform the services in their contract, as they are simply selling a company’s life insurance policies; and the employee is a full-time sales agent for one life insurance company. Because such an employee meets all the three requirements, their employer, the life insurance company, is not required to withhold taxes from the employee’s wages but is required to withhold Social Security and Medicare taxes from the employee’s paychecks. Generally, statutory employees do not receive the traditional benefits from their employer as those are reserved for common law employees.
The word “statutory” just refers to how the IRS classifies certain types of workers. If a worker is classified as a statutory employee, this means their employer can withhold certain taxes from their paychecks. However, in order for such tax withholding purposes to apply, a statutory employee must meet three conditions:
- Their service contract either states or implies that a substantial amount of all services is to be personally performed by them.
- The employee does not have a substantial investment in the equipment and property that is used to perform the services in their contract.
- The employee’s services are performed on a continuing basis for the same payer.
What is a statutory employer?
Statutory employers are individuals or businesses that employ another individual to perform work and, by law, become actual employers who are liable for workers’ compensation. Essentially, these employers are liable to any individual who gets injured while performing their work or duties. For example, in construction, a General Contractor who hires a Subcontractor to perform specific work for part of the General Contractor’s contract is considered a statutory employer; the Subcontractors are thus statutory employees. This means that if any of the Subcontractors were to be injured on the job, the General Contractor would be liable for paying workers’ compensation to the injured subcontractors. The law of statutory employer and employee relationships is to protect an employee who is not covered for workers compensation benefits because of lack of insurance or unclear employer-employee arrangements, such as those that occur in construction labor. These types of arrangements may take place in many forms of labor and is thus designed to protect those individuals.
Generally, an employer cannot withhold taxes for most independent contractors but because statutory employees are not considered independent contractors nor employees, a statutory employee is able to receive a W-2 and 1099 tax form from their employer. In essence, a statutory employee receives a W-2 form, which is reserved for salaried employees, but is not considered by the IRS to be a complete employee.