Statutory Employee

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Statutory Employee

What is a Statutory Employee?

A statutory employee is one who works for a corporation, however, the employer is not required to withhold all the taxes from their wages except Social Security and Medicare taxes.

A statutory employee is an employee - a worker - who is hired services from by the employers or the service receiving agents against the services rendered. That is an individual who works for the business activity and these kinds of service providers are often known as independent contractors.

Statutory employees are the ones whereby their tax deductions can be made in terms of health care services and social security. They can deduct work-related expenses on schedule C form of IRS in place of A Schedule form. Although there remain differences in both the schedules of IRS, schedule C allows statutory employees larger tax deductions of their business expenses. An agreement contract is signed between the employer and the statutory employees, this is known as a service contract. Whereas real estate agency workers and direct selling employees are another domain of the statutory nonemployee, and not the statutory employee, categorically.

Statutory employees do not own into the estate or equipment of the company, they cannot be in any permanent position within an organization; rather statutory employees have their little investment in tools and that is their investment in work facility.

The United States Internal Revenue Services (IRS) defines that independent contractors under the common rule law should not be considered as employees by the statutes that are statutory employees, except following:

  • The chauffeurs (drivers) who work on commission based and deliver beverages (except milk), vegetables, meat, fruits, bakery, dry cleaning, and/or laundry
  • Employees who work for employers and provision of services take place at homes, in other words, home-based service providers – whose work specifications are offered by the employers
  • Full-time insurance company employees selling their products like life insurance, contracts of annuity, provided that the employee works for the one Company only
  • Any sales person’s principal business activity is to provide supplies for use of the buyer’s business operations or resale merchandising.
  • Medicare taxes and Social Security should be deducted from the statutory employees’ income if they meet all the three below mentioned preconditions:
  • If the facility agreement says that the services requisite would be all rendered by those
  • The investment in instruments and estate should not be their part, except transportation
  • The services are provided continually to one client

What is more to know about the independent contractors and statutory employees is that the independent contractors do receive each year 1099-MISC form to declare what they earned for last year, but a statutory employee does not. In place of 1099-MISC, a statutory employee receives a W-2 form which therein has box 13 checked for a statutory employee. 

What are the plans for Retirement and Pensions of a Statutory Employee?

Following is the criteria whereby the statutory employee can participate in the SEP known as Simplified Employee Pension Plan (if the employer offers so), whereby meeting that:

  • The employee must be twenty-one years of age or elder
  • Total three years, of the last five years, the employee has worked for the employer
  • Worker earned $600 wage in the calendar year

Are there any other benefits applicable for Statutory Employees?

Yes, there are, as appended below:

  • Employers do pay half amount of the Medicare and Social Security taxes as common law employees
  • Health insurance is received
  • Time off or Vacation time
  • 410 (k) plan, as common-law employees
  • Income tax levies treatment like independent contractors

The afore-mentioned two taxes which the statutory employees contribute as half of those are collectively known as FICA – Federal Insurance Contribution Act.

Social Security contributions are 6.2% each the employee and the employer do, making a total of 12.4%. Whereas, Medicare is 2.9% as of the year 2021 data availability, for updated information, the IRS official website may be consulted before making any arrangements, as the rates may vary from time to time subject to budgetary allocation, dollar rates in international markets, and economic conditions at the global level.

Moreover, it is pertinent to mention here that the contracts were given to ordinary full time or part-time employees and in contrast to statutory employees are never different but they differ in terms and conditions therein, say their term of assignment is lesser and like for a particular job task completion, which is contrary to contingent hired staff having a time-bound activity of a project.

The methods of payments do differ also that is they are paid in the shape of commissions, pieces and/or wages, etc.