[US] What are statutory employees?

The Internal Revenue Service (IRS) distinguishes certain workers as “statutory employees.” This means that although at face value a worker may appear to be a contractor, but the IRS considers them an employee for the purposes of Social Security and Medicare tax withholding.

The IRS describes statutory employees in four categories. If the worker falls into one of these four categories, they must then meet all three conditions outlined by the IRS for you to have to withhold Social Security and Medicare taxes from their wages. The worker will then receive Form W-2 with Statutory Employee check-marked in Box 13.

The four categories of statutory employees

  • A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.
  • A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.
  • An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.
  • A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson's principal business activity. For more information on salespersons, please see this guide.

The three conditions to qualify for mandatory withholding

If your employee falls into one of the categories in the previous section and meets all three of these conditions, you must withholding Social Security and Medicare taxes from their wages.

  • The service contract states or implies that substantially all the services are to be performed personally by them.
  • They do not have a substantial investment in the equipment and property used to perform the services (other than an investment in transportation facilities).
  • The services are performed on a continuing basis for the same payer. 

Tax requirements differ according to your business and location, so Wave can’t give you specific tax advice. If you aren’t sure if the worker you’re paying is an employee, a contractor, or a statutory employee, check out the IRS website or talk to your accountant.

How to have this reflected on the W-2 in Wave 

At year-end, when your Forms W-2 and W-3 are available to generate, you will be given an option per employee to mark them as a statutory employee.

This will then show up on the employee's Form W-2, with the following box checked off:

 

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