[US] Frequently asked questions about statutory employees

More information on statutory employees is available from the IRS in Publication 15-A, Employer's Supplemental Tax Guide.

What are statutory employees?

The Internal Revenue Service (IRS) recognizes certain workers as statutory employees. This means that although a worker’s agreement with you may be as a contractor, the law requires them to be taxed as an employee for Social Security and Medicare tax withholding.

To be considered a statutory employee, the work performed must fall into one of four categories. If the worker falls into one of the four categories, they must then meet all three conditions outlined by the IRS. If all conditions are met, you must withhold Social Security and Medicare taxes from their wages.

What are the different categories of statutory employees?

The four categories of statutory employees are:

  • 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.

What are the three conditions to qualify for mandatory withholding?

If your employee falls into one of the four categories of statutory employees and meets all three of these conditions, you must withhold 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.

How do you indicate if an employee is a statutory employee in Wave?

You can add statutory employees by following the same steps as adding regular employees in Wave. Social Security and Medicare will automatically be calculated when you run payrolls. Learn how to add employees.

You need to indicate if an employee is classified as a statutory employee on their Form W-2 at year-end. Learn how in [US] Indicate statutory employee status on Form W-2.