A statutory employee is an independent contractor under IRS common law that is treated as an employee, by statute, for tax withholdings. For a standard independent contractor, an employer cannot withhold taxes, as this would change the independent contractor relationship into an employer-employee relationship. Statutory employees are also permitted to deduct work-related expenses on Schedule C instead of Schedule A in the United States tax system. As a result, they are allowed a greater tax deduction for business expenses than standard employees, as Schedule C expenses are not subject to the 2% adjusted gross income threshold as seen with Schedule A.
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Criteria
To be considered a statutory employee, all three of the following conditions must apply:
Some examples of employees that may be considered statutory are as follows:
Advantages over standard employee
Statutory employees occupy an intermediate position between employees and independent contractors from the perspective of the employer. Statutory employees are less expensive to hire than regular employees because the employer does not have to pay unemployment taxes. However, they are more expensive to hire than independent contractors because Social Security and Medicare taxes must be paid on wages in the form of FICA tax. Statutory employees pay FICA tax through their employer, and so do not pay self-employment tax; despite this, they must report expenses, income and wage.
Similar to independent contractors, statutory employees may deduct business expense from W-2 earnings.