What is a statutory employee?

You are not the only one who is unaware of what the term statutory employee implies. A lot of experts are unclear of the true meaning of payroll taxes because there are so numerous differences and complexities to keep in mind. Businesses often either hire common-law workers or independent contractors. Additionally, a lot of the time, employees can choose between the two types of jobs.

In this article, we will be discussing about the stator employee. You might need to employ and properly compensate a statutory employee at some point. You are at the perfect place if you are in this scenario right now or if you just want to learn more about what a statutory employee is. Lets see!

Qualifying Factors for Statutory Employee Status

Firstly, let us define what are statutory employees. A statutory employee is a worker who falls within a certain tax bracket, meaning that employers must deduct social security and healthcare taxes from their pay, but not income taxes. In other words, statutory employees can be seen by companies as falling somewhere between ordinary employees and independent contractors.

To be regarded as statutory, an employee must satisfy three different requirements. First and foremost, the employee must perform the tasks independently. Second, the individual cannot have a sizable financial investment in the equipment and assets they need to carry out their job. Finally, they must consistently work for one employer.

Those who qualify as statutory employees have a wide range of employment options. A statutory employee might be someone who works at home with equipment they borrow from their employer, for instance. A driver who picks up and delivers laundry and distributes food for commission may be an employee under the labour law. Another type of statutory employee might be a salesperson who travels or works in the insurance industry.

Statutory employees typically contribute on their own to the costs of their workplace. They frequently play a minor part in the business and may not hold a permanent position there. the government will ultimately treat any employee whose W2 form has the box marked in Box 13 as "Statutory Employee" as such.

According to reports, about 15% of employees are actually full- or partially-time independent contractors.

Businesses can avoid many of the payroll costs resulting from hiring full-time regular personnel by using independent contractors instead. Sometimes companies treat statutory employees like full-time workers in order to avoid paying taxes. Statutory employment rules have the goal to safeguard employees who work primarily for companies from unfair minimum wage practices.

Rights and Benefits of Statutory Employees

Now that you know the what is statutory employee, you must learn about the rights and employee benefits. It goes without saying that for many people, becoming a statutory employee is frequently a good alternative. Statutory employees frequently benefit from better tax planning over independent contractors. Plus, they can have a lot of the same freedom as freelancing individuals. Even if there are some drawbacks, it is typically viewed as a win-win scenario.

First off, statutory employees are exempt from paying all Social Security and healthcare taxes. Employers, as opposed to independent contractors, are accountable for a percentage of their FICA costs, which is typically to their advantage. In contrast, these expenses in addition to income tax can be a significant financial hardship for many independent contractors.

Statutory employees are eligible for some of the same benefits that independent contractors are, despite not being entirely responsible for taxes. They can specifically deduct costs relating to their jobs. Statutory workers complete a Schedule C tax form that gives them the option to claim larger deductions if necessary.

Another advantage is that, in some circumstances, statutory employees are eligible for unemployment compensation. This mostly relies on the laws of each respective state.

Likewise, a statutory employer can obtain several benefits, such as:

·        Employers still have control over work hours, workload, and methods of completion of tasks under this status.

·        Employers save on the expense of tools because they are not always required to give statutory workers all the equipment and technology they require for the job.

·        Avoiding misclassification. Statutory employees, like other workers, complete a W-2 form each year. They indicate that they are statutory employees by checking box 13 on the form. As a result, businesses avoid misclassification and are correctly taxed.

Tax Implications for Statutory Employees

Statutory employees must be classed as employees for the purposes of Social Security and Medicare taxes, according to the IRS.

Companies can save a lot of money by not deducting taxes from employee pay checks, paying benefits to independent contractors, or covering their Social Security and Medicare taxes. Since the independent contractor is responsible for covering the percentage that an employer would pay, they effectively pay twice the amount in taxes for Medicare and Social Security as an employee.

Both the employee and the employer are jointly liable for paying Social Security and Medicare tax when someone works as an employee. Other federal, state, and municipal payroll taxes must also be paid by them. 15.3% of these taxes are made up of Medicare tax (2.9%) and Social Security tax (12.4%). However, because the cost is split by the employee and the employer, both parties contribute 6.2% for Social Security and 1.45% for taxes on Medicare. The employee's share is deducted from their pay, and the equal amount is paid by the employer.

Self-employment taxes must be payable by everyone who works for themselves. There is no corporate contribution; these are the entire 15.3% Social Security and Medicare levies. The employer-equivalent share of the tax, or the amount your employer would contribute if you were an employee, is half of the total tax and is deductible.

The 7.65% necessary for covering half of the Healthcare and Social Security taxes is borne by the employer when an independent contractor qualifies as a statutory employee.

Statutory employees get a W-2 at the conclusion of January, the same time that other employees do. These are necessary for people to submit their yearly tax returns. However, unlike other employees, Box 13 is verified on the W-2s of statutory employees.

Comparing Statutory Employees and Independent Contractors

The phrase "common law" refers to a corpus of non-statutory history, custom, and rulings in real-life situations that have historically served as a foundation for legal judgements. Frequently in circumstances when the laws and legislation controlling the issue are ambiguous or non existent. A person who provides services in general may be regarded as a "employee" if the person receiving the services has the power to choose the specifics of the services' performance.

Generally speaking, under common law, individuals participating to perform work where such control does not exist may be regarded as independent contractors.

The classification of a worker as an independent contractor or an employee may rely on a variety of circumstances. Because they qualify as independent contractors, employers do not have to deduct money from employees' pay checks for federal tax purposes. Instead, independent contractors are required by law to take care of these duties on their own, typically by making quarterly anticipated tax payments.

Dentists, electricians, plumbers, other craftsmen, and building contractors are examples of professionals who fall under the category of independent contractors. Independent contractors may also include freelancers in several professions, including journalists and hairdressers.

Certain categories of workers may be regarded as independent contractors since they do not meet the legal definition of an employee. However, for a number of reasons, statutes may require that these individuals be considered in some ways as employees, i.e., "statutory employees."

As part of this approach, the individual or organization hiring the workers is required to deduct federal labor taxes such as Medicare, Social Security, and federal unemployment tax (FUTA). In most cases, the employer is not required to withhold money to pay for income taxes. If this withholding obligation is not met, the employer may have to pay the taxes, interest, and penalties in the future.

Navigating the Statutory Employee Classification - Tips for Employers and Workers

The following lists both categories and requirements to be statutory employee:

1.      Drivers that deliver commission-based goods including meat, non-milk beverages, produce, bakery goods, laundry, or dry cleaning.

2.      Employees working full-time in the insurance industry who primarily represent one life insurance provider and offer annuities or life insurance.

3.      Employees working from home who use supplies provided by a business and complete projects according to instructions given by the company.

4.      Traveling salesmen that work full-time and solicit orders from contractors, restaurateurs, wholesalers, and retailers. Orders must be utilized in their sales processes, and this should be the salesperson's main line of work.

For statutory employees in groups one and two above, FUTA must be withheld; categories 3 and 4 are exempt.

If a freelancer satisfies one of the preceding requirements, they must additionally fulfil the following criteria:

·        The independent contractor does the majority of the services themselves (this may be expressly in their contract).

·        They do not have significant investments in the tools or supplies they utilize to complete the job.

·        They continue to work for the same business on a regular basis.

Medicare and Social Security contributions will be deducted from a worker's pay if they meet all four of the above circumstances.

For all federal tax reasons, including earnings and wage tax withholding, the following individuals are regarded as self-employed:

·        The "Direct Sellers." Persons who engage in buying and selling consumer goods to any buyer on a "buy-sell," "deposit-commission," or comparable agreement for resale in their residence or at a location of business other than an ongoing retail establishment. Or persons soliciting the sale of consumer goods in their residence or place of business other than enduring retail establishments. People that distribute or sell papers or retail news, as well as relating services, fall under this group as well.

·        "Legal real estate brokers." As long as they receive compensation for their work according to sales or other output, those who work in assessment for real estate sales fall under this category.