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Statutory Employee

Last Updated March 19, 2009

Definition

Some workers are deemed to be employees by statute. For an exempt organization, the most common employees in this category are its officers.  In addition, while not as prevalent in an exempt organization, the following workers are also statutory employees:

  • A full-time traveling or city salesperson who solicits orders from wholesalers, restaurants, or similar establishments on behalf of a principal. The merchandise sold must be for resale (e.g., food sold to a restaurant) or for supplies used in the buyer's business;
  • A full-time life insurance agent whose principal business activity is selling life insurance and/or annuity contracts for one life insurance company;
  • An agent-driver or commission-driver engaged in distributing meat, vegetables, bakery goods, beverages (other than milk), or laundry or dry cleaning services; and
  • A home worker performing work on material or goods furnished by the employer.

An employer should indicate on the worker's Form W-2 whether the worker is classified as a statutory employee.  Statutory employees report their wages, income, and allowable expenses on Schedule C (or Schedule C-EZ), Form 1040.  Statutory employees are not liable for self-employment tax because their employers must treat them as employees for social security tax purposes.

 

Referring Cite

IRC § § 3508; 3509

Additional Helpful Information

Statutory Employees

If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute ( statutory employees ) for certain employment tax purposes if they fall within any one of the following four categories and meet the three conditions described under Social security and Medicare taxes , below.

  • 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. Refer to the Salesperson section located in Publication 15-A, Employer s Supplemental Tax Guide for additional information.

Statutory Nonemployees
There are two categories of statutory nonemployees: direct sellers and licensed real estate agents. They are treated as self-employed for all Federal tax purposes, including income and employment taxes, if:

  1. Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked and
  2. Their services are performed under a written contract providing that they will not be treated as employees for Federal tax purposes.

Refer to information on Direct Sellers located in Publication 15-A, Employer s Supplemental Tax Guide for additional information. 

Misclassification of Employees

Consequences of treating an employee as an independent contractor.  If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker.  See Internal Revenue Code section 3509 for additional information. 

This information was taken from the IRS' website www.irs.gov