The IRS classifies certain workers as statutory employees for tax purposes. They’re considered independent contractors for federal tax withholding but are treated like employees when it comes to Social Security and Medicare taxes (FICA).

This classification usually applies to drivers, delivery personnel, and full-time life insurance sales agents who meet specific criteria.

Understanding worker classifications

The IRS recognizes different types of workers, each with its own tax rules:

  • Employee: Works under an employer’s control and follows their direction.
  • Independent Contractor: Runs their own business, serves multiple clients, and decides how and when to work.
  • Statutory Employee: Considered an employee for FICA taxes but an independent contractor for federal tax withholding.
  • Statutory Nonemployee: Includes direct sellers, licensed real estate agents, and certain companion sitters, who are not considered employees for tax purposes.
  • Common-Law Employee: Falls under IRS common-law rules, meaning the employer controls how the work is done.
  • Joint Employment: When two or more employers share control over a worker’s job duties.

Each classification impacts tax responsibilities, benefits, and legal obligations, so it’s important to classify workers correctly based on their actual job role.

Characteristics of a statutory employee

Statutory employees have a mix of employee and independent contractor traits. This status lets them deduct work-related expenses while still qualifying for some employee benefits.

To be considered a statutory employee, a worker must:

  • Have provided services for the company during the current or previous tax year.
  • Be contractually responsible for all work-related expenses.
  • Not receive reimbursements for those expenses.
  • Earn pay based on sales rather than an hourly rate or fixed project fee.
  • Not be included in the company’s retirement plan.
  • Not own equity in the company.

Knowing these rules helps businesses stay compliant and ensures workers understand their tax status and benefits.

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