Statutory employees aren’t exactly commonplace in the small business (SMB) world, but if you operate in certain industries, you’ve likely heard the term thrown around. Still, even if you’ve participated in conversations about statutory employees as an SMB owner or manager, a lot of confusion still surrounds them. More specifically, it’s not always clear how they’re classified and what implications they have for employers.
If you’re interested in potentially hiring one (or a few!) statutory workers, you must understand exactly what they are, as well as the pros and cons they can offer SMBs. So, let’s break that down.
What is a statutory employee?
In the United States, a statutory employee is a category of worker that falls between an independent contractor and a regular employee.
According to the Internal Revenue Service (IRS), these workers are considered independent contractors under common law rules but have to be treated as employees for some employment tax purposes if they meet certain conditions. Namely:
- They carry out all their work, tasks, and responsibilities themselves.
- They don’t have to make a significant investment in equipment or property to do their work (other than potentially in a means of transportation).
- They work and are paid by the same employer continuously and in the long term.
In terms of payroll, small business owners need to be aware that if they hire a statutory employee, they are not responsible for withholding income tax from their earnings, but they are responsible for withholding Medicare and Social Security taxes (sometimes referred to as Federal Insurance Contributions Act or FICA taxes).
It’s also worth noting that team members need to agree to have the status of statutory worker when they begin their employment and sign a service agreement to that end.
What kinds of jobs can statutory employees have?
In addition to the three conditions outlined above, workers need to fit into one of four job categories to be considered statutory employees. Because of that, potential statutory worker examples are fairly limited. Here are the possibilities as stated by the IRS:
- Commission-based drivers: A driver who delivers drinks (other than milk), meat, vegetables, fruit, or baked goods. Also, drivers who either pick up or deliver laundry or dry cleaning. The driver has to be the employer’s agent and get paid based on commission.
- Life insurance sales agents: Full-time sales agents who sell life insurance or annuity contracts, or both, as their main job (defined as “principal business activity”) for a single life insurance company.
- Home-based employees: Someone who works from home with materials or goods their employer supplies. The employer has to provide the worker with instructions to carry out their tasks and responsibilities. The materials and goods also have to be returned to the employer or someone they designate upon request.
- A traveling or city salesperson: A full-time employee whose main job (defined as “principal business activity”) is organizing and submitting orders to their employer from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods they sell must be for resale or supplies that’ll be used in the buyer’s business operation.
While statutory employees might carry out tasks and have important responsibilities for a business, their jobs usually aren’t central to the business’s main functions and/or operations.
Pros and cons of hiring a statutory employee for your small business
Now that you understand what a statutory worker is and what you have to consider if you want to hire one, let’s consider why doing so can be beneficial or problematic from a small business perspective.
- More control over work practices: When you hire an independent contractor, they should always do the work outlined in your initial agreement. However, you won’t have much say regarding how they carry out that work.
On the other hand, statutory employees expect a lot more instruction and guidance concerning preferred best practices and ways of working. That leads to more consistency and, in some cases, peace of mind for small business owners.
- Wider training and development opportunities: Similar to the point above, small business owners and managers aren’t in a position to ask independent contractors to undertake any specific training or professional development activities. You have to trust that the people you hire as independent contractors know what they’re doing and don’t require additional training (at least not immediately).
In contrast, since statutory workers are treated more as regular employees, you may be able to ask them to complete certain training. This can also benefit your small business in the long term if you want to upskill statutory employees and eventually move them into regular, full-time positions.
- Tax benefits: If you hire statutory workers, you may be able to deduct some of the related expenses as business expenses, which can lead to lower tax payments for you. For instance, if you’re buying equipment for home-based statutory employees, keep those receipts, as it may qualify as a tax write-off.
- More reliability: People normally hire independent contractors for one-off jobs, such as a landscaping company for your garden or a designer for your website. While there’s no problem with that, you don’t have much chance to build a long-term working relationship with independent contractors, which can lead to less reliability and loyalty.
Because statutory workers mainly work for single employers for longer periods of time, they’re more like regular employees, and business owners and managers have time to build stronger relationships with them.
- More complicated payroll: If you hire a statutory employee, your payroll calculations will get more difficult. That’s because you’ll need to take care of calculating and withholding statutory workers’ Medicare and Social Security taxes yourself. If you use an SMB-friendly, full-service payroll tool like Homebase payroll this won’t be a problem, but it might be tricky if you’re doing manual calculations by yourself.
- Additional regulatory compliance considerations: Bringing a statutory employee on board can also make small business owners’ and managers’ lives more complicated when it comes to legal compliance. Statutory workers come with additional IRS regulations and guidelines, which can lead to issues if you don’t follow them correctly. And even if you tick all the boxes, you’ll need to take care of more paperwork and record-keeping in case of potential audits or complaints.
Some small business owners find this daunting as they may not have much human resources experience or the time to keep themselves up to date with what the IRS requires, but an easy solution is to use a tool like Homebase HR and compliance to help you out. With our HR Pro feature, you can even book a call with a certified HR expert to go over your business practices and make sure you’re doing everything above board.
- Can result in higher costs: This isn’t always the case, especially because the federal and state tax contributions that small business owners make are often very similar for regular employees and statutory workers. Still, in some cases, statutory workers can come with additional costs. For example, SMB owners may have to pay for additional equipment for their statutory employees. They also might decide to provide them with certain benefits like paid time off (PTO), 401(k) contributions, and/or extended health coverage, depending on the circumstances.
Pro tip: If you want to learn more about how Homebase can help you manage paid time off (PTO) for all your small business team members, check out this video tutorial.
- Little flexibility: As we’ve seen, to be considered a statutory worker, people are very limited in terms of the roles they can have and the tasks they can fulfill (more or less only commission-based drivers, life insurance sales agents, home-based employees, and traveling or city salespeople). That shouldn’t be a problem if your small business specializes in one of those areas or has a very specific vacancy to that end, but it’s not realistic to hire statutory employees and then shift them to another role as your needs change.
In addition, statutory employees often expect regular hours and work conditions, whereas independent contractors often have much more flexibility around when they’re willing to work. For example, a statutory worker might expect a Monday to Friday employee schedule at similar hours each week, whereas an independent contractor may be fine with working different days and hours depending on their availability.
Homebase makes employing statutory workers simple
All in all, hiring a statutory employee might not make sense — or even be possible — for many small businesses. But the bottom line is: If you’re going to employ a statutory worker, you have to do it right.
Bringing a statutory employee onto your team can bring a lot of benefits to your business, namely, more control over their work practices when compared with independent contractors, broader training and development opportunities, certain tax benefits, and deeper reliability and loyalty.
On the other hand, they also come with tricky administrative work, especially around payroll and compliance. Small business owners have to make sure they calculate and withhold the correct taxes for statutory employees and fulfill all the conditions and regulations laid down by the IRS, which are naturally subject to change.
But you won’t have to worry about any of that if you use a handy small business management platform like Homebase to help you out. We’ve got a built-in, full-service payroll tool and a comprehensive HR and compliance feature that can help take care of your statutory employee admin and beyond.
Because we want to make running your small business quick, easy, and stress-free — no matter what category of workers you have on your team.
FAQs about statutory employees
What’s the difference between a statutory employee and an independent contractor?
The difference between a statutory employee and an independent contractor is simple. Independent contractors work for themselves and offer services to their clients within the framework of a work agreement, but they’re responsible for their own business financials and tax calculations, withholdings, and payments.
On the other hand, statutory employees are something between a regular employee and an independent contractor. They’re technically independent contractors but are treated as employees for certain tax purposes. For example, their employer doesn’t have to withhold income tax based on their earnings when payroll comes around, but they do have to withhold their Medicare and Social Security contributions.
How are statutory employees taxed?
Statutory employees are taxed like other wage-earning workers in the United States. Because they are technically independent contractors, they have to take care of withholding, calculating, and paying their own income tax — unlike regular employees. However, due to their status as statutory employees, their employer needs to calculate and withhold their Medicare and Social Security tax (also known as FICA taxes) when they’re taking care of payroll.
Is a statutory employee eligible for benefits?
Whether or not a statutory employee is eligible for benefits is largely up to their employer. Most often, they don’t receive the same benefits as regular team members, like health insurance, 401(k) contributions, or paid time off (PTO). However, some small business owners may want to extend modified benefits or perks to their statutory employees.
Statutory employees are also eligible for some state and federal benefits. For example, they may qualify for unemployment benefits depending on their circumstances and state. In addition, they can contribute to simplified employee pensions (SEP), and they get some medical coverage as a result of their FICA tax contributions,
What taxes will I have to pay to hire a statutory employee?
As an employer, you don’t have to pay any special taxes to hire a statutory employee, although it’s always a good idea to consult an accountant or HR professional to make sure you tick all the boxes and stay compliant. Statutory workers have to take care of all their own income tax calculations and withholdings, so you won’t have to worry about that.
You will, however, need to calculate and withhold their Medicare and Social Security taxes, also known as FICA taxes. These amount to approximately 15.3% of the workers’ income and are divided between employer and employee as follows:
- Social Security: 12.4% (the employee pays 6.2% and the employer pays 6.2%)
Medicare: 2.9% (the employee pays 1.45% and the employer pays 1.45%)