Is It Better To Be A Statutory Employee?

Q: What are statutory employees, and how are they unique in terms of tax treatment?

A: Statutory employees are a specific category of workers who receive a W-2 from their employers. 

Despite being issued a W-2, they report their wages, income, and allowable expenses on schedules, similar to self-employed taxpayers. Notably, statutory employees, often salespeople or commission-based workers, are exempt from paying self-employment taxes. 

Employers must treat them as employees for social security purposes. Examples of statutory employees include full-time life insurance salespeople, traveling salespeople, certain commission truck drivers, directors, board members of corporations, officers of non-profit organizations, and certain homeworkers working on materials provided by the employer.

Q: How can one identify a statutory employee on their W-2 form?

A: If an individual is a statutory employee, box 13 of their W-2 should be checked. Additionally, there are no federal income taxes withheld. While they are treated as employees for FICA tax purposes, they are not considered employees for income tax purposes. Therefore, they report their wages, income, and expenses on schedules, and they are exempt from self-employment taxes.

Q: What distinguishes statutory non-employees, and what are the two main categories within this classification?

A: Statutory non-employees fall into two main categories: direct sellers and licensed real estate agents. They are treated as self-employed for federal tax purposes, including income and unemployment taxes. Payments for their services are directly linked to sales rather than hours worked, and they operate under written contracts stipulating their non-employee status for tax purposes.

Q: Could you provide an example of a statutory non-employee, and how is their income reported?

A: Eugenia, who works as a full-time real estate agent with Trustworthy Realty Services, is an example of a statutory non-employee. She visits the office daily, manages listings, and earns commissions. Trustworthy Realty issues Eugenia a Form 1099-MISC for her commissions, and she reports her income and expenses on Schedule C, as statutory non-employees are responsible for their own tax obligations.