Statutory Employees and Your Retail Business
What is a statutory employee?
A statutory employee is someone who is in a separate company from the company that is hiring. Where specific conditions are met, this person is treated like an employee in relation to withholding tax. The word statutory is in reference to how the Internal Revenue Service (IRS) classifies the above type of workers, who are subject to tax withholding under common-law rules.
Your retail business is not allowed to keep hold of taxes for independent contractors. However, statutory employees are different because their classification falls between an independent contractor and an employee.
Statutory employees are usually people who work on a commission basis, for example, salespeople. Individuals who provide services to your retail business while using your resources and tools are generally also considered to be statutory employees.
Statutory employee classifications
The IRS has specified the following classifications of statutory employees:
- A driver who distributes drinks (other than milk), meat, fruit, vegetables, or bakery products, or who collects and delivers dry cleaning or laundry, if the driver is your agent or is paid on commission.
- A person who works at home on goods or materials that you provide and those goods must be given to you or someone that you choose, if you also give specifications for how the work is done. This classification of statutory employee is also known as a piece worker.
- A full-time life insurance sales agent whose main business activity is selling annuity contracts, life insurance, or both. For the most part, the life insurance salesman should sell life insurance or annuity contracts for only one insurance company.
- A full-time city or traveling salesperson who works on behalf of your business and turns orders to your business from retailers, wholesalers, restaurants, operators of hotels, contractors or other comparable establishments. The goods that are sold must be products for resale or supplies for use in your business operation. The work that is done for you must be the salesperson’s primary business activity.
The purpose of statutory employment
Before 1986, employees were classified as outside sales people, independent contractors or common-law employees. However, some classifications of employees were liable for business expenses that could not be claimed back. This group of employees would be in a similar position to independent contractors, but would also keep some traits of common-law employees.
The tax code at the time was not equipped to deal with the special circumstances of this classification of worker. Therefore, the statutory employment status was created by congress and used for particular employment conditions and categories to describe this type of worker. Consequently, statutory employees have distinct income reporting rules in order to establish their adjusted gross income.
It is important to understand what a statutory non-employee is, when considering statutory employees for your retail business. According to the IRS, there are three categories of statutory non-employees. They are:
- Direct sellers.
- Licensed real estate agents.
- Certain companion sitters.
Licensed real estate agents and direct sellers are considered to be self-employed for all federal taxes, including employment and income taxes if:
- A significant amount of all payments for their services as direct sellers or real estate agents are directly associated to sales or other output, rather than to the number of hours worked, and
- Their services are performed under a written contract stating that they will not be considered employees for the purposes of federal tax.
Statutory employment considerations
If you are thinking about using statutory employees for your retail business, you must take into consideration certain factors.
You must withhold Medicare and social security taxes from your statutory employee’s paycheck if all of the following requirements are met:
- The service contract specifies or implies that substantially all of the services are to be carried out personally by the statutory employee.
- The statutory employee does not have a significant investment in the property or equipment used to carry out the services (other than an investment in transport facilities).
- The services are carried out on a continued basis for you (as the employer).
Statutory employees are entitled to higher tax deductions for their business expenses in comparison to other employees. This is because Schedule C expenses are not liable for the 2% adjusted-gross income threshold expenses on Schedule A.
Benefits of statutory employment
There are benefits for a statutory employee who works with your retail business. These advantages are mostly related to the tax that is paid. Some of the advantages of being a statutory employee include:
- Statutory employees can deduct their expenses just like independent contractors.
- Statutory employees do not have to pay self-employment tax, which could result in saving money.
A benefit for your retail business when working with statutory employees is that you do not have to be concerned about incurring penalties for classifying statutory employees under the wrong status.
Disadvantages of statutory employment
As well as the benefits of statutory employment, there are also some downsides for the statutory employee and for your retail business.
The following are the disadvantages of being a statutory employee:
- No entitlement to the benefits that other employees receive.
- No right to claim workers’ compensation. An insurance company may not honor a workers’ compensation claim if a statutory employee gets hurts at work.
- No eligibility for sick pay.
- No job security.
There can also be some negative aspects of employing statutory employees in your retail business.
Statutory employees are normally employees of a professional employer organization (PEO). These firms usually outsource employee management tasks, like compensation, payroll, training and employee benefits.
Where a statutory employee is employed by a PEO, you do not have the freedom to make the statutory employee a part of your staff. If you are happy with the statutory employee’s performance and want to provide them with traditional common-law employment, they will need to leave the PEO to be hired by your retail business. This process can be stressful to both you and the statutory employee.
How to hire a statutory employee for your retail business
You will need to provide your statutory employee with a Form W-9 in order for them to verify their tax identification number. The statutory employee does not need to complete a Form W-4 as you will not be withholding their income tax.
In order to safeguard your retail business, you should provide a contract to the statutory employee, detailing their employment status as well as the type of working relationship they are entering into. You should also use a trusted employee scheduling platform that makes it easy for your managers to create schedules and easy for your employees to receive them, click here for .
Paying statutory employees
You need to decide how to pay a statutory employee who is working with your retail business. You can choose to pay the statutory employee, such as a salesperson, a commission on every sale. Alternatively, if your statutory employee is considered to be a ‘piece worker’, you can pay them per piece of work they produce.
You do not withhold your statutory employee’s income taxes from their paycheck. Therefore, they are responsible for making these payments themselves. In this instance, a statutory employee is similar to an independent contractor who pays self-employment tax on their work income.
Your obligation to withhold social security and Medicare taxes from the statutory employee is dependent on the answer to three questions, which have already been detailed above. Essentially, these questions help you to decide on the statutory employee’s status by focusing on:
- Personal services.
- Investment in property or equipment.
- Single payer.
Statutory employees and income tax
You must provide your statutory employee with a Form W-2 and not with a 1099-MISC. A statutory employee differs from an independent contractor because they will still receive a Form W-2 at the end of the year. The Form W-2 that a statutory employee has to complete is a little different from the one that is completed by a conventional, common-law employee. The Form W-2 is marked by a check for the ‘statutory employee’ option in box 13, to signify the person’s employment status.
The statutory employee needs to report their earnings on Schedule C, when they receive the Form W-2. The statutory employee will complete the Schedule C form as an independent contractor. This means that the statutory employee can deduct expenses and could have a business profit or loss. A statutory employee must pay income taxes on their profits, or they could use losses to offset other income.
If the worker is an independent contractor, then they are liable for the Federal Insurance Contributions Act (FICA) taxes in relation to what they earn. Independent contractors do not receive help from your retail business in terms of Medicare taxes and social security taxes. They have to pay the entire share of these taxes. However, a statutory employee gains benefits in this situation. This is because they are seen as an employee, in terms of FICA taxes. Your retail business will pay a share of your statutory employee’s tax bill, so they will have to pay less tax overall.
Statutory employees are regarded as independent contractors in relation to income tax. This means that statutory employees can write-off any unreimbursed business expenses. It is highly likely that the statutory employee’s tax bill will be lower than the tax bill of an independent contractor. However, this does depend on individual circumstances.
It is advisable that your statutory employees keep a close eye on their business expenses during the year. It is their responsibility to retain documentary evidence for their expenses. This is because they will need to show that the expenses they claim are eligible for deduction. Your statutory employee may need to use the services of a professional tax consultant to ensure that all unreimbursed expenses are accounted for.
You also need to keep records of tax payments that you have made for statutory employees that work with your retail business. This will ensure that all entries are represented when you report your tax.
Compliance and statutory employees
In order to comply with the relevant regulations and legislation relating to statutory employees, you must ensure that when you hire an employee, they are accurately classified as a common-law employee or a statutory employee. You are obligated to report the status of your employees to the IRS, using a Form W-2. Additionally, if the statutory employee is eligible, you must also make the right amount of contributions.
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