The following four categories of workers are called statutory employees:
A driver who distributes meat products, vegetable products, fruit products, bakery products, or beverages (other than milk) or picks up and delivers laundry or dry cleaning, if the driver is an 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 material or goods which are supplied by the payer and which must be returned to the payer or a person named by the payer, if the payer also furnishes specifications for the work to be done.
A full-time traveling or city salesperson who works full time on the payer's behalf and turns in orders to the payer from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be items for resale or supplies for use in the buyer's business operation. The work performed must be the salesperson's principal business activity.
Classifying an employee as a statutory employee affects federal tax withholding, Social Security and Medicare taxes, federal unemployment insurance, and Form W-2 reporting.
Federal income tax is not withheld from payments made to statutory employees if the individual would not be considered an employee under the common law tests (refer to IRS Publication 937, Employment Taxes and Information Returns, for information about the common law rules).
Individuals in any of the four categories of statutory employees are subject to FICA if they meet all of these conditions:
The service contract states or implies that almost all of the services are to be performed personally by the individual
and
the individual does not have a substantial investment in the equipment or property used to perform the services (other than an investment in transportation facilities)
and
the services are performed on a continuing basis.
Payments to individuals in category 1 (drivers) or category 4 (full time traveling or city salespersons) are considered subject to federal unemployment taxes if they meet all of these conditions:
The service contract states or implies that almost all of the services are to be performed personally by the individual
and
the individual does not have a substantial investment in the equipment or property used to perform the services (other than an investment in transportation facilities)
and
the services are performed on a continuing basis.
Individuals in category 2 (full-time life insurance sales agents) and category 3 (individuals who work at home) are not considered statutory employees for FUTA purposes, and payments to these individuals are not subject to federal unemployment taxes unless they would be considered employees under the common law tests.
Use Form W-2 to report payments to statutory employees.
Payments are shown in Box 1, 3, and 5 of Form W-2.
Mark box 13 for statutory employees whose earnings are subject to FICA but not subject to FITW (federal income tax withholding).
The statutory employee reports earnings on Form 1040, Schedule C, line 1.