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This article provides general information only and is current as of the date of publication. The rules discussed in this article could change at any time. Nothing in this article is intended to or should be construed as legal or tax advice. Please consult an attorney or qualified tax professional for legal and/or tax advice or if you have any questions.
When you decide to hire, one of the considerations is whether to hire a 1099 contractor or a W-2 employee. There are pros and cons to each, depending on the work you need help with, the stage of your business, and the kind of expertise you need. If you’re considering hiring an independent contractor, you should know that there’s a type that receives special treatment when it comes to federal tax withholdings. They are called statutory employees.
What is a statutory employee?
A statutory employee is a contractor that, by the nature of their work, qualifies to be treated like a W-2 employee when it comes to federal employment taxes. A statutory employee falls into one of these four categories:
- A driver who is your agent or gets paid in commissions: Works distributing beverages (excluding milk), meat, vegetables, fruit, or bakery goods; or works delivering laundry or dry cleaning.
- Home workers: Works on materials or goods that you supply and must be returned to you or a person you name responsible. You specify how this work should be done.
- Life insurance sales agent: Works primarily for one company, selling life insurance or annuity contracts, or both.
- A full-time traveling or city salesperson: Works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar businesses. The goods this salesperson works to sell must be for resale by the customer they sell to or supplies to be used in that customer’s business.
The pattern amongst these kinds of workers is that they are either paid in commissions or they rely on your business for supplies or resources. From the perspective of the employer, statutory employees are essentially in between independent contractors and employees when it comes to employment taxes. Like independent contractors, statutory employees pay their own income taxes, but as with employees, you need to withhold and pay Social Security and Medicare taxes. Don’t worry, it’s not as complicated as you think.
How do I pay a statutory employee?
Classifying someone you hire as a statutory employee comes into play when you pay them. We don’t mean the way their wage is earned. They can be paid their wage in any form (commissions, by piece, etc.) regardless of their tax status.
When it comes to income taxes, statutory employees pay their own income taxes. For this reason, they fill out a W-9 rather than a W-4, and you’ll likely have a contract or documentation scoping their work for you. However, they do fill out a W-2 form rather than a 1099-MISC. When they get to box 13, they identify themselves as a statutory employee.
To determine if you must withhold Social Security and Medicare taxes (FICA taxes) from these employees, all three of the following must be true:
- Personal services: If the service contract with that employee states that substantially all the services are to be performed personally by them.
- Investment in equipment or property: If the work they’re doing includes materials or equipment that they didn’t make a substantial investment in (e.g., someone is painting your house and you buy the paint and all the equipment required).
- Single payer: The employee performs the same service for the same person paying them consistently.
In addition, your business may have separate withholding obligations under state and city requirements. Be sure to consult a qualified tax professional to help you determine what obligations apply.
Once you’ve determined that the employee you have is, in fact, a statutory employee, and you know what withholdings to deduct from their wages, you need to choose a payroll processor that supports your needs. Square Payroll can help you pay your employees, calculate withholdings, and file employment taxes on your behalf. For one low monthly cost, Square Payroll makes paying employees of any kind easy.
Please note that the information contained in this article is limited in scope and is only intended as a high-level overview of the topics discussed. The information is current as of the publication date only, and the laws (and associated agency and/or judicial interpretations) on the topics discussed could change at any point in the future. Square, Inc. (including its affiliates, subsidiaries, employees, officers, directors, attorneys, and tax advisors) undertakes no obligation to update this article for future changes in the law. In addition, laws vary by jurisdiction, and this article does not attempt to address all jurisdictions – for example, states, counties, or cities often have requirements that differ from federal law. Nothing in this article is or should be used as tax or legal advice. In particular, this article cannot be relied upon for the purposes of avoiding taxes, penalties, or other obligations under applicable law. For guidance or advice specific to your business, you should consult with a qualified tax and/or legal professional.
