In the United States, a statutory employee refers to a certain type of worker who doesn’t require tax deductions. These employees show similar characteristics as independent contractors but are considered standard employees for the purpose of certain tax withholding, such as Medicare and Social Security tax. That’s why a statutory employee enjoys more flexibility than a standard employee but has less authority than an independent contractor.
Who Can be Eligible as a Statutory Employee?
Based on the context of the IRS, an individual can be considered a statutory employee if they fall under the following criteria:
An employee must perform the jobs personally or by themselves.
An individual cannot have a large portion of investment in the properties or equipment used by their respective companies.
An individual must provide continuous service to one single employer.
According to these eligibility criteria, a statutory employee can be:
Vehicle drivers who provide services to deliver fruits, vegetables, meat, etc.
Individuals who sell different types of insurance for one insurance company.
Full-time traveling sales executives.
What Are the Differences Between an Independent Contractor and a Statutory Employee?
Although a statutory employee and an independent contractor share many similarities, they also have some major differences. For example, statutory employees have to work for only one employer, which is totally opposite to independent contractors. Independent contractors often provide their services to several individuals and companies simultaneously.
Besides, independent workers have to pay all their income taxes by themselves, whereas employers pay most of the taxes on behalf of statutory employees.
Do Statutory Employees Qualify for a SEP?
A Simplified Employee Pension Plan, or SEP, is a retirement plan that most self-employed entities can enjoy. Just like a self-employed person, a statutory employee is qualified to contribute to a Simplified Employee Pension Plan. That means if a recruiter offers a SEP plan, these types of employees will be able to accept it. But an employee has to follow specific criteria for obtaining SEP qualification, such as:
The employee has to be over 21 years of age.
The employee has to work for the same employer for a minimum of 3 years.
The employee must earn a minimum of $600 within a year.
What Benefits Can a Statutory Employee Receive?
For statutory employment, half of the social security taxes as well as medicare should be paid by the employer. But apart from that, these employees don’t receive any major benefits. Unlike a common employee, a statutory employee doesn’t receive a 401(k) plan, vacation time, and health insurance from companies.
Why are Statutory Employees Essential for Modern HR?
The designation of a statutory employee is getting more popular among general employees as it offers various types of benefits. For instance, statutory employees don’t have to pay self-employment taxes because they will be paid by the employer. Besides, this designation offers employees a lot of flexibility and independence, which are not present in standard employee positions.
However, recruiting statutory employees is beneficial for employers too. Because statutory employees don’t enjoy specific benefits such as retirement, vacation time, and health care, hiring these types of employees can save a company valuable money and time.
The position of a statutory employee can be quite appealing to many workers because of its comparative flexibility and advantages. Similarly, many employers are interested in hiring statutory employees as it can be beneficial from a financial standpoint. That’s why having a proper idea about this designation can prove helpful for both the workers and employers.