What are statutory employees? (https://www.irs.gov/businesses/small-businesses-self-employed/statutory-employees) If you run a small business, one of the most important decisions you’ll make is how you classify your workers: are they employees or independent contractors?
It’s not just a paperwork issue—it’s a tax decision with real financial consequences. If you classify a worker as an independent contractor, you don’t have to pay the employer’s share of Social Security and Medicare taxes, withhold income taxes, or pay unemployment tax (FUTA). That’s why many businesses prefer this route.
But beware: the IRS has rules in place to keep you honest.
The “Right of Control” Test
The IRS uses what’s called the right of control test to decide whether someone qualifies as a contractor. If you only control the outcome—not how the work is done—the worker is likely an independent contractor. For example, if you hire a graphic designer to deliver a logo by Friday, but you don’t tell them when or how to work, they pass this test.
That’s usually where the classification process ends. But not always…
The Statutory Employees Exception
Some workers meet the definition of an independent contractor but are still considered employees for certain tax purposes. These folks are called statutory employees, and if you hire one, you have to:
- Pay your share of Social Security and Medicare taxes
- Withhold their share of Social Security and Medicare taxes
- Pay FUTA tax (for some categories)
However, you don’t have to withhold federal income tax—except when the worker is a corporate officer.
Who Counts as a Statutory Employee?
The IRS has a short list:
- Corporate officers
- Drivers delivering food, beverages, or laundry
- Full-time life insurance salespeople
- Traveling or city-based salespeople
- Certain at-home workers
But here’s the good news: not everyone in these roles is automatically a statutory employee.
To qualify, the worker must:
- Personally perform the work
- Have no significant investment in equipment or facilities
- Maintain an ongoing relationship with your business
If even one of these conditions is missing, you may not need to treat them as an employee.
Final Word
Misclassifying a worker can lead to IRS penalties, back taxes, and a big headache. If you’re unsure, or if you’re hiring in any of the categories above, now is the time to double-check your worker relationships.
Need help reviewing how your workers are classified?
Let Ken-Mar Tax help you “Think Outside the Block.”
Schedule a consultation today and get ahead of the IRS.
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If you’ve been frustrated dealing with the IRS, or you just don’t want to deal with the IRS, contact Ken Weinberg to explain your situation and find out what Ken-Mar Tax would charge to handle your situation and avoid dealing with the IRS all together.
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