Statutory Employees

Statutory employees occupy a sort of middle ground between independent contractors and regular employees. They are workers in certain occupations who would not be considered employees under the usual rules, but who have been declared employees under the federal tax laws so that their employers must withhold FICA taxes on their income.

If you are a classified as a statutory employee, you must report your income on Schedule C, although your employer should give you a W-2 Form that reports this income and shows that payroll taxes were withheld on it.

Because FICA taxes have already been paid by your employer on this income, you don't have to file a Schedule SE and pay Self-Employment Contributions Act (SECA) tax on it. Just be sure to check the box on Line 1 on your Schedule C or C-EZ, so that the IRS doesn't go looking for a Schedule SE that's not there.

If you have both statutory employee income and other income from your own business, do not combine these two types of income on a single Schedule C. You must file two Schedule Cs, and only the income from your non-statutory-employee business will flow through to your Schedule SE.

Occupations that may be considered statutory employees are:

• Full-time life insurance salespersons who work primarily for one insurance company.
• Agent drivers and commission drivers who deliver specified products — individuals who
  • operate their own trucks or the trucks of the persons for whom they perform services,
  • serve customers designated by their principals and customers they solicit on their own initiative,
  • make wholesale or retail sales, and
  • are paid commissions on their sales or earn the difference between what they charge their customers and what they pay their principals for the products or services they sell.
  Such drivers are "statutory employees" if they distribute beverages (other than milk), meat, vegetables, fruit, or bakery products, or if they pick up and deliver laundry or dry cleaning.
• Traveling or city salespersons (other than agent drivers or commission drivers) who work full time on the principal's behalf and remit orders from customers who are retailers, wholesalers, contractors, or operators of hotels, restaurants, or other businesses whose primary function is the furnishing of food or lodging. The orders must be for items that their customers will resell or will use as supplies in their business operations.
• Homeworkers who work on a contract or piecework basis, in their own homes or in the homes of others. For example, persons hired to type up correspondence and to do other word processing jobs on their home computers would be homeworkers.

Statutory employees are entitled to deduct their business expenses on Schedule C, and must pay income taxes on their net income since their employers are not required to withhold income taxes from their pay.

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