Statutory employee what is

ALS determined which schools she would service and supplied the material and format for submitting the data. At these sessions she was given a training manual, a CD with the template on it, and instructions on how to collect and enter data.

VanZant e-mailed the templates to ALS after the data were entered. VanZant claimed that she was a statutory employee under the Sec. Although she met the requirement of performing her home tasks under the specifications of ALS, the IRS argued that she failed the overall test because she did not receive materials or goods from ALS, as required by the section. Essentially, the IRS argued that to be a home worker the taxpayer would have to be assembling items from materials in the manner that assembly is understood in the manufacturing sense.

The Tax Court rejected this narrow definition. It noted that neither the Code nor regulations provide any guidance on the definition of goods or materials:.

Petitioner was required to use the ALS template to perform her duties. The ALS template is, therefore, a material. Thus, petitioner performed services on materials or goods furnished by such person, which are required to be returned to such person. Since the Tax Court issued a summary opinion in VanZant , tax advisers cannot cite it as precedent.

A critical issue in obtaining statutory employee status is that the employee not provide his or her own materials, other than transportation. Tax professionals who advise employers may want to emphasize that if an employer wants home workers to be classified as independent contractors as opposed to statutory employees, it cannot provide them with materials. If this is the standard for employer-provided materials that courts are going to apply in a world of virtual employment from the home, many employers may find that they are providing employees the materials needed to complete their tasks.

Tax advisers can also counsel employers that, even when independent contractor status is not warranted for a home employee, statutory employee status will be advantageous for both the employer and the employee. The employer will not have to withhold income tax or pay FUTA.

The employer also saves by not having to provide office space to the employee. Since the employee can directly offset expenses against income, the employer can use this as a selling point on the advantages of home employment. Probably the most common type of statutory employee at present is the traveling salesperson defined in Sec.

Too much control by the employer will result in common law employee status. In Cole , 22 the taxpayer traveled extensively on behalf of two employers for whom he worked at different periods of time. Neither employer had checked the box on the form W-2 that identifies a statutory employee. For both employers, Cole was directed to the clients, told where he needed to go, and what needed to be done. With the other employer, he was required to turn in time sheets signed by the client stating that the work had been done satisfactorily.

He received a regular salary at one employer and an hourly wage at the other, and he did not receive the commissions one would expect to find with a traveling salesperson. Both employers exercised a great degree of control over his work.

Therefore, the court held he was a common law employee for both employers. The problems that can arise in classifying a traveling salesperson were perhaps best illustrated in Hathaway.

The employer withheld FICA and income taxes. Initially, Hathaway deducted his expenses as itemized deductions on Schedule A. However, he amended his returns for two years, claiming that he was a statutory employee, and filed a Schedule C for both years. The Tax Court examined his duties performed on behalf of the employer.

He was found to have a great deal of control over his work. The employer did not control, or have the right to control, how Hathaway conducted his sales activities, the means by which he solicited sales, or the results to be obtained. Hathaway was not required to use specific sales techniques or materials in making sales presentations or finding customers.

The employer did not provide sales training or require its sales representatives to attend sales meetings. Hathaway controlled the manner in which he solicited sales and the scheduling of his time. The court also found it important that the employer did not provide leads to its sales representatives, did not require them to pursue or report on leads, and did not have the right to change the method by which they solicited sales.

Other relevant factors listed by the court were that Hathaway 1 was paid on a commission basis, 2 paid his own business expenses, 3 paid assistants in certain circumstances, 4 paid the costs of maintaining a business headquarters, 5 purchased materials and equipment from his employer, and 6 guaranteed customer credit in some situations.

One of the factors arguing against statutory employee status was that Hathaway had a substantial investment in facilities, an item indicating independent contractor status. In looking at all these factors, the court held that he was an independent contractor, thereby allowing him to amend his returns by filing a Schedule C.

However, the court stated that it would not rule on the issue of whether he was a statutory employee. The Hathaway decision will probably be of very limited use to taxpayers unless they are in the exact same situation. In the recent case of Rosato , 24 the taxpayer set his own hours, was not told when to work, could take days off as he chose, and could perform some of his sales work from home.

He even paid half the cost of his secretary and administrative assistant and a portion of the cost for his office. However, the understanding he had with his employer was that he was an at-will employee, and the employer did not check the statutory employee box on the Form W Rosato also participated in employer fringe benefit programs, a sign of common law employee status.

The Tax Court noted that, unlike Hathaway, Rosato was required to attend meetings and had superiors who oversaw and supervised his performance.

In a subsequent case, 26 the court held that even though the IRS auditor had allowed statutory employee status for a traveling salesperson in and , this would not preclude the IRS from asserting common law employee status for the years and Statutory employees are allowed the benefit of direct deductions against income enjoyed by Schedule C filers without the self-employment tax burden such filers face.

However, the ability to file as a statutory employee applies only to the categories of employees listed in Sec. To be classified as a statutory employee, the worker must exhibit more of the traits of an independent contractor than of a common law employee. Generally, this means that the employee has control over how work is accomplished with a minimum amount of input by the employer.

Courts will often look to the intent of the parties to determine statutory employee status. A critical component of intent is whether the employer has checked the Form W-2 box identifying a statutory employee.

However, as shown in Hathaway , even when the employer fails to check the box and withholds income taxes—factors indicating common law employee status—the overall facts may support allowing the worker to file a Schedule C. The While this might seem complicated at first, it is actually a fairly simple solution to a complex employment situation. The conditions which must be met to be considered a statutory employee are rather narrow. In fact, there are just four categories of workers who qualify as statutory employees under the current tax code:.

As you can see, these categories will apply to only a small minority of workers in the United States. Those who are included, however, will need to know how to file their taxes properly based on this unique employment status. Unlike an independent contractor, a statutory employee will still receive a W-2 at the end of the year. A statutory employee W-2 is slightly different from one issued to a standard, common law employee. When you receive this type of W-2, it is important that your earnings are reported on Schedule C, where you will be able to report allowable expenses along with your income.

If you work as a true independent contractor, you are responsible for all of the FICA taxes related to your income. This is why self-employed filers are often surprised at their first income tax bill after deciding to work independently. When FICA taxes are added to standard income taxes, the overall tax bill can be rather significant.

As a statutory employee, your employer is paying their share of FICA tax es , and your overall tax bill will be lower as a result. Since you are still considered an independent contractor for income tax purposes, you can also write off unreimbursed employee business expenses. While each case will vary depending on specifics, it is likely that your tax responsibility will be lower at the end of the year as a statutory employee as opposed to a fully independent contractor.

Of course, it will be important to track your business expenses accurately throughout the year. Withhold Social Security and Medicare taxes from the wages of statutory employees if all three of the following conditions apply. More In File. A driver who distributes beverages other than milk or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your 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.