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10770: 1040 - Statutory Employees


1040 Individual Data Entry

What is a statutory employee? How do I enter wages for a statutory employee?

 

What is a statutory employee?

Statutory employees occupy a sort of middle ground between independent contractors and regular employees. They can be defined as 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. 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.

The IRS provides this description (Statutory Employees):

"If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute (statutory employees) for certain employment tax purposes if they fall within any one of the following four categories and meet the three conditions described under Social Security and Medicare taxes, below.

  • 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.
  • An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.
  • A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson's principal business activity."

Regarding withholding:

"You must withhold social security and Medicare taxes from the wages of statutory employees if all three of the following conditions apply.

  • The service contract states or implies that substantially all the services are to be performed personally by them.
  • They don't have a substantial investment in the equipment and property used to perform the services (other than an investment in facilities for transportation, such as a car or truck).
  • The services are performed on a continuing basis for the same payer."

Publication 15-A, Employer's Supplemental Tax Guide, page 5-6. See also the Salesperson section in Publication 15-A.

How do I enter wages for a statutory employee in Drake Tax?

Wages and expenses for statutory employees should be entered in the following manner:

Enter the wages on the W-2 as you normally would, then be sure to:

  1. Select the Statutory Employee box on line 13, and select the Schedule C code from the Special Tax Treatment drop list that matches to this employee.

    Making one entry, but not both, generates EF Message 5219.

    INCONSISTENT DATA ENTRY: There is conflicting data entry on screen W2.
    Either:
    - Box 13, "Stat employee," was marked for a statutory employee but no selection was made from the "Special tax treatment" drop list, directing the wages to flow to a particular Schedule C.
    - A selection was made for a Schedule C from the "Special tax treatment" drop list but box 13, "Stat Employee," was not marked for a statutory employee.
    Return to screen W2 and correct your entries.

  2. Enter all the expenses on the correct C screen for the employee. Page C-5 of the Schedule C instructions states –

"If you received a Form W-2 and the "Statutory employee" box in box 13 of that form was checked, report your income and expenses related to that income on Schedule C. Enter your statutory employee income from box 1 of Form W-2 on line 1 of Schedule C and check the box on that line. Social security and Medicare tax should have been withheld from your earnings; as a result, you do not owe self-employment tax on these earnings. Statutory employees include full-time life insurance agents, certain agent or commission drivers and traveling salespersons, and certain homeworkers.

If you had both self-employment income and statutory employee income, you must file two Schedules C. You cannot combine these amounts on a single Schedule C"


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