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2024 California Statutory Employee: Are You Misclassified?

In California, a statutory employee is someone who, while technically an independent contractor under common law, is treated as an employee for tax withholding purposes due to specific legal criteria. This designation primarily affects how employers withhold taxes and is defined under federal tax law, not just California state law.
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How is a Statutory Employee Defined in California?

A statutory employee in the context of employment law refers to a worker designated as an employee by statute for tax withholding purposes, even though they might be considered an independent contractor under common law rules.

This classification affects only a small portion of the workforce, as most employment relationships are governed by common law rules, which are assessed through multi-factor tests by agencies such as the IRS and the Employment Development Department (EDD).

Statutory employees include workers performing services for an individual or an entity such as a corporation or LLC – IRS Stated.

Specific categories of workers can qualify as statutory employees, including:

  • Agent drivers or commission drivers who distribute products like meat, fruits, vegetables, bakery items, beverages (excluding milk), or offer laundry or dry-cleaning services.
  • Full-time traveling or city salespersons (excluding agent drivers and commission drivers) who take orders for merchandise or supplies from businesses such as wholesalers, retailers, contractors, and operators of hotels, restaurants, and similar establishments.
  • Home workers who perform domestic services under the guidance of the person they serve.

This unique employment status is designed to streamline the tax process for workers who fall into these specific categories, ensuring proper tax handling by the entities or individuals they work for.

Also Read: Employee Misclassification Explained

What is the Difference Between a Statutory Employee and a Regular Employee?

According to SCLG, common law employees are California workers who have been classified as employees through legal tests that come from California Supreme Court decisions, rather than from statutes” [1].

The classification process for these workers involves two primary legal tests designed to distinguish employees from independent contractors. These are:

  • ABC test
  • The “manner and means” test

Both tests scrutinize the actual conditions of the working relationship. The central criterion is the degree of control that the hiring entity exercises over the worker. If significant control is exerted, the worker is generally classified as an employee. Conversely, if the hiring entity does not have substantial control, the worker may be classified as an independent contractor under common law.

This classification system is distinct from that of a statutory employee, whose employment status is defined strictly by specific legislative categories. These statutory definitions do not typically consider the nuanced details of the worker’s day-to-day job functions.

Also Read: California Exempt Employee Salary Minimum

Is it Better to be a Statutory Employee?

This dual classification means that employers contribute to half of the Social Security and Medicare taxes for statutory employees.

According to Bamboo HR, statutory employees do have the perk of being treated like an independent contractor for income tax purposes, while still being treated like a common law employee for Social Security and Medicare tax purposes [2].

However, it’s typical for statutory employees to not receive traditional employment benefits such as health insurance, paid vacation, or retirement plans like a 401(k), which are more commonly associated with common law employees.

What are the Disadvantages of Being a Statutory Employee?

One downside for statutory employees is that they lack the benefits that traditional employees often enjoy, such as health insurance, paid leave, and retirement plans. Additionally, unlike independent contractors, they do not possess the autonomy to choose their clients and manage their own schedules.

In the U.S., the majority of workers fall under the non-statutory category as defined by common law. These non-statutory employees typically receive a range of benefits including health insurance, paid vacation, retirement plans, and other perks that are not available to statutory employees or independent contractors.

Filling Out a W-2 for a Statutory Employee

Independent contractors are issued a Form 1099-MISC, while both employees and statutory employees receive a Form W-2.

When preparing a Form W-2 for a statutory employee, it’s important to check the “statutory employee” box located in Box 13 of the form.

Earnings for statutory employees are categorized as “other compensation” and should be recorded in Box 1 of the W-2 form.

You should also document the statutory employee’s wages that are subject to Social Security and Medicare taxes in Boxes 3 and 5, and note the amounts withheld for these taxes.

It’s crucial to distribute Forms W-2 to both employees and statutory employees by the deadline of January 31 each year.

Upon receiving their Form W-2, statutory employees should proceed to complete their personal tax returns. They should attach Schedule C, Profit or Loss from Business to their Form 1040. In contrast to regular employees, statutory employees are not required to complete Schedule A for Itemized Deductions.

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