Key Takeaways
- Statutory employees: employees for FICA, report on Schedule C.
- Four categories: drivers, insurance agents, home workers, salespersons.
- Three conditions: personal service, no substantial investment, continuing relationship.
- Statutory non-employees: real estate agents, direct sellers, companion sitters.
- Non-employees: output-based pay + written contract.
- W-2 Box 13 checked = statutory employee.
Last updated: January 2026
Statutory Employees & Non-Employees
Why This Matters for the Exam
Statutory classifications override common law. Know the four categories and the conditions.
Expect at least 2-3 questions on statutory classifications.
Statutory Employees
| Feature | Treatment |
|---|---|
| FICA | Treated as employee (withheld) |
| Income reporting | Schedule C (not W-2 wages) |
| Expenses | Deductible on Schedule C |
| SE Tax | NOT owed (FICA already withheld) |
The Four Categories
| Category | Description |
|---|---|
| Drivers | Agent/commission drivers (food/beverages, NOT milk) |
| Insurance agents | Full-time life insurance, primarily one company |
| Home workers | Work at home, materials from employer |
| Salespersons | Full-time traveling/city, one principal |
Three Mandatory Conditions
| Condition | Requirement |
|---|---|
| 1 | Personal service (substantially all) |
| 2 | No substantial investment (except transportation) |
| 3 | Continuing relationship (same payer) |
Statutory Non-Employees
| Category | Requirements |
|---|---|
| Real estate agents | 90%+ pay based on sales, written contract |
| Direct sellers | In-home sales, output-based pay, written contract |
| Companion sitters | Personal attendance, household care |
Real Estate Agent Trap
| Scenario | Status |
|---|---|
| 100% commission | Statutory non-employee |
| $2,000/month base + commission | May LOSE non-employee status |
W-2 Box 13
| Indicator | Meaning |
|---|---|
| Box 13 checked | Statutory employee |
| Signal | Use Schedule C, not W-2 wages |
Real-World Scenario
Scenario: Full-time life insurance agent, one carrier, uses own car, no other investment.
- Category: Insurance agent (one of four).
- Conditions: Personal service, no substantial investment, continuing.
- Result: Statutory employee—Schedule C for income/expenses.
On the Exam
Expect 2-3 questions on statutory, typically:
- Category Questions: "Which worker is statutory employee?"
- Expense Questions: "How do statutory employees report expenses?"
- Non-Employee Questions: "What makes real estate agent non-employee?"
The key is to remember: Four categories (drivers, insurance, home, sales). Three conditions. Schedule C + W-2 Box 13 checked. Non-employees = output pay + written contract.
Test Your Knowledge
Which worker is most likely statutory employee (with conditions met)?
A
B
C
D
Test Your Knowledge
How do statutory employees report business expenses?
A
B
C
D
Test Your Knowledge
Real estate agent requirement for statutory non-employee?
A
B
C
D