13.3 Statutory Employees & Non-Employees
Key Takeaways
- Statutory employees: FICA withheld by employer; income reported on Schedule C; NO SE tax (FICA already paid).
- Four categories: agent/commission drivers; full-time life insurance salespersons; home workers; full-time traveling/city salespersons.
- Three mandatory conditions: personal service, no substantial investment (except transportation), continuing relationship.
- Statutory non-employees: licensed real estate agents, direct sellers, certain companion sitters.
- Non-employees require output-based pay plus written contract.
- W-2 Box 13 "Statutory employee" must be checked — signals Schedule C treatment.
Why This Matters for the Exam
Statutory classifications override the common law test. Know the four categories, the three conditions, and the W-2 Box 13 signal. The statutory framework was not changed by OBBBA.
Expect at least 2-3 questions on statutory classifications.
Statutory Employees
| Feature | Treatment |
|---|---|
| FICA | Treated as employee — employer withholds employee share (6.2% SS up to $176,100 wage base; 1.45% Medicare) |
| Income reporting | Schedule C (not W-2 wages on Form 1040 line) |
| Expenses | Deductible on Schedule C against the same income |
| SE Tax | NOT owed — FICA already withheld through W-2 |
The Four Categories
| Category | Description |
|---|---|
| Drivers | Agent or commission drivers distributing meat, vegetables, fruit, bakery, beverages (other than milk), or laundry/dry-cleaning |
| Insurance agents | Full-time life insurance salespersons working primarily for one company |
| Home workers | Work performed at home on materials/goods supplied by the employer, returned per employer specifications |
| Salespersons | Full-time traveling or city salespersons soliciting orders from wholesalers, retailers, contractors, hotels, restaurants — for one principal |
Three Mandatory Conditions
| Condition | Requirement |
|---|---|
| 1 | Service contract states (or implies) substantially all services to be performed personally |
| 2 | Worker has no substantial investment in equipment used for the work (except transportation) |
| 3 | Services are performed on a continuing basis for the same payer |
Statutory Non-Employees
| Category | Requirements |
|---|---|
| Licensed real estate agents | Substantially all pay (typically 90%+) tied to sales output, not hours; written contract states non-employee for tax purposes |
| Direct sellers | Sell consumer products in homes/non-permanent retail locations; output-based pay; written contract |
| Certain companion sitters | Personal attendance, household care under specific Treasury rules |
Statutory non-employees are treated as self-employed contractors — they pay SE tax and report on Schedule C, with no FICA withheld.
Real Estate Agent Trap
| Scenario | Status |
|---|---|
| 100% commission, written non-employee contract | Statutory non-employee |
| $2,000/month base + commission | May LOSE statutory non-employee status (pay no longer substantially based on output) |
W-2 Box 13
| Indicator | Meaning |
|---|---|
| Box 13 "Statutory employee" checked | Worker is statutory employee |
| Signal | Report wages on Schedule C; deduct related expenses there; no SE tax |
Real-World Scenario (2025)
Scenario: A full-time life insurance agent works for one carrier in 2025, uses her own car, has no other substantial investment, and provides services personally on a continuing basis.
- Category: Insurance agent (one of the four categories).
- Conditions: Personal service, no substantial investment (transport excepted), continuing relationship — all met.
- Result: Statutory employee — W-2 with Box 13 checked, Schedule C for income/expenses, no SE tax.
On the Exam
Expect 2-3 questions on statutory classifications, typically:
- Category Questions: "Which worker is a statutory employee?"
- Expense Questions: "How do statutory employees report expenses?"
- Non-Employee Questions: "What makes a real estate agent a statutory non-employee?"
The key is to remember: Four categories (drivers, insurance, home, sales). Three conditions. Schedule C + W-2 Box 13 checked. Statutory non-employees = output pay + written contract.
Which worker is most likely statutory employee (with conditions met)?
How do statutory employees report business expenses?
Real estate agent requirement for statutory non-employee?