Statutory employee

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A statutory employee is an independent contractor under American common law who is treated as an employee, by statute, for purposes of tax withholdings. [1] For a standard independent contractor, an employer cannot withhold taxes. Statutory employees are also permitted to deduct work-related expenses on IRS Schedule C instead of Schedule A in the United States tax system. As a result, they are allowed a greater tax deduction for business expenses than standard employees, as Schedule C expenses are not subject to the 2% adjusted gross income threshold as seen with Schedule A. [2]

An independent contractor is a natural person, business, or corporation that provides goods or services to another entity under terms specified in a contract or within a verbal agreement. Unlike an employee, an independent contractor does not work regularly for an employer but works as and when required, during which time they may be subject to law of agency. Independent contractors are usually paid on a freelance basis. Contractors often work through a limited company or franchise, which they themselves own, or may work through an umbrella company.

Common law law developed by judges

In law, common law is that body of law derived from judicial decisions of courts and similar tribunals. The defining characteristic of “common law” is that it arises as precedent. In cases where the parties disagree on what the law is, a common law court looks to past precedential decisions of relevant courts, and synthesizes the principles of those past cases as applicable to the current facts. If a similar dispute has been resolved in the past, the court is usually bound to follow the reasoning used in the prior decision. If, however, the court finds that the current dispute is fundamentally distinct from all previous cases, and legislative statutes are either silent or ambiguous on the question, judges have the authority and duty to resolve the issue. The court states an opinion that gives reasons for the decision, and those reasons agglomerate with past decisions as precedent to bind future judges and litigants. Common law, as the body of law made by judges, stands in contrast to and on equal footing with statutes which are adopted through the legislative process, and regulations which are promulgated by the executive branch. Stare decisis, the principle that cases should be decided according to consistent principled rules so that similar facts will yield similar results, lies at the heart of all common law systems.

Statute formal written document that creates law, including acts, executive orders, and by-laws

A statute is a formal written enactment of a legislative authority that governs a city, state, or country. Typically, statutes command or prohibit something, or declare policy. Statutes are rules made by legislative bodies; they are distinguished from case law or precedent, which is decided by courts, and regulations issued by government agencies.

Contents

Criteria

For an individual to be considered a statutory employee, all of the following conditions must apply: [2]

  1. Services must be personally performed by the individual.
  2. The individual does not have substantial investment in the equipment and property used to perform the services.
  3. The services are performed on a continuing basis for the same payer.

Some examples of persons who may be considered statutory employees are as follows: [2]

  1. A driver distributing non-dairy beverages, meat, vegetable, fruit, or baked goods; or who picks up laundry, if he acts as an agent or is paid by commission.
  2. A life insurance agent whose main business is life insurance and annuity for one company.
  3. Someone who works from home on materials an employer supplies, that must be returned and for which the employer gives work specifications.
  4. A traveling salesperson who turns in orders from wholesalers, retailers, contractors, hotels, or restaurants, either for resale or business use. Work performed must be the principal business activity of the employee.

Advantages over standard employee

Statutory employees occupy an intermediate position between employees and independent contractors from the perspective of the employer. Statutory employees are less expensive to hire than regular employees because the employer does not have to pay unemployment taxes. However, such employees are more expensive to hire than independent contractors because Social Security and Medicare taxes must be paid on wages in the form of FICA tax. [2] Statutory employees pay FICA tax through their employer, and so do not pay self-employment tax; despite this, they must report expenses, income and wage. [3]

Social Security (United States) American system of social security

In the United States, Social Security is the commonly used term for the federal Old-Age, Survivors, and Disability Insurance (OASDI) program and is administered by the Social Security Administration. The original Social Security Act was signed into law by President Franklin D. Roosevelt in 1935, and the current version of the Act, as amended, encompasses several social welfare and social insurance programs.

Medicare (United States) United States single-payer national social insurance program

Medicare is a national health insurance program in the United States, begun in 1966 under the Social Security Administration and now administered by the Centers for Medicare and Medicaid Services (CMS). It provides health insurance for Americans aged 65 and older. It also provides health insurance to younger people with some disability status as determined by the Social Security Administration, as well as people with end stage renal disease and amyotrophic lateral sclerosis. Medicare is funded by a combination of a payroll tax, beneficiary premiums and surtaxes from beneficiaries, and general U.S. Treasury revenue.

The Federal Insurance Contributions Act is a United States federal payroll contribution directed towards both employees and employers to fund Social Security and Medicare—federal programs that provide benefits for retirees, people with disabilities, and children of deceased workers.

Similar to independent contractors, statutory employees may deduct business expense from W-2 earnings. [3]

Internal Revenue Service (IRS) tax forms are forms used for taxpayers and tax-exempt organizations to report financial information to the Internal Revenue Service of the United States. They are used to report income, calculate taxes to be paid to the federal government, and disclose other information as required by the Internal Revenue Code (IRC). There are over 800 various forms and schedules. Other tax forms in the United States are filed with state and local governments.

See also

Misclassification of employees as independent contractors in the United States can occur with respect to tax treatment or the Fair Labor Standards Act.

A subcontractor is an individual or in many cases a business that signs a contract to perform part or all of the obligations of another's contract.

Taxation in the United States taxes are imposed in the United States at each of levels; taxes on income, payroll, property, sales, capital gains, dividends, imports, estates and gifts, as well as various fees

The United States of America has separate federal, state, and local governments with taxes imposed at each of these levels. Taxes are levied on income, payroll, property, sales, capital gains, dividends, imports, estates and gifts, as well as various fees. In 2010, taxes collected by federal, state, and municipal governments amounted to 24.8% of GDP. In the OECD, only Chile and Mexico are taxed less as a share of their GDP.

Related Research Articles

A pay-as-you-earn tax (PAYE) or pay-as-you-go is a withholding tax on income payments to employees. Amounts withheld are treated as advance payments of income tax due. They are refundable to the extent they exceed tax as determined on tax returns. PAYE may include withholding the employee portion of insurance contributions or similar social benefit taxes. In most countries, they are determined by employers but subject to government review. PAYE is deducted from each paycheck by the employer and must be remitted promptly to the government. Most countries refer to income tax withholding by other terms, including pay-as-you-go tax.

Payroll tax

Payroll taxes are taxes imposed on employers or employees, and are usually calculated as a percentage of the salaries that employers pay their staff. Payroll taxes generally fall into two categories: deductions from an employee’s wages, and taxes paid by the employer based on the employee's wages. The first kind are taxes that employers are required to withhold from employees' wages, also known as withholding tax, pay-as-you-earn tax (PAYE), or pay-as-you-go tax (PAYG) and often covering advance payment of income tax, social security contributions, and various insurances. The second kind is a tax that is paid from the employer's own funds and that is directly related to employing a worker. These can consist of fixed charges or be proportionally linked to an employee's pay. The charges paid by the employer usually cover the employer's funding of the social security system, medicare, and other insurance programs. The economic burden of the payroll tax falls almost entirely on the worker, regardless of whether the tax is remitted by the employer or the employee, as the employers’ share of payroll taxes is passed on to employees in the form of lower wages than would otherwise be paid. Because payroll taxes fall exclusively on wages and not on returns to financial or physical investments, payroll taxes may contribute to underinvestment in human capital such as higher education.

Payroll

A payroll is a company's list of its employees, but the term is commonly used to refer to:

Self-employment is the state of working for oneself rather than an employer.

A health savings account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP). The funds contributed to an account are not subject to federal income tax at the time of deposit. Unlike a flexible spending account (FSA), HSA funds roll over and accumulate year to year if they are not spent. HSAs are owned by the individual, which differentiates them from company-owned Health Reimbursement Arrangements (HRA) that are an alternate tax-deductible source of funds paired with either high-deductible health plans or standard health plans.

In the United States income tax system, adjusted gross income (AGI) is an individual's total gross income minus specific deductions. Taxable income is adjusted gross income minus allowances for personal exemptions and itemized deductions. For most individual tax purposes, AGI is more relevant than gross income.

Three key types of withholding tax are imposed at various levels in the United States:

A Simplified Employee Pension Individual Retirement Arrangement is a variation of the Individual Retirement Account used in the United States. SEP IRAs are adopted by business owners to provide retirement benefits for themselves and their employees. There are no significant administration costs for a self-employed person with no employees. If the self-employed person does have employees, all employees must receive the same benefits under a SEP plan. Since SEP IRAs are a type of IRA, funds can be invested the same way as most other IRAs.

A withholding tax, or a retention tax, is an income tax to be paid to the government by the payer of the income rather than by the recipient of the income. The tax is thus withheld or deducted from the income due to the recipient. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require withholding tax on payments of interest or dividends. In most jurisdictions, there are additional withholding tax obligations if the recipient of the income is resident in a different jurisdiction, and in those circumstances withholding tax sometimes applies to royalties, rent or even the sale of real estate. Governments use withholding tax as a means to combat tax evasion, and sometimes impose additional withholding tax requirements if the recipient has been delinquent in filing tax returns, or in industries where tax evasion is perceived to be common.

S corporation

An S corporation, for United States federal income tax purposes, is a closely held corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. In general, S corporations do not pay any income taxes. Instead, the corporation's income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns.

Health Reimbursement Account is a notional derivative of a Health Reimbursement Arrangement (HRA), a type of US employer-funded health benefit plan that reimburses employees for out-of-pocket medical expenses and, in limited cases, to pay for health insurance plan premiums.

Income tax in the United States

Income taxes in the United States are imposed by the federal, most state, and many local governments. The income taxes are determined by applying a tax rate, which may increase as income increases, to taxable income, which is the total income less allowable deductions. Income is broadly defined. Individuals and corporations are directly taxable, and estates and trusts may be taxable on undistributed income. Partnerships are not taxed, but their partners are taxed on their shares of partnership income. Residents and citizens are taxed on worldwide income, while nonresidents are taxed only on income within the jurisdiction. Several types of credits reduce tax, and some types of credits may exceed tax before credits. An alternative tax applies at the federal and some state levels.

United States v. General Dynamics Corp., 481 U.S. 239 (1987), is a United States Supreme Court case, which hold that under 162(a) of the Internal Revenue Code and Treasury Regulation 1.461-1(a)(2), the "all events" test entitled an accrual-basis taxpayer to a federal income tax business-expense deduction, for the taxable year in which (1) all events had occurred which determined the fact of the taxpayer's liability, and (2) the amount of that liability could be determined with reasonable accuracy.

The Commonwealth of Puerto Rico is a territory of the United States and Puerto Ricans are US citizens. However, Puerto Rico is not a US state. Because of this, only Puerto Rican residents who are government employees, and those with income sources outside of the territory, pay federal income tax. All other employers and employees pay no federal income taxes. However, residents of Puerto Rico and businesses operating in Puerto Rico do pay some federal taxes, and the commonwealth's government has its own taxes as well.

The combination of payroll taxes withheld from a household employee and the employment taxes paid by their employer are commonly referred to as the nanny tax. Under current law, any family or individual that pays a household employee more than $2,100 a year must withhold and pay Social Security and Medicare taxes, also known as FICA. The law mandates that all domestic workers, such as cooks, nannies, housekeepers and gardeners, are subject to the nanny tax. Federal unemployment insurance taxes must also be paid if the household pays any number of employees a total of $1,000 or more in a calendar quarter. State unemployment insurance taxes have the same requirement with the exceptions of California ($750), New York ($500), and Washington, D.C. ($500) have lower thresholds.

References

  1. ↑ See generally Internal Revenue Code section 3121(d)(3), at 26 U.S.C.   § 3121.
  2. 1 2 3 4 "Statutory Employees". IRS.gov. Retrieved Jan 9, 2015.
  3. 1 2 Brabec, Barbara (Nov 26, 2014). How to Maximize Schedule C Deductions & Cut Self-Employment Taxes to the BONE -. Barbara Brabec Productions. p. 107. ISBN   978-0985633318.

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