Think you’ve classified your workers correctly? There’s one exception you can’t afford to miss: statutory employees.

Most business owners understand the basic difference between employees and independent contractors. But buried in the tax code is a third category—statutory employees—and misunderstanding this group could expose your business to IRS penalties.

At Polaris Tax & Accounting, we help businesses across Florida structure their workforce correctly to minimize tax risk. Here’s what every employer should know:

What Are Statutory Employees?

A statutory employee is a worker who looks like an independent contractor, but the IRS says you must treat them as an employee for specific tax purposes.

Unlike regular W-2 employees, you don’t have to withhold federal income tax—but you do have to pay and withhold Social Security and Medicare (FICA) and possibly federal unemployment tax (FUTA).

Statutory employees fall into a few narrow categories:

  • Corporate officers receiving compensation
  • Full-time life insurance salespeople
  • Drivers delivering food, beverages, or laundry
  • Homeworkers who work at home on materials supplied by the employer
  • City or traveling salespeople who solicit orders from wholesalers or retailers

Why Does This Matter?

Many businesses misclassify statutory employees as independent contractors to avoid payroll tax. That’s a red flag for the IRS.

Here’s what you must do if you’re paying someone who qualifies:

  • Withhold and pay FICA taxes (Social Security and Medicare)
  • Pay federal unemployment tax (in some cases)
  • Report wages on Form W-2 with Box 13 marked for statutory employee

You do not need to withhold federal income tax—unless they’re a corporate officer.

How Do You Know if a Worker Qualifies?

Statutory employee status only applies if all three of the following are true:

  1. The worker personally performs the services
  2. The worker has no substantial investment in tools or equipment
  3. There is an ongoing relationship between the worker and your business

If even one of these is missing, the person may not qualify as a statutory employee—and may be better classified as a 1099 contractor.

Real-Life Examples

✅ You hire a traveling sales rep to solicit orders for your product, and they work full-time for you. You pay them a base + commission. They meet all 3 requirements. → Statutory employee.

❌ You hire a freelance designer with their own LLC and design studio. They bill you per project. → Independent contractor.

✅ Your corporate officer receives a monthly check. Even if they don’t work “day-to-day,” the IRS considers them an employee. → Withhold income tax and FICA.

What You Should Do Now

If your company uses independent contractors, double-check whether any of them fall into the statutory employee category. Incorrect classification could mean:

  • Back payroll taxes
  • Penalties and interest
  • IRS scrutiny of other worker relationships

📍 At Polaris, we help businesses in Plantation and beyond assess contractor relationships and avoid nasty surprises.

👉  Schedule a consultation today with our team and stay ahead of the IRS.