Question 340: What are the implications of being a statutory employee for unemployment benefits, since the employer is not required to pay into the unemployment fund for these employees?
I wish we had a better term for folks in that position than "statutory employee," because it is quite misleading.
The first thing you have to realize if your company gives you a W-2 with the Statutory Employee box checked, it means they think you aren't their employee. They think you are an independent contractor. [Code §3121(d)(3); Colvin v. Commissioner, T.C. Memo. 2007-157 (2007).]
Where does this phrase come from? The FICA rules have their own statutory definition of employee. If you are an officer of the company, or a common-law employee, then you are an employee for FICA tax. But the law doesn't stop there. It adds four categories of workers who are not actually employees (i.e., the company claims it doesn't have sufficient control over them to call them employees) but whom the law treats as employees for FICA taxes. The four categories are:
- Agent-drivers or commission-drivers who distribute meat, vegetables, fruit (or meat, vegetable or fruit products), baked goods, beverages other than milk, or laundry or dry-cleaning services for a business,
- Full-time life insurance salespeople,
- Certain home workers, and
- Certain traveling or city salespeople.
What does this mean for unemployment benefits? If the company thinks you are in this category, they think you are already unemployed! You certainly aren't their employee. But in some circumstances the law requires them to pay Federal Unemployment Tax (FUTA) anyway. The FUTA rules use the FICA definition of employee, which means it includes statutory employees. But it is limited to statutory employees in categories 1 and 4. [Code §3306(i); see also IRS Publication 15-A.]
Where does that leave us? Statutory employees who are full-time life insurance salespeople or home workers are not employees for purposes of FUTA. They have no unemployment benefits. Because they are independent contractors, they need to take care of themselves. Statutory employees who are drivers or traveling or city salespeople are employees for purposes of FUTA.
For a complete discussion of statutory employees, see Chapter 4 of Who's the Employer. The 7th edition is coming in less than 2 weeks.