This blog was written by Shelly Lampkin, Payroll Specialist at Helpside.
You’ve determined that your new hire is not an employee under common law rules. And this means that you don’t have to worry about taxes for them, right? Not so fast. Although they may not be employees under common law, some workers are defined as employees for the purposes of employment taxes under the Internal Revenue Code.
What Is A Statutory Employee?
Statutory employees are independent contractors under the common-law rules and treated as employees by statute, if specific requirements are met. The IRS provides guidelines for statutory employees, including designated categories and general requirements. Workers who fall into one of the four categories must also meet some general requirement before qualifying as a statutory employee.
- Agent-Drivers or Commission-Drivers deliver food or beverages (besides milk), pick up or deliver laundry or dry-cleaning services. These drivers are paid on a commission basis, or work as an agent of your company.
- Full-time Life Insurance Salespersons includes workers whose office space and supplies, including advertising materials, are provided by the company to allow them to perform the principal business activity of selling life insurance and/or annuity contracts that are primarily for one company.
- Homeworkers work at home on materials or goods supplied by the employer, according to the employer’s specifications. The goods or materials are returned to the employer or a designated person.
- Homeworkers should not be confused with domestic employees who work in the employer’s home – There is a whole different set of rules that govern domestic workers.
- Travelling or City Salespersons are full-time workers that work for an employer acquiring merchandise orders for resell or supplies to be used in the buyer’s business operation. They acquire these orders from wholesalers, retailers, contractors, operator of hotels, restaurants, or similar establishments. If the salesperson occasionally solicits orders for a different company, they are still considered a statutory employee only for the primary employer.
- The service contract states or implies that all services are to be performed personally by the worker
- They don’t have substantial investments in business equipment or facilities, other than transportation.
- Their work must be part of a continuing relationship with the same payer.
Under the IRS guidelines, employer payments to statutory employees are not subject to Federal income tax (FIT) withholding, but they are subject to Social Security and Medicare taxes (FICA) for both the employee and employer. Employers are exempt from paying FUTA tax on the earnings of a full-time life insurance salesperson if all the earnings are from commissions, and homeworkers who are not employees under the common law. However, employers are not exempt from paying FUTA on the earning of agents or commission drivers and traveling/city salespersons.
What Is A Statutory Non-Employee?
Statutory non-employee is a worker classification that is parallel with independent contractors for tax purposes, even though they may qualify as employees under the common law test. Employers do not need to withhold FIT and FICA from their worker’s earnings and do not need to pay FUTA tax on their wages, if the worker fall into the following categories:
- Licensed Real Estate Agents engaged in performing services in connection with the sale of real property, including advertising or showing property, making appraisals, recruiting, training, or supervising other real estate agents and earns income based on sales.
- Direct Sellers engaged in sales activities of consumer products other than in a permanent retail establishment on a buy-sell or deposit-commission basis, not hours worked. This includes delivery/distribution of newspapers or shopping news.
Statutory non-employees perform work under a written contract that states that the individual will not be treated as an employee for tax purposes. In addition, Companion sitters who are not employees of a placement service are generally treated as self-employed for Federal tax purposes.
If you need assistance determining whether your workers qualify as either a statutory employee or non-Employee, or if you have other related questions, your CPA or tax advisor will be able to help you.