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Statutory Employees vs. Subcontractors – IRS Has Best Basic Definitions

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Statutory Employees vs. Subcontractors – IRS Has Best Advice

Outside Statutory Employees view
Wikimedia Commons – DXR

I have received a large number of emails since the last time that I posted on Statutory Employees. I first posted on statutory employees after a South Carolina Supreme Court decision separated the employment status of statutory employees and subcontractors. There seems to be some confusion between the two classifications of workers.

I had searched for the best definitions possible to help analyze the differences. The IRS website had a great overall definition of statutory employees –

Some workers are deemed to be employees by statute. For an exempt organization, the most common employees in this category are its officers. In addition, while not as prevalent in an exempt organization, the following workers are also statutory employees:

1. A full-time traveling or city salesperson who solicits orders from wholesalers, restaurants, or similar establishments on behalf of a principal. The merchandise sold must be for resale (e.g., food sold to a restaurant) or for supplies used in the buyer’s business;

2. A full-time life insurance agent whose principal business activity is selling life insurance and/or annuity contracts for one life insurance company;

Woman And Man Statutory Employees vs. Subcontractors Standing
StockUnlimited

3. An agent-driver or commission-driver engaged in distributing meat, vegetables, bakery goods, beverages (other than milk), or laundry or dry cleaning services;

4. A home worker performing work on material or goods furnished by the employer.

These are great examples of a statutory employee. The worker in the SC Supreme Court case did not necessarily fit any of those definitions exactly.

The IRS goes on to say “Statutory employees are not liable for self-employment tax because their employers must treat them as employees for social security tax purposes.” That means the employer must withhold FICA taxes.

I kept researching Statutory Employees and found that they exist as a combination between an employee and a subcontractor. What should a company do for covering a statutory employee under Workers Compensation or make them obtain their own Workers Compensation insurance?

From the previous South Carolina decision, I am thinking that under the above circumstances that Workers Comp coverage should be supplied by the employer. The fourth one is asking the employer to cover home workers. That is still a hotly debated topic yet today.

In November 2009, I posted an advisory note from the IRS on how to classify employees and subcontractors. In my last post, I included how the IRS recommends differentiating employees and statutory employees. I could not find any articles by the IRS that directly compared Statutory Employees and Subcontractors.

Employment Status Determination

I would think that an employer would have to first determine whether or not a worker is a subcontractor or an employee. If the worker is considered an employee, then the employer would have to determine whether or not the employer is a statutory employee.

The level of control that an employer has over a worker’s activities seems to be the main determinant on the subcontractor/employee classification decision.

The one area that insurance carrier premium auditors tend to consider less over time is the certificate of insurance. We have often seen where the premium auditors will include a subcontractors pay as a company’s payroll, even if there is a valid certificate of insurance. I do not agree and have debated this point with many auditors. Is it not against state insurance laws to require a company or individual be insured twice?

I do agree with insurance premium auditors concerning ghost polices. I will comment on ghost policies next time.

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James Moore

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Mgmt Consultants, Inc. in 1996. J&L’s mission is to reduce our clients’ Workers Compensation premiums by using time-tested techniques. J&L’s claims, premium, reserve and Experience Mod reviews have saved employers over $9.8 million in earned premiums over the last three years. J&L has saved numerous companies from bankruptcy proceedings as a result of insurance overpayments.

James has over 27 years of experience in insurance claims, audit, and underwriting, specializing in Workers’ Compensation. He has supervised, and managed the administration of Workers’ Compensation claims, and underwriting in over 45 states. His professional experience includes being the Director of Risk Management for the North Carolina School Boards Association. He created a very successful Workers’ Compensation Injury Rehabilitation Unit for school personnel.

James’s educational background, which centered on computer technology, culminated in earning a Masters of Business Administration (MBA); an Associate in Claims designation (AIC); and an Associate in Risk Management designation (ARM). He is a Chartered Financial Consultant (ChFC) and a licensed financial advisor. The NC Department of Insurance has certified him as an insurance instructor. He also possesses a Bachelors’ Degree in Actuarial Science.

LexisNexis has twice recognized his blog as one of the Top 25 Blogs on Workers’ Compensation. J&L has been listed in AM Best’s Preferred Providers Directory for Insurance Experts – Workers Compensation for over eight years. He recently won the prestigious Baucom Shine Lifetime Achievement Award for his volunteer contributions to the area of risk management and safety. James was recently named as an instructor for the prestigious Insurance Academy.

James is on the Board of Directors and Treasurer of the North Carolina Mid-State Safety Council. He has published two manuals on Workers’ Compensation and three different claims processing manuals. He has also written and has been quoted in numerous articles on reducing Workers’ Compensation costs for public and private employers. James publishes a weekly newsletter with 7,000 readers.

He currently possess press credentials and am invited to various national Workers Compensation conferences as a reporter.

James’s articles or interviews on Workers’ Compensation have appeared in the following publications or websites:

  • Risk and Insurance Management Society (RIMS)
  • Entrepreneur Magazine
  • Bloomberg Business News
  • WorkCompCentral.com
  • Claims Magazine
  • Risk & Insurance Magazine
  • Insurance Journal
  • Workers Compensation.com
  • LinkedIn, Twitter, Facebook and other social media sites
  • Various trade publications

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