Subcontractors And Statutory Employees
Classifying Subcontractors And Statutory Employees can be a difficult task for any business. A great publication on employee classification is IRS Publication 15-A (PDF File) along with this IRS webpage.
This is not to be confused with classification codes.
One of the more informative sections from the IRS webpage on subcontractors and employees is below:
The person performing the services may be –
- An employee (common-law employee)
A confusing area which we receive a large amount of emails concerns statutory employees/nonemployees. The below helpful sections are from Publication 15-A mentioned previously.
If you are having to make the decision how to classify employees, downloading the publication may help you make the proper determination.
From Publication 15-A
If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute, (also known as “statutory employees”) for certain employment tax purposes. This would happen if they fall within any one of the following four categories and meet the three conditions described next under Social security and Medicare taxes.
1. A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.
2. A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.
3. An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.
4. A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson’s principal business activity. See Salesperson in section 2.
Statutory Nonemployees
There are three categories of statutory nonemployees:
direct sellers, licensed real estate agents, and certain companion sitters.
Direct sellers and licensed real estate agents are treated as self-employed for all federal tax purposes, including income and employment taxes, if:
Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked,
and Their services are performed under a written contract providing that they will not be treated as employees for federal tax purposes.
Direct sellers. Direct sellers include persons falling within any of the following three groups.
1. Persons engaged in selling (or soliciting the sale of) consumer products in the home or place of business other than in a permanent retail establishment.
2. Persons engaged in selling (or soliciting the sale of) consumer products to any buyer on a buy-sell basis, a deposit-commission basis, or any similar basis prescribed by regulations, for resale in the home or at a place of business other than in a permanent retail establishment.
3. Persons engaged in the trade or business of delivering or distributing newspapers or shopping news (including any services directly related to such delivery or distribution). Direct selling includes activities of individuals who attempt to increase direct sales activities of their direct sellers and who earn income based on the productivity of their direct sellers. Such activities include providing motivation and encouragement; imparting skills, knowledge, or experience; and recruiting.
Licensed real estate agents.
This category includes individuals engaged in appraisal activities for real estate sales if they earn income based on sales or other output.
Companion Sitters
Companion sitters are individuals who furnish personal attendance, companionship, or household care services to children or to individuals who are elderly or disabled.
A person engaged in the trade or business of putting the sitters in touch with individuals who wish to employ them (that is, a companion sitting placement service) will not be treated as the employer of the sitters if that person does not receive or pay the salary or wages of the sitters and is compensated by the sitters or the persons who employ them on a fee basis.
Companion sitters who are not employees of a companion sitting placement service are generally treated as self-employed for all federal tax purposes.
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Subcontractors and statutory employees were covered by an earlier article from the DOL under the FLSA.
*Please note that I am a ChFC and can provide this advice. However, checking with your accountant before making such classifications may be a good idea.
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