The Internal Revenue Service (IRS) uses the statutory employee classification for tax purposes. Individuals classified as statutory employees are considered independent contractors for federal tax withholding purposes but are treated as employees for Social Security and Medicare tax (FICA) purposes.
They typically include certain workers, such as drivers, delivery personnel, and full-time life insurance sales agents, who meet specific criteria.
Understanding Worker Classifications
The IRS recognizes several worker classifications, including
- Employee: Generally, workers who perform services for an employer under the employer’s control and direction are classified as employees.
- Independent Contractor: Workers in business for themselves and offer services to multiple clients, maintaining control over how and when work is performed, are classified as independent contractors.
- Statutory Employee: Certain workers, such as drivers, delivery personnel, and full-time life insurance sales agents, are treated as employees for Social Security and Medicare tax (FICA) purposes but as independent contractors for federal tax withholding purposes.
- Statutory Nonemployee: Individuals who work under specific arrangements, such as direct sellers, licensed real estate agents, and certain companion sitters, are treated as nonemployees for tax purposes.
- Common-Law Employee: Workers who meet specific criteria defined by common law, including control over work performance, are classified as common-law employees.
- Joint Employment: When two or more employers share control and supervision over a worker’s employment, the IRS recognizes joint employment arrangements.
Each classification has different tax implications and obligations for the worker and the employer, so it’s crucial to accurately determine the worker’s classification based on their specific relationship with the employer.
Characteristics of a Statutory Employee
Statutory employees possess characteristics of both employees and independent contractors. This allows them to take advantage of certain tax deductions while also receiving some benefits typically reserved for employees.
The following criteria must be met for a worker to be considered a statutory employee:
- The worker must have performed services for the company in the current or previous tax year.
- The worker’s contract states that they are responsible for all expenses related to their job.
- The worker does not receive any type of reimbursement for their expenses.
- The worker’s pay is primarily based on sales rather than hourly or project-based rates.
- The worker is not a member of the company’s retirement plan.
- The worker does not hold any equity in the company.