Statutory Employees vs. Statutory Non-Employees?: Know the Difference
In the workforce, classifications are important — especially when it comes to taxes. But not all classifications are easily identified. For instance, as an employer you may be wondering how to identify statutory employees vs statutory non-employees. Unfortunately, the distinction is not always clear. But knowing the what distinguishes each is essential for small business owners and human resource representatives.
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This article is adapted from the IRS definitions of statutory employees vs statutory non-employees, and has been simplified to remove jargon.
Statutory employees vs statutory non-employees?
Typically, you don't think of an independent contractor as an employee.
Well, they defy the "common law test." As outlined by this test, a worker is defined as an employee if the hiring company controls how and when they complete their work.
For example, employers determine the the number and exact hours standard employees work. But an independent contractor is free to determine their own hours.
But even so, Federal tax regulations consider some independent contractors to be employees. For that reason, these contractors must pay FICA (Social Security and Medicare) taxes. Similarly, they must also pay Federal Unemployment Taxes (FUTA).
Essentially, under these rules, the federal government considers certain independent contractors to be part company workforce. The IRS defines these particular workers as "statutory employees."
Therefore, tax laws classify an independent contractor as a statutory employee if they fall within one of the following categories.
Contractors that are statutory employees:
- Drivers delivering drinks (excluding milk), meat, fresh produce, or baked goods. Also included in this mix are drivers who collect and deliver clothing for laundry or dry cleaning. Additionally, if the driver is a company agent or receives wages from commission, then he or she is a statutory employee.
- Full time life insurance sales representatives who primarily sell life insurance policies and annuity contracts for one insurance supplier. This shows exclusivity to a single life insurance company, which makes them a statutory employee.
- Remote contractors that create products or goods you then pass on to business customers. In addition, the worker must relinquish the products to you (or to a chosen representative) if you also provide instructions for the work requested.
- Full time traveling or city based sales representatives operating on behalf of your company. These representatives collect orders from vendors, retailers, contractors, suppliers, and operators. However, this is mainly applies to leisure and hospitality businesses like hotels and eateries. Any goods this representative transacts must be for resale purposes or for use in the customer’s own company.
But simply falling into one of the above areas alone isn't enough.
Additionally, the independent contractor must meet all three conditions under Social Security and Medicare tax laws as outlined below:
Social Security and Medicare tax conditions
If an independent contractor falls in one of the categories above, then you must withhold Social Security and Medicare taxes from their wages. But this is only in the event that the following factors apply. Remember ALL factors must apply:
- The service agreement clearly outlines that the worker independently provides the majority of the contracted work/services .
- The worker does not hold a significant investment in the equipment and tools used to perform the services. This does not include means of transportation.
- The worker consistently provides services to the same customer.
Federal tax laws consider statutory non-employees to be self employed. By contrast, statutory employees are not.
There are three types of statutory non-employees. They are:
- Direct sellers
- Licensed real estate agents
- Some private caregivers (domestic care).
Factors that apply
Contractors are self employed according to Federal tax rules if the following factors apply:
- You pay the contractor based on the number of transactions they complete not the hours they spend. Remember, you typically pay these individuals on commission and not in terms of time/hours spent.
- Both parties agreed to a written statement statement that outlines that the worker rending the services is NOT an employee of the company.
- Private domestic care providers who are not employees of a placement agency are generally considered self employed under Federal tax laws.
Paying statutory employees vs statutory non-employees
So how do you pay statutory employees vs statutory non- employees?
Ideally, the key thing to remember is that statutory employees are responsible for paying their own federal and state income taxes.
However, you may be required to withhold FICA taxes from the wages earned by these workers.
Similar to other employees, statutory employees receive W-2 in January. On the other hand, statutory non-employees receive a 1099 MISC.
Why the difference matters
The distinction between statutory employees vs. statutory non-employees can seem like a fine line. But knowing the difference can keep you from accumulating avoidable tax penalties.
Above all, you work hard for you money. And so do those that work for you.
For that reason, understanding the different worker classifications and what they can mean for federal tax purposes can help you better guard your business.