Workers who are independent contractors, as opposed to employees under the common law rules, may be treated as employees by statute or “statutory employees” for purposes of employment tax withholdings.
There are four very specific categories of workers who qualify as statutory employees under current tax law:
- A driver who distributes beverages (excluding milk), meat, vegetables, 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.
- 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.
- 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.
- 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.
If workers fit into any of these categories, employers are required to withhold Social Security and Medicare taxes from their wages when all three of the following conditions apply:
The service contract states or implies that substantially all the services are to be performed personally by them.
They do not have a substantial investment in the equipment and property used to perform the services (other than an investment in transportation facilities).
The services are performed on a continuing basis for the same employer.
Unlike an independent contractor who receives Form 1099-MISC, a statutory employee will receive a Form W-2 at the end of the year. A statutory employee’s W-2 is slightly different from one issued to a common law employee. There is a checkmark in Box 13 to indicate the worker’s status as a statutory employee and there will be withholding in Boxes 4 and 6. The worker reports the income from Box 1 of Form W-2 and any related business expenses on Schedule C, Profit or Loss from Business. Since Social Security and Medicare taxes were withheld, no self-employment tax is due.
A statutory nonemployee is defined and treated as self-employed for federal tax purposes, including income, Social Security and Medicare taxes. Statutory nonemployees include direct sellers, qualified real estate agents and certain companion sitters.
To learn more about statutory employees and their income and expense reporting requirements, complete our Business Tax Reporting on the 1040 self-study course, which reviews this topic as well as other business-related topics.