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Employee or Independent Contractor

An important issue for employers is whether their workers are employees or worker-checklistindependent contractors. The worker’s status determines whether the employer must withhold income and FICA (Social Security and Medicare) taxes, pay the employer’s portion of FICA taxes, and pay federal unemployment taxes. Additionally, an employer’s misclassification of workers can cause it to incur stiff penalties.

Common-Law Rules

If the employer has the right to “control and direct” the worker with regard to the details of the job and how it is to be performed, the worker is considered an employee. Conversely, if the services performed are in the control of the worker, that person is generally an independent contractor.

Statutory Employees

However, there may still be instances in which workers who would be independent contractors under common-law rules are nevertheless treated as employees by statute (“statutory employees”). This category includes certain types of drivers who are agents or are paid on commission, life insurance agents who sell primarily for one insurance company, individuals who work at home on materials or goods supplied by the employer, and full-time salespeople whose principal business activity is to collect orders for merchandise or supplies for use by wholesalers, retailers, and similar establishments.

Statutory employees are subject to withholding for Social Security and Medicare taxes if all three of the following conditions are met: the service contract states or implies that substantially all the services are to be performed personally by them, they do not have a large ownership stake in the equipment or property they use to perform these services, and they provide these services to the employer on a continuing basis.

Statutory Independent Contractors

The IRS specifically identifies three categories of individuals as statutory nonemployees — or statutory independent contractors — and therefore not subject to wage withholding. These are direct sellers, licensed real estate agents, and certain companion sitters.

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