To determine whether a worker is an employee or independent contractor, many companies utilize the common law test. Simply put, if someone performs services for a business and that business controls what will be done and how it will be done, that person is an employee.
With the common law test considered, there are two special types of employees that are not often discussed: statutory employees and statutory non-employees.
A statutory employee is a special type of worker whose wages are not subject to federal income tax withholding but are subject to FICA (Social Security and Medicare) and FUTA (unemployment) taxes. These employees are statutory employees because under the common law test, they are an independent contractor by definition but they can be treated by statute to avoid paying federal income tax. Statutory employees include:
- Drivers who distribute beverages (but not milkmen) or meat, fruit, vegetable, or baked goods. Drivers who deliver laundry or dry cleaning - if that driver is an agent or paid on commission.
- Full time life insurance sales agent who sell life insurance or annuity contractors as his or her prime business activity - and for one primary insurance company. These agents utilize office space offered to them but do not pay for the use of stenographic assistance, telephones, forms, and similar resources.
- Individuals or homeworkers who work on materials or goods supplied to them and must be returned to that person or a specific named person.
- Full time traveling salespersons. The work performed must be the salesperson’s prime business activity.
Statutory employees can avoid FICA taxes if they meet any of the following: their contractor agreement states all services are performed personally by them; they do not have an investment in the equipment used to perform their services; the services they perform are for the same payer on a consistent basis.
Statutory non-employees qualify as independent contractors under the common law test but are treated as employees when it comes to paying taxes, meaning they are not subject to federal income withholding tax OR FICA and FUTA taxes. There are three categories of statutory non-employees:
- Direct sellers or someone who markets and sells products directly to consumers away from a fixed retail spot. People who deliver and distribute newspaper and shopping news circulars are also clumped into this category.
- Licensed retail agents.
- Companion sitters, or someone similar to a caregiver who is qualified to prepare meals, do light housekeeping, and offer help with laundry and other errands.
To be exempt from ALL withholding taxes, statutory non-employees must meet the following: their services are performed under a written contractor stating they will not be treated as an employee; the payments for their services are directly related to their sales and not to the hours worked.