Publication 15a |
2001 Tax Year |
Chapter 1 Who Are Employees?
Before you can know how to treat payments you make for services,
you must first know the business relationship that exists between you
and the person performing the services. The person performing the
services may be--
- An independent contractor.
- A common-law employee.
- A statutory employee.
- A statutory nonemployee.
This discussion explains these four categories. A later discussion,
Employee or Independent Contractor? (section 2), points out
the differences between an independent contractor and an employee and
gives examples from various types of occupations. If an individual who
works for you is not an employee under the common-law rules (see
section 2), you generally do not have to withhold Federal income tax
from that individual's pay. However, in some cases you may be required
to withhold under backup withholding requirements on these payments.
See Circular E for information on backup withholding.
Independent Contractors
People such as lawyers, contractors, subcontractors, public
stenographers, and auctioneers who follow an independent trade,
business, or profession in which they offer their services to the
public, are generally not employees. However, whether such people are
employees or independent contractors depends on the facts in each
case. The general rule is that an individual is an independent
contractor if you, the payer, have the right to control or direct only
the result of the work and not the means and methods of accomplishing
the result.
Common-Law Employees
Under common-law rules, anyone who performs services for you is
your employee if you can control what will be done and how it will be
done. This is so even when you give the employee freedom of action.
What matters is that you have the right to control the details of how
the services are performed. For a discussion of facts that indicate
whether an individual providing services is an independent contractor
or employee, see Employee or Independent Contractor?
(section 2).
If you have an employer-employee relationship, it makes no
difference how it is labeled. The substance of the
relationship, not the label, governs the worker's status.
Nor does it matter whether the individual is employed full time or
part time.
For employment tax purposes, no distinction is made between classes
of employees. Superintendents, managers, and other supervisory
personnel are all employees. An officer of a corporation is
generally an employee; however, an officer who performs no services or
only minor services, and neither receives nor is entitled to receive
any pay, is not considered an employee. A director of a
corporation is not an employee.
You generally have to withhold and pay income, social security, and
Medicare taxes on wages you pay to common-law employees. However, the
wages of certain employees may be exempt from one or more of these
taxes. See Employees of Exempt Organizations (section 3)
and Religious Exemptions (section 4).
Leased employees.
Under certain circumstances, a corporation furnishing workers to
various professional people and firms is the employer of those workers
for employment tax purposes. For example, a professional service
corporation may provide the services of secretaries, nurses, and other
similarly trained workers to its subscribers.
The service corporation enters into contracts with the subscribers
under which the subscribers specify the services to be provided and
the fee to be paid to the service corporation for each individual
furnished. The service corporation has the right to control and direct
the worker's services for the subscriber, including the right to
discharge or reassign the worker. The service corporation hires the
workers, controls the payment of their wages, provides them with
unemployment insurance and other benefits, and is the employer for
employment tax purposes. For information on employee leasing as it
relates to pension plan qualification requirements, see Leased
employees in Pub. 560, Retirement Plans for Small
Business (SEP, SIMPLE, and Keogh Plans).
Additional information.
For more information about the treatment of special types of
employment, the treatment of special types of payments, and similar
subjects, get Circular E or Circular A (for agricultural employers).
Statutory Employees
Four categories of workers who are independent contractors under
common law are treated by statute as employees.
- A driver who distributes beverages (other than milk) or
meat, vegetable, 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. See
Salesperson in section 2.
Social security and Medicare taxes.
Withhold social security and Medicare taxes from the wages of
statutory employees if 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 payer.
Federal unemployment (FUTA) tax.
For FUTA tax, the term employee means the same as it
does for social security and Medicare taxes, except that it does not
include statutory employees in categories 2 and 3 above. Thus, any
individual who is an employee under category 1 or 4 is also an
employee for FUTA tax purposes and subject to FUTA tax.
Income tax.
Do not withhold income tax from the wages of statutory employees.
Reporting payments to statutory employees.
Furnish a Form W-2 to a statutory employee, and check "statutory
employee" in box 15 (box 13 on the 2001 Form W-2). Show your
payments to the employee as other compensation in box 1. Also, show
social security wages in box 3, social security tax withheld in box 4,
Medicare wages in box 5, and Medicare tax withheld in box 6. The
statutory employee can deduct his or her trade or business expenses
from the payments shown on Form W-2. He or she reports earnings as a
statutory employee on line 1 of Schedule C or C-EZ (Form 1040). (A
statutory employee's business expenses are deductible on Schedule C or
C-EZ (Form 1040) and are not subject to the reduction by 2% of his or
her adjusted gross income that applies to common-law employees.)
Statutory Nonemployees
There are two categories of statutory nonemployees: direct
sellers and licensed real estate agents. They are
treated as self-employed for all Federal tax purposes, including
income and employment taxes, if:
- Substantially all payments for their services as direct
sellers or real estate agents are directly related to sales or other
output, rather than to the number of hours worked and
- Their services are performed under a written contract
providing that they will not be treated as employees for Federal tax
purposes.
Direct sellers.
Direct sellers include persons falling within any of the following
three groups:
- Persons engaged in selling (or soliciting the sale of)
consumer products in the home or place of business other than in a
permanent retail establishment.
- Persons engaged in selling (or soliciting the sale of)
consumer products to any buyer on a buy-sell basis, a
deposit-commission basis, or any similar basis prescribed by
regulations, for resale in the home or at a place of business other
than in a permanent retail establishment.
- Persons engaged in the trade or business of delivering or
distributing newspapers or shopping news (including any services
directly related to such delivery or distribution).
Direct selling includes activities of individuals who attempt to
increase direct sales activities of their direct sellers and who earn
income based on the productivity of their direct sellers. Such
activities include providing motivation and encouragement; imparting
skills, knowledge, or experience; and recruiting. For more information
on direct sellers, see Pub. 911, Direct Sellers.
Licensed real estate agents.
This category includes individuals engaged in appraisal activities
for real estate sales if they earn income based on sales or other
output.
Misclassification of Employees
Consequences of treating an employee as an independent
contractor.
If you classify an employee as an independent contractor and you
have no reasonable basis for doing so, you may be held liable for
employment taxes for that worker (the relief provisions, discussed
below, will not apply). See Internal Revenue Code section 3509 for
more information.
Relief provisions.
If you have a reasonable basis for not treating a worker as an
employee, you may be relieved from having to pay employment taxes for
that worker. To get this relief, you must file all required Federal
information returns on a basis consistent with your treatment of the
worker. You (or your predecessor) must not have treated any worker
holding a substantially similar position as an employee for any
periods beginning after 1977.
Technical service specialists.
This relief provision does not apply to a worker who provides
services to another business (the client) as a technical service
specialist under an arrangement between the business providing the
worker, such as a technical services firm, and the client. A technical
service specialist is an engineer, designer, drafter, computer
programmer, systems analyst, or other similarly skilled worker engaged
in a similar line of work.
This rule does not affect the determination of whether such workers
are employees under the common-law rules. The common-law rules control
whether the specialist is treated as an employee or an independent
contractor. However, if you directly contract with a technical service
specialist to provide services for your business rather than for
another business, you may still be entitled to the relief provision.
See Employee or Independent Contractor? below.
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