When you hire a worker, one of the most important decisions you’ll make is classifying the worker as either an employee or an independent contractor for tax purposes. If you correctly classify a worker as an independent contractor, you’re not required to pay the employer’s share of Social Security and Medicare taxes or to withhold income taxes from their pay.

The IRS uses the “right of control” test to make this classification. Under this rule, the IRS considers your worker an independent contractor if your business has the right to control only the result of the work—not how the worker does the work.

In most cases, if a worker qualifies as an independent contractor under this test, that’s the end of the matter. But there’s an exception: statutory employees.

You must classify some workers who meet the independent contractor definition as employees for certain tax purposes. These workers are known as statutory employees, and they fall into just a few categories:

• Corporate officers

• Certain homeworkers

• Drivers who distribute food, beverages, or laundry

• Full-time life insurance salespeople

• Traveling or city salespeople

If a worker qualifies as a statutory employee, you must

• pay your share of their Social Security and Medicare taxes;

• withhold the employee’s share of Social Security and Medicare taxes from their paycheck; and

• pay federal unemployment (FUTA) tax for some categories.

(Note: You do not have to withhold federal income tax—except for corporate officers.)

Naturally, businesses often prefer to classify such workers as independent contractors to avoid these obligations. Fortunately, not all workers in the categories listed above are automatically statutory employees. A worker in one of these roles is considered a statutory employee only if all the following apply:

• They personally perform the work.

• They have no substantial investment in facilities or equipment.

• They have an ongoing relationship with your company.

If any one of the conditions does not apply, you don’t have to treat the worker as a statutory employee. Carefully structuring the relationship can help avoid unintended employee classification.

Follow me on Instagram,  LinkedIn and Youtube Check out my website. 

Matt Bontrager