Taxable
Independent Contractors
The general rule is that you only have payroll tax
obligations with respect to workers who are considered
employees, and you don't have to withhold or pay payroll taxes
for independent contractors.
However, when it comes to the tax laws, there's an exception
for virtually every rule! In this case, the exception is that
for workers in certain occupations, you will be required to
withhold and pay certain payroll taxes under certain
circumstances even if those workers are not your common-law
employees. These so-called "statutory
employees" are
- Agent-drivers and commission drivers who deliver
specified products — individuals who (1) operate their own
trucks or the trucks of the persons for whom they perform
services, (2) serve customers designated by their principals
and customers they solicit on their own initiative, (3) make
wholesale or retail sales, and (4) are paid commissions on
their sales or earn the difference between what they charge
their customers and what they pay their principals for the
products or services they sell. Such drivers are
"statutory employees" if they distribute beverages
(other than milk) or meat, vegetables, fruit, or bakery
products or if they pick up and deliver laundry or dry
cleaning.
- Traveling or city salespersons (other than
agent-drivers or commission drivers) who work full time on
your behalf and remit orders from customers who are
retailers, wholesalers, contractors, or operators of hotels,
restaurants, or other businesses whose primary function is
the furnishing of food or lodging. The orders must be for
items that your customers will resell or will use as
supplies in their business operations.
- Homeworkers who perform work from you, generally on
a contract or piecework basis, in their own homes or in the
homes of others. For example, persons you hire to type your
correspondence and to do other word processing jobs on their
home computers would be homeworkers.
- Full-time life insurance salespersons who work
primarily for one insurance company.
When you retain the services of any of these types of workers
who would otherwise be independent contractors, you are not
required to withhold income
taxes from their compensation. However, you must withhold
and pay FICA
taxes and, in the case of drivers and salespersons, you must
pay federal and state unemployment
taxes, if each of the following conditions exists:
- the service contract, whether written or oral,
contemplates that the worker will personally perform
substantially all of the work,
- the worker's investment in equipment and property, other
than transportation equipment, used in providing services is
insubstantial,
- the worker performs services for you on a continuing (that
is, regular or frequently recurring) basis, and
- with respect to homeworkers, you've paid the workers $100
in cash wages during the year. Once you've reached the $100
threshold, all wages paid during the year are subject to the
FICA taxes, including the initial $100 as well as any
noncash wages that you pay.
|
Just to clarify, the "statutory
employee" designation becomes relevant only
if a worker is not a common-law employee. All
the normal payroll tax obligations apply if a
statutory employee is in fact a common-law
employee.
|
|
|