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.

 
Warning

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.