According to the IRS, if you are only able to control the outcome of the work performed and not the method used to complete the work, the individual performing the work is an independent contractor and not your employee.
However, if an individual falls into one of the following four categories, they may be treated as an employee for certain employment tax purposes:
- Drivers that are your agent or are paid on commission. Drivers that distribute beverages (other than milk), meat, bakery products, fruit, or vegetables. Drivers that deliver dry cleaning or laundry.
- A full-time life insurance sales agent whose primary business is selling life insurance or annuity contracts, primarily for a single insurance company.
- Someone who works at home on materials and goods that you supply and are returned to you or to a person you choose. You must also give instructions on how the work must 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 or hotels, restaurants, or other similar establishments. The goods being sold must be supplies for use in the buyer’s business operation or for-sale merchandise. The work performed for you must be the salesperson’s principal business activity.
Social Security Withholdings
If you are treating the individual as a statutory employee, the employer must withhold Social Security and Medicare taxes from the worker's wages if all of the following apply:
- The contract states the majority of the services are to be performed by the individual.
- They do not have any investment in the equipment or property used.
- The work completed is performed on a regular basis for the same individual.
In conclusion, a statutory employee is one who controls the work load and how much is to be done with little to no input from the employer.
W-2 Reporting
The employer should indicate on the worker's Form W-2 whether the worker is classified as a statutory employee in box 13. Statutory employees report their wages, income, and allowable expenses on Schedule C, along with filing federal Form 1040. Statutory employees are not liable for self-employment tax because their employers must treat them as employees for social security tax purposes.