To be a statutory IC, the worker must fall into one of the categories discussed below and must meet the following two threshold requirements:
- the worker’s pay must be based on sales commissions and not on the number of hours worked, and
- there must be a written contract with the hiring firm providing that the worker will not be treated as an employee for federal tax purposes.
The IRS calls these workers “statutory non-employees,” which is bureaucratese for ICs. The fortunate employers of these workers need not pay FICA or FUTA taxes or withhold federal income taxes.
Caution Don’t Forget State Taxes
These rules apply only to federal taxes—Social Security (FICA), Federal Unemployment Tax (FUTA) and federal income tax withholding. You may still have to pay state payroll taxes and provide workers’ compensation coverage depending on how those tests classify the worker. See State Payroll Taxes for information on state payroll taxes. See Workers’ Compensation for information on state workers’ compensation issues.
1. Direct Sellers
Direct sellers (commonly referred to as door-to-door salespeople) sell consumer products to people in their homes or at a place other than an established retail store—for example, at swap meets. The products they sell include tangible personal property that is used for personal, family or household purposes. These products include such things as vacuum cleaners, cosmetics, encyclopedias, gardening equipment and other similar products. They also include intangible consumer services or products such as home study courses and cable television services.
EXAMPLE: Larry is a Mavon Guy. He sells men’s toiletries door to door. He is paid a 20% commission on all his sales. This is his only remuneration from Mavon. He has a written contract with Mavon that provides that he will not be treated as an employee for federal tax purposes. Larry is a statutory independent contractor. Mavon need not pay FICA, FUTA or withhold federal income taxes for Larry. It’s up to Larry to pay his own self-employment taxes. This is so whether or not Larry would qualify as an IC under the common law test.
Direct sellers can also include people who sell or distribute newspapers or shopping news. This is true whether they are paid by the publisher based on the number of papers delivered, or they purchase newspapers from the publisher and then sell them and keep the money.
2. Licensed Real Estate Agents
Most states require that real estate agents—called real estate sales people in some states—be licensed and work for a licensed real estate broker who is legally responsible for their actions. Real estate agents are usually paid on a straight commission basis. Whether they pay their own expenses and how much control the broker exercises over them varies from firm to firm.
Some real estate agents would probably qualify as employees under the common law test, while others would probably be ICs. Regardless of the common law test, however, they are statutory ICs if they meet the threshold requirements that we described above.
The broker need not pay FICA, FUTA or withhold federal income taxes.
EXAMPLE: Mary is a licensed real estate agent who works for the Boldwell Canker real estate brokerage firm. Art, the real estate broker for whom she works, provides her with office space, pays most of her expenses and exercises a good deal of control over her actions. However, Mary’s pay is based solely on commission fees from properties she lists and sells. Boldwell Canker has a written agreement with Mary providing that she will not be treated as an employee for federal tax purposes.
Mary would probably qualify as Boldwell’s employee under the common law test, but this doesn’t matter because she is a statutory independent contractor. Boldwell need not pay FICA, FUTA or withhold federal income taxes for Mary.