A business must identify the worker’s classification before deciding how to treat payments. Workers fall into four categories: common‑law employees, statutory employees, statutory nonemployees, and independent contractors.
Common‑Law Employees
A worker is an employee when the business has the right to control what work is done and how it is done, even if the worker has freedom in day‑to‑day tasks. Full‑time or part‑time status does not matter.
Corporate officers are employees unless they perform no services and receive no pay. Corporate directors are not employees for director duties.
Employers must withhold income tax, Social Security, and Medicare on employee wages.
Statutory Employees
Some workers are treated as employees by law even if they are independent contractors under common‑law rules. The four categories are:
- Commission or agent drivers delivering specified goods or laundry.
- Full‑time life insurance sales agents for one company.
- Home‑based workers using materials supplied by the business.
- Full‑time traveling or city salespeople submitting orders for resale goods or business supplies.
Social Security and Medicare apply if: • Services are performed personally • Worker has no substantial equipment investment • Work is ongoing for the same payer
Statutory employee wages count for FUTA. W‑2 Box 13 is checked.
Statutory Nonemployees
Three groups are treated as self‑employed for all federal tax purposes:
- Direct sellers
- Licensed real estate agents
- Certain companion sitters
Direct sellers and real estate agents must be paid based on sales/output and work under a contract stating they are not employees.
Independent Contractors
Independent contractors are self‑employed. They control the result only, not the methods. They pay self‑employment tax on their earnings.
Professionals such as accountants, contractors, and similar service providers are typically independent contractors, but classification always depends on the facts.