The determination of a worker’s status as an employee or independent contractor has a major impact on the finances of federal, state, and local governments. A workers status also has a direct on the bottom line of businesses hiring workers. As a result, governments and business often take opposite sides on who is and is not an employee.
For the government, having workers classified as employees means billions of dollars in taxes - Income tax, Social Security, Medicare, and Unemployment tax. It also means a reduction if the tax gap – the $400 billion in tax dollars that go unpaid because businesses are not properly filing Form 1099-MISC for workers not treated as employees.
For businesses, having workers classified as employees is a costly proposition. It means withholding and remitting income tax, paying social security, Medicare taxes, and unemployment taxes. It also means providing expensive benefits and the high cost of administrating payroll.
As the nature of business changes with the emergence of the gig economy, states hungry for tax dollars are redefining what it means to be an employee. Their increased scrutiny makes this a good time for employers to review the four types of workers as presented in our course Employee vs. Independent Contractor.
The four types of workers are Statutory Employees, Statutory Nonemployees, Common Law Employees, and Independent Contractors. If a worker is not one of the first three, they are an independent contractor.
In this article, I’ll discuss the three types of Statutory Non Employees.
Statutory Nonemployees are self-employed by law. They are independent contractors. A business or person hiring a Statutory Nonemployee in the course of business is not required to withhold, remit, or pay employment taxes. They do not send the worker a W2. They must, however, send the worker a Form 1099-MISC if and when required.
Those meeting the definition of a statutory nonemployee report their income on schedule C where they can also deduct expenses related to the production of that income. Statutory nonemployees are also required to calculate and pay income tax, and self-employment tax on form 1040 and, when required make estimated tax payments throughout the year.
There are three types of Statutory Nonemployees: Direct Sellers, Licensed Real Estate Agents, and certain Companion Sitters.
Direct sellers: Direct sellers are persons providing any of the three following services:
The most common example of Direct selling is multi-level product sales activities such as Mary Kay, Tupperware, and those utilizing similar compensation and distribution methods. Direct sellers also include those attempting to increase the sales of downline sellers when compensation is based on the productivity of downline sellers.
Licensed Real Estate Agents: This category includes individuals engaged in appraisal activities for real estate sales if they earn income based on sales or other output.
Additional Requirements for Direct Sellers and Licensed Real Estate Agents: To be treated as independent contractors, Direct Sellers and Licensed Real Estate Agents must meet the following requirements:
Companion sitters: Companion sitters are individuals who furnish personal attendance, companionship, or household care services to children or to individuals who are elderly or disabled. Placement services engaged in the trade or business of putting the sitters in touch with individuals who wish to employ them are treated as the employer of the sitters when the sitter does not receive a salary or wages from the service and placement service is compensated by the sitters or those who employ them on a fee basis.
Companion sitters who are not employees of a companion sitting placement service are generally treated as self-employed for all federal tax purposes.
A final note on companion sitters: If the sitter works in a household under the direction of the homeowner, they may be a household employee under common law.
We hope this article has helped you better understand statutory nonemployees. Our course library has a variety of courses designed to help you navigate the tax laws and minimize your tax liability. Additionally, our 1099-MISC Course for Businesses and Organizations will help you properly complete form 1099-MISC and comply with its filing requirements for independent contractors, including Statutory Nonemployees. Our Form 1099-MISC Basics training course will help you and your employees understand and file Form 1099-MISC.
Need More Help? Brett Hersh is an instructor and author for Overnight Accountant. He is also a tax professional who specializes in helping real estate agents, brokers, professionals, investors, and businesses in related industries. If you would like to schedule a consult with Brett or inquire about his services, please feel free to email him.
All courses and articles are for informational purposes only and do not constitute tax advice. Taxes are complicated - do not act on course information without consulting a professional. Always refer to treasury regulation before making any tax decision. Read the full disclaimer.
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