Statutory Employees and Wages

February 5, 2015 Tax Blog by Calli McWilliams, MSA, MSM

Information for employers of salespersons

Did you know that you can treat some of your independent contractors as statutory employees for employment taxes purposes? This is a relatively uncommon used approach, compared to the standard determination of an employee or independent contractor. This is both a benefit to the employee and the business owner. This holds true for many different areas, but especially for salespersons. They must fall within the following three conditions described under Social Security and Medicare taxes, below:

  • A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson’s principal business activity.

Additionally there are eight elements that must be met under the statutory employee test, in order to withhold and claim social security, Medicare, and FUTA tax expenses.

  1. Works full time for one person or company except, possibly, for sideline sales activities on behalf of some other person,
  2. Sells on behalf of, and turns his or her orders over to, the person or company for which he or she works,
  3. Sells to wholesalers, retailers, contractors, or operators of hotels, restaurants, or similar establishments,
  4. Sells merchandise for resale, or supplies for use in the customer’s business,
  5. Agrees to do substantially all of this work personally,
  6. Has no substantial investment in the facilities for transportation,
  7. Maintains a continuing relationship with the person or company for which he or she works, and
  8. Is not an employee under common-law rules.

What does this mean for the statutory employee?

The statutory employee uses Schedule C to report wages and expenses. The employee benefits from the withholding of taxes, but can also take their unreimbursed business expenses against their wage income. They do not have to take them on Schedule A, subjecting them to the 2% of their adjusted gross income limits. In many cases, the employee never gets a benefit from this on their personal tax return, but can if they are treated as a statutory employee.

For additional information you may refer to the following publications, and certainly consult your tax preparer.

Refer to the Salesperson section located in Publication 15-A, Employer’s Supplemental Tax Guide (PDF) for additional information.

Refer to Instructions to Form 1040, Schedule C, (2013), p. C-1.
Refer to Rev Rul 90-93, 1990-2 CB 33