You’ve heard of employees. You know about independent contractors. And by this point, you may be familiar with what is a statutory employee. But, what about a statutory nonemployee?
Understanding who employees are and aren’t is essential to accurately handle payroll taxes. But if you have statutory nonemployees, you likely don’t need to withhold taxes from their wages.
What is a statutory nonemployee?
A statutory nonemployee is a worker classification that aligns with independent contractors. Businesses that employ statutory nonemployees do not need to withhold federal income or FICA (Social Security and Medicare) taxes from their wages. And, businesses do not need to pay employer taxes, like FUTA tax, on their wages. Statutory nonemployees are treated as self-employed individuals for tax purposes.
According to the IRS, workers can fall into one of four categories:
- Independent contractor
- Common-law employee
- Statutory employee
- Statutory nonemployee
So, what sets statutory nonemployees apart from the other worker classifications? How do you know if a worker is a statutory nonemployee?
Do you have a statutory nonemployee?
You have a statutory nonemployee if you hire a direct seller, licensed real estate agent, or qualifying companion sitter.
In some cases, you may need to withhold payroll taxes from wages to direct sellers and licensed real estate agents. But if you treat them as self-employed, you do not need to handle taxes.
Treat direct sellers and licensed real estate agents as self-employed if both the following are true:
- All payments for their services are directly related to sales or another output, rather than to the number of hours worked
- They perform their services under a written contract that says they won’t be treated as employees for tax purposes
Learn more about the three categories of statutory nonemployees below.
Direct sellers are workers who engage in sales activities. These workers attempt to increase direct sales activities and earn income based on productivity.
Examples of direct sales activities include:
- Selling consumers products outside a permanent retail establishment
- Providing motivation and encouragement
- Imparting skills, knowledge, or experience
- Distributing newspapers or shopping news
Licensed real estate agents
Licensed real estate agents are workers who engage in appraisal activities for real estate sales.
To qualify as a statutory nonemployee, these workers must earn income based on sales.
Companion sitters are workers who provide personal attendance, companionship, or household care services to children, the elderly, and the disabled.
Unless a companion sitter is an employee of a companion sitting placement service, they are considered self-employed.
Handling statutory nonemployee wages
Again, don’t withhold taxes on statutory nonemployee wages. These workers are treated as self-employed individuals and are responsible for paying employment taxes on their own. However, you must report statutory nonemployee wages.
Complete Form 1099-MISC, Miscellaneous Income, for each statutory nonemployee you hire.
Statutory nonemployee vs. statutory employee
Unlike statutory nonemployees, statutory employees are independent contractors who qualify for employee treatment.
If a worker qualifies as a statutory employee, you must withhold Social Security and Medicare taxes from their wages. You must also contribute the employer portion of Social Security and Medicare taxes.
Like statutory nonemployees, workers must meet specific qualifications to obtain statutory employee status. The following are considered statutory employees:
- Agent or commission-based drivers
- Life insurance sales agents
- Home-based workers
- Traveling or city salespersons
If you have statutory employees, you must fill out and distribute Form W-2. Do not use Form W-2 to report statutory nonemployee wages. Again, you will use Form 1099-MISC for statutory nonemployees.
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This article is updated from its original publication date of July 2, 2019.This is not intended as legal advice; for more information, please click here.