8722 / Who is an “employee” for employment tax purposes?

Employers are often concerned with the classification of workers as employees or independent contractors because, among other reasons, the employer is responsible for paying one-half of an employee’s employment taxes. Conversely, an independent contractor is liable for the entire sum of employment taxes (see Q 8724 for further discussion of the self-employment tax).

Generally, for employment tax purposes, the IRC defines “employee” to include the following taxpayers:

(1)  Any officer of a corporation

(2)  Any individual who is an employee under the common law rules (see Q 8723)

(3)  Any individual who performs services as

a. a driver who distributes certain products (meat, vegetables, fruit, bakery products, beverages (other than milk), or laundry or dry cleaning services);

b. a full-time life insurance salesperson (but see below and Q 8732);

c. a home worker performing work pursuant to the specifications given by the person for whom the services are performed; or

d. a traveling salesperson who, on a full-time basis, solicits orders on behalf of a principal from wholesalers, retailers, contractors, or operators of hotels, restaurants or similar establishments for merchandise purchased for resale or supplies for use in their business.¹

However, an individual will not be an “employee” for purposes of (3) above if the individual has a substantial investment in facilities used in connection with the performance of services (other than an investment in transportation facilities), or if the services are in the nature of a single transaction that is not part of a continuing relationship with the person for whom the services are performed.² For these purposes the term “substantial investment” refers to substantial facilities being furnished by the worker for conducting the business. All of the facts of each case must be considered to determine whether the facilities furnished by the worker are substantial. For factors considered in making these determinations, see Exhibit 4.23.5-3 (Statutory Employees) of the Internal Revenue Manual.

Despite this enumeration, the IRS has ruled that a full-time life insurance salesperson is not an “employee” for purposes of IRC Section 62 (deduction of trade or business expenses) and IRC Section 67 (2 percent floor on miscellaneous itemized deductions), even though he is treated as a “statutory employee” for Social Security tax purposes.³

See Q 8723 for a detailed discussion of the factors that are relevant in determining employment status. See Q 8732 to Q 8735 for a discussion of the tax treatment of life insurance salespersons.