Payroll Taxes for Independent Contractors
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by Rebecca Berlin
There are some kinds of independent contractors for whom you will have to withhold and pay payroll taxes. They are known as statutory employees because the IRS treats them as employees even though they are independent contractors. This article describes the four categories of workers that are considered statutory employees.
1. A delivery driver who is your agent or who is paid on commission. This is limited to drivers who distribute beverages, meat, fruits or vegetables, or bakery products, as well as drivers who pick up and deliver dry cleaning.
2. A full-time life insurance agent primarily working for a single life insurance company, if the agent's principal business activity is the sale of life insurance or of annuity contracts.
3. A home worker who does work on goods or materials that are supplied by you and that also must be returned to you. You must also provide specifications for how the work should be done.
4. A full time traveling or city salesperson. This person works full time on your behalf as his principal business activity and either sells goods for resale or sells supplies that will be used in the buyer's business. This person sells to wholesalers, retailers, contractors, or operators of hotels or restaurants.
You are not responsible for withholding income tax from the payments you make to these employees. You are responsible for withholding social security and Medicare taxes on statutory employees when all of the following apply:
1. Their contract with you indicates that they will personally perform the work.
2. Their investment in any equipment or property used to perform the work (other than in transportation facilities) is not substantial.
3. They perform services for you on a continuing basis.
You will also need to withhold FUTA tax from your payments to full-time life insurance agents or home workers, but not for delivery drivers or traveling or city salespersons. You will report these payments to your statutory employees on a Form W-2.