Independent Contractor or Employee? – Who is an Employee

This is the first post in the Independent Contractor/Employee series. This series is dedicated to presenting individuals, sole proprietorships, and small to large businesses with a basic understanding of independent contractor issues.

Internal Revenue Code Section 3121 defines who is an “employee” when the IRS is determining whether to reclassify a workers’ status. The key provisions of Internal Revenue Code Section 3121 with regard to the definition of “employee” are highlighted in this article.

An officer of a corporation is generally an employee. However, an officer who does not perform any services as an officer or performs only minor services is not considered an employee if he neither receives nor is entitled to receive any remuneration, directly or indirectly. An officer is an employee of his/her corporation even if he/she is the sole shareholder and, as such, controls his/her own duties and remuneration.

Common law employee status is determined by applying 20 factors to a particular case to determine whether an employer/employee relationship exists. Such relationship exists if the person for whom the worker performs services has the right to direct and control the worker in performing the services.

Pursuant to Internal Revenue Code Section 3121, “statutory employees” may not be employees under the common law rules, but are considered employees for FICA tax purposes if they receive remuneration under certain circumstances. The following four occupational groups are statutory employees:

  1. Agent-drivers or commission drivers. This group is limited to workers who distribute meat or meat products, vegetables or vegetable products, fruit or fruit products, bakery products, beverages (other than milk), or laundry or dry cleaning services.
  2. Full-time life insurance salesperson. This group includes salespersons whose full time occupation is soliciting life insurance or annuity contracts, or both, primarily for one life insurance company.
  3. Homeworkers. This group includes people who make clothing, needlecraft products, bedspreads, buttons, quilts, gloves, etc. The work is done away from the employer’s place of business, usually in the worker’s own home, the home of another, or a home workshop.
  4. Traveling or city salesperson. This category includes individuals who operate away from the employer’s premises. Their full time business activity is selling merchandise for a principal employer.