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Worker Tax Classifications: Employees, Contractors, Statutory Roles

How a worker is classified determines how they are taxed and the portion of employment taxes a business must pay on their behalf. For example, an employer must submit money based on the employee's income for income taxes, Social Security, Medicare, and federal unemployment taxes to the proper government entity. However, if a worker is classified as a statutory employee, statutory nonemployee, or independent contractor, the employer's responsibility to remit taxes is significantly changed, and much of the responsibility and expense are passed on to the worker. To learn more about your tax burden as a worker or as an employer, our CPA firm in Raleigh is sharing a closer look at worker classifications.

Traditional "Common Law" Employees

The overwhelming majority of workers are "common law employees." A common law employee is hired by the employer who sets the parameters of the job, including where and how it's performed as well as a set rate of pay based on hourly rates or an annual salary. Additionally, an employer will have an element of control over how the employee performs the scope of the work, provide tools and supplies, and provide benefits, such as insurance, vacation pay, or even an employee discount.

Taxes for Employees

When a common law employee is hired by an employer, they will fill out a W-4 form that dictates how much an employer should withhold from the employee's pay to cover payroll taxes. An employer is responsible for paying a portion of the employee's Medicare, Social Security, and unemployment taxes, while the other portion, as well as federal, state, and local income taxes are withheld from the employee's paycheck.

Examples of a Traditional Employee

Common law employees are found in every sector, industry, and professional level, but some examples include:

  • Teachers
  • Nurses
  • Cashiers
  • Executive assistants and receptionists
  • Human resources department workers
  • IT department workers
  • Roofers hired directly by a roofing contractor or general contractor

Independent Contractor

An independent contractor is an individual who is self-employed and provides their work or service to the company without direction on what or how the work is completed, merely the result of the work provided. Also called a 1099 employee, an independent contractor will be paid an agreed-upon rate for the services they provide but will not receive a traditional paycheck or benefits. Often, hiring an independent contractor is a cost-saving strategy to a company in order to avoid paying a share of payroll taxes and having to offer benefits.

Taxes for Independent Contractors

Because an independent contractor is self-employed, they are responsible for paying all taxes, including the full percentage of Medicare, Social Security, and a higher rate of business taxes. However, independent contractors can deduct business expenses on a Schedule C form that common law employees can't.

Examples of Independent Contractors

Almost anyone who provides a service to the general public is an independent contractor, but some examples include:

  • Dentists and doctors with their own practices
  • Attorneys with their own law office
  • Freelance writers or graphic designers
  • Hairstylists who rent a booth or have their own studio
  • Rideshare drivers for Uber or Lyft
  • Delivery drivers for Instacart, GrubHub, or Shipt

Statutory Employees

A statutory employee splits the difference between an independent contractor and a common law employee. They are an independent contractor who provides a service to a business, but they also have Medicare and Social Security withheld by the business for whom they work.

Taxes for Statutory Employees

Like a common law employee, a statutory employee will receive a traditional paycheck with a portion of their income withheld to pay for Medicare and Social Security, but they are not subject to federal income tax being withheld from their paycheck. Also, the employee will fill out a W-9 form instead of a W-4 and can also deduct business expenses on their annual tax return using a Schedule C form.

Examples of Statutory Employees

  • Insurance salespeople
  • Delivery drivers
  • People who work from home but use company supplies and resources
  • Traveling salespeople

Statutory Nonemployees

Statutory nonemployees are similar to independent contractors but only fall into one of three categories:

  • Direct sellers (such as for MLM companies)
  • Licensed real estate agents
  • Companion sitters, such as someone sitting for an elderly or disabled person.

Taxes for Statutory Nonemployees

When a statutory nonemployee is paid, they are not subject to FICA, unemployment, or federal income withholding taxes, plus, they report income and expenses on a Schedule C like a sole proprietor does.

Contact a Small Business Accountant in Raleigh Today

We understand that if you are an independent contractor, statutory employee, or statutory nonemployee, it can be difficult to complete taxes. Our Raleigh CPA firm can help you with your monthly accounting and tax preparation. To learn more about how we can help you, call us today at  919-420-0092 or fill out the form below to get started.