NEW IRS EMPLOYEE CLASSIFICATIONS
by Marvin Sahl, CLU
The Internal Revenue Service (IRS) has marched on, and now there's more to say about classifying employees. Federal law (that is, IRS regulations) now defines six classes of employees:
1. Leased employees
2. Technical specialists
3. Statutory employees
4. Statutory nonemployees
5. Common-law employees
6. Independent contractors
Only certain businesses need be concerned with the first four classes, but most businesses should be alert to the requirements of the last two classes.
COMMON-LAW EMPLOYEES
This is the most common form of employee/employer relationship. Generally, employees are defined as commonlaw employees unless they fall under special statutes (some of which are referred to in the article hotlinked above). If employers can dictate what is to be done or when and how it is to be done- for instance, if they supply tools for the job, provide the place to work, or have the power to fire employees-their employees are defined as common-law. The employers will probably be required to withhold taxes on these employees.
LEASED EMPLOYEES
Companies providing leased employees are basically an extension of temporary help agencies. These workers are employees of the leasing company, which pays their taxes, Workers' Compensation, and other costs. Properly operated, employee leasing can provide workers (at a fixed fee per time period or project) for generally longer periods than temporary help agencies. Employee leasing can be useful for projects that require a number of specialists who will not be needed after the project's end.
One usual advantage of leased employees is that the cost of getting the job done through an outsource is less expensive than using common-law employees. A danger, however, occurs if the company providing the leased employees does not meet the tax or Workers' Comp obligations under the law. In this case, an employer utilizing leased employees may be liable for their taxes and benefits (including obligations under the Family Leave Act).
A recent IRS ruling exemplifies this confusion on the part of employers. Nurses supplied to a hospital by an outside firm were found to be working full-time on a schedule set by the hospital, were paid hourly by the hospital, and had no investment in their own equipment. The hospital required their attendance at an orientation before starting their job and could fire them.
Of course, the ruling declared them to be hospital employees. The IRS said the hospital exercised enough control over the nurses to make them ineligible for the status of independent contractors or leased employees.
TECHNICAL SERVICE SPECIALISTS
This class includes computer specialists, engineers, and others acting through another company or on their own. Each of these types of employees is classified independently by the IRS under a special relief provision.
STATUTORY EMPLOYEES (DISCUSSED AT LENGTH IN ARTICLE HOTLINKED ABOVE)
Some types of salespeople are statutory employees, which means that the business must withhold Social Security, Medicare, and unemployment taxes- but not federal income taxes. There is no requirement to cover statutory employees with Workers' Compensation, although it may be offered to them. Other fringe benefits, such as medical and retirement plans, may be offered to statutory employees, whose ranks include:
- An agent or commission driver delivering food, beverages (other than milk), laundry, or dry cleaning for someone else
- A full-time Life insurance salesperson
- A homemaker who works under the guidelines of the person for whom the work is done, with materials furnished by and returned to that person or to someone that person designates
- A traveling or city salesperson (other than an agent or commission driver) who works full-time (except for sideline sales activities) for one firm or person. Sales orders must be for items intended for resale or use as supplies in the customer's business. Customers must be retailers, wholesalers, contractors, or operators of hotels, restaurants, or other businesses dealing with food or lodging.
STATUTORY NONEMPLOYEES
Direct salespeople and licensed real-estate salespeople are classified as statutory nonemployees. Their pay is based on sales, not hours-and then only if they work under a contract that states they will not be classified as an employee for tax purposes. If so classified, they are treated as self-employed independent contractors; taxes are not withheld because they are responsible for their own taxes.
TOUGH TRAPS
Of course, these numerous classifications may create more problems. OSHA can require that business owners give all kinds of safety training to anyone working on the business' premises, regardless of who the employer might be. This and other training and legal requirements may well wipe out any semblance of separation between the business and its outsource.