Generally, employees are defined either under common law or under statutes for certain situations.

Employee status under common law.  A worker who performs services for you is generally your employee if you have the right to control what will be done and how it will be done by them. Even though you give the employee freedom of action. The fact that you have the right to control the details of how the services are performed is what matters.

People in business for themselves are generally not employees. People in an independent trade that offer their services to the public such as lawyers and doctors are usually not employees. However, if the business is incorporated, corporate officers who work in the business are considered employees of the corporation.

It doesn’t matter what it is called if an employer-employee relationship exists. The employee may be called an agent or independent contractor. How payments are calculated or paid, what they’re called, or if the employee works full or part-time also doesn’t matter.

Statutory employees. Unless backup withholding applies, don’t withhold federal income tax from pay if someone who works for you isn’t an employee under the common law rules discussed earlier. The following are considered employees by statute for social security, Medicare, and FUTA tax purposes under certain conditions although they may not be common law employees.

• An agent (or commission) driver who delivers food, beverages (other than milk), laundry, or dry cleaning for someone else.
• A full-time life insurance salesperson who sells primarily for one company.
• A homeworker who works by 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-driver or commission-driver) who works full time (except for side-line sales activities) for one firm or person getting orders from customers. The orders must be for merchandise for resale or supplies for use in the customer’s business. The customers must be retailers, wholesalers, contractors, or operators of hotels, restaurants, or other businesses dealing with food or lodging.

Statutory nonemployees. By law, direct sellers, qualified real estate agents, and certain companion sitters are considered nonemployees. For all federal tax purposes, including income and employment taxes, they are generally treated as self-employed.

Treating employees as nonemployees. You will generally be liable for social security and Medicare taxes and withheld income tax if you don’t deduct and withhold these taxes because you treated an employee as a non-employee. Using special IRC section 3509 rates for the employee share of social security and Medicare taxes and the federal income tax withholding, you may be able to calculate your liability. The applicable rates depend on whether you filed required Forms 1099. If the tax is paid under IRC section 3509, you can’t recover the employee share of social security tax, Medicare tax, or income tax withholding

from the employee. Regardless of whether the employee paid income tax on the wages, you are liable for the income tax withholding. The full employer share of social security and Medicare taxes will continue to be owed. The employee remains liable for the employee share of social security and Medicare taxes.

If you intentionally disregard the requirement to withhold taxes from the employee or if you withheld income taxes but not social security or Medicare taxes IRC section 3509 rates aren’t available. IRC section 3509 isn’t available for reclassifying statutory employees.

If the employer issued required information returns, the IRC section 3509 rates are:

• For social security taxes; employer rate of 6.2% plus 20% of the employee rate of 6.2% for a total rate of 7.44% of wages.
• For Medicare taxes; employer rate of 1.45% plus 20% of the employee rate of 1.45%, for a total rate of 1.74% of wages.
• For Additional Medicare Tax; 0.18% (20% of the employee rate of 0.9%) of wages subject to Additional Medicare Tax.
• For income tax withholding, the rate is 1.5% of wages.

If the employer didn’t issue required information returns, the IRC section 3509 rates are:

• For social security taxes; employer rate of 6.2% plus 40% of the employee rate of 6.2% for a total rate of 8.68% of wages.
• For Medicare taxes; employer rate of 1.45% plus 40% of the employee rate of 1.45%, for a total rate of 2.03% of wages.
• For Additional Medicare Tax; 0.36% (40% of the employee rate of 0.9%) of wages subject to Additional Medicare Tax.
• For income tax withholding, the rate is 3.0% of wages.

Relief provisions. You may be relieved from having to pay employment taxes for a worker if you have a reasonable basis for not treating that worker as an employee. You must file all required federal tax returns, including information returns, on a basis consistent with your treatment of the worker to get this relief. For any periods beginning after 1977, you (or your predecessor) must not have treated any worker holding a substantially similar position as an employee.

IRS help. File Form SS-8 if you want the IRS to determine whether a worker is an employee.

Voluntary Classification Settlement Program (VCSP). If certain requirements are met, employers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to voluntarily reclassify their workers as employees for future tax periods may be eligible to participate in the VCSP. File Form 8952 to apply for the VCSP.

Business Owned and Operated by Spouses 

You may be partners in a partnership if you and your spouse jointly own and operate a business and share in the profits and losses. This is the case whether or not you have a formal partnership agreement. The partnership is considered the employer of any employees and is liable for any employment taxes due on wages paid to its employees.

Exception—Qualified joint venture. For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are spouses filing a joint income tax return, can elect not to be treated as a partnership for federal tax purposes. A qualified joint venture conducts a trade or business where:

• The only members of the joint venture are spouses who file a joint income tax return,
• Both spouses materially participate in the trade or business (mere joint ownership of property isn’t enough),
• Both spouses elect to not be treated as a partnership, and
• The business is co-owned by both spouses and isn’t held in the name of a state law entity such as a partnership or limited liability company (LLC).

To make the election, all items of income, gain, loss, deduction, and credit must be divided between the spouses, in accordance with each spouse’s interest in the venture, and reported on separate Schedules C or F as sole proprietors. Each spouse must also file a separate Schedule SE to pay self-employment taxes, as applicable.

Spouses using the qualified joint venture rules are treated as sole proprietors for federal tax purposes and generally don’t need an EIN. Either spouse may report and pay the employment taxes due on the wages paid to the employees using the EIN of that spouse’s sole proprietorship if employment taxes are owed by the qualified joint venture. Filing as a qualified joint venture won’t generally increase the spouses’ total tax owed on the joint income tax return. However, it gives each spouse credit for social security earnings on which retirement benefits are based and for Medicare coverage without filing a partnership return.

Exception—Community income. You can treat the business either as a sole proprietorship or a partnership if you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U.S. possession. You may still make an election to be taxed as a qualified joint venture instead of a partnership.