Definition of an employee

An employee is an individual who works for someone else in exchange for compensation. The exact nature of an employee arrangement is important, since the applicability of payroll taxes and the responsibility for their remittance depends on whether someone is an employee. Thus, a person who performs services for a business may be categorized in one of the following ways:

  • Common-law employee. Under common-law rules, someone is an employee if you have the right to control what will be done and how it will be done, even if the individual has a considerable degree of freedom of action. A person who meets these criteria is considered an employee, irrespective of all other considerations. For example, a person is still an employee if he works on a full-time or part-time basis, and irrespective of any job title, such as being called an agent or an independent contractor.
  • Independent contractor. This includes people who follow an independent trade in which they offer services to the public, such as doctors, locksmiths, and plumbers. These people are not considered employees, especially if they have control over the means and methods of producing their work.
  • Statutory employee. A worker is considered an employee if he or she falls into one of the following categories:
    • A driver who delivers food, beverages (other than milk), laundry, or dry cleaning for someone else. This person may be on a commission form of compensation.
    • A full-time life insurance salesperson who sells primarily on behalf of one company.
    • Someone who works at home under guidelines issued by the entity for which the work is done, with materials furnished by and returned to that entity.
    • A traveling salesperson who works full-time for one entity to obtain orders from customers. These orders must be for items for either resale or use as supplies in the customer’s business. The customers must be either be contractors, retailers, wholesalers, or operators of hotels, restaurants, or any other businesses dealing with food or lodgings.

In addition, the service contract must state or imply that substantially all of the services are to be performed personally by the worker, the worker does not have a substantial investment in the assets used to perform the service, and the service is performed on a continuing basis for the same payer.

  • Statutory nonemployee. By statute, there are three categories of workers who are not considered to be employees. They are:
    • Companion sitters. Includes individuals who provide personal attendance, companionship, or household care services to children, the elderly, or the disabled.
    • Direct sellers. Includes individuals selling consumer products other than in a retail establishment, and those delivering newspapers. This classification applies if payments to the person are directly related to sales or other output, rather than the number of hours worked, and their services are performed under a written contract stating that they will not be classified as employees for federal tax deduction and withholding purposes.
    • Qualified real estate agents. Includes real estate agents as well as those people engaged in appraisal activities where they earn income based on sales. This classification applies if payments to the person are directly related to sales or other output, rather than the number of hours worked, and their services are performed under a written contract stating that they will not be classified as employees for federal tax deduction and withholding purposes.

The definition of a statutory employee is of particular significance, because you only deduct payroll taxes from the wages of statutory employees; you do not withhold federal income taxes from their wages.