Independent Contractors

People such as doctors, veterinarians, and auctioneers who work in an independent trade, business, or profession in which they offer their services to the public are generally not employees. However, whether such people are employees or independent contractors depends on the facts in each case. The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.

Common-Law Employees

Under common-law rules, anyone 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. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed. For a discussion of facts that indicate whether an individual providing services is an independent contractor or employee, see section 2.

If you have an employer-employee relationship, it makes no difference how it is labeled. The substance of the relationship, not the label, governs the worker's status. It doesn't matter whether the individual is employed full time or part time.

For employment tax purposes, no distinction is made between classes of employees. Superintendents, managers, and other supervisory personnel are all employees. An officer of a corporation is generally an employee; however, an officer who performs no services or only minor services, and neither receives nor is entitled to receive any pay, isn't considered an employee. A director of a corporation isn't an employee with respect to services performed as a director.

You generally have to withhold and pay income, social security, and Medicare taxes on wages that you pay to common-law employees. However, the wages of certain employees may be exempt from one or more of these taxes. See Employees of Exempt Organizations (section 3) and Religious Exemptions and Special Rules for Ministers (section 4).

Statutory Employees

If workers are independent contractors under the
common-law rules, such workers may nevertheless be treated as employees by statute (also known as statutory employees) for certain employment tax purposes. This would happen if they fall within any one of the following four categories and meet the three conditions described next under Social security and Medicare taxes.

Statutory Nonemployees

There are three categories of statutory nonemployees: direct sellers, licensed real estate agents, and certain companion sitters. Direct sellers and licensed real estate agents are treated as self-employed for all federal tax purposes, including income and employment taxes, if:

Misclassification of Employees

Common-Law Rules

To determine whether an individual is an employee or an independent contractor under the common-law rules, the relationship of the worker and the business must be examined. In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered.

Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties. These facts are discussed next.

Industry Examples

The following examples may help you properly classify your workers.

Relocating for Temporary Work Assignments

If an employee is given a temporary work assignment away from their regular place of work, certain travel expenses reimbursed or paid directly by the employer in accordance with an accountable plan (see section 5 of Pub. 15) may be excludable from the employee’s wages. Generally, a temporary work assignment in a single location is one that is realistically expected to last (and does in fact last) for 1 year or less. If the employee’s new work assignment is indefinite, any living expenses reimbursed or paid by the employer (other than qualified moving expenses paid to a member of the U.S. Armed Forces on active duty who moves because of a permanent change of station due to a military order) must be included in the employee’s wages as compensation. For the travel expenses to be excludable:

If you reimburse or pay any personal expenses of an employee during their temporary work assignment, such as expenses for home leave for family members or for vacations, these amounts must be included in the employee's wages. See chapter 1 of Pub. 463, Travel, Gift, and Car Expenses, and section 5 of Pub. 15 for more information. These rules generally apply to temporary work assignments both inside and outside the United States.

Employee Achievement Awards

Don't withhold federal income, social security, or Medicare tax on the fair market value of an employee achievement award if it is excludable from your employee's gross income. To be excludable from your employee's gross income, the award must be tangible personal property given to an employee for length of service or safety achievement, awarded as part of a meaningful presentation, and awarded under circumstances that don't indicate that the payment is disguised compensation. Excludable employee achievement awards also aren't subject to FUTA tax.

The exclusion doesn’t apply to awards of cash, cash equivalents, gift cards, gift coupons, or gift certificates (other than arrangements granting only the right to select and receive tangible personal property from a limited assortment of items preselected or preapproved by you). The exclusion also doesn’t apply to vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items.

Scholarship and Fellowship Payments

Only amounts that you pay as a qualified scholarship to a candidate for a degree may be excluded from the recipient's gross income. A qualified scholarship is any amount granted as a scholarship or fellowship that is used for:

The exclusion from income doesn't apply to the portion of any amount received that represents payment for teaching, research, or other services required as a condition of receiving the scholarship or tuition reduction. These amounts are reportable on Form W-2. However, the exclusion will still apply for any amount, despite any service condition attached to the amount, received under the National Health Service Corps Scholarship Program; the Armed Forces Health Professions Scholarship and Financial Assistance Program; and a comprehensive student work-learning-service program operated by a work college, as defined in section 448(e) of the Higher Education Act of 1965.

Any amounts that you pay for room and board aren't excludable from the recipient's gross income. A qualified scholarship isn't subject to social security, Medicare, and FUTA taxes, or federal income tax withholding. For more information, see Pub. 970, Tax Benefits for Education.

Outplacement Services

If you provide outplacement services to your employees to help them find new employment (such as career counseling, resume assistance, or skills assessment), the value of these benefits may be income to them and subject to all withholding taxes. However, the value of these services won't be subject to any employment taxes if:

However, if you receive no additional benefit from providing the services, or if the services aren't provided on the basis of employee need, then the value of the services is treated as wages and is subject to federal income tax withholding and social security and Medicare taxes. Similarly, if an employee receives the outplacement services in exchange for reduced severance pay (or other taxable compensation), then the amount the severance pay is reduced is treated as wages for employment tax purposes.

Withholding for Idle Time

Payments made under a voluntary guarantee to employees for idle time (any time during which an employee performs no services) are wages for the purposes of social security, Medicare, and FUTA taxes, and federal income tax withholding.

Back Pay

Treat back pay as wages in the year paid and withhold and pay employment taxes as required. If back pay was awarded by a court or government agency to enforce a federal or state statute protecting an employee's right to employment or wages, special rules apply for reporting those wages to the Social Security Administration. These rules also apply to litigation actions and settlement agreements or agency directives that are resolved out of court and not under a court decree or order. Examples of pertinent statutes include, but aren't limited to, the National Labor Relations Act, Fair Labor Standards Act, Equal Pay Act, and Age Discrimination in Employment Act. See Pub. 957, Reporting Back Pay and Special Wage Payments to the Social Security Administration, and Form SSA-131, Employer Report of Special Wage Payments, for details.

Supplemental Unemployment Compensation Benefits

If you pay, under a plan, supplemental unemployment compensation benefits to a former employee, all or part of the payments may be taxable and subject to federal income tax withholding, depending on how the plan is funded. Amounts that represent a return to the employee of amounts previously subject to tax aren't taxable and aren't subject to withholding. You should withhold federal income tax on the taxable part of the payments made, under a plan, to an employee who is involuntarily separated because of a reduction in force, discontinuance of a plant or operation, or other similar condition. It doesn't matter whether the separation is temporary or permanent.

There are special rules that apply in determining whether supplemental unemployment compensation benefits are excluded from wages for social security, Medicare, and FUTA tax purposes. To be excluded from wages for such purposes, the benefits must meet the following requirements.

Withholding on taxable supplemental unemployment compensation benefits must be based on the withholding certificate (Form W-4) that the employee gave to you.

For more information, see Revenue Ruling 90-72, 1990-36 I.R.B. 13.

Golden Parachute Payments

A golden parachute payment, in general, is a payment made under a contract entered into by a corporation and key personnel. Under the agreement, the corporation agrees to pay certain amounts to its key personnel in the event of a change in ownership or control of the corporation. Payments to employees under golden parachute contracts are subject to social security, Medicare, and FUTA taxes, and federal income tax withholding. See Regulations section 1.280G-1 for more information.

No deduction is allowed to the corporation for any excess parachute payment. To determine the amount of the excess parachute payment, you must first determine if there is a parachute payment for purposes of section 280G. A parachute payment for purposes of section 280G is any payment that meets all of the following.

An excess parachute payment amount is the excess of any parachute payment over the base amount. For more information, see Regulations section 1.280G-1. The recipient of an excess parachute payment is subject to a 20% nondeductible excise tax. If the recipient is an employee, the 20% excise tax is to be withheld by the corporation.

Interest-Free and Below-Market-Interest-Rate Loans

In general, if an employer lends an employee more than $10,000 at an interest rate less than the current applicable federal rate (AFR), the difference between the interest paid and the interest that would be paid under the AFR is considered additional compensation to the employee. This rule applies to a loan of $10,000 or less if one of its principal purposes is the avoidance of federal tax.

This additional compensation to the employee is subject to social security, Medicare, and FUTA taxes, but not to federal income tax withholding. Include it in compensation on Form W-2 (or Form 1099-NEC for an independent contractor). The AFR is established monthly and published by the IRS each month in the Internal Revenue Bulletin. You can get these rates by going to IRS.gov and entering “AFR” in the search box. For more information, see section 7872 and its related regulations.

Leave-Sharing Plans

If you establish a leave-sharing plan for your employees that allows them to transfer leave to other employees for medical emergencies, the amounts paid to the recipients of the leave are considered wages. These amounts are includible in the gross income of the recipients and are subject to social security, Medicare, and FUTA taxes, and federal income tax withholding. Don't include these amounts in the wages of the transferors. These rules apply only to leave-sharing plans that permit employees to transfer leave to other employees for medical emergencies.

In addition, you may establish a leave-sharing plan that allows your employees to deposit leave in an employer-sponsored leave bank for use by other employees who have been adversely affected by a major disaster. Under such programs, the IRS won’t assert that a leave donor who deposits leave in the employer-sponsored leave bank under a major disaster leave-sharing program has income, wages, compensation, or rail wages for the deposited leave if the plan treats the employer’s payments to the leave recipient as wages or compensation for purposes of the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), the Railroad Retirement Tax Act (RRTA), the Railroad Unemployment Repayment Tax (RURT), and federal income tax withholding, unless excluded by another provision of law. See Notice 2006-59, 2006-28 I.R.B. 60, available at IRS.gov/irb/2006-28_IRB#NOT-2006-59, for what constitutes a major disaster and other rules.

Nonqualified Deferred Compensation Plans

Tax-Sheltered Annuities

Employer payments made by a public educational institution or a tax-exempt organization to purchase a tax-sheltered annuity for an employee (annual deferrals) are included in the employee's social security and Medicare wages if the payments are made because of a salary reduction agreement. However, they aren't included in box 1 of Form W-2 in the year the deferrals are made and aren't subject to federal income tax withholding. See Regulations section 31.3121(a)(5)-2 for the definition of a salary reduction agreement.

Contributions to a Simplified Employee Pension (SEP)

An employer's SEP contributions to an employee's individual retirement arrangement (IRA) are excluded from the employee's gross income. These excluded amounts aren't subject to social security, Medicare, or FUTA tax, or federal income tax withholding. However, any SEP contributions paid under a salary reduction agreement (SARSEP) are included in wages for purposes of social security, Medicare, and FUTA taxes. See Pub. 560 for more information about SEPs.

SIMPLE Retirement Plans

Employer and employee contributions to a savings incentive match plan for employees (SIMPLE) retirement account (subject to limitations) are excludable from the employee's income and are exempt from federal income tax withholding. An employer's nonelective (2%) or matching contributions are exempt from social security, Medicare, and FUTA taxes. However, an employee's salary reduction contributions to a SIMPLE retirement plan are subject to social security, Medicare, and FUTA taxes. For more information about SIMPLE retirement plans, see Pub. 560.

Sick Pay

Sick pay generally means any amount paid under a plan because of an employee's temporary absence from work due to injury, sickness, or disability. It may be paid by either the employer or a third party, such as an insurance company. Sick pay includes both short- and long-term benefits. It is often expressed as a percentage of the employee's regular wages.

Payments That Aren't Sick Pay

Sick pay doesn't include the following payments.

Sick Pay Plan

A sick pay plan is a plan or system established by an employer under which sick pay is available to employees generally or to a class or classes of employees. This doesn't include a situation in which benefits are provided on a discretionary or occasional basis with merely an intention to aid particular employees in time of need.

You have a sick pay plan or system if the plan is in writing or is otherwise made known to employees, such as by a bulletin board notice or your long and established practice. Some indications that you have a sick pay plan or system include references to the plan or system in the contract of employment, employer contributions to a plan, or segregated accounts for the payment of benefits.

Third-Party Payers of Sick Pay

Social Security, Medicare, and FUTA Taxes on Sick Pay

Income Tax Withholding on Sick Pay

The requirements for federal income tax withholding on sick pay and the methods for figuring it differ depending on whether the sick pay is paid by:

Depositing and Reporting

This section discusses who is liable for depositing social security, Medicare, FUTA, and withheld federal income taxes on sick pay. These taxes must be deposited under the same rules that apply to deposits of taxes on regular wage payments. See Pub. 15 for information on the deposit rules.

This section also explains how sick pay should be reported on Forms W-2, W-3, 940, and 941 (or Form 944).

Example of Figuring and Reporting Sick Pay

Note. The following example is for wages paid in 2023.

Dave, an employee of Edgewood Corporation, was seriously injured in a car accident on January 1, 2023. Dave's last day of work was December 31, 2022. The accident wasn't job related.

Key, an insurance company that wasn't an agent of the employer, paid Dave $2,000 sick pay each month for 10 months, beginning in January 2023. Dave submitted a Form W-4S to Key, requesting $210 be withheld from each payment for federal income tax. Dave received no payments from Edgewood from January 2023 through October 2023. Dave returned to work on November 1, 2023.

For the policy year in which the car accident occurred, Dave paid a part of the premiums for coverage, and Edgewood paid the remaining part. The plan was, therefore, a “contributory plan.” During the 3 policy years before the calendar year of the accident, Edgewood paid 70% of the total of the net premiums for its employees' insurance coverage, and its employees paid 30%.

Common Paymaster

If two or more related corporations employ the same individual at the same time and pay this individual through a common paymaster that is one of the corporations, the corporations are considered to be a single employer. They have to pay, in total, no more in social security tax than a single employer would pay.

Each corporation must pay its own part of the employment taxes and may deduct only its own part of the wages. The deductions won't be allowed unless the corporation reimburses the common paymaster for the wage and tax payments. See Regulations section 31.3121(s)-1 for more information. The common paymaster is responsible for filing information and tax returns and issuing Forms W-2 with respect to wages it is considered to have paid as a common paymaster.

Agent With an Approved Form 2678

Employers and payers must use Form 2678 to request approval for an agent to file returns and make deposits or payments of their employment or other withholding taxes. See Revenue Procedure 2013-39, 2013-52 I.R.B. 830, available at IRS.gov/irb/2013-52_IRB#RP-2013-39; Revenue Procedure 84-33, 1984-1 C.B. 502; and the General Instructions for Forms W-2 and W-3 for procedures and reporting requirements. Form 2678 doesn't apply to FUTA tax reportable on Form 940 unless the employer is a home care service recipient receiving home care services through a program administered by a federal, state, or local government agency.

Agents filing an aggregate Form 940 must file Schedule R (Form 940). Agents filing an aggregate Form 941 must file Schedule R (Form 941).

Reporting Agents

.For more information on third-party payer arrangements, including agents with an approved Form 2678, reporting agents, and certified professional employer organizations, see section 16 of Pub. 15..

Employee's Portion of Taxes Paid by Employer

.The information provided in this section doesn't take into account an employer that chooses to pay the Additional Medicare Tax on behalf of the employee..

If you pay your employee's social security and Medicare taxes without deducting them from the employee's pay, you must include the amount of the payments in the employee's wages for federal income tax withholding and social security, Medicare, and FUTA taxes. This increase in the employee's wages for your payment of the employee's social security and Medicare taxes is also subject to employee social security and Medicare taxes. This again increases the amount of the additional taxes you must pay.

To figure the employee's increased wages in this situation, divide the stated pay (the amount that you pay without taking into account your payment of employee social security and Medicare taxes) by a factor for that year. This factor is determined by subtracting from 1.0 the combined employee social security and Medicare tax rate for the year that the wages are paid. For 2024, the factor is 0.9235 (1.0 − 0.0765). If the stated pay is more than $155,702.10 (2024 wage base $168,600 × 0.9235), follow the procedure described under Stated pay of more than $155,702.10 in 2024 below.

International Social Security Agreements

The United States has social security agreements, also known as totalization agreements, with many countries that eliminate dual social security coverage and taxation. Under these agreements, employees must generally pay social security taxes only to the country where they work. Employees and employers who are subject to foreign social security taxes under these agreements are potentially exempt from U.S. social security taxes, including the Medicare portion. For more information, go to SSA.gov/international, or see Pub. 519, U.S. Tax Guide for Aliens.

Periodic Payments

Periodic payments are those made in installments at regular intervals over a period of more than 1 year. They may be paid annually, quarterly, monthly, etc. Withholding from periodic payments of a pension or annuity is generally figured in the same manner as withholding from wages. Form W-4P is used to request withholding on periodic payments. Form W-4P was redesigned for 2022. Although the final redesigned Form W-4P was available for use in 2022, the IRS postponed the requirement to begin using the redesigned form until January 1, 2023. Payers should have updated their system programming for this form in 2022. See Pub. 15-T for more information on how to withhold on periodic payments.

.Consider advising payees to use the IRS Tax Withholding Estimator, available at IRS.gov/W4App, when completing Form W-4P if they have social security, dividend, capital gain, or business income; are subject to the Additional Medicare Tax or Net Investment Income Tax; or receive these payments or pension and annuity payments for only part of the year..

There are some kinds of periodic payments for which the payee can't use Form W-4P because they are already defined as wages subject to federal income tax withholding. These include retirement pay for service in the U.S. Armed Forces and payments from certain NQDC plans and deferred compensation plans of exempt organizations described in section 457.

The payee’s Form W-4P stays in effect until they change or revoke it. You must notify payees each year of their right to choose not to have federal income tax withheld or to change their previous choice.

Nonperiodic Payments—10% Default Withholding Rate

Form W-4R is used to request withholding on nonperiodic payments. Distributions from an IRA that are payable on demand are treated as nonperiodic payments. Although Form W-4R was available for use in 2022, the IRS postponed the requirement to begin using the new form until January 1, 2023. Payers should have updated their system programming for this form in 2022.

Eligible Rollover Distribution—20% Default Withholding Rate

Form W-4R is used to request withholding on eligible rollover distributions. Eligible rollover distributions include distributions from eligible retirement plans (other than IRAs), such as qualified plans, section 401(k) plans, section 457(b) plans maintained by a governmental employer, section 403(a) annuity plans, or section 403(b) tax-sheltered annuities that are eligible to be rolled over tax free to an IRA or another eligible retirement plan. Although the Form W-4R was available for use in 2022, the IRS postponed the requirement to begin using the new form until January 1, 2023. Payers should have updated their system programming for this form in 2022.

Payments Outside the United States and Payments to Foreign Persons

Generally, if a payee is a U.S. citizen or a resident alien, the payee can't choose not to have federal income tax withheld on periodic payments (or choose a rate of less than 10% for nonperiodic payments) to be delivered outside the United States and its territories.

Don't use Form W-4P or Form W-4R for payments to nonresident aliens, nonresident alien beneficiaries, or foreign estates. In the absence of a treaty exemption, nonresident aliens, nonresident alien beneficiaries, and foreign estates are generally subject to a 30% withholding tax under section 1441 on the taxable portion of a periodic or nonperiodic pension or annuity payment that is from U.S. sources. However, many tax treaties provide that private pensions and annuities are exempt from withholding and tax. Also, payments from certain pension plans are exempt from withholding even if no tax treaty applies. See Pub. 515 and Pub. 519. A foreign person should submit Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), to you before receiving any payments. The Form W-8BEN must contain the foreign person's taxpayer identification number (TIN) to support a withholding exemption. A TIN for this purpose means a U.S. TIN (SSN or individual taxpayer identification number (ITIN)). However, for a claim based on a tax treaty, a foreign TIN may be substituted for a U.S. TIN.

Special rules may apply to nonresident aliens who relinquished U.S. citizenship or ceased to be long-term residents of the United States after June 16, 2008. For more information, see section 5 of Notice 2009-85, 2009-45 I.R.B. 598, available at IRS.gov/irb/2009-45_IRB#NOT-2009-85. Also, see Form W-8CE, Notice of Expatriation and Waiver of Treaty Benefits.

Statement of Income Tax Withheld

By January 31 of the next year, you must furnish a statement on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., showing the total amount of the payee's pension or annuity payments and the total federal income tax you withheld during the prior year. Report income tax withheld on Form 945, Annual Return of Withheld Federal Income Tax, not on Forms 941 or Form 944.

If the payee is a foreign person who has provided you with Form W-8BEN, you must instead furnish a statement to the payee on Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, by March 15 for the prior year. Report federal income tax withheld on Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.

Substitute Submissions of Form W-4R

General requirements for any system set up to electronically receive a Form W-4R are discussed earlier under Electronic submission of Forms W-4R, W-4S, and W-4V. This section provides specific requirements for substitute submissions of Form W-4R. For payers using electronic or paper substitutes for Form W-4R, substitute forms for the 2024 Form W-4R incorporating all changes made to the 2024 Form W-4R and complying with the guidelines provided here must be in use by the later of January 1, 2024, or 30 days after the IRS releases the final version of the 2024 Form W-4R.

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