Our NYC CPA firm can help self-employed business owners determine how to classify employees for tax purposes. If the outside salespeople or sales reps your company uses to sell its product work independently, you must treat them as independent contractors instead of as employees for tax purposes. However, your definition of independent work may not be the same as the IRS’s definition. What matters to the IRS is whether you have the right to direct and control not only what a worker will do but also how it should be done.
As a result you need to plan how you treat your sales force keeping in mind the key criteria that IRS examiners will use in deciding whether you have an employee payroll tax problem. Although each company will be judged separately and every piece of information is important, there are some main points you can expect the IRS to cover in determining whether your salespeople are really employees.
Training: An extensive training program for new salespeople, coupled with ongoing periodic sales training, may tend to indicate that an employer-employee relationship exists.
Supervision: Frequent call-ins and scheduling weekly sales meetings are typical requirements of a regular employer, but having salespeople check in occasionally with the sales manager is probably OK.
Right to sell other products or services: Having a blanket prohibition that prevents your salespeople selling anything other than your product or service is a strong employee-like factor. On the other hand, allowing salespeople to sell only non-competing products or services may be OK.
Expenses: Independent contractors typically pay their own expenses, such as travel, supplies, and auto expenses; on the other hand, employees usually are partially or completely reimbursed by their employers.
Payment for services rendered: Salespeople who are true independent contractors are generally paid only when they produce, aren’t paid a minimum, and don’t receive benefits. Salespeople who are true employees usually are paid a minimum salary, and may get benefits as well, such as participation in a retirement plan.
Office facilities: Having an office off-site is not necessarily a strong indicator that a worker is an independent contractor or an employee. But if having an office represents a significant investment in the business, the worker is more likely to be an independent contractor.
Keep in mind that these are only some of the criteria that IRS examiners use to check the payroll tax treatment of salespeople. Other complex rules may come into play, including some that automatically treat certain types of salespeople as employees for FICA tax purposes. Please do not hesitate to contact our office if you have questions or would like us to make an in-depth review of how to classify your employees.