statutory employees

[winnie]

I have an S corporation who is using contract sales people that may be statutory employees. I am trying to resolve this issue. An excerpt from Kleinrock's Federal Tax Expert defines the type of statutory employee that I am concerned with as follows:

"(4) a traveling or city salesman, other than as an agent-driver or commission-driver, engaged upon a full-time basis in the solicitation on the behalf of, and in the transmission to, his principal (except for side-line sales activities on behalf of some other person) of orders from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments for merchandise for resale or supplies for use in their business operations. Code Section 3121(d)(3)."


This hinges on one main issue - can this be supplies? My client sells and installs flooring, primarily to business customers. There are no sales of just flooring -- all sales are installed. My question is whether the floor that we stand on could be construed to be a "supply for use in their business operations"?

Any thoughts, experiences, references for this kind of situation?

Winnie in NC

[Bees Knees]

I wouldn't call it a supply. An installed floor could be viewed as merchandise. But then the requirement also says the salesman has to be involved in the transmission of the merchandise or supply from the wholesaler to the business. Is the salesman going to do the actual installing of the floor?

[winnie]

no transmission

They only sell. They don't deliver, install or place order for the flooring. Owner, not sales people, place the purchase order and is responsible for installation using various subcontractors. Do you think that clarifies that these guys are not statutory employees?

[Bees Knees]

maybe this will help

Reg. Section 31.3121(d)-1(d)(3)(iv) says:

(iv) TRAVELING OR CITY SALESMAN.

(a) This occupational group includes a city or traveling
salesman who is engaged upon a full-time basis in the
solicitation on behalf of, and the transmission to, his
principal (except for side-line sales activities on behalf
of some other person or persons) of orders from
wholesalers, retailers, contractors, or operators of
hotels, restaurants, or other similar establishments for
merchandise for resale or supplies for use in their
business operations. An agent-driver or commission-driver
is not within this occupational group. City or traveling
salesmen who sell to retailers or to the others specified,
operate off the premises of their principals, and are
generally compensated on a commission basis, are within
this occupational group. Such salesmen are generally not
controlled as to the details of their services or the means
by which they cover their territories, but in the ordinary
case they are expected to call on regular customers with a
fair degree of regularity.

(b) In order for a city or traveling salesman to be
included within this occupational group, his entire or
principal business activity must be devoted to the
solicitation of orders for one principal. Thus, the
multiple-line salesman generally is not within this
occupational group. However, if the salesman solicits
orders primarily for one principal, he is not excluded from
this occupational group solely because of side-line sales
activities on behalf of one or more other persons. In such
a case, the salesman is within this occupational group only
with respect to the services performed for the person for
whom he primarily solicits orders and not with respect to
the services performed for such other persons. The
following examples illustrate the application of the
foregoing provisions:

EXAMPLE 1. Salesman A's principal business activity is
the solicitation of orders from retail pharmacies on
behalf of the X Wholesale Drug Company. A also
occasionally solicits orders for drugs on behalf of
the Y and Z Companies. A is within this occupational
group with respect to his services for the X Company
but not with respect to his services for either the Y
Company or the Z Company.

EXAMPLE 2. Salesman B's principal business activity is
the solicitation of orders from retail hardware stores
on behalf of the R Tool Company and the S Cooking
Utensil Company. B regularly solicits orders on behalf
of both companies. B is not within this occupational
group with respect to the services performed for
either the R Company or the S Company.

EXAMPLE 3. Salesman C's principal business activity is
the house-to-house solicitation of orders on behalf of
the T Brush Company. C occasionally solicits such
orders from retail stores and restaurants. C is not
within this occupational group.

[Bees Knees]

None of the examples in the regs seem to include contractors who perform installation services. I think you might have a problem in that the product requires a certain amount of labor to deliver. I don't think construction contract type services were intended to be included in this category. Also, you have a problem with regularity. How often do you sell the installed floor to the same customer? It isn't regular if you only visit the customer once every 10 years to have a new floor installed.

[winnie]

Thanks for the reference and your replies. I have read the regs and the Code and still can't tell if it applies to my situation! I certainly don't want them to be statutory employees, but I want to do the right thing.

If I understand, I think you are saying that because of the additional labor and the events that happen after the salesman makes the sale, it puts them out of the statutory employee category. This reading between the lines is driving me crazy!

Has anyone been through an audit on the issue?

[winnie]

regularity

I don't know how often they go to the clients, but some of them are very big. Like big hospitals and universities that could have ongoing needs in different locations. I will find out.

[Bees Knees]

One thing to keep in mind, according to Pub 15-A, a statutory employee is generally considered an independent contractor under the common law rules, except for the specific rules described in the statute that defines them as statutory employees.

In other words, even if they are one of the professions listed, if they are treated as an employee rather than an independent contractor, they are an employee, not a statutory employee.

You can defeat the independent contractor rules by the level of control the employer has over the employee, the financial control, fringe benefits, and other things that make the person obviously an employee. If you want to play it safe, treat the worker like an employee and withhold federal income tax along with FICA and state taxes. Pay unemployment tax, workers comp, and do all the other stuff you do to regular employees. The IRS is never going to question whether a worker is an employee or not. The only time IRS gets involved is when you try to treat someone as an independent contractor, or something in-between, like a statutory employee. It is to the government's advantage NOT to allow statutory employee treatment, because statutory employees do not have federal income tax withheld, and they get to deduct 100% of their unreimbursed business expenses on Schedule C, rather than Schedule A, subject to the 2% AGI limitation.

[winnie]

thanks

My client does not want these guys to be employees and is taking serious steps to make them more like independent contractors. This is a good caution.

Just had to advise my church on independent contractor position vs employee for a friend who wanted to be an independent contractor. Had to say, sorry, looks like employee to me! And I think IRS would say employee all the way.