For the most part, salespersons are treated the same as other employees for payroll tax purposes. As a result, a business is required to withhold and pay payroll taxes if the salespersons are considered employees. With respect to salespersons who are independent contractors (except certain traveling or city salespersons), there are no payroll tax obligations.
However, real estate agents and direct sellers are two types of salespersons for whom a business may be relieved of all federal and most state payroll taxes even if they are properly classified as employees.
This relief is only available if:
- substantially all salesperson compensation is directly related to sales or other output, as opposed to the number of hours they work, and
- the salespersons perform their services pursuant to written contracts specifying that they will not be treated as employees for payroll tax purposes
“Direct sellers” are persons who sell or solicit the sale of consumer products at a place of business, such as a home, that is not a permanent retail establishment. The sales can be to the ultimate consumer or to a buyer who purchases the products for resale and on a buy-sell basis, deposit-commission basis, or similar basis.
The independent contractor versus employee debate has been raging for years and is sure to continue in the foreseeable future. The heart of the matter rests with the right to direct or control the worker’s efforts. Payroll audits are geared to ensure compliance and to detect avoidance of payroll tax obligations. Nevertheless, businesses that do their due diligence in following the guidelines set forth herein, who document their positions, and who maintain a line of communication with their tax professional, will ensure that they mitigate the effects of any potential audit finding.
If you have questions, please contact Victor C. Belgiorno at 516-861-3704 or or Christopher J. Sena at 516-541-6549 or .