Income: Tip and Statutory Employees

Question 1

What is a Statutory Employee?

Answer 1

An independent contractor who is treated as an employee for certain tax purposes

Question 2

Five categories of Statutory Employees

Answer 2

1. officers of tax exempt organizations
2. certain delivery drivers
3. full time life insurance/annuity sales agent primarily working for one company
4. some full time traveling sales people

Question 3

Statutory Employee: What three conditions must be met so that an employer can withhold Social Security and Medicare tax for the employee?

Answer 3

1. The service contract implies that substantially all the work will be done by the contractor
2. the contractor does not have a substantial investment in the equipment/property used for the job (other than transportation)
3. Services are performed on a continuing basis for the same payer

Question 4

What taxes are employers allowed to withhold on behalf of a statutory employee?

Answer 4

1. social security
2. medicare
3. FUTA - for delivery drivers/traveling salespeople
   NOT Federal income tax withholdings

Question 5

Does a Statutory Employee have to file a Schedule C or Schedule SE?

Answer 5

Schedule C - yes
Schedule SE - no
Schedule SE will only be filed for non-statutory income

Question 6

If two different companies treat a TP as a statutory employee how does that affect the TP’s return?

Answer 6

The taxpayer must file a separate Schedule C for each employer

Question 7

Can a Statutory Employee participate in a company’s retirement plan?

Answer 7

No.

Exception: Full-time life insurance salesperson

Question 8

Can a Statutory Employee deduct work related expenses?

Answer 8

Yes - Schedule C

Question 9

When can a salesperson be considered a Statutory Employee?

Answer 9

1. Full time traveling/city salesperson as a principal business
2. Salesperson primarily for one business
3. works on behalf of the business
4. sells merchandise/supplies for a business
   5 Turns in orders from: wholesalers, retailers,contractors, hotels, restaurants, etc.

Question 10

When can an “at home” worker be considered a Statutory Employee?

Answer 10

1. works on materials/goods that the employer provides
2. Employer furnishes specifications
3. Supplies/materials are returned to employer or a 3rd party the employer designates

Question 11

Requirements for a delivery driver to be considered a Statutory employee?

Answer 11

1. Agent or paid on commission

2. distributes beverages (not milk), fruits, veggies, or baked goods OR pickup/delivery laundry/dry cleaning

Question 12

Does a taxpayer report service charges added to a customer’s bill as tip income?

Answer 12

No, because the customer did not have an unrestricted right to determine the amount. The employer will add this amount to the employee’s wages.

Question 13

Is there anytime a taxpayer can skip reporting tips to an employer?

Answer 13

Yes, If tips for one job and for one month < $20

Question 14

How is tip income reported on a W@?

Answer 14

Regular tips are included as wages on the W2 in box 1
Allocated tips are reported on the W2 in box 8

Both amounts are included on the 1040 as wages.

Question 15

Are physical gifts given as tips taxable?

Answer 15

yes

Question 16

What three things is a taxpayer receiving tips required to do?

Answer 16

1. keep records
2. report all tips to the employer
3. report all tip income on the tax return