Publication 15-A
Employer's Supplemental Tax Guide
(Revised: 1/2003)

(Supplement to Circular E, Employer's Tax Guide (Publication 15))

Introduction

This publication supplements Circular E, Employer's Tax Guide. It contains specialized and detailed employment tax information supplementing the basic information provided in Circular E. Publication 15-B, Employer's Tax Guide to Fringe Benefits, contains information about the employment tax treatment of various types of noncash compensation. This publication contains:

• Alternative methods and tables for figuring income tax withholding.
• Combined income tax, employee social security tax, and employee Medicare tax withholding tables.
• Tables for withholding on distributions of Indian gaming profits to tribal members.

Telephone help.   You can call the IRS with your tax questions. Check your telephone book for the local number or call 1-800-829-4933.

Help for people with disabilities.   Telephone help is available using TTY/TDD equipment. You can call 1-800-829-4059 with your tax question or to order forms and publications. You may also use this number for problem resolution assistance.

Ordering publications and forms.   See page 58 for information on how to obtain forms and publications.

Useful Items

You may want to see:

Publication

• 15   Circular E, Employer's Tax Guide
• 15-B   Employer's Tax Guide to Fringe Benefits
• 51   Agricultural Employer's Tax Guide
• 509   Tax Calendars for 2003
• 225   Farmer's Tax Guide
• 515   Withholding of Tax on Nonresident Aliens and Foreign Entities
• 535   Business Expenses
• 553   Highlights of 2002 Tax Changes
• 583   Starting a Business and Keeping Records
• 1635   Understanding Your EIN

Items To Note

Furnishing Form W-2 to employees electronically.   You may set up a system to furnish Forms W-2 to employees who choose to receive them in this format. Each employee participating must consent electronically, and you must notify the employees of all hardware and software requirements to receive them. You may not send Form W-2 electronically to any employee who does not consent or who has revoked consent previously provided.

To furnish Forms W-2 electronically, you must meet the following disclosure requirements and provide a clear and conspicuous statement of each of them to your employees.

1. The employee must be informed that he or she may receive a paper Form W-2 if consent is not given to receive it electronically. The consent statement must be made electronically in a way that demonstrates that the employee can access the Form W-2 in the electronic form that will be used to furnish the statement.
2. The employee must be informed how to obtain a paper copy and whether any fee will be charged for a paper copy.
3. The employee may withdraw consent in writing at any time on 30 days notice. The employer will confirm the withdrawal in writing, and inform the employee of the consequences of the withdrawal.
4. The employer will notify the employee of the scope and duration of the consent.
5. The employer will inform the employee that the form may be required to be attached to his or her tax returns, and that the employee may need to print the forms.

The employer must furnish the electronic statements by the due date of the paper forms. The employer must notify the employees that the Forms W-2 will be posted on a web site by January 31. This notice may be delivered by mail, electronic mail, or in person.

For more information, see the Regulations under section 6051.

Electronic deposit requirement.   Certain employers are required to make deposits of employment taxes using the Electronic Federal Tax Payment System (EFTPS). If you are required to use EFTPS and fail to do so, you may be subject to a 10% penalty. See Circular E for more information.

If you are not required to use EFTPS, you may participate voluntarily. To enroll in or get more information about EFTPS, call 1-800-945-8400 or 1-800-555-4477 or visit the EFTPS Web Site at www.eftps.gov.

Electronic submission of Forms W-4, W-4P, W-4S, W-4V, and W-5.   You may set up a system to electronically receive any or all of the following forms from an employee or payee:

• Form W-4, Employee's Withholding Allowance Certificate
• Form W-4P, Withholding Certificate for Pension or Annuity Payments
• Form W-4S, Request for Federal Income Tax Withholding From Sick Pay
• Form W-4V, Voluntary Withholding Request
• Form W-5, Employee's Advance Earned Income Credit Certificate

If you establish an electronic system to receive any of these forms, you do not need to process that form in a paper version.

For each form that you establish an electronic submission system for, you must meet the following requirements:

1. The electronic system must ensure that the information received by the payer is the information sent by the payee. The system must document all occasions of user access that result in a submission. In addition, the design and operation of the electronic system, including access procedures, must make it reasonably certain that the person accessing the system and submitting the form is the person identified on the form.
2. The electronic system must provide exactly the same information as the paper form.
3. The electronic submission must be signed with an electronic signature by the payee whose name is on the form. The electronic signature must be the final entry in the submission.
4. Upon request, you must furnish a hard copy of any completed electronic form to the IRS and a statement that, to the best of the payer's knowledge, the electronic form was submitted by the named payee. The hard copy of the electronic form must provide exactly the same information as, but need not be a facsimile of, the paper form. For Forms W-4 and W-5, the signature must be under penalty of perjury, and must contain the same language that appears on the paper version of the form. The electronic system must inform the employee that he or she must make a declaration contained in the perjury statement and that the declaration is made by signing the Form W-4 or W-5.
5. You must meet all recordkeeping requirements that apply to the paper forms.

For more information, see:

• Form W-4 - Regulations section 31.3402(f)(5)-1
• Form W-5 - Announcement 99-3. You can find Announcement 99-3 on page 15 of Internal Revenue Bulletin 1999-3 at
  www.irs.gov/pub/irs-irbs/irb99-03.pdf.
• Forms W-4P, W-4S, and W-4V - Announcement 99-6. You can find Announcement 99-6 on page 24 of Internal Revenue Bulletin 1999-4 at
  www.irs.gov/pub/irs-irbs/irb99-04.pdf.

Photographs of Missing Children

The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this booklet on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

1. Who Are Employees?

Before you can know how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be -

• An independent contractor.
• A common-law employee.
• A statutory employee.
• A statutory nonemployee.

This discussion explains these four categories. A later discussion, Employee or Independent Contractor? (section 2), points out the differences between an independent contractor and an employee and gives examples from various types of occupations. If an individual who works for you is not an employee under the common-law rules (see section 2), you generally do not have to withhold Federal income tax from that individual's pay. However, in some cases you may be required to withhold under backup withholding requirements on these payments. See Circular E for information on backup withholding.

Independent Contractors

People such as lawyers, contractors, subcontractors, public stenographers, and auctioneers who follow 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 your employee if you can 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 Employee or Independent Contractor? (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. Nor does it 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, is not considered an employee. A director of a corporation is not 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 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 (section 4).

Leased employees.   Under certain circumstances, a corporation furnishing workers to various professional people and firms is the employer of those workers for employment tax purposes. For example, a professional service corporation may provide the services of secretaries, nurses, and other similarly trained workers to its subscribers.

The service corporation enters into contracts with the subscribers under which the subscribers specify the services to be provided and the fee to be paid to the service corporation for each individual furnished. The service corporation has the right to control and direct the worker's services for the subscriber, including the right to discharge or reassign the worker. The service corporation hires the workers, controls the payment of their wages, provides them with unemployment insurance and other benefits, and is the employer for employment tax purposes. For information on employee leasing as it relates to pension plan qualification requirements, see Leased employees in Pub. 560, Retirement Plans for Small Business (SEP, SIMPLE, and Keogh Plans).

Additional information.   For more information about the treatment of special types of employment, the treatment of special types of payments, and similar subjects, get Circular E or Circular A (for agricultural employers).

Statutory Employees

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

1. A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.
2. A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.
3. An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.
4. A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer's business operation. The work performed for you must be the salesperson's principal business activity. See Salesperson in section 2.

Social security and Medicare taxes.   Withhold social security and Medicare taxes from the wages of statutory employees if all three of the following conditions apply.

• The service contract states or implies that substantially all the services are to be performed personally by them.
• They do not have a substantial investment in the equipment and property used to perform the services (other than an investment in transportation facilities).
• The services are performed on a continuing basis for the same payer.

Federal unemployment (FUTA) tax.   For FUTA tax, the term employee means the same as it does for social security and Medicare taxes, except that it does not include statutory employees in categories 2 and 3 above. Thus, any individual who is an employee under category 1 or 4 is also an employee for FUTA tax purposes and subject to FUTA tax.

Income tax.   Do not withhold income tax from the wages of statutory employees.

Reporting payments to statutory employees.   Furnish a Form W-2 to a statutory employee, and check statutory employee in box 13. Show your payments to the employee as other compensation in box 1. Also, show social security wages in box 3, social security tax withheld in box 4, Medicare wages in box 5, and Medicare tax withheld in box 6. The statutory employee can deduct his or her trade or business expenses from the payments shown on Form W-2. He or she reports earnings as a statutory employee on line 1 of Schedule C or C-EZ (Form 1040). (A statutory employee's business expenses are deductible on Schedule C or C-EZ (Form 1040) and are not subject to the reduction by 2% of his or her adjusted gross income that applies to common-law employees.)

Statutory Nonemployees

There are two categories of statutory nonemployees: direct sellers and licensed real estate agents. They are treated as self-employed for all Federal tax purposes, including income and employment taxes, if:

1. Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked and
2. Their services are performed under a written contract providing that they will not be treated as employees for Federal tax purposes.

Direct sellers.   Direct sellers include persons falling within any of the following three groups:

1. Persons engaged in selling (or soliciting the sale of) consumer products in the home or place of business other than in a permanent retail establishment.
2. Persons engaged in selling (or soliciting the sale of) consumer products to any buyer on a buy-sell basis, a deposit-commission basis, or any similar basis prescribed by regulations, for resale in the home or at a place of business other than in a permanent retail establishment.
3. Persons engaged in the trade or business of delivering or distributing newspapers or shopping news (including any services directly related to such delivery or distribution).

Direct selling includes activities of individuals who attempt to increase direct sales activities of their direct sellers and who earn income based on the productivity of their direct sellers. Such activities include providing motivation and encouragement; imparting skills, knowledge, or experience; and recruiting. For more information on direct sellers, see Pub. 911, Direct Sellers.

Licensed real estate agents.   This category includes individuals engaged in appraisal activities for real estate sales if they earn income based on sales or other output.

Misclassification of Employees

Consequences of treating an employee as an independent contractor.   If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker (the relief provisions, discussed below, will not apply). See Internal Revenue Code section 3509 for more information.

Relief provisions.   If you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes for that worker. To get this relief, you must file all required Federal information returns on a basis consistent with your treatment of the worker. You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977.

Technical service specialists.   This relief provision does not apply to a worker who provides services to another business (the client) as a technical service specialist under an arrangement between the business providing the worker, such as a technical services firm, and the client. A technical service specialist is an engineer, designer, drafter, computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work.

This rule does not affect the determination of whether such workers are employees under the common-law rules. The common-law rules control whether the specialist is treated as an employee or an independent contractor. However, if you directly contract with a technical service specialist to provide services for your business rather than for another business, you may still be entitled to the relief provision. See Employee or Independent Contractor? below.

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