Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 76-16

1976-1 C.B. 311

Section 3121 -- Social Security Definitions

IRS Headnote

Home improvement salespersons. Individuals, engaged by a home improvement company under oral agreements to sell its products and services to homeowners, who make their own appointments, furnish their own transportation, pay their own expenses, are paid commissions, allowed a weekly advance, may determine the prices to be charged but are not liable if a loss is incurred, are provided a desk, telephone use, stationery, and are required to contact furnished leads, to report in during the day, and whose services may be terminated at any time by either party, are employees for purposes of the FICA, FUTA, and income tax withholding.

Full Text

Rev. Rul. 76-16

Advice has been requested whether, under the circumstances described below, salespeople are employees of a company for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages (chapters 21, 23, and 24 respectively, subtitle C, Internal Revenue Code of 1954).

A company in the home improvement business engages individuals to sell its products and services to homeowners. The individuals work under oral agreements whereby the company furnishes them with leads to prospective customers. The individuals make their own appointments, furnish their own transportation, and pay their own expenses. They are paid commissions on the job contracts sold. They are allowed advances of $300 per week against future commissions. Each job is different so that no fixed price may be established by the company. The salesperson determines the materials and labor needed for a job and the price which will be charged for the job. The salesperson is instructed to set prices at a level to permit the company to realize a profit on each job, but the salesperson is not liable if a loss is incurred by the company on a job. Either party may terminate the arrangement at any time.

The company provides each salesperson with a desk, use of a telephone, stationery, and leads, at no cost to the salesperson. The salespersons operate under the company's name when performing services and do not perform services for others. They are required to contact leads and report in during the day to discuss contracts sold, price, and to pick up new leads. No minimum quota is required, but a salesperson is expected to earn the $300 per week draw.

Guides for determining whether an employer-employee relationship exists are found in three substantially similar sections of the Employment Tax Regulations, namely, sections 31.3121(d)-1(c), 31.3306(i)-1, 31.3401(c)-1. The regulations provide, in part, that generally the relationship of employer and employee exists when the person for whom the services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work, but also as to the details and means by which that result is accomplished. Thus, an employee is subject to the will and control of the employer not only as to what shall be done, but as to how it shall be done. In this connection it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. The right to discharge is also an important factor indicating that the person possessing that right is an employer. Other factors characteristic of an employer, but not necessarily present in every case, are the furnishing of tools and the furnishing of a place to work, to the individual who performs the services.

In the instant case, the company furnishes the individuals with prospects on whom they are expected to call and report the results, and reviews the contracts sold. The company also provides the necessary facilities, instructions, and assistance to enable the salespeople to carry out its functions. The company exercises or has the right to exercise the control over the salespeople in the performance of their services that is necessary to establish the relationship of employer and employee under the common law rules. See Rev. Rul. 55-124, 1955-1 C.B. 482, which holds that a commission salesperson, who called on sales prospects furnished by a company and at times waited on customers that came into the company's store, was an employee for Federal employment tax purposes.

Accordingly, the salespeople are employees of the company for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages.