Why is this Topic Important to Financial Professionals? General classification and taxation of insurance professionals is governed by statute. Therefore, a basic discussion of the law as it applies to insurance agents and tax is below.
Just because common law classifications would allow for compensation as an independent contractor, doesn’t mean Congress agrees. An individual who meets the legal definition of an independent contractor may still be considered an “employee” for tax purposes. Generally, these “independent contractors” that are treated as “employees” are given the name “Statutory Employees”. As the name implies, Congress created a law that states some individuals who would normally be considered under common law as independent contractors are treated as employees for tax purposes. Among the categorization of “Statutory Employees”, according to the Code is “full-time life insurance salesman.” 
A full-time life insurance salesman means “[a]n individual whose entire or principal business activity is devoted to the solicitation of life insurance or annuity contracts, or both, primarily for one life insurance company”. The Treasury Regulations state that a full time life insurance salesman “ordinarily uses the office space provided by the company or its general agent, and stenographic assistance, telephone facilities, forms, rate books, and advertising materials are usually made available to him without cost.” 
On the contrary, an individual is not considered a full time life insurance salesman when he “is engaged in the general insurance business… the individual’s principal business activity” is not the, “solicitation of life insurance or annuity contracts, or both, for one company”. Likewise, “any individual who devotes only part time to the solicitation of life insurance contracts, including annuity contracts, and is principally engaged in other endeavors, is not a full-time life insurance salesman.”  Also, some producer groups have contractual relationships with multiple insurance companies, so life-insurance salespeople are sometimes able to sell products for more than one company, generally excluding them from statutory employee definition.
What does it mean to be a statutory employee? As has been discussed earlier this week, the tax treatment of the two dissimilar arrangements is significantly different. On the one hand, an employee, including statutory employees, will file for withholding of federal income taxes on wages as well as withholding for Medicare and Social Security taxes. Employees also are not considered to be in a trade or business. Generally, independent contractors operate as sole-proprietors or some incorporated or limited liability business structure. Meeting the definition of a trade or business, generally, these individuals will have gain or loss treatment in relation to their income as a tax structure.
Other examples of statutory employees include:
- “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 [an] agent or is paid on commission.
- “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.
For a detailed analysis regarding the tax treatment of life insurance agent, see Tax Facts Q 361. Who is an owner-employee for purposes of the qualification requirements?
We invite your questions and comments by posting them below, or by calling the Panel of Experts.
 26 U.S.C.A. § 3121(d)(3)(b)
 26 C.F.R. § 31.3121(d)-1
 Internal Revenue Service Publication 15-A (2010). Page 4.