Is a fee-based employee exempt from SE tax?

[dianejhart]

I have a client who is a Special Civil Part Court Officer-Process Server, he is paid strictly a fee based how much he recovers from clients. He is stating that his job is exempt from SE tax. He said all the employess state they are exempt from SE. He even gave me some back up data from the SSA but it was old and I can not find out if this is actually the case and if so, how do I exempt him from SE tax?  Form 4029 is for Clergy etc. Thank you in advance.

[TaxGuyBill]

At first glance, it is just the opposite - fee-based public officials ARE subject to SE tax.

A fee-basis public official receives and retains remuneration directly from the public. This work is considered self-employment under IRC 1402(c)(2)(E) and these individuals are not employees with respect to this work. An official who receives salary, even if it’s called “fees,” is a common-law employee and is subject to social security and Medicare withholding. Fee-basis public officials are subject to self-employment tax.

https://www.irs.gov/government-entities/federal-state-local-governments/tax-withholding-for-governme...

Therefore, holders of “public office” are not subject to self-employment tax. An exception applies for certain public officials paid solely on a fee basis. All other holders of public office, paid on a salary basis, are excepted from self-employment tax and are presumed to be employees receiving wages.

https://www.irs.gov/government-entities/federal-state-local-governments/tax-withholding-for-governme...

[sjrcpa]

So, is OP's client a holder of a public office?

I just reread Bill's post.

[dianejhart]

Thank you for your answer. No I am even more stumped. The SS handbook #1001 that states "you perform services in a position compensated solely on a fee basis" (this is the info he gave me also) then you are exempt, this is what he is saying they fall under. Yes he does, because he only receives a fee if he recovers any money. If this is the case, how do I exempt him in Proseries Professional? I do not see a Section 218 agreement in the list of forms. 

And again thank you for your help.

[rbynaker]

I think I'm missing something obvious.  Aren't employees exempt from SE tax because, well, THEY'RE EMPLOYEES!?!?

[dianejhart]

He is reporting his own income-no 1099 or W2.

[Norman2001 · Accepted solution]

I have a few clients that work for the county appraisal office. Their pay is reported on 1099-NEC and claim that they are exempt from self-employment tax. I asked for proof, and they produced a letter from the Taxpayer Advocacy Service that backed up their claim.  

I entered the income as Other Income, Sch 1 Line 8. Line 8 has a worksheet, then entered on Line 3 e (Non Employee Compensation  from 1099-NEC). There are other categories on the worksheet that might fit your situation.

I've been doing this for 3 years, so far nothing from IRS.  

[qbteachmt]

It seems they are confusing Employee, Statutory Employee, and Independent Contractor. I know who would be able to address this (other than the SSA, of course): A Local Government Entity-qualified auditor, to be found on the State's qualified-approved list. That's who I learn these things from. Or, the State's Social Security Administrator.

Pub 963:

"If a position is covered by a Section 218 Agreement, then anyone holding that position is an employee. Therefore, the first question for a government to ask about a worker’s status is whether the worker is in a position covered under a Section 218 Agreement. If Section 218 Agreement coverage applies, this fact takes precedence over other considerations, including the common law tests discussed below and the mandatory coverage rules."

Employees would not be subject to SE, obviously. But, to argue you are fee-based, is to argue against your own argument that you are not subject to SE taxes.

"Services in positions compensated solely by fees are excluded from coverage under Section 218 Agreements (unless the State specifically included these services) and are covered as self-employment and subject to SECA. "

"A fee-based public official is an individual who receives and retains remuneration directly from the public. An individual who receives payment for services from government funds in the form of a wage or salary is not a fee-based public official, even if the compensation is called a fee."

https://secure.ssa.gov/poms.nsf/lnx/1960001625

The person is not paid by the public (fee based); fee based is unusual, because it can be leveraged. Being paid because of and based on how much you collect is not Paid by the Public. The money is turned over, and there is a Commission, essentially. Is the County/Court paying the person? Did they contract for this or do an intake form?

The taxpayer should know their worker status. This County/Court District can be doing it wrong, of course. If the taxpayer had to bid on the work, and is at risk of losing this contract for services, that would make them independent contractors.

Read Pub 963.

Pub 15-A covers Statutory Employee for FICA.

Social security and Medicare taxes.

You must 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 don't have a substantial investment in the equipment and property used to perform the services (other than an investment in facilities for transportation, such as a car or truck).

• The services are performed on a continuing basis for the same payer.

Good luck. It's worth knowing this stuff. You might be paid for amending all of the returns for all of these people!

[dianejhart]

Thank you!

[BobKamman]

What exactly does he do?  If he is a "process server," he delivers summons and complaints to parties involved in a lawsuit.  The documents come from the court but he doesn't work for the court.  The party who asked for the service, pays him.  When you write "how much he recovers from clients," that makes it sound like he's a collection agency, or it might just be a different way of saying "how much that party  pays him" and making it sound like he's something special when he's not.  Process servers pay SE tax.  

[dianejhart]

He gets paid a fee directly from the funds he recovers from the person he serves. It comes out of a trust account. The court does not pay him. He is completely on his own. I hope this helps.

[dianejhart]

He gets paid a fee directly from the funds he recovers from the person he serves. It comes out of a trust account. The court does not pay him. He is completely on his own. I hope this helps.

[BobKamman]

This sounds like we are being told just enough to make sure we don't come up with the right answer.  Does this have something to do with wage garnishment for delinquent child support?  He serves the writ of garnishment on the employer or bank.  Maybe it results in collection of funds.  The money goes to the state agency that administers child-support enforcement for mothers on welfare.  OK, sometimes fathers.  Either case, the state keeps the funds because it has a lien on it for benefits already paid.  It has a contingency-fee arrangement with some process servers that they don't get paid if nothing is collected. Like all the other process servers in America, his income is subject to Social Security tax. And when he turns 67, he will be happy about it.  

[qbteachmt]

"He gets paid a fee directly from the funds he recovers from the person he serves. It comes out of a trust account. The court does not pay him."

Let's try it this way: His function is to collect something (we still don't know much), such as Penalties, settlement amounts, fees, whatever. Those go into a Trust Account. That is owned by some entity, such as District Court or County or County Court or City or City Court system. The entity then pays him.

The people he collects from are not providing a fee to him.

And the entity that pays him does so from the resources he collected. That means the service he is providing isn't to the people who paid those collected funds. What that typically means is the funds are Restricted, not from General (operating funds), and earmarked for the specific function.

If you read Pub 963, it covers how to understand if the entity is a governmental unit or not, such as, a Court District is formed and empowered by statute of the State. A Water District can be a governmental entity or a private entity. The water service can be a public or private water system, which is not the same as the governance (District). The County can require that a Water District gets formed, but it still might be a private district.

This is all "in my wheelhouse" as they say. There's too much give-and-take required to use an internet forum to determine what might be wrong here or not. But I find it hard to believe that a person not covered under the public retirement plan is also not subject to FICA, either employee/employer or SE. Nearly no one gets off scott free.

Obviously you have to find out what you need, get your evidence, and take your position on the issue. That's due diligence.

[dianejhart]

The court does not pay him. The attorneys send it from a trust account. He is not covered under any county pension, as he is not an employee of theirs. I put the question out here to see if anyone else had a client in this situation, especially since the SSA handbook does have a section that says a fee based person does not pay SE and he said they all fall into this category. I agree that he should pay SE tax. Thank you for taking the time to comment. 

[dianejhart]

I appreciate everyone's input. Thank you.

[qbteachmt]

"since the SSA handbook does have a section that says a fee based person does not pay SE"

That's still backwards. That's not how it reads, and it's the opposite of this. This is confusing a Person with a Public official, and the Public official is a title/position that is easily and clearly identified. There is no "fee-based person" in this code or in this discussion. He can call himself an elephant, but that doesn't change anything.

You can be the maintenance worker, a landscape company operator, or the Mayor, and mow the lawn at the fairgrounds. One is the Public official. All three are Persons. All three would pay FICA, but one would pay it through their business. No one is fee-based, even though the lawn company gets paid per mowing and paid from the Fairgrounds funds, which is part of the County's Restricted funds.

He is either an employee subject to FICA, an employee participating in the public retirement plan and able to exclude SS, or self-employed and subject to SE taxes.

https://secure.ssa.gov/poms.nsf/lnx/1960001625

SL 60001.625 Fee-Based Public Officials

A fee-based public official is an individual who receives and retains remuneration directly from the public. An individual who receives payment for services from government funds in the form of a wage or salary is not a fee-based public official, even if the compensation is called a fee.

Reference: Social Security Ruling 92-4p (SSA adopted the IRS definition of a “fee.”)

A. POSITION COMPENSATED SOLELY BY FEES

Services in positions compensated solely by fees are excluded from coverage under Section 218 Agreements (unless the State specifically included these services) and are covered as self-employment and subject to SECA.

B. POSITION COMPENSATED BY SALARY AND FEES

Generally, a position compensated by a salary and fees is considered a fee-basis position if the fees are the principal source of compensation, unless a State law provides that a position for which any salary is paid is not a fee-basis position. A State may exclude positions compensated by both salary and fees from Social Security and Medicare coverage under the State’s Section 218 Agreement. If the exclusion is taken, none of the compensation received, including the salary, is covered wages under the Section 218 Agreement. However, the salary payment, while excluded under the Agreement, is subject to mandatory Social Security if the official is not a member of a public retirement system.

[BobKamman]

But, but, but .... someone else did it that way for three years and hasn't been caught yet by IRS.  I like his answer!

[dianejhart]

Ok thanks!