Question and Answer Samples and Techniques

Transcription

1 Question and Answer Samples and Techniques

2 Introduction Overarching Legal Issue: is an appointed or elected official of a state or local government an independent contractor or an employee for pension and FICA purposes? NOTE: This presentation is NOT addressing election workers or election officials. Key information pertinent to this discussion is available in the Federal-State Reference Guide (IRS Pub. 963) at: 2

3 Historical context Five key dates apply to elected and appointed officials: January 1, 1951: Date when states could voluntarily elect Social Security coverage for public employees NOT covered under a public retirement system by entering into a Section 218 Agreement with the Social Security Administration (under its, then, umbrella federal department, i.e., Department of Health and Human Services). January 1, 1955: Date when states could extend Social Security coverage to employees (other than police officers and firefighters) covered under a public retirement system. 3

4 Historical context -- continued April 20, 1983: As of that date, coverage under a Section 218 Agreement cannot be terminated unless the governmental entity is legally dissolved. April 1, 1986: State and local government employees hired on or after this date, not already covered, are mandatorily covered for Medicare, unless specifically excluded by law. For state and local government employees hired before April 1, 1986, Medicare coverage may be elected under a Section 218 Agreement. July 2, 1991: As of this date, most state and local government employees became subject to mandatory Social Security and Medicare coverage, unless they are (1) members of a public retirement system, or (2) covered under a Section 218 Agreement. 4

5 Federal versus State Laws While Federal law determines whether earnings are wages subject to Social Security and Medicare, state laws have a bearing on the issue of employment, such as whether a position is that of a public official of a state. An opinion of the state legal officer (e.g., State Attorney General) may be requested. The state s opinion will be given weight in making the decision, but it will not be determinative of the issue. 5

6 Federal and state jurisdiction for some of the major questions: Federal Law: Does an employer-employee relationship exist? Who is the employer? Are the earnings wages? What are emergency services? What are student services? State Law: Who is an officer of a state or political subdivision? Is an entity a political subdivision? Is a function governmental or proprietary? Is a position under a retirement system? Which employees are eligible for membership in a retirement system? Who is an employee for purposes of retirement system participation? 6

7 Classification Issues Involving Government Employees Public Officials The term public official refers to someone who has authority to exercise the power of the government and does so as an agent and employee of the government. The Internal Revenue Code does not define the term public official, but Regulation (c)-2(b), explaining the applicability of self-employment tax, indicates that holders of public office are not in a trade or business and are therefore not subject to self-employment tax. If self-employment tax is not applicable, these individuals are employees. This Regulation states that the performance of the functions of a public office does not constitute a trade or business. An exception applies for certain public officials paid solely on a fee basis. Otherwise holders of public office are excepted from selfemployment tax and are presumed to be employees receiving wages. 7

8 Meaning of Public Office NOTE: Treasury Regulation Section (c)-2(b), states, in pertinent part: Meaning of public office. The term public office includes any elective or appointive office of the United States or any possession thereof, of the District of Columbia, of a State or its political subdivisions, or a wholly-owned instrumentality of any one or more of the foregoing.... 8

9 Examples of Public Office Positions The regulations give the following specific examples of positions that constitute public office : Mayor Member of a legislature or elected representative (e.g., elective office) County commissioner State or local judge, or justice of the peace County or city attorney, marshal, sheriff, constable Registrar of deeds Tax collector or tax assessor Road commissioners Members of boards and commissions, such as school boards, utility districts, zoning boards, and boards of health 9

10 Elected Officials Under Internal Revenue Code (IRC) Section 3401, elected officials are employees for income tax withholding purposes. For Social Security and Medicare purposes, elected officials (also referred to as individuals in elective positions ), are subject to a degree of control that typically makes them employees under the common law. Elected officials are responsible to the public, which has the power to vote them out of office. Elected officials may also be subject to recall by the public or a superior official 10

11 Employee or Independent Contractor? Common-Law Standard IRC 3121(d)(2) states that an employee is any individual who, under the usual common-law rules applicable in determining the employer-employee relationship, has the status of an employee. 11

12 Employee or Independent Contractor? (continued) All the facts and circumstances must be considered in deciding whether a worker is an independent contractor or an employee. The facts fall into three main categories: 1) Whether the entity has the right to control the behavior of the worker; 2) Whether the entity has financial control over the worker; and 3) The relationship of the parties, including how they see their relationship. 12

13 Employee or Independent Contractor? (continued) Generally, when workers are employees, the government entity that employs them must withhold and pay employment taxes and file employment tax returns. Employment taxes consist of Federal income tax withholding and FICA. When workers are independent contractors, the governmental entity may have information-reporting and backup withholding responsibilities, but it is not required to withhold and pay employment taxes on behalf of those workers. 13

14 Form SS-8 Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding In difficult cases, the IRS can provide a determination as to whether a worker is an employee or an independent contractor. To obtain a determination from the IRS, file Form SS-8. There is no cost for an SS-8 determination. Either a governmental entity or a worker may submit Form SS-8. Note: The SS-8 determination is not an examination. It does not reopen a closed examination or change the findings for years previously examined. 14

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16 Key Question #1: Is there a Section 218 Agreement? If a Section 218 Agreement applies: When did the state voluntarily enter into a Section 218 Agreement to elect Social Security coverage for a particular political subdivision? What optional exclusions and what coverage groups were listed in that Agreement or later modification? Does the political subdivision have more than one modification? Did the state or political subdivision terminate voluntary Social Security coverage, in its entirety or with respect to any coverage group(s), before April 20, 1983? Has the state elected to provide Medicare-only for a particular entity? 16

17 Key Question #2: Were any of the following optional exclusions taken? When Section 218 (voluntary) coverage agreements were first authorized by federal law in 1950, states were allowed to OPTIONALLY EXCLUDE the following coverage groups: All services in any class or classes of elective positions. All services in any class or classes of part-time positions. (Many elected officials serve on a part-time basis.) All services in any class or classes of positions compensated solely by fees received directly from the public by an individual who is treated by the governmental entity as selfemployed. NOTE: There are several other categories of optional exclusions, such as students and election workers, that are not relevant to this presentation. 17

18 Key Question #3: If not covered by a Section 218 Agreement... Does the state or political subdivision have any employees who were hired prior to April 1, 1986, and who are exempt from mandatory Medicare? Does the state or political subdivision have a public retirement system? If so, employees who are qualified participants in the public retirement system are not subject to mandatory Social Security coverage that began July 2,

19 Key Question #3: If not covered by a Section 218 Agreement... (continued) OBRA 1990 ( mandatory Social Security ), which became effective on July 2, 1991, required part-time employees and elected. and appointed officials to be covered either by Social Security or a qualifying FICA replacement public pension plan. This requirement applies EVEN IF part-time employees and elective positions were optionally excluded under a Section 218 Agreement. Optional exclusions apply only to voluntary Social Security coverage under a Section 218 Agreement; there are no optional exclusions from mandatory coverage. Mandatory Social Security coverage ceases for a state or local government employee when he or she becomes a member of a qualifying public retirement system. 19

20 Determination of whether Section 218 or mandatory Social Security applies to an employee Section 218 Social Security coverage is based on the position an employee occupies. Mandatory Social Security coverage is based on the situation of the individual employee. 20

21 Fee-Based Public Official A public official who receives and retains remuneration directly from members of the public, for example, a notary public. An official 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. 21

22 Fee-Basis Exclusion Positions 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). They ARE, however, covered by FICA as self-employment and subject to selfemployment tax (SECA). 22

23 Fee-Basis Exclusion 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. If the state makes this exclusion, none of the compensation, including the salary, is covered wages under the state s Section 218 Agreement. In this case, the salary payment, while excluded under the Agreement, is subject to mandatory Social Security if the official is not a qualified participant in a public retirement system. 23

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25 Proper treatment of elected and appointed public officials can be confusing. 25

26 Does the performance of the functions of a public office constitute a trade or business? U.S. Treasury Regulation Section 1.401(c)-2 states, in pertinent part: In general (1) General rule. Except as otherwise provided in subparagraph (2) of this paragraph, the performance of the functions of a public office does not constitute a trade or business. Very few elected officials have sufficient independence to be considered independent contractors. Regardless of any determination for Social Security and Medicare purposes, elected officials are employees for income tax withholding purposes. 26

27 True or False: Passage of OBRA 1990 effectively negated all optional exclusion under Section 218. Beginning July 2, 1991, most services that were optionally excluded under a Section 218 Agreement are covered by the mandatory Social Security provisions unless: 1) The employee is covered under a qualifying public retirement system or 2) The services are excluded from mandatory Social Security coverage under Section 210 of the Act (e.g., election worker services, student services). 27

28 True or False: If there is no Section 218 coverage, a public official is considered to be an independent contractor of the government. Rarely are elected or appointed public officials of state and local governments NOT employees. 28

29 True or False? Election officials and elected officials are the same thing. Separate legal requirements apply to election workers and officials that are not addressed in this presentation. 29

30 Do Public Officials fall under exclusions from mandatory Social Security coverage? Exclusions from Mandatory Social Security Coverage Under Section 210(a) of the Social Security Act, a number of categories of employees are not subject to mandatory Social Security coverage, even if they are not covered by a public retirement system, including: Services in positions compensated solely by fees that are subject to self-employment tax (SECA), unless a Section 218 Agreement covers these services. See discussion of Fee-Based Public Officials. 30

31 True or False: An elected official is the same thing as an elective position/ official for FICA purposes. 31

32 True or False: Coverage under a Section 218 Agreement is always controlling. Coverage under a Section 218 Agreement always takes precedence over other employment circumstances. When considering whether the mandatory Social Security coverage and exclusion rules apply to a worker s services, first determine whether the services are covered by a Section 218 Agreement. 32

33 How do you know if someone is an employee or an independent contractor? Common-Law Standard - Summary In many worker classification cases, some facts will support independent contractor status and others will support employee status. Independent contractors are rarely totally unconstrained in the performance of their contracts, and employees almost always have some degree of autonomy. The determination of a worker s status, therefore, rests on the weight given to the facts as a whole, keeping in mind that no one factor is determinative. 33

34 True or False: If a public employer took the elective official optional exclusion from a Section 218 Agreement it entered into, they are also excluded from mandatory Social Security. Beginning July 2, 1991, most services that were optionally excluded under a Section 218 Agreement are covered by the mandatory Social Security provisions. Elective officials are one of those optional exclusions under Section 218 that are now required to be covered by mandatory Social Security. The only exceptions are: 1) The employee is covered under a qualifying public retirement system or 2) The services are excluded from mandatory Social Security coverage under Section 210 of the Act (e.g., election worker services, student services). This is NOT applicable to elective positions or officials. 34

35 Can public officials be excluded from Section 218 coverage? The following are positions and services that may be excluded from a Section 218 Agreement at the option of the state: All services in any class or classes of elective positions. 35

36 Can a part-time public official, such as a Board or City Council member, be excluded from Section 218 coverage? All services in any class or classes of part-time positions. A parttime position is one for which the number of work hours normally required by the position in a week or a pay period is less than the normal time requirements for the majority of the positions in the employing entity. Note: The definition of part-time under a Section 218 Agreement provisions may be different from the definition of part-time used to determine whether an individual is a qualified participant in a public retirement system. 36

37 Can a public employer or employee get a determination from the federal government as to whether a worker is an employee or an independent contractor? Submit a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, to the IRS. Either a governmental entity or a worker may submit Form SS-8. 37

38 True or False: If board members are paid nominal amounts, for example under $1,000 per year, Social Security and Medicare taxes do NOT need to be withheld. Elected and most appointed officials are employees of the public entity they serve, and are generally subject to the rules that apply to other workers. Withhold Social Security and Medicare taxes for any official who is either 1) covered under a Section 218 Agreement or 2) not a qualified participant in a public retirement system. Any official elected or appointed after March 31, 1986, is subject to Medicare. 38

39 Must Social Security (OASDI) be paid for any of the following? Sheriff of a county with a Section 218 Agreement State Supreme Court Justice ;no Section 218 coverage of state employees No; not included in definition of employees under that Section No OASDI paid; subject to mandatory Medicare Secretary of State; no Section 218 coverage of state employees, but covered by State pension plan Staff of a company hired to remodel a government office Notary public covered by Section 218 Agreement Required to pay full FICA Yes, unless covered by a public pension system No; Independent Contractors of the government 39

40 Conclusion Public and Elected Officials (those that have authority to exercise the power of government) are employees.* Rarely are elected or appointed public officials of state and local governments NOT employees. Elected and appointed officials who are employees are subject to FICA either: Pursuant to a Section 218 Agreement (if the elective officer optional exclusion was NOT taken in the original agreement or if a subsequent Modification added them to the agreement). If no Section 218 Agreement applies, mandatory Social Security and mandatory Medicare DO apply. Check state law to see if they define elected and appointed officials as employees. If there is ANY doubt about the classification of an elected or appointed official, request an SS-8 Determination from the IRS. *Sec (c)-2(b), Income Tax Regulations and Buckley v. Valeo, 424 U.S. 1(1975) and Metcalf & Eddy v. Mitchel, 269 U.S. 514 (1926). 40