EFFECTIVE/PUBLICATION DATE: 03/20/92
Purpose: To state the policy change by which the Social Security Administration (SSA) adopted the Internal Revenue Service (IRS) definition of a "fee" for purposes of Social Security coverage under section 218 of the Social Security Act (the Act), of compensation of certain State and local public officials, effective January 1, 1992.
Citation (Authority): Sections 218(c) and 218(m) of the Social Security Act (42 U.S.C. 418(c) and 418(m)); 20 CFR sections 404.1073(b)(1) and 404.1210.
Pertinent History: There is no Federal statutory definition of a "fee," and as a result, IRS and SSA in some instances have used different definitions as to what constitutes a "fee." Consequently, in these situations, different outcomes have been reached by the two agencies when determining whether compensation received by certain individuals, such as State or local tax collectors, is a fee. The definition of a "fee" is significant for determining: (1) whether certain positions may be excluded from Social Security coverage under the optional fee- basis exclusion; and (2) whether certain positions are compensated solely by fees and, therefore, whether occupants of these positions may be treated as self-employer individuals. This issue affects certain State and local public officials nationwide.
SSA's policy prior to 1992 defined a "fee" as compensation for a particular act or service without regard to the amount of time spent in its performance. Furthermore, whether compensation was a "fee" was determined by the method of payment and the appropriate State statute and/or any related court decision. SSA had held that a "fee" may be paid by the State, one of its political subdivisions, or a third party.
The IRS position holds that the source of the remuneration paid is an important factor in determining whether the remuneration is a "fee." When a public official receives remuneration for services in the form of a "fee" directly from members of the public with whom he or she does business, that is considered to be a "fee." Otherwise, if payment is made to a public official from government funds, and no portion of the monies collected by him or her belongs to or can be retained by him or her as compensation, that remuneration is not considered to be a "fee." IRS concludes that, in the latter case, the public official is not engaged in a trade or business under section 1402(c)(1) of the Internal Revenue Code and the remuneration for services is not net earnings from self- employment.
Because of the differences between the SSA and IRS interpretations of what constituted a "fee," State and local political employing entities have received inconsistent advice regarding how to report the compensation of individuals in certain positions, e.g., tax collectors in Pennsylvania. As a result of this new policy interpretations, SSA and IRS will now have a single, coordinated position on the definition of a "fee."
SSA's Change in Its Definition of a "Fee"
After full consideration of the issue, the Commissioner of Social Security concluded that it would be appropriate for SSA to adopt the IRS definition because it related to the source of the payment and the official's authority to retain the payment as compensation. Therefore, SSA has adopted the IRS definition for Social Security coverage purposes under section 218 of the Act, effective January 1, 1992.
Adopting the IRS definition means that, effective January 1, 1992, SSA will consider the remuneration for service received by a State or local public official, such as a tax collector or any other official who performs service in a position compensated solely on a fee basis, a "fee" if the payment is made directly by a member of the public with whom he or she does business, and the public official is authorized to retain the payment or a portion thereof as compensation. In this situation, the official is engaged in a trade or business as set forth in sections 211(c)(1) and 211(c)(2)(E) of the Act and thus, self-employed. Conversely, when a State or local public official has no authority to retain the monies collected by him or her from a member of the public as compensation, but instead receives payment from government funds, that payment is not a "fee." In the latter situation, the official is not engaged in a trade or business, and his earnings are not net earnings from self-employment but are wages received as an employee.
Treatment of Remuneration Paid to Public Officials Affected
by the SSA Change of Definition of a "Fee"
Under SSA's policy prior to 1992, a "fee" was distinguishable from a salary in that a "fee" was usually paid as compensation for a particular act or service regardless of the amount of time spent in its performance, while a salary was normally related to the amount of time worked.
Beginning January 1, 1992, SSA will find that a "fee" is distinguishable from a salary only when the compensation for a particular act or service is paid directly to the State or local public official by a member of the public for whom the act or service is performed and the official is authorized to retain the payment or a portion thereof as compensation.
Treatment of Positions Compensated Solely by Fees
For services first covered after 1967, services in any class or classes of positions compensated solely by fees are excluded from coverage under agreements pursuant to section 218 of the Act unless the State specifically includes these services. Consequently, services performed after 1967 by State and local public officials in positions solely compensated by fees which are not covered under a section 218 agreement, are compulsorily covered as self-employment for Social Security purposes under sections 211(c)(1) and 211(c)(2)(E) of the Act.
The above principle is not affected by SSA's change in positions as it applies to individuals whose services are actually compensated by a "fee." Therefore, SSA uses the definition of a "fee" for years prior to January 1, 1992, to determine whether compensation for services is made solely on the basis of fees. Beginning January 1, 1992, SSA determines whether services are compensated solely by a fee by using the revised definition of a "fee."
Treatment of Positions Compensated by Salary and Fees
After 1967, a State may exclude services from coverage under an agreement, as provided in section 218(c) of the Act, in any class or classes of fee-basis positions compensated by both salary and fees. If the exclusion is taken, none of the compensation, whether salary or fees, is covered as wages. If the exclusion is not taken, all of the compensation received, including the fees, is covered as wages under the State's section 218 agreement.
Effective Date: This policy is effective for all remuneration received for services after December 31, 1991.
Cross References: Program Operations Manual System, Part 03, Chapter 015, Subchapter 05, Sections .007 and .042; Part 03, Chapter 018, Subchapter 02, Sections .200 and .220; Handbook for State Social Security Administrators, Section 238; SSR 77-17, Pennsylvania Justice of the Peace; and SSR 73-58c, Nebraska Constables, Justices of the Peace, and Registrars. The revised definition as cited in this Policy Interpretation ruling does not affect the herein cross-referred Rulings. These two Rulings continue to provide examples of a "fee."
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