Prior to January 1st, 1992, social security and IRS had different definitions of what constitutes a “fee” changed by certain state and local officials, such as tax collectors, for purposes of coverage under the Social Security Act. Fees are distinct from wages. Wages are covered under the Social Security Act, but fees are not necessarily covered.
The distinction between fees and wages is important in two respects: 1) for determining whether certain positions may be excluded from Social Security coverage under the optional fee-based exclusion; and, 2) whether certain positions are compensated solely by fees, and may therefore be considered to be self-employment.
This distinction affects certain state and local officials nationwide.
Prior to 1992, Social Security defined a “fee” as compensation earned for an act or service without regard to the amount of time spent in rendering the services. The definition also took into consideration the method of payment and state statutes and related court decisions. A “fee” could be paid by a state, one of its political subdivisions, or a third party.
The IRS position, on the other hand, looks to the source of payment in determining whether a “fee” has been paid. If a public official receives remuneration directly from the member of the public with whom he does business, it is considered a “fee.” Otherwise, if payment to a public official is made from government funds, and no portion of it may be retained by the public official as compensation, it is not a “fee.” In such a case, the public official is not considered to be engaged in a trade or profession under Internal Revenue Code Section 1402 (c)(1) and the remuneration is not considered to be net earnings from self-employment.
Because of the different definitions, State and local government employers of certain public officials (such as tax collectors in Pennsylvania) were receiving conflicting advice on how to report compensation.
In order to resolve this dilemma and to achieve consistency, Social Security adopted the IRS definition of “fee” beginning January 1st, 1992.
For services first covered after 1967, services in all classes of positions compensated solely by fees are excluded from coverage under agreements pursuant to section 218 of the Social Security Act, unless such services are specifically included by the state.
A section 218 Agreement is a voluntary agreement between a state and the Social Security Administration to provide Social Security and Medicare HI (Hospital Insurance) coverage, or Medicare HI coverage only, for state and local government employees.
Services compensated solely by fees which are excluded from coverage under a 218 agreement are mandatorily covered as self-employment under the Social Security Act. This principle did not change with 1992’s new definition of “fees.”
After 1967, a State may exclude services from coverage under a 218 agreement for any class of fee-based position compensated by fees and salary. If the exclusion if taken, all of the compensation, including fees and salary, will be excluded from coverage as wages. If the exclusion is taken, all compensation, including fees, will be covered as wages.
These principles are set forth in Social Security Ruling (SSR) 92-4p.
This material should not be construed as legal advice for any particular fact situation, but is intended for general informational purposes only. For advice specific to any individual situation, an experienced attorney should be contacted.