Termination Payments Subject to SE Tax
A TaxBookNews article FYI a courtesy of www.EA taxes.neet
Self-employment tax (SE tax) generally applies to the net profits earned while carrying on a trade or business as a sole proprietor or general partner in a partnership.
IRC section 1402(a) uses the term "carried on," and the courts generally interpret this to mean income earned while the individual is conducting business.
Income earned for not carrying on a business, such as income earned under a covenant not-to-compete agreement is generally not subject to SE tax because the individual is being paid to not work (Milligan, 9th Cir., 1994).
Likewise, income received as a retired partner under a written partnership plan that provides for lifelong periodic retirement payments are not subject to SE tax if the retired partner had no other interest in the partnership and didn't perform services for it during the year.
In this court case, the taxpayer sold insurance as an independent contractor. He received commission advances from the insurance company which created a debit balance and were repaid from his future earned commissions. His contracts with the insurance company included a vesting schedule that was dependent on his length of service with the insurance company.
The contract stated all of the commissions earned following the agent's termination date shall be 100% vested if the agent has completed ten years of continuous service.
IRC section 1402(k) says termination payments received by former insurance salesmen are exempt from SE tax if:
1) The payments are received after termination of the individual's agreement to perform services for the insurance company,
2) The individual performs no services for the insurance company after the termination and before the close of the tax year,
3) The individual enters into a covenant not-to-compete against the insurance company which applies to at least the 1-year period beginning on the date of the termination, and
4) The amount of the payment:
a) Depends primarily on policies sold by or credited to the account of the individual during the last year of the agreement or the extent to which such policies remain in force for some period after the termination, or both, and
b) Does not depend to any extent on the length of service or overall earnings from services performed for the company (without regard to whether eligibility for payment depends on the length of service).
The court said that in this case, the taxpayer's commission payments credited toward his account were dependent on his length of service with the insurance company. Accordingly, he did not meet the requirements of IRC section 1402(k). Therefore, the termination payments were subject to SE tax.
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2017 Tax Materials, Inc.
TheTaxBook News
1
Release Date: 7/17/17
Termination Payments
Subject to SE Tax
Cross References
?
Geneser,
T.C. Memo. 2017-110, June 12, 2017
Self-employment tax (SE tax) generally applies to the net profits earned while carrying
on a trade or business as a sole proprietor or general partner in a partnership. IRC section
1402(a) uses the term “carried on,” and the courts generally interpret this to mean income
earned while the individual is conducting business. Income earned for not carrying on a
business, such as income earned under a covenant not-to-compete agreement is gener
-
ally not subject to SE tax because the individual is being paid to not work (
Milligan,
9th
Cir., 1994). Likewise, income received as a retired partner under a written partnership
plan that provides for lifelong periodic retirement payments are not subject to SE tax if
the retired partner had no other interest in the partnership and didn’t perform services
for it during the year.
In this court case, the taxpayer sold insurance as an independent contractor. He received
commission advances from the insurance company which created a debit balance and were
repaid from his future earned commissions. His contracts with the insurance company in
-
cluded a vesting schedule that was dependent on his length of service with the insurance
company. The contract stated all of the commissions earned following the agent’s termina
-
tion date shall be 100% vested if the agent has completed ten years of continuous service.
IRC section 1402(k) says termination payments received by former insurance salesmen
are exempt from SE tax if:
1)
The payments are received after termination of the individual’s agreement to perform
services for the insurance company,
2)
The individual performs no services for the insurance company after the termination
and before the close of the tax year,
3)
The individual enters into a covenant not-to-compete against the insurance company
which applies to at least the 1-year period beginning on the date of the termination, and
4)
The amount of the payment:
a)
Depends primarily on policies sold by or credited to the account of the individual
during the last year of the agreement or the extent to which such policies remain in
force for some period after the termination, or both, and
b)
Does not depend to any extent on the length of service or overall earnings from ser
-
vices performed for the company (without regard to whether eligibility for payment
depends on length of service).
The court said that in this case, the taxpayer’s commission payments credited toward his
account were dependent on his length of service with the insurance company. Accord-
ingly, he did not meet the requirements of IRC section 1402(k). Therefore, the termination
payments were subject to SE tax.
News
1
Automatic Zoom
Actual Size
Page Fit
Page Width
50%
75%
100%
125%
150%
200%
300%
400%
?
2017 Tax Materials, Inc.
TheTaxBook News
1
Release Date: 7/17/17
Termination Payments
Subject to SE Tax
Cross References
?
Geneser,
T.C. Memo. 2017-110, June 12, 2017
Self-employment tax (SE tax) generally applies to the net profits earned while carrying
on a trade or business as a sole proprietor or general partner in a partnership. IRC section
1402(a) uses the term “carried on,” and the courts generally interpret this to mean income
earned while the individual is conducting business. Income earned for not carrying on a
business, such as income earned under a covenant not-to-compete agreement is gener
-
ally not subject to SE tax because the individual is being paid to not work (
Milligan,
9th
Cir., 1994). Likewise, income received as a retired partner under a written partnership
plan that provides for lifelong periodic retirement payments are not subject to SE tax if
the retired partner had no other interest in the partnership and didn’t perform services
for it during the year.
In this court case, the taxpayer sold insurance as an independent contractor. He received
commission advances from the insurance company which created a debit balance and were
repaid from his future earned commissions. His contracts with the insurance company in
-
cluded a vesting schedule that was dependent on his length of service with the insurance
company. The contract stated all of the commissions earned following the agent’s termina
-
tion date shall be 100% vested if the agent has completed ten years of continuous service.
IRC section 1402(k) says termination payments received by former insurance salesmen
are exempt from SE tax if:
1)
The payments are received after termination of the individual’s agreement to perform
services for the insurance company,
2)
The individual performs no services for the insurance company after the termination
and before the close of the tax year,
3)
The individual enters into a covenant not-to-compete against the insurance company
which applies to at least the 1-year period beginning on the date of the termination, and
4)
The amount of the payment:
a)
Depends primarily on policies sold by or credited to the account of the individual
during the last year of the agreement or the extent to which such policies remain in
force for some period after the termination, or both, and
b)
Does not depend to any extent on the length of service or overall earnings from ser
-
vices performed for the company (without regard to whether eligibility for payment
depends on length of service).
The court said that in this case, the taxpayer’s commission payments credited toward his
account were dependent on his length of service with the insurance company. Accord-
ingly, he did not meet the requirements of IRC section 1402(k). Therefore, the termination
payments were subject to SE tax.
News