45.6 Self-Employment Tax Rules for Certain Positions
Table 45-1 Self-Employed or Employee?
| If you are— | Tax rule— |
| Babysitter | Where you perform services in your own home and determine the nature and manner of the services to be performed, you are considered to have self-employment income. However, where services are performed in the parent’s home according to instructions by the parents, you are an employee of the parents and do not have self-employment earnings. In one case, the Tax Court held that grandparents who provided care only for their own grandchildren and received payments from a state-sponsored childcare assistance program had to pay income tax on the payments, but the payments were not subject to self-employment tax because the grandparents’ primary purpose in providing the care was not to make a profit. |
| Clergy | If you are an ordained minister, priest, or rabbi, a member of a religious order who has not taken a vow of poverty, or a Christian Science practitioner, you are subject to self-employment tax, unless you elect not to be covered on the grounds of conscientious or religious objection to Social Security benefits. An application for exemption from Social Security coverage must be filed on Form 4361 by the due date, including extensions, of your income tax return for the second taxable year for which you have net earnings from services of $400 or more. An exemption, once granted, is irrevocable. Self-employment tax does not apply to the rental value of any parsonage or parsonage allowance provided after retirement. Other retirement benefits from a church plan are also exempted. |
| Consultant | The IRS generally takes the position that income earned by a consultant is subject to self-employment tax. The IRS has also held that a retired executive hired as a consultant by his former firm received self-employment income, even though he was subject to an agreement prohibiting him from giving advice to competing companies. According to the IRS, consulting for one firm is a business; it makes no difference that you act as a consultant only with your former company. The IRS has also imposed self-employment tax on consulting fees, although no services were performed for them. The courts have generally approved the IRS position. |
| Dealer in commodities and options | Registered options dealers and commodities dealers are subject to self-employment tax on net gains from trading in Section 1256 contracts, which include regulated futures contracts, foreign currency contracts, dealer equity options, and non-equity options. Self-employment tax also applies to net gains from trading property related to such contracts, like stock used to hedge options. |
| Director | You are taxed as a self-employed person if you are not an employee of the company. Fees for attendance at meetings are self-employment income. If the fees are not received until after the year you provide the services, you treat the fees as self-employment earnings in the year they are received. |
| Employee of foreign government or international organization | If you are a U.S. citizen and you work in the United States for a foreign government or its wholly owned instrumentality, or an international organization, you pay self-employment tax if Social Security and Medicare taxes are not withheld from your pay. |
| Executor or guardian | If you are a professional fiduciary, you will always be treated as having self-employment income, regardless of the assets held by the estate. But if you serve as a nonprofessional executor or administrator for the estate of a deceased friend or relative, you will not be treated as having self-employment income unless all of the following tests are met: (1) the estate includes a business; (2) you actively participate in the operation of the business; and (3) all or part of your fee is related to your operation of the business. The IRS applied similar business tests to deny self-employment treatment for a guardian who was appointed by a court to care for a disabled cousin. The guardian negotiated sales of the cousin’s property and invested the proceeds, but these activities were not extensive enough to be considered management of a business. |
| Former insurance salespersons | Termination payments by a former insurance salesperson may be exempt from self-employment tax. They must be received from an insurance company after the termination of a services agreement. No services may be performed for the company after the agreement ends and before the end of the tax year. The payments must be conditioned on the salesperson’s entering into a covenant not to compete with the company for at least one year after termination. The amount of the payment must be primarily based on policies sold by (or credited to) the salesperson during the last year of the services agreement or on the period for which such policies remain in force after the termination. |
| Lecturer | You are not taxed as a self-employed person if you give only occasional lectures. If, however, you seek lecture engagements and get them with reasonable regularity, your lecture fees are treated as self-employment income. |
| Nonresident alien | You do not pay Social Security tax on your self-employment income derived from a trade, business, or profession. This is so even though you pay income tax. Your exemption from self-employment tax is not influenced by the fact that your business in the United States is carried on by an agent, employee, or partnership of which you are a member. However, if you live in Puerto Rico, the Virgin Islands, American Samoa, the Commonwealth of the Northern Mariana Islands, or Guam, you are not considered a nonresident alien and are subject to self-employment tax. |
| Nurse | If you are a registered nurse or licensed practical nurse who is hired directly by clients for private nursing services, you are considered self-employed. You are an employee if hired directly by a hospital or a private physician and work for a salary following a strict routine during fixed hours, or if you provide primarily domestic services in the home of a client. Where registered or licensed practical nurses are assigned nursing jobs by an agency that pays them, the IRS, in several rulings, has treated such nurses as employees of the agency. Nurses’ aides, domestics, and other unlicensed individuals who classify themselves as practical nurses are treated by the IRS as employees, regardless of whether they work for a medical institution, a private physician, or a private household. |
| Real estate agent or door-to-door salesperson | Licensed real estate agents are considered self-employed if they have a contract specifying that they are not to be treated as employees and if substantially all of their pay is related to sales rather than number of hours worked. The same rule also applies to door-to-door salespeople with similar contracts who work on a commission basis selling products in homes or other non-retail establishments. |
| Technical service contractor | Consulting engineers and computer technicians who receive assignments from technical service agencies are generally treated as employees and do not pay self-employment tax. The IRS distinguishes between (1) technicians who in three-party arrangements are assigned clients by a technical services agency and (2) those who directly enter into contracts with clients. Employee status covers only technicians in Group 1. Technical specialists who contract directly with clients may be classified as independent contractors by showing that they have been consistently treated as independent contractors by the client, and that other workers in similar positions have also been treated as independent contractors. Thus, they may treat their income as self-employment income. Firms that are treated as employers of technical specialists are responsible for withholding and payroll taxes. |
| Traders in securities | Gains and losses from a trading business are not subject to self-employment tax. |
| Writer | Royalties from writing books are self-employment income to a writer. Royalties on books by a professor employed by a university may also be self-employment income despite employment as a professor. |
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