Internal Revenue Service
Revenue Ruling
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smRev. Rul. 56-2
1956-1 C.B. 496
Sec. 1402
IRS Headnote
An individual examines state income tax returns for two municipalities of a state, on a yearly contract basis, to see that income taxes allocable to the respective municipalities under state statute are paid to them and not to other municipalities. He also prepares the necessary papers pertinent to the filing of claims to recover taxes erroneously allocated and is remunerated in an amount equal to 15 percent of all monies recovered. He is not furnished desk or office space or other conveniences by the municipalities and is not carried on their payrolls. His work is performed partly at the county courthouse and partly in his own home. He determines his own working hours and the amount of time which he will devote to the work. The municipalities agree not to enter into similar contracts with other individuals during the life of the respective contracts. The contracts are automatically renewed each year unless either party notifies the other of intention not to renew. Held , the individual is not an employee of the municipalities for Federal income tax withholding purposes.
Such activity constitutes a `trade or business,' the income from which is includible in computing net earnings from self-employment for purposes of the Self-Employment Contributions Act of 1954.
Full Text
Rev. Rul. 56-2
An inquiry has been received relative to the status, for purposes of the Collection of Income Tax At Source On Wages (chapter 24, subtitle C, Internal Revenue Code of 1954), and the Self-Employment Contributions Act of 1954 (chapter 2, subtitle A, Internal Revenue Code of 1954), of an individual performing certain services for two municipalities of a state under the circumstances described below.
Under the term of similar one-year contracts entered into with the municipalities, the individual agrees to act in their behalf in making an inspection of all of the state income tax returns filed by individuals, partnerships and corporations, whether residing within the respective municipalities or elsewhere, to see that income taxes which are allocable under state statute to such municipalities are paid to them and not to other municipalities not entitled to receive them. The individual further agrees to parpare the necessary petitions, papers, and other data pertaining to the filing of claims for the recovery of taxes erroneously allocated or paid to other municipalities, and is remunerated in an amount equal to 15 percent of all monies recovered. The municipalities each agree not to enter into a like contract with any other person for such services. The contracts are automatically renewed each year unless either party, within ninety days prior to the expiration date thereof, notifies the other in writing of an intention not to renew. The municipalities do not furnish office space or other conveniences to the individual and do not carry him on their payrolls. His work is done partly at the county courthouse and partly in his own home. He determines his own working hours and spends his time as he pleases in the interest and progress of the work.
Section 406.203 of Regulations 120, applicable to the Internal Revenue Code of 1954 by virtue of Treasury Decision 6091, C.B. 1954-2, 47, sets forth certain guides to be used in determining whether, for Federal income tax withholding purposes, the legal relationship of employer and employee exists. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is not an employee.
The facts in the instant case, namely, that the individual is not required to perform his services on the premises or under the supervision of the municipalities, is not required to observe particular hours, is not controlled as to the manner in which the work should be done, and is required under the contracts only to show accomplished results, indicate that the municipalities do not exercise the control or direction necessary to establish an employer-employee relationship for Federal income tax withholding purposes. In addition, the municipalities have not reserved any rights under the contracts to exercise such control or direction over the manner in which he performs his services. Accordingly, he is not an employee of the municipalities for such purposes.
Section 1402 of the Self-Employment Contributions Act of 1954 provides in part:
(a) NET EARNINGS FROM SELF-EMPLOYMENT.-The term `net earnings from self-employment' means the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle subtitle A which are attributable to such trade or business, * * *
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(c) TRADE OR BUSINESS.-The term `trade or business,' when used with reference to self-employment income or net earnings from self-employment, shall have the same meaning as when used in section 162 * * *.
As a general rule, when a person is regularly engaged in an occupation or profession for profit which constitutes, in whole or in part, his livelihood and, as to such occupation or profession, is not regarded as an employee for Federal income tax withholding purposes or otherwise excluded from the self-employment tax provisions, he is engaged in a `trade or business.'
Under the circumstances stated herein, it is concluded that the individual is engaged in a `trade or business' with respect to the services rendered to the municipalities in the examination of state income tax returns and the preparation of claims in connection therewith. Accordingly, the income derived from such services should be taken into consideration in computing net earnings from self-employment for purposes of the Self-Employment Contributions Act of 1954.