Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-81

1975-1 C.B. 326

IRS Headnote

FUTA tax; insurance agents and solicitors. Examples illustrate that the FUTA tax on remuneration to insurance agents and solicitors, compensated during the calendar year by both commissions and other compensation, and the exclusion provided by section 3306(c)(14) of the Code are determined for each pay period rather than on an annual basis; Rev. Ruls. 67-44 and 71-357 revoked.

Full Text

Rev. Rul. 75-81

Reconsideration has been given to Rev. Rul. 67-44, 1967-1 C.B. 287, and Rev. Rul. 71-357, 1971-2 C.B. 353, concerning the determination of the amount of tax imposed on employers by section 3301 of the Federal Unemployment Tax Act (chapter 23, subtitle C, Internal Revenue Code of 1954) in the case of remuneration paid to insurance agents or solicitors compensated both by commissions and other compensation during a calendar year.

In the situations described below, the agents or solicitors are common law employees performing services as insurance agents or solicitors who are paid commissions due them at the conclusion of each month of service during the calendar year whether or not at that time they are entitled to or paid any other form of remuneration. All other compensation paid the salesmen constitutes wages paid by their employers within the meaning of sections 3306(a) and (b) of the Act except to the extent exceeding the limitation of section 3306(b)(1) for the calendar year.

Situation (1). A, an agent, was paid only commissions by his employer insurance company until his final pay check in December of the calendar year 1973. The final pay check included a lump-sum bonus of $1,500 in addition to commissions of $1,025. His total remuneration for 1973 was $11,255.

Situation (2). An insurance company gave everyone currently employed by it for at least the three months preceding December of the calendar year 1973, a Christmas bonus of $25 at about the time of payment of the last regular pay it made to its employees in December. Insurance agent E, who received no other remuneration during the 10 months he worked for the company except commissions, received the bonus. His total commissions for the calendar year 1973 were $6,600, and his December commissions totaled $980.

Situation (3). Insurance agent B was paid a total of $2,325 for both salary and commission for three of the months of the calendar year 1973 that he was employed by his insurance company. He was not employed by the company for the first three months and received only commissions for the last six months of the calendar year, totalling $8,535.

Situation (4). Insurance company Z gives some of its agents a two-week paid vacation each year. In August 1973 agent C was paid $300 for his annual two-week vacation in addition to his earned commissions of $487 for the month. This was the only pay he received other than commissions totaling $9,356 during 1973. The vacation pay was paid to C at the time he was starting his vacation in August and his check for commissions of $487 was issued to him at the regular time of his monthly commission check. In 1974 C took his vacation in July and received, at the usual time for payment of his monthly commission, a single check for $843 which represented commission remuneration for July of $518 and vacation pay of $325.

The tax imposed on an employer for each calendar year by section 3301 of the Federal Unemployment Tax Act is based on the aggregate of wages paid by the employer for services of individuals that are "employment" within the meaning of section 3306(c) of the Act. The general rule as to what is "employment" in the preliminary portion of section 3306(c) is followed by a series of numerically-designated paragraphs excepting certain services from the definition of "employment." In determining the aggregate of wages for purposes of computing the tax, wages for such services are to be excluded.

Section 3306(d) of the Act provides a means of determining the extent to which remuneration for a particular pay period of an individual will be considered to be for "employment" within the meaning of section 3306(c) in those cases where the wages paid are attributable, in part, to employment as generally defined in the Act and, in part, to services excluded therefrom by one of the numerically-designated paragraphs of section 3306(c). Since the wages on which the tax imposed under section 3301 of the Act is to be computed is the aggregate of the wages for each pay period found to constitute remuneration for employment, it is necessary to apply section 3306(d) wherever the remuneration for a particular pay period is in part attributable to employment within the meaning of section 3306(c) and in part attributable to services excluded therefrom by reason of one of the numerically-designated paragraphs of section 3306(c).

However, under section 3306(c)(14) of the Act, the term "employment" does not include services performed as an insurance agent or insurance solicitor if all such service is performed for remuneration solely by way of commission. This obviates applying the provisions of section 3306(d) for purposes of determining, under section 3306(c)(14), whether wages for a particular pay period constitute wages for "employment" that are to be aggregated for purposes of the computation of the tax. This is because the determination whether the exclusion of section 3306(c)(14) applies is made by deciding whether any part of the remuneration for a particular pay period is other than by way of commission. It is, therefore, impossible for section 3306(c)(14) to apply to only part of the services performed during a particular pay period, since if any part of the services performed for the pay period in question was remunerated for other than by way of commission, all of the services performed for that pay period would not be remunerated solely by way of commission. In this respect, see section 31.3306(c)(14)-1(b) of the Employment Tax Regulations. Nevertheless, section 3306(d) is applicable in determining the period of service to which the exclusionary test of section 3306(c)(14) will be applied. See Reliable Life Insurance Company v. United States, 356 F. Supp. 235 (E.D.Mo. 1973), on this point. Section 3306(d) specifies that period of service, to be the period (of not more than 31 consecutive days) for which a payment of remuneration is ordinarily made to the employee by the person employing him.

In Situation (1), the bonus paid A in his final pay period of the year was remuneration other than commission. Therefore, section 3306(c)(14) has no application for the purpose of excepting any of A's remuneration for that pay period from wages for purposes of computing the employer's tax under section 3301 of the Act. Accordingly, the total final paycheck of $2,525 is subject to the employer's tax under the Act, although the balance of A's commissions for the year of $8,730 are not.

In Situation (2), the $25 Christmas bonus was remuneration other than commissions. Therefore, $5,620 of E's total remuneration of $6,625 did not constitute wages for employment by reason of section 3306(c)(14) of the Act and $1,005 (E's $25 bonus and his commissions for December of $980) constituted the aggregate of his wages subject to the employer's tax imposed by section 3301, because the $25 Christmas bonus was not remuneration in the nature of commission and, accordingly, none of E's remuneration for the pay period in which it was paid met the requirements of the cited section.

Situation (3) presents another set of facts where remuneration not solely by way of commission is paid for services performed during only some of the pay periods of a particular calendar year. The entire amount of $2,325 paid for services performed for remuneration not solely by commission for three months of the calendar year, is subject to the employer's tax under section 3301. However, the $8,535 paid as commissions for six of the monthly pay periods of the year during which B was remunerated solely by way of commission constitutes remuneration for services other than "employment" by reason of section 3306(c)(14) and is not to be taken into account in computing the tax under section 3301 of the Act.

With respect to Situation (4), the entire amount of $787 paid to C for the month of August 1973 was paid for services performed for remuneration not solely by commission and is subject to the employer's tax under section 3301. The balance of C's commissions for the year 1973, $8,869, is not subject to the tax since C received nothing but commissions during the rest of the year. C's receipt of the check for July 1974 results in its entire amount being taken into account in determining the total amount of C's remuneration subject to the employer's tax for 1974 under section 3301, since it was not remuneration solely by way of commission.

Rev. Rul. 67-44 and  Rev. Rul. 71-357, that hold that an insurance company paying its agents or solicitors a guaranteed salary for any part of a calendar year must take into consideration all of the remuneration paid to the agents or solicitors during the calendar year in computing the tax imposed by the Federal Unemployment Tax Act are revoked.