Rev. Rul. 84-56
1984-1 C.B. 184, 1984-16 I.R.B. 6.
Internal Revenue Service
Revenue Ruling
FEDERAL EMPLOYEES; SELF-EMPLOYED OR EMPLOYED DURING OFF-DUTY HOURS
Published: April 16, 1984
Section 1401. - -Rate of Tax
Section 1402. Definitions
(Also Sections 1401, 3101, 3111, 3121, 6413; 26 CFR 31.6413(c)-1.)
Federal employees; self-employed or employed during off-duty hours. If a federal employee who has been continuously employed since December 31, 1983, is also self-employed during off-duty hours, the individual's maximum income that is subject to the hospital insurance self-employment tax is reduced by the amount of wages subject to the hospital insurance tax. If the federal employee was employed instead of self-employed during off-duty hours, both the federal and outside wages are subject to the hospital insurance tax, but a credit may be taken on the individual's federal income tax return for any excess taxes deducted because of the dual employment.
ISSUES
1. For a federal employee, hired in 1983, who is also self-employed, is the maximum income that is subject to the hospital insurance self-employment tax reduced by the amount of wages earned by the federal employee for federal employment?
2. Are the wages of a federal employee hired in 1983 subject to the hospital insurance tax, even though the employee also has outside employment that is subject to social security taxes?
FACTS
Issue 1. A federal employee, hired in 1983, whose service is covered by a United States retirement system, is also self-employed during off-duty hours as the operator of a bookbinding business.
Issue 2. A federal employee, hired in 1983, whose service is covered by a United States retirement system, is also employed during off-duty hours as a sales clerk.
LAW
Sections 3101(a) and 3111(a) of the Internal Revenue Code impose old age, survivors and disability insurance taxes on employees and employers, respectively, based on wages paid for "employment." Sections 3101(b) and 3111(b) impose hospital insurance taxes on employees and employers, respectively, based on wages paid for "employment."
Section 3121(b)(5) of the Code excepts from the term "employment" service performed in the employ of the United States by most career employees if the service is covered by a retirement system established by a law of the United States and if the service is performed by an individual who has been continuously in the employ of the United States since December 31, 1983 (including those with a break in service of 365 or fewer consecutive days whether the period of separation began before, on, or after December 31, 1983). For those employees, effective with respect to remuneration paid after December 31, 1982, section 3121(u)(1) provides that the section 3121(b)(5) exception shall not apply for purposes of the hospital insurance taxes imposed by sections 3101(b) and 3111(b). (Section 3121(b)(5), as amended by section 101(b)(1) of the Social Security Amendments of 1983, 1983-29 I.R.B. 20, 21; and section 3121(u)(1), as added by section 278(a)(1) of the Tax Equity and Fiscal Responsibility Act of 1982, 1982-2 C.B. 462, 539, and amended by section 101(b)(2) of the 1983 amendments at page 21.)
LAW AND ANALYSIS--ISSUE 1
Section 1401(a) of the Code imposes an old age, survivors, and disability insurance tax on the self-employment income of every individual. In addition to that tax, section 1401(b) imposes a hospital insurance tax on that income.
Section 1402(b) of the Code provides that self-employment income does not include amounts above a certain maximum and also provides that the maximum is to be reduced by the amount of the wages subject to social security taxes paid to the individual for the taxable year. Effective with respect to remuneration paid after December 31, 1982, those wages include, but only with respect to the hospital insurance tax imposed by section 1401(b), remuneration paid to federal employees continuously in the employ of the United States since December 31, 1983, that is subject to the taxes imposed by sections 3101(b) and 3111(b) because of the
provisions of section 3121(u)(1), as amended.
Therefore, federal employees continuously in the employ of the United States since December 31, 1983, who are subject to the hospital insurance tax by reason of section 3121(u)(1) of the Code and who are also self-employed must use the wages that are subject to the hospital insurance tax to reduce their maximum liability for the hospital insurance portion of the self-employment tax.
LAW AND ANALYSIS--ISSUE 2
Rev. Rul. 55-584, 1955-2 C.B. 394 (as modified by Rev. Rul. 57-32, 1957-1 C.B. 301), holds that, in determining whether an employee has been paid the maximum wages subject to social security taxes in a calendar year, an employer may not take into consideration wages paid to the employee by another employer (except a predecessor).
However, under section 6413(c) of the Code, the employee may secure a special refund of or credit for any excess employee social security tax deducted by the two employers.
HOLDINGS
Issue 1. The bookbinder's maximum income that is subject to the hospital insurance self-employment tax imposed by section 1401(b) of the Code is reduced by the amount of federal wages subject to the hospital insurance tax because of section 3121(u)(1) of the Code. However, the bookbinder may not take federal wages into account in computing self-employment income for purposes of liability for the old-age, survivors, and disability insurance tax imposed by section 1401(a).
Issue 2. The sales clerk's federal wages are subject to withholding for the hospital insurance tax, but a credit may be taken on his or her federal income tax return for any excess employee hospital insurance tax deducted in a calendar year by the two employers. To determine the amount of the credit the individual should use Form 4469, Computation of Excess Hospital Insurance Benefits Tax Credit.
Federal employees hired on or after January 1, 1984, including those with previous periods of government service if the period of separation from government service exceeds 365 days, are subject to all social security taxes, including both the old-age, survivors, and disability insurance tax under section 3101(a) of the Code and the hospital insurance tax under section 3101(b). Therefore, they are treated the same as all workers subject to those taxes.
Rev. Rul. 84-56, 1984-1 C.B. 184, 1984-16 I.R.B. 6.