Rev. Rul. 85-63,

1985-1 C.B. 292, 1985-21 I.R.B. 10.

SELF-EMPLOYMENT TAX; LIABILITY OF DIRECT SELLER

Published: May 28, 1985

Section 1402.-Definitions, 26 CFR 1.1402(c)-1: Trade or business.

(Also Sections 1401.3121. 3508; 1.401-1. 31.312(d)-1.)

  Self-employment tax; liability of direct seller.  An individual who performs services as a qualified real estate agent or as a direct seller, as defined in section 3508 of the Code, is liable for the tax on self-employment income.

ISSUE

  Is an individual who performs services as a qualified real estate agent or as a direct seller, as defined in section 3508 of the Internal Revenue Code, liable for the tax on self-employment income imposed by section 1401?

FACTS

  SITUATION 1. A, an individual, is a licensed real estate agent. Substantially all of the cash and noncash remuneration for services that A performs as a real estate agent for X, a corporation, is directly related to A's sales and not to the number of hours A works. A's services for X are performed under a written contract between A and X which specifies that X will not be treated as an employee with respect to those services for federal tax purposes. A therefore meets the description of a qualified real estate agent contained in section 3508(b)(l) of the Code.

  The direction and control that X exercises over A in the performance of X's services would establish the relationship of employer and employee under applicable common-law rules. Thus, but for the application of section 3508(a) of the Code, A would be X's employee within the meaning of section 3121(d)(2). As such, A would be an employee for purposes of the Federal Insurance Contributions Act (FICA).

  X does not withhold FICA or federal income tax from the remuneration paid to A.

  SITUATION 2. B, an individual, performs services selling consumer household products door-to-door for Y, a corporation. These services are performed under a written agreement which provides that, for federal tax purposes, Y will not treat B as an employee. B is paid solely on a commission basis. B thus meets he description of a direct seller contained in section 3508(b)(2) of the Code.

  The direction and control that Y exercises over B in the performance of B's services would establish the relationship of employer and employee under applicable common-law rules. Thus, but for the application of section 3508(a) of the Code, B would be Y's employee within the meaning of section 3121(d)(2).

  Y does not withhold FICA or federal income tax from the remuneration paid to B.

LAW AND ANALYSIS

  Section 1401 of the Code imposes taxes upon the self-employment income of every individual.

  Sections 1402(a) and (b) of the Code define 'self-employment income' as the gross income derived by an individual from any trade or business carried on by the individual with certain exceptions and exclusions.

  In general, section 1402(c) of the Code provides that the term trade or business, when used with reference to self-employment income or net earnings from self-employment, has the same meaning as when used in section 162, relating to trade or business expenses.

  Section 1402(c)(2) of the Code provides, with certain exceptions, that the term trade or business does not include the performance of service by an individual as an employee.

  Section 3121(d)(2) of the Code provides, in part, that the term 'employee' includes 'an individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee.'

  Section 3508(a) of the Code, which was added by section 269 of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), 1982-2 C.B. 462, 535, provides that, for purposes of the Code, in the case of services performed as a qualified real estate agent or as a direct seller, the individual performing the services shall not be treated as an employee.

  Section 3508(b)(1) of the Code provides in part that the term 'qualified real estate agent' includes any individual who is a sales person if

  (A) such individual is a licensed real estate agent.

  (B) substantially all of the remuneration (whether or not paid in cash) for the services performed by such individual as a real estate agent is directly related to sales or other output (including the performance of services) rather than to the number of hours worked, and

  (C) the services performed by the individual are performed pursuant to a written contract between such individual and the perform for whom the services are performed and such contract provides that the individual will not be treated as an employee with respect to such services for federal tax purposes.

  Section 3508(b)(2) of the Code provides in part that the term 'direct seller' includes a person only if such person

  (i) is engaged in the trade or business of selling (or soliciting the sale of) consumer products to any buyer on a buy-sell basis, a deposit-commission basis, or any similar basis which the Secretary prescribes by regulations, for resale (by the buyer or any other person) in the home or otherwise than in a permanent retail establishment, or

  (ii) is engaged in the trade or business of selling (or soliciting the sale of) consumer products in the home or otherwise than in a permanent retail establishment.

  In order to be a direct seller, a person must also meet criteria analogous to (B) and (C) above for qualified real estate agents. The Conference Report accompanying TEFRA, Conf. Rep. 97-760, 1982-2 C.B. 600, 687, states that under section 3508 Congress intended to establish two classes of statutory nonemployees, qualified real estate agents and direct sellers, and that the members of both classes 'are treated for federal income employment tax purposes as self-employed persons . . . .'

  A and B are in a trade or business for purposes of section 1402(c) of the Code. Under section 3508(a) of the Code, A and B are nonemployees for purposes of the employment taxes under subtitle C of the Code, as well as for purposes of the self-employment taxes under chapter 2 of subtitle A of the Code. Thus, the employee exception contained in section 1402(c)(2) does not apply to A or B.

HOLDING

  A and B are liable for the self-employment income taxes imposed by section 1401.

Rev. Rul. 85-63, 1985-1 C.B. 292, 1985-21 I.R.B. 10.