Rev. Rul. 75-343

Advice has been requested as to the status of an individual performing services for a Federal agency, under the circumstances described below, for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages (chapters 21, 23, and 24, respectively, subtitle C, Internal Revenue Code of 1954), and for purposes of the Self-Employment Contributions Act of 1954, (chapter 2, subtitle A of the Code).

The individual performs services as an examination monitor and counselor pursuant to a contract executed with a Federal agency. The contract states that the individual is solely responsible for correctly administering tests, for adhering to the agency's procedural standards specified for each test, for making and preserving the administrative records pertaining to the tests, for grading tests in accordance with the agency's standards, and for recording and reporting the results thereof. The contract specifies the building in which the individual is to perform the services, and the days and hours during which the services are to be performed. Payment of the contract price is stated in monthly increments based upon the number of testing sessions conducted by the individual during that reporting period.

The individual is required to familiarize himself with the general testing requirements in effect at the particular agency and with the specific requirements of each test to be administered. During the administration of the test the individual is required to monitor the students, exclude unauthorized persons from the testing area, and to maintain visual supervision of the test participants.

In addition, the individual is required to deliver, within 10 days of a request therefor, a report regarding the testing and counseling service that is to include all germane statistics, pertinent comments regarding the services, and any recommendations with respect to the services.

The individual is prohibited from subcontracting any portion of the services without the prior approval of the contracting officer. The individual's services may be terminated for failure to comply with the terms of the contract, for his failure to provide a satisfactory substitute, for frequent requests for approval of substitutes, or for any other reason deemed by the contracting officer to be in the best interests of the Government.

Training is furnished the individual with respect to the proper method to be used in completing the forms and reports. All necessary supplies and materials are furnished by the agency. The individual does not advertise his services in a local directory and does not hold himself out to the general public as being able to perform services of a related or similar nature. The contract also states that the individual is not an employee of the agency, and that the remuneration is not "wages" for Federal employment tax purposes. In this regard, the agency has invoked the provisions of section 3122 of the Federal Insurance Contributions Act.

An individual is an employee for Federal employment tax purposes if he has the status of an employee under the usual common law rules applicable in determining the employer-employee relations. Guides for determining the existence of that status are found in three substantially similar sections of the Employment Tax Regulations, namely, sections 31.3121(d)-1, 31.3306(i)-1, and 31.3401(c)-1. Generally, the relationship of employer-employee exists when the person for whom the services are performed has the right to control and direct the individual who performs the services not only as to the results to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but as to how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. The right to discharge is also an important factor indicating that the person possessing the right is the employer. Other factors characteristic of an employer, but not necessarily present in each case, are the furnishing of tools and the furnishing of a place to work to the individual who performs the services.

Furthermore, consideration must be given to such factors as the continuity of the relationship, and whether or not the individual's services are an integral part of the business of the employer as distinguished from an independent trade or business of the individual himself in which he assumes the risks of realizing a profit or suffering a loss. See United States v. Silk and Grevyan Lines, Inc., 331 U.S. 704 (1947), 1947-2 C.B. 167, and Bartels v. Birmingham, 332 U.S. 126 (1947), 1947-2 C.B. 174.

The facts in this case show that pursuant to the contract the individual performs personal services in a building provided by the agency on its premises, on specified days during specified hours, and that such services are both necessary and incident to the overall training program. The individual is not engaged in an independent enterprise in which he assumes the risk of the profit and loss. Additionally, the agency retains the right to supervise him to the extent necessary for the successful completion of a particular project.

In the instant case, the agency retains the right to exercise over the individual the degree of control and direction necessary to establish the relationship of employer and employee. Accordingly, the individual is an employee of the agency for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages.

Each of the above chapters of the Code (chapters 21, 23, and 24, respectively) imposes a tax or taxes with respect to wages. Section 3121(a) of the Federal Insurance Contributions Act (chapter 21 of the Code) defines the term "wages," with certain exceptions not here material, as "all remuneration for employment." Section 3121(b) of the Act, again with exceptions not here material, defines the term "employment" as service performed by an employee for the person employing him.

However, section 3122 of the Federal Insurance Contributions Act provides, with respect to services performed in the employ of the United States or a wholly owned instrumentality thereof, that the determination of whether an individual has performed service which constitutes employment as defined in the Act, the determination of the amount of remuneration for such services which constitutes wages as defined in the Act, and the return and payment of the taxes imposed by the Act, shall be made by the head of the Federal agency or instrumentality having control of such service, or by the agent or agents whom he may designate. A determination made by the head of the agency is final for purposes of that Act.

Sections 3306(b) and (c) of the Federal Unemployment Tax Act (chapter 23 of the Code) define wages and employment, respectively, similarly to the manner in which those terms are defined under section 3121(a) and (b) of the Federal Insurance Contributions Act. However, section 3306(c)(6) excepts from the term "employment" service performed in the employ of the United States Government.

Section 3401(a) of the Collection of Income Tax at Source on Wages (chapter 24 of the Code) defines the term wages for purposes thereof, with exceptions not here material, as all remuneration for services performed by an employee for his employer.

Therefore, under the facts and circumstances presented, the remuneration for the services performed as an examination monitor and counselor are excepted from the taxes imposed by the Federal Insurance Contributions Act and the Federal Unemployment Tax Act pursuant to sections 3122 and 3306(c)(6) of those Acts.

There are no provisions in the Collection of Income Tax at Source on Wages, (chapter 24 of the Code) that are analogous to the exceptions of those Acts. Neither a determination under section 3122 of the Federal Insurance Contributions Act nor a finding that section 3306(c)(6) of the Federal Unemployment Tax Act is applicable to the factual situation presented has any effect with respect to the application of the income tax withholding provisions. Therefore, the remuneration in question here is wages subject to the Collection of Income Tax at Source on Wages.

Section 1401 of the Self-Employment Contributions Act of 1954 (chapter 2 of the Code) imposes a tax on the self-employment income of every individual to be levied, assessed and collected as part of the income tax imposed by subtitle A of the Code. (See section 1.1401-1(a) of the Income Tax Regulations)

Section 1402(b) of the Act provides that the term "self-employment income" means the net earnings from self-employment derived by an individual during any taxable year, with exceptions and limitations not here material. Section 1402(a) of the Act provides that the term "net earnings from self-employment" includes the gross income derived by an individual from any trade or business carried on by such individual less the deductions allowed by subtitle A of the Code attributable to such trade or business.

Under section 1402(c)(2) of the Act, the term "trade or business" is to have the same meaning as when used in section 162 of the Code (relating to trade or business expenses) except that it generally does not include the performance of services by an individual as an employee.

In addition, section 1402(d) of the Act provides that the term employee and the term wages shall have the same meaning as when used in chapter 21 (section 3101 and following, Federal Insurance Contributions Act). However, the determination under section 3122 of the Federal Insurance Contributions Act has no significant effect, for purposes of applying the provisions of the Self-Employment Contributions Act of 1954 with respect to whether or not (1) the individual is engaged in a trade or business, (2) has self-employment income, or (3) is an employee. The pertinent portions of section 3122 relate only to whether the individual performed service constituting "employment" or received remuneration constituting wages and do not preclude a finding under section 3121(d) of the Federal Insurance Contributions Act that the individual has the status of an employee.

Under section 1.1402(c)-3(a) of the regulations, the performance of services by an individual as an employee, as defined in the Federal Insurance Contributions Act (chapter 21 of the Code) does not constitute a trade or business within the meaning of section 1402(c) of the Self-Employment Contributions Act of 1954 and section 1.1402(c)-1 of the regulations.

Accordingly, inasmuch as the individual in the instant case has been determined to be an employee within the meaning of the Federal Insurance Contributions Act and is not otherwise shown to be engaged in a trade or business, this individual has no self-employment income to be subject to the tax imposed by section 1401 of the Self-Employment Contributions Act of 1954.

Rev. Rul. 147, 1953-2 C.B. 301, holds that the remuneration paid by the Department of the Army to civilian instructors at army education centers for services performed on a contract or fee basis, does not constitute wages with respect to employment because of section 1426(b)(7)(C)(v) of the Federal Insurance Contributions Act. The ruling also holds that such remuneration paid to civilian instructors who are citizens or residents of the United States, constitute wages subject to the withholding of income tax at source pursuant to section 1622 of the Internal Revenue Code of 1939. The withholding provisions were substantially unchanged by the Internal Revenue Code of 1954. However, the Social Security Amendments of 1954, section 205(d)(2), 1954-2 C.B. 603, 608, removed section 1426(b)(7)(C)(v) from the Act. See H. R. Rep. No. 1698, 83rd Cong., 2d Sess. 87 (1954), 1954-2 C.B. 676, 690.

Thus, Rev. Rul. 147 is no longer applicable with respect to the conclusion that was based on the specific exclusion from wages with respect to employment that was deleted from the Act by the 1954 Amendments. However, with respect to (1) the conclusions contained therein regarding the Collection of Income Tax at Source on Wages, and (2) the reference to the application of section 3122 of the Federal Insurance Contributions Act, (formerly section 1420(e) of the 1939 Code), Rev. Rul. 147 is superseded, since the position set forth therein is restated under current law and regulations in this Revenue Ruling.

In Rev. Rul. 56-615, 1956-2 C.B. 565, it was determined that where a Federal agency engages the services of a tutor and teacher under a contract, and the head of that agency pursuant to the provisions of section 3122 of the Federal Insurance Contributions Act, determines that the services are not employment and the remuneration is not wages for purposes of the Act, no liability is incurred for the taxes imposed thereby. It was also determined that the individual, under the circumstances presented, was performing services that constituted the carrying on of a "trade or business," within the meaning of section 1402(c) of the Self-Employment Contributions Act of 1954, and the amounts so received were includible in determining his net earnings from self-employment.

Rev. Rul. 56-615 is modified to remove any implication that a determination made by a head of a Federal agency pursuant to section 3122 of the Federal Insurance Contributions Act automatically establishes the existence of self-employment and precludes the existence of an employer-employee relationship.

Rev. Rul. 147 is superseded and Rev. Rul. 56-615 is modified.