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SUBCHAPTER C--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

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SUBCHAPTER C--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE Powered By Docstoc
					  SUBCHAPTER C—EMPLOYMENT TAXES AND COLLECTION
             OF INCOME TAX AT SOURCE

PART   31—EMPLOYMENT  TAXES                           31.3121(a)(5)–1 Payments from or to certain
                                                          tax-exempt trusts, or under or to certain
  AND COLLECTION OF INCOME                                annuity plans or bond purchase plans.
  TAX AT SOURCE                                       31.3121(a)(6)–1 Payment by an employer of
                                                          employee tax under section 3101 or em-
          Subpart A—Introduction                          ployee contributions under a State law.
                                                      31.3121(a)(7)–1 Payments for services not in
Sec.                                                      the course of employer’s trade or busi-
31.0–1 Introduction.                                      ness or for domestic service.
31.0–2 General definitions and use of terms.          31.3121(a)(8)–1 Payments for agricultural
31.0–3 Scope of regulations.                              labor.
31.0–4 Extent to which the regulations in             31.3121(a)(9)–1 Payments to employees for
    this part supersede prior regulations.                nonwork periods.
                                                      31.3121(a)(10)–1 Payments to certain home
Subpart B—Federal Insurance Contribu-                     workers.
   tions Act (Chapter 21, Internal Rev-               31.3121(a)(11)–1 Moving expenses.
   enue Code of 1954)                                 31.3121(a)(12)–1 Tips.
                                                      31.3121(a)(13)–1 Payments under certain em-
             TAX ON EMPLOYEES                             ployers’ plans after retirement, dis-
                                                          ability, or death.
31.3101–1 Measure of employee tax.                    31.3121(a)(14)–1 Payments by employer to
31.3101–2 Rates and computation of em-                    survivor or estate of former employee.
    ployee tax.                                       31.3121(a)(15)–1 Payments by employer to
31.3101–3 When employee tax attaches.                     disabled former employee.
31.3102–1 Collection of, and liability for, em-       31.3121(a)(18)–1 Payments or benefits under
    ployee tax; in general.                               a qualified educational assistance pro-
31.3102–2 Manner and time of payment of                   gram.
    employee tax.                                     31.3121(b)–1 Employment; services to which
31.3102–3 Collection of, and liability for, em-           the regulations in this subpart apply.
    ployee tax on tips.                               31.3121(b)–2 Employment;       services    per-
                                                          formed before 1955.
             TAX ON EMPLOYERS                         31.3121(b)–3 Employment;       services    per-
31.3111–1 Measure of employer tax.                        formed after 1954.
31.3111–2 Rates and computation of em-                31.3121(b)–4 Employment; excepted services
    ployer tax.                                           in general.
31.3111–3 When employer tax attaches.                 31.3121(b)(1)–1 Certain services performed by
31.3111–4 Liability for employer tax.                     foreign agricultural workers, or per-
31.3111–5 Manner and time of payment of                   formed before 1959 in connection with
    employer tax.                                         oleoresinous products.
31.3112–1 Instrumentalities of the United             31.3121(b)(2)–1 Domestic service performed
    States specifically exempted from the                 by students for certain college organiza-
    employer tax.                                         tions.
                                                      31.3121(b)(3)–1 Family employment.
            GENERAL PROVISIONS                        31.3121(b)(4)–1 Services performed on or in
                                                          connection with a non-American vessel
31.3121(a)–1 Wages.                                       or aircraft.
31.3121(a)–1T Question and answer relating            31.3121(b)(5)–1 Services in employ of an in-
    to the definition of wages in section                 strumentality of the United States spe-
    3121(a) (Temporary).                                  cifically exempted from the employer
31.3121(a)–2 Wages; when paid and received.               tax.
31.3121(a)–3 Reimbursement and other ex-              31.3121(b)(6)–1 Services in employ of United
    pense allowance amounts.                              States or instrumentality thereof.
31.3121(a)(1)–1 Annual wage limitation.               31.3121(b)(7)–1 Services in employ of States
31.3121(a)(2)–1 Payments under employers’                 or their political subdivisions or instru-
    plans on account of retirement, sickness              mentalities.
    or accident disability, medical or hos-           31.3121(b)(7)–2 Service by employees who are
    pitalization expenses, or death.                      not members of a public retirement sys-
31.3121(a)(3)–1 Retirement payments.                      tem.
31.3121(a)(4)–1 Payments on account of sick-          31.3121(b)(8)–1 Services performed by a min-
    ness or accident disability, or medical or            ister of a church or a member of a reli-
    hospitalization expenses.                             gious order.

                                                  5
Pt. 31                                                            26 CFR Ch. I (4–1–99 Edition)
31.3121(b)(8)–2 Services in employ of reli-          31.3121(k)–3 Request for coverage of indi-
    gious, charitable, educational, or certain           vidual employed by exempt organization
    other organizations exempt from income               before August 1, 1956.
    tax.                                             31.3121(k)–4 Constructive filing of waivers of
31.3121(b)(9)–1 Railroad industry; services              exemption from social security taxes by
    performed by an employee or an em-                   certain tax-exempt organizations.
    ployee representative as defined in sec-         31.3121(l)–1 Agreements entered into by do-
    tion 3231.                                           mestic corporations with respect to for-
31.3121(b)(10)–1 Services for remuneration of            eign subsidiaries.
    less than $50 for calendar quarter in the        31.3121(o)–1 Crew leader.
    employ of certain organizations exempt           31.3121(q)–1 Tips included for employee
    from income tax.                                     taxes.
31.3121(b)(10)–2 Services performed by cer-          31.3121(r)–1 Election of coverage by religious
    tain students in the employ of a school,             orders.
    college, or university, or of a nonprofit        31.3121(s)–1 Concurrent employment by re-
    organization auxiliary to a school, col-             lated corporations with common pay-
    lege, or university.                                 master.
                                                     31.3121(v)(2)–1 Treatment of amounts de-
31.3121(b)(11)–1 Services in the employ of a
                                                         ferred under certain nonqualified de-
    foreign government.
                                                         ferred compensation plans.
31.3121(b)(12)–1 Services in employ of wholly
                                                     31.3121(v)(2)–2 Effective dates and transition
    owned instrumentality of foreign govern-
                                                         rules.
    ment.
                                                     31.3123–1 Deductions by an employer from
31.3121(b)(13)–1 Services of student nurse or            remuneration of an employee.
    hospital intern.
31.3121(b)(14)–1 Services in delivery or dis-        Subpart C—Railroad Retirement Tax Act
    tribution of newspapers, shopping news,
                                                        (Chapter 22, Internal Revenue Code of
    or magazines.
31.3121(b)(15)–1 Services in employ of inter-
                                                        1954)
    national organization.                                          TAX ON EMPLOYEES
31.3121(b)(16)–1 Services performed under
    share-farming arrangement.                       31.3201–1 Measure of employee tax.
31.3121(b)(17)–1 Services in employ of Com-          31.3201–2 Rates and computation of em-
    munist organization.                                 ployee tax.
                                                     31.3202–1 Collection of, and liability for, em-
31.3121(b)(18)–1 Services performed by a resi-
                                                         ployee tax.
    dent of the Republic of the Philippines
    while temporarily in Guam.                            TAX ON EMPLOYEE REPRESENTATIVES
31.3121(b)(19)–1 Services of certain non-
    resident aliens.                                 31.3211–1 Measure of employee representa-
31.3121(b)(20)–1 Service performed on a boat             tive tax.
    engaged in catching fish.                        31.3211–2 Rates and computation of em-
                                                         ployee representative tax.
31.3121(c)–1 Included and excluded services.
                                                     31.3211–3 Employee representative supple-
31.3121(d)–1 Who are employees.
                                                         mental tax.
31.3121(d)–2 Who are employers.                      31.3212–1 Determination of compensation.
31.3121(e)–1 State, United States, and cit-
    izen.                                                           TAX ON EMPLOYERS
31.3121(f)–1 American vessel and aircraft.
                                                     31.3221–1 Measure of employer tax.
31.3121(g)–1 Agricultural labor.                     31.3221–2 Rates and computation        of   em-
31.3121(h)–1 American employer.                          ployer tax.
31.3121(i)–1 Computation to nearest dollar of        31.3221–3 Supplemental tax.
    cash remuneration for domestic service.
31.3121(i)–2 Computation of remuneration                           GENERAL PROVISIONS
    for service performed by an individual as
                                                     31.3231(a)–1 Who are employers.
    a member of a uniformed service.                 31.3231(b)–1 Who are employees.
31.3121(i)–3 Computation of remuneration             31.3231(c)–1 Who are employee representa-
    for service performed by an individual as            tives.
    a volunteer or volunteer leader within           31.3231(d)–1 Service.
    the meaning of the Peace Corps Act.              31.3231(e)–1 Compensation.
31.3121(i)–4 Computation of remuneration             31.3231(e)–2 Contribution base.
    for service performed by certain mem-
    bers of religious orders.                        Subpart D—Federal Unemployment Tax
31.3121(j)–1 Covered transportation service.            Act (Chapter 23, Internal Revenue
31.3121(k)–1 Waiver of exemption from                   Code of 1954)
    taxes.
31.3121(k)–2 Waivers of exemption; original          31.3301–1   Persons liable for tax.
    effective date changed retroactively.            31.3301–2   Measure of tax.

                                                 6
Internal Revenue Service, Treasury                                                          Pt. 31
31.3301–3 Rate and computation of tax.               31.3306(c)(8)–1 Services in employ of reli-
31.3301–4 When wages are paid.                           gious, charitable, educational, or certain
31.3302(a)–1 Credit against tax for contribu-            other organizations exempt from income
    tions paid.                                          tax.
31.3302(a)–2 Refund of State contributions.          31.3306(c)(9)–1 Railroad industry; services
31.3302(a)–3 Proof of credit under section               performed by an employee or an em-
    3302(a).                                             ployee representative under the Railroad
31.3302(b)–1 Additional credit against tax.              Unemployment Insurance Act.
31.3302(b)–2 Proof of additional credit under        31.3306(c)(10)–1 Services in the employ of
    section 3302(b).                                     certain organizations exempt from in-
31.3302(c)–1 Limit on total credits.                     come tax.
31.3302(d)–1 Definitions and special rules re-       31.3306(c)(10)–2 Services of student in em-
    lating to limit on total credits.                    ploy of school, college, or university.
31.3302(e)–1 Successor employer.                     31.3306(c)(10)–3 Services before 1962 in em-
31.3306(a)–1 Who are employers.                          ploy of certain employees’ beneficiary
31.3306(b)–1 Wages.                                      associations.
31.3306(b)–1T Question and answer relating           31.3306(c)(11)–1 Services in employ of foreign
    to the definition of wages in section                government.
    3306(b) (Temporary).                             31.3306(c)(12)–1 Services in employ of wholly
31.3306(b)–2 Reimbursement and other ex-                 owned instrumentality of foreign govern-
    pense allowance amounts.                             ment.
31.3306(b)(1)–1 $3,000 limitation.                   31.3306(c)(13)–1 Services of student nurse or
31.3306(b)(2)–1 Payments under employers’                hospital intern.
    plans on account of retirement, sickness         31.3306(c)(14)–1 Services of insurance agent
    or accident disability, medical or hos-              or solicitor.
    pitalization expenses, or death.                 31.3306(c)(15)–1 Services in delivery or dis-
31.3306(b)(3)–1 Retirement payments.                     tribution of newspapers, shopping news,
31.3306(b)(4)–1 Payments on account of sick-             or magazines.
                                                     31.3306(c)(16)–1 Services in employ of inter-
    ness or accident disability, or medical or
                                                         national organization.
    hospitalization expenses.
                                                     31.3306(c)(17)–1 Fishing services.
31.3306(b)(5)–1 Payments from or to certain
                                                     31.3306(c)(18)–1 Services of certain non-
    tax-exempt trusts, or under or to certain
                                                         resident aliens.
    annuity plans or bond purchase plans.
                                                     31.3306(d)–1 Included and excluded service.
31.3306(b)(6)–1 Payment by an employer of
                                                     31.3306(i)–1 Who are employees.
    employee tax under section 3101 or em-
                                                     31.3306(j)–1 State, United States, and cit-
    ployee contributions under a State law.
                                                         izen.
31.3306(b)(7)–1 Payments other than in cash          31.3306(k)–1 Agricultural labor.
    for service not in the course of employ-         31.3306(m)–1 American vessel and aircraft.
    er’s trade or business.                          31.3306(n)–1 Services on American vessel
31.3306(b)(8)–1 Payments to employees for                whose business is conducted by general
    non-work periods.                                    agent of Secretary of Commerce.
31.3306(b)(9)–1 Moving expenses.                     31.3306(p)–1 Employees or related corpora-
31.3306(b)(10)–1 Payments under certain em-              tions.
    ployers’ plans after retirement, dis-            31.3306(r)(2)–1 Treatment of amounts de-
    ability, or death.                                   ferred under certain nonqualified de-
31.3306(b)(13)–1 Payments or benefits under              ferred compensation plans.
    a qualified educational assistance pro-          31.3307–1 Deductions by an employer from
    gram.                                                remuneration of an employee.
31.3306(c)–1 Employment;        services  per-       31.3308–1 Instrumentalities of the United
    formed before 1955.                                  States specifically exempted from tax
31.3306(c)–2 Employment;        services  per-           imposed by section 3301.
    formed after 1954.
31.3306(c)–3 Employment; excepted services             Subpart E—Collection of Income Tax at
    in general.                                                       Source
31.3306(c)(1)–1 Agricultural labor.
31.3306(c)(2)–1 Domestic service.                    31.3401(a)–1 Wages.
31.3306(c)(3)–1 Services not in the course of        31.3401(a)–1T Question and answer relating
    employer’s trade or business.                        to the definition of wages in section
31.3306(c)(4)–1 Services on or in connection             3401(a) (Temporary).
    with a non-American vessel or aircraft.          31.3401(a)–2 Exclusions from wages.
31.3306(c)(5)–1 Family employment.                   31.3401(a)–3 Amounts deemed wages under
31.3306(c)(6)–1 Services in employ of United             voluntary withholding agreements.
    States or instrumentality thereof.               31.3401(a)–4 Reimbursements and other ex-
31.3306(c)(7)–1 Services in employ of States             pense allowance amounts.
    or their political subdivisions or instru-       31.3401(a)(1)–1 Remuneration of members of
    mentalities.                                         the Armed Forces of the United States

                                                 7
Pt. 31                                                          26 CFR Ch. I (4–1–99 Edition)
    for active service in combat zone or             31.3402(b)–1 Percentage method of with-
    while hospitalized as a result of such               holding.
    service.                                         31.3402(c)–1 Wage bracket withholding.
31.3401(a)(2)–1 Agricultural labor.                  31.3402(d)–1 Failure to withhold.
31.3401(a)(3)–1 Remuneration for domestic            31.3402(e)–1 Included and excluded wages.
    service.                                         31.3402(f)(1)–1 Withholding exemptions.
31.3401(a)(4)–1 Cash remuneration for service        31.3402(f)(2)–1 Withholding exemption cer-
    not in the course of employer’s trade or             tificates.
    business.                                        31.3402(f)(3)–1 When withholding exemption
31.3401(a)(5)–1 Remuneration for services for            certificate takes effect.
    foreign government or international or-          31.3402(f)(4)–1 Period during which with-
    ganization.                                          holding exemption certificate remains in
31.3401(a)(6)–1 Remuneration for services of             effect.
    nonresident alien individuals.                   31.3402(f)(4)–2 Effective period of with-
31.3401(a)(6)–1A Remuneration for services               holding exemption certificate.
    of certain nonresident alien individuals         31.3402(f)(5)–1 Form and contents of with-
    paid before January 1, 1967.                         holding exemption certificates.
31.3401(a)(7)–1 Remuneration paid before             31.3402(f)(6)–1 Withholding exemptions for
    January 1, 1967, for services performed by           nonresident alien individuals.
    nonresident alien individuals who are            31.3402(g)–1 Supplemental wage payments.
    residents of a contiguous country and            31.3402(g)–2 Wages paid for payroll period of
    who enter and leave the United States at             more than one year.
    frequent intervals.                              31.3402(g)–3 Wages paid through an agent, fi-
31.3401(a)(8)(A)–1 Remuneration for services             duciary, or other person on behalf of two
    performed outside the United States by               or more employers.
    citizens of the United States.                   31.3402(h)(1)–1 Withholding on basis of aver-
31.3401(a)(8)(B)–1 Remuneration for services             age wages.
    performed in possession of the United            31.3402(h)(2)–1 Withholding on basis of
    States (other than Puerto Rico) by cit-              annualized wages.
    izen of the United States.                       31.3402(h)(3)–1 Withholding on basis of cu-
31.3401(a)(8)(C)–1 Remuneration for services             mulative wages.
    performed in Puerto Rico by citizen of           31.3402(h)(4)–1 Other methods.
    the United States.                               31.3402(i)–1 Additional withholding.
31.3401(a)(9)–1 Remuneration for services            31.3402(i)–2 Increases or decreases in with-
    performed by a minister of a church or a             holding.
    member of a religious order.                     31.3402(j)–1 Remuneration other than in
31.3401(a)(10)–1 Remuneration for services in            cash for service performed by retail com-
    delivery or distribution of newspapers,              mission salesman.
    shopping news, or magazines.                     31.3402(k)–1 Special rule for tips.
31.3401(a)(11)–1 Remuneration other than in          31.3402(l)–1 Determination and disclosure of
    cash for service not in the course of em-            marital status.
    ployer’s trade or business.                      31.3402(m)–1 Withholding allowances.
31.3401(a)(12)–1 Payments from or to certain         31.3402(n)–1 Employees incurring no income
    tax-exempt trusts, or under or to certain            tax liability.
    annuity plans or bond purchase plans, or         31.3402(o)–1 Extension of withholding to
    to individual retirement plans.                      supplemental unemployment compensa-
31.3401(a)(13)–1 Remuneration for services               tion benefits.
    performed by Peace Corps volunteers.             31.3402(o)–2 Extension of withholding to an-
31.3401(a)(14)–1 Group-term life insurance.              nuity payments if requested by payee.
31.3401(a)(15)–1 Moving expenses.                    31.3402(o)–3 Extension of withholding to
31.3401(a)(16)–1 Tips.                                   sick pay.
31.3401(a)(17)–1 Remuneration for services           31.3402(p)–1 Voluntary withholding agree-
    performed on a boat engaged in catching              ments.
    fish.                                            31.3402(q)–1 Extension of withholding to cer-
31.3401(a)(18)–1 Payments or benefits under              tain gambling winnings.
    a qualified educational assistance pro-          31.3402(r)–1 Withholding on distributions of
    gram.                                                Indian gaming profits to tribal members.
31.3401(a)(19)–1 Reimbursements under a              31.3403–1 Liability for tax.
    self-insured medical reimbursement plan.         31.3404–1 Return and payment by govern-
31.3401(b)–1 Payroll period.                             mental employer.
31.3401(c)–1 Employee.                               31.3405(c)–1 Withholding on eligible rollover
31.3401(d)–1 Employer.                                   distributions; questions and answers.
31.3401(e)–1 Number of withholding exemp-            31.3406–0 Outline of the backup withholding
    tions claimed.                                       regulations.
31.3401(f)–1 Tips.                                   31.3406a–1 Backup withholding requirement
31.3402(a)–1 Requirement of withholding.                 on reportable payments.

                                                 8
Internal Revenue Service, Treasury                                                          Pt. 31
31.3406a–2 Definition of payors obligated to         31.3503–1 Tax under chapter 21 or 22 paid
    backup withhold.                                     under wrong chapter.
31.3406a–3 Scope and extent of accounts sub-         31.3504–1 Acts to be performed by agents.
    ject to backup withholding.                      31.3505–1 Liability of third parties paying or
31.3406a–4 Time when payments are consid-                providing for wages.
    ered to be paid and subject to backup            31.3506–1 Companion sitting placement serv-
    withholding.                                         ices.
31.3406(b((2)–1 Reportable interest payment.         31.3507–1 Advance payments of earned in-
31.3406(b)(2)–2 Original issue discount.                 come credit.
31.3406(b)(2)–3 Window transactions.                 31.3507–2 Earned income credit advance pay-
31.3406(b)(2)–4 Reportable dividend payment.             ment certificates.
31.3406(b)(2)–5 Reportable patronage divi-
    dend payment.                                    Subpart G—Administrative Provisions of
31.3406(b)(3)–1 Reportable     payments     of          Special Application to Employment
    rents, commissions, nonemployee com-                Taxes (Selected Provisions of Subtitle F,
    pensation, etc.                                     Internal Revenue Code of 1954)
31.3406(b)(3)–2 Reportable barter exchanges
    and gross proceeds of sales of securities        31.6001–1 Records in general.
    or commodities by brokers.                       31.6001–2 Additional records under Federal
31.3406(b)(3)–3 Reportable payments by cer-              Insurance Contributions Act.
    tain fishing boat operators.                     31.6001–3 Additional records under Railroad
31.3406(b)(3)–4 Reportable payments of roy-              Retirement Tax Act.
    alties.                                          31.6001–4 Additional records under Federal
31.3406(b)(4)–1 Exemption for certain mini-              Unemployment Tax Act.
    mal payments.                                    31.6001–5 Additional records in connection
31.3406(c)–1 Notified payee underreporting of            with collection of income tax at source
    reportable interest or dividend pay-                 on wages.
    ments.                                           31.6001–6 Notice by district director requir-
31.3406(d)–1 Manner required for furnishing              ing returns, statements, or the keeping
    a taxpayer identification number.                    of records.
31.3406(d)–2 Payee certification failure.            31.6011(a)–1 Returns under Federal Insur-
31.3406(d)–3 Special 30–day rules for certain            ance Contributions Act.
    reportable payments.                             31.6011(a)–2 Returns under Railroad Retire-
31.3406(d)–4 Special    rules    for   readily           ment Tax Act.
    tradable instruments acquired through a          31.6011(a)–3 Returns under Federal Unem-
    broker.                                              ployment Tax Act.
31.3406(d)–5 Backup withholding when the             31.6011(a)–3A Returns of the railroad unem-
    Service or a broker notifies the payor to            ployment repayment tax.
    withhold because the payee’s taxpayer            31.6011(a)–4 Returns of income tax withheld.
    identification number is incorrect.              31.6011(a)–5 Monthly returns.
31.3406(e)–1 Period during which backup              31.6011(a)–6 Final returns.
    withholding is required.                         31.6011(a)–7 Execution of returns.
31.3406(f)–1 Confidentiality of information.         31.6011(a)–8 Composite return in lieu of
31.3406(g)–1 Exception for payments to cer-              specified form.
    tain payees and certain other payments.          31.6011(a)–9 Instructions to forms control as
31.3406(g)–2 Exception for reportable pay-               to which form is to be used.
    ments for which withholding is otherwise         31.6011(a)–10 Instructions to forms may
    required.                                            waive filing requirement in case of no li-
31.3406(g)–3 Exemption while payee is wait-              ability tax returns.
    ing for a taxpayer identification number.        31.6011(b)–1 Employers’ identification num-
31.3406(h)–1 Definitions.                                bers.
31.3406(h)–2 Special rules.                          31.6011(b)–2 Employees’ account numbers.
31.3406(h)–3 Certificates.                           31.6051–1 Statements for employees.
31.3406(i)–1 Effective date.                         31.6051–2 Information returns on Form W–3
31.3406(j)–1 Taxpayer Identification Number              and Internal Revenue Service copies of
    (TIN) matching program.                              Forms W–2.
                                                     31.6051–3 Statements required in case of
Subpart F—General Provisions Relating to                 sick pay paid by third parties.
   Employment Taxes (Chapter 25, Inter-              31.6051–4 Statement required in case of
   nal Revenue Code of 1954)                             backup withholding.
                                                     31.6053–1 Report of tips by employee to em-
31.3501(a)–1T Question and answer relating               ployer.
    to the time employers must collect and           31.6053–2 Employer statement of uncollected
    pay the taxes on noncash fringe benefits             employee tax.
    (Temporary).                                     31.6053–3 Reporting by certain large food or
31.3502–1 Nondeductibility of taxes in com-              beverage establishments with respect to
    puting taxable income.                               tips.

                                                 9
Pt. 31                                                             26 CFR Ch. I (4–1–99 Edition)
31.6053–4 Substantiation requirements for             31.6302(c)–4 Cross references.
    tipped employees.                                 31.6361–1 Collection and administration of
31.6061–1 Signing of returns.                             qualified State individual income taxes.
31.6065(a)–1 Verification of returns or other         31.6402(a)–1 Credits or refunds.
    documents.                                        31.6402(a)–2 Credit or refund of tax under
31.6071(a)–1 Time for filing returns and                  Federal Insurance Contributions Act or
    other documents.                                      Railroad Retirement Tax Act.
31.6071(a)–1A Time for filing returns with            31.6402(a)–3 Refund of Federal unemploy-
    respect to the railroad unemployment re-              ment tax.
    payment tax.                                      31.6404(a)–1 Abatements.
31.6081(a)–1 Extensions of time for filing re-        31.6413(a)–1 Repayment by employer of tax
    turns and other documents.                            erroneously collected from employee.
31.6091–1 Place for filing returns.                   31.6413(a)–2 Adjustment of overpayments.
31.6101–1 Period covered by returns.                  31.6413(a)–3 Repayment by payor of tax er-
31.6109–1 Supplying of identifying numbers.               roneously collected from payee.
31.6151–1 Time for paying tax.                        31.6413(b)–1 Overpayments of certain em-
31.6157–1 Cross reference.                                ployment taxes.
31.6161(a)(1)–1 Extensions of time for paying         31.6413(c)–1 Special refunds.
    tax.                                              31.6414–1 Credit or refund of income tax
31.6205–1 Adjustments of underpayments.                   withheld from wages.
31.6205–2 Adjustments of underpayments of             31.6652(c)–1 Failure of employee to report
    hospital insurance taxes that accrue                  tips for purposes of the Federal Insur-
    after March 31, 1986, and before January              ance Contributions Act.
    1, 1987, with respect to wages of State           31.6674–1 Penalties for fraudulent statement
    and local government employees.                       or failure to furnish statement.
31.6302–0 Table of Contents.                          31.6682–1 False information with respect to
31.6302–1 Federal tax deposit rules for with-             withholding.
    held income taxes and taxes under the             31.7805–1 Promulgation of regulations.
    Federal Insurance Contributions Act               31.9999–0 Effective dates.
    (FICA) attributable to payments made                AUTHORITY: 26 U.S.C. 7805.
    after December 31, 1992.                          Sections 31.3121(a)–1, 31.3121(a)–3, 31.3231(e)–1,
31.6302–1T Federal tax deposit rules for                31.3231(e)–3,     31.3306(b)–1,    31.3306(b)–2,
    withheld income taxes and taxes under               31.3401(a)–1, and 31.3401(a)–4 also issued
    the Federal Insurance Contributions Act             under 26 U.S.C. 62.
    (FICA) attributable to payments made              Section 31.3121(b)(7)–2 also issued under 26
    after December 31, 1992 (temporary).                U.S.C. 3121(b)(7)(F).
31.6302–2 Federal Tax Deposit Rules for               Section 31.3121(b)(19)–1 also issued under 26
    amounts withheld under the Railroad Re-             U.S.C. 7701(b)(11).
    tirement Tax Act (R.R.T.A.) attributable          Section 31.3306(c)(18)–1 also issued under 26
    to payments made after December 31,                 U.S.C. 7701(b)(11).
    1992.                                             Section 31.3401(a)(6)–1 also issued under 26
31.6302–3 Federal tax deposit rules for                 U.S.C. 1441(c)(4) and 26 U.S.C. 3401(a)(6).
    amounts withheld under the backup                 Section 31.3402(f)(1)–1 also issued under 26
    withholding requirements of section 3406            U.S.C. 3402(m).
    for payments made after December 31,              Section 31.3402(f)(5)–1 also issued under 26
    1992.                                               U.S.C. 3402 (i) and (m).
31.6302–4 Federal tax deposit rules for with-         Section 31.3402(r)–1 also issued under 26
    held income taxes attributable to non-              U.S.C. 3402(p) and (r).
    payroll payments made after December              Sections 31.3406(a)–1 through 31.3406(i)–1 also
    31, 1993.                                           issued under 26 U.S.C.3406(i).
31.6302(b)–1 Method of collection.                    Section 31.3406(j)–1 also issued under 26
31.6302(c)–1 Use of Government depositories             U.S.C. 3406(i).
    in connection with taxes under Federal            Section 31.6011(a)–3A is also issued under the
    Insurance Contributions Act and income              authority of 26 U.S.C. 6011.
    tax withheld for amounts attributable to          Section 31.6011(a)–4 also issued under 26
    payments made before January 1, 1993.               U.S.C. 6011.
31.6302(c)–2 Use of Government depositories             Section 31.6051–1(d) also issued under 26
    in connection with employee and em-               U.S.C. 6051.
    ployer taxes under Railroad Retirement              Section 31.6051–2 also issued under 26 U.S.C.
    Tax Act for amounts attributable to pay-          6051.
    ments made before January 1, 1993.                Sections 31.6053–3 (b)(5), (h) and (j)(9) and
31.6302(c)–2A Use of Government deposi-                 31.6053–4 are also issued under sec. 1072 of
    taries in connection with the railroad              Pub. L. 98–369, 98 Stat. 1052; and 26 U.S.C.
    unemployment repayment tax.                         6001.
31.6302(c)–3 Use of Government depositaries           Sections 31.6053–3T and 31.6053–4T are also
    in connection with tax under the Federal            issued under sec. 1072 of Pub. L. 98–369, 98
    Unemployment Tax Act.                               Stat. 1052; and 26 U.S.C. 6001.

                                                 10
Internal Revenue Service, Treasury                                                        § 31.0–2
  Section 31.6071–1 also issued under 26 U.S.C.         Subpart E relates to the collection of
6071.                                                   income tax at source on wages under
Section 31.6071(a)–1A is also issued under the          chapter 24 of the Code. Subpart F re-
  authority of 26 U.S.C. 6071.
  Section 31.6081–1 also issued under 26 U.S.C.         lates to the provisions of chapter 25 of
6081.                                                   the Code which are applicable in re-
Section 31.6205–2 is also issued under 26               spect of the taxes imposed by chapters
  U.S.C. 6205(a)(1).                                    21 to 24, inclusive, of the Code. Subpart
Sections 31.6302–1 through 31.6302–3 also               G relates to selected provisions of sub-
  issued under 26 U.S.C. 6302 (a), (c), and (h).        title F of the Code, relating to proce-
Section 31.6302–1T also issued under 26 U.S.C.          dure and administration, which have
  6302 (a) and (c).
Section 31.6302–4 also issued under 26 U.S.C.           special application in respect of the
  6302 (a) and (c).                                     taxes imposed by subtitle C of the
Section 31.6302(c)–2A is also issued under 26           Code. Inasmuch as these regulations
  U.S.C. 6302 and 6157(d).                              constitute Part 31 of Title 26 of the
Section 31.6302(c)–3 also issued under 26               Code of Federal Regulations, each sec-
  U.S.C. 6302(h).                                       tion of the regulations is preceded by a
  SOURCE: T.D. 6516, 25 FR 13032, Dec. 20, 1960;        section symbol and 31 followed by a
25 FR 14021, Dec. 31, 1960, unless otherwise            decimal point (§ 31.). Sections of law or
noted.                                                  references thereto are preceded by
                                                        ‘‘Sec.’’ or the word ‘‘section’’.
       Subpart A—Introduction                           [T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
§ 31.0–1 Introduction.                                  amended by T.D. 8723, 62 FR 37492, July 14,
                                                        1997]
   (a) In general. The regulations in this
part relate to the employment taxes                     § 31.0–2 General definitions and use of
imposed by subtitle C (chapters 21 to                        terms.
25, inclusive) of the Internal Revenue                     (a) In general. As used in the regula-
Code of 1954, as amended. References in                 tions in this part, unless otherwise ex-
the regulations to the ‘‘Internal Rev-                  pressly indicated—
enue Code’’ or the ‘‘Code’’ are ref-
                                                           (1) The terms defined in the provi-
erences to the Internal Revenue Code
                                                        sions of law contained in the regula-
of 1954, as amended, unless otherwise
                                                        tions in this part shall have the mean-
indicated. References to the Federal
                                                        ings so assigned to them.
Insurance Contributions Act, the Rail-
road Retirement Tax Act, and the Fed-                      (2) The Internal Revenue Code of 1954
eral Unemployment Tax Act are ref-                      means the act approved August 16, 1954
erences to chapters 21, 22, and 23, re-                 (26 U.S.C.), entitled ‘‘An act to revise
spectively, of the Code. References to                  the internal revenue laws of the United
sections of law are references to sec-                  States’’, as amended.
tions of the Internal Revenue Code un-                     (3) The Internal Revenue Code of 1939
less otherwise indicated. The regula-                   means the act approved February 10,
tions in this part also provide rules re-               1939 (53 Stat., Part 1), as amended.
lating to the deposit of other taxes by                    (4) The Social Security Act means
electronic funds transfer.                              the act approved August 14, 1935 (42
   (b) Division of regulations. The regula-             U.S.C. c. 7), as amended.
tions in this part are divided into 7                      (5) (i) The Social Security Amend-
subparts. Subpart A contains provi-                     ments of 1954 means the act approved
sions relating to general definitions                   September 1, 1954 (68 Stat. 1052), as
and use of terms, the division and                      amended.
scope of the regulations in this part,                     (ii) The Social Security Amendments
and the extent to which the regula-                     of 1956 means the act approved August
tions in this part supersede prior regu-                1, 1956 (70 Stat. 807), as amended.
lations relating to employment taxes.                      (iii) The Social Security Amend-
Subpart B relates to the taxes under                    ments of 1958 means the act approved
the Federal Insurance Contributions                     August 28, 1958 (72 Stat. 1013), as
Act. Subpart C relates to the taxes                     amended.
under the Railroad Retirement Tax                          (iv) The Social Security Amendments
Act. Subpart D relates to the tax under                 of 1960 means the act approved Sep-
the Federal Unemployment Tax Act.                       tember 13, 1960 (74 Stat. 924).

                                                   11
§ 31.0–2                                                 26 CFR Ch. I (4–1–99 Edition)

  (v) The Social Security Amendments           Internal Revenue Code of 1954, under
of 1961 means the act approved June 30,        Subchapter A or D of Chapter 9 of the
1961 (75 Stat. 131).                           Internal Revenue Code of 1939, or under
  (vi) The Social Security Amendments          Title VIII of the Social Security Act.
of 1965 means the act approved July 30,        See also § 301.7701–12 of this chapter
1965 (79 Stat. 286).                           (Regulations on Procedure and Admin-
  (vii) The Social Security Amend-             istration).
ments of 1967 means the act approved             (12) Regulations 90 means the regula-
January 2, 1968 (81 Stat. 821).                tions approved February 17, 1936 (26
  (viii) The Social Security Amend-            CFR (1939) Part 400), as amended, relat-
ments of 1972 means the act approved           ing to the excise tax on employers
October 30, 1972 (86 Stat. 1329).              under Title IX of the Social Security
  (6) The Social Security Administra-          Act, and such regulations as made ap-
tion means the Social Security Admin-          plicable to Subchapter C of Chapter 9
istration of the Department of Health          and other provisions of the Internal
and Human Services. (See the State-            Revenue Code of 1939 by Treasury Deci-
ment of Organization and delegations           sion 4885, approved February 11, 1939 (26
of Authority of the Department of              CFR (1939) 1943 Cum. Supp., p. 5876), to-
Health and Human Services (20 CFR              gether with any amendments to such
Part 1996).)                                   regulations as so made applicable to
  (7) District director means district         the Internal Revenue Code of 1939.
director of internal revenue. The term           (13) Regulations 91 means the regula-
also includes the Director of Inter-           tions approved November 9, 1936 (26
national Operations in all cases where         CFR (1939) Part 401), as amended, relat-
the authority to perform the functions         ing to the employees’ tax and the em-
which may be performed by a district           ployers’ tax under Title VIII of the So-
director has been delegated to the Di-         cial Security Act, and such regulations
rector of International Operations.            as made applicable to Subchapter A of
  (8) Person includes an individual, a         Chapter 9 and other provisions of the
corporation, a partnership, a trust or         Internal Revenue Code of 1939 by Treas-
estate, a joint-stock company, an asso-        ury Decision 4885, approved February
ciation, or a syndicate, group, pool,          11, 1939 (26 CFR (1939) 1943 Cum. Supp.,
joint venture or other unincorporated          p. 5876), together with any amendments
organization or group, through or by           to such regulations as so made applica-
means of which any business, financial         ble to the Internal Revenue Code of
operation, or venture is carried on. It        1939.
includes a guardian, committee, trust-           (14) Regulations 106 means the regu-
ee, executor, administrator, trustee in        lations approved February 24, 1940 (26
bankruptcy, receiver, assignee for the         CFR (1939) Part 402), as amended, relat-
benefit of creditors, conservator, or          ing to the employees’ tax and the em-
any person acting in a fiduciary capac-        ployers’ tax under the Federal Insur-
ity.                                           ance Contributions Act (Subchapter A
  (9) Calendar quarter means a period          of Chapter 9 of the Internal Revenue
of 3 calendar months ending on March           Code of 1939) with respect to the period
31, June 30, September 30, or December         after 1939 and before 1951.
31.                                              (15) Regulations 107 means the regu-
  (10) Account number means the iden-          lations approved September 12, 1940 (26
tifying number of an employee as-              CFR (1939) Part 403), as amended, relat-
signed, as the case may be, under the          ing to the excise tax on employers
Internal Revenue Code of 1954, under           under the Federal Unemployment Tax
Subchapter A of Chapter 9 of the Inter-        Act (Subchapter C of Chapter 9 of the
nal Revenue Code of 1939, or under             Internal Revenue Code of 1939) with re-
Title VIII of the Social Security Act.         spect to the period after 1939 and before
See also § 301.7701–11 of this chapter         1955.
(Regulations on Procedure and Admin-             (16) Regulations 114 means the regu-
istration).                                    lations approved December 30, 1948 (26
  (11) Identification number means the         CFR (1939) Part 411), as amended, relat-
identifying number of an employer as-          ing to the employers’ tax, employees’
signed, as the case may be, under the          tax, and employee representatives’ tax

                                          12
Internal Revenue Service, Treasury                                                       § 31.0–3

under the Railroad Retirement Tax Act             tion 10 of the Railroad Retirement Act
(Subchapter B of Chapter 9 of the In-             of 1937 (45 U.S.C. 228j).
ternal Revenue Code of 1939) with re-               (5) Tax means the employee tax, the
spect to compensation paid after 1948             employee representative tax, or the
for services rendered after 1946 and be-          employer tax, as respectively defined
fore 1955.                                        in this paragraph.
  (17) Regulations 120 means the regu-              (6) Employee tax means the tax im-
lations approved December 22, 1953 (26            posed by section 3201 of the Code.
CFR (1939) Part 406), as amended, relat-            (7) Employee representative tax
ing to collection of income tax at                means the tax imposed by section 3211
source on wages under Subchapter D of             of the Code.
Chapter 9 of the Internal Revenue Code              (8) Employer tax means the tax im-
of 1939 with respect to the period after          posed by section 3221 of the Code.
1953 and before 1955.                               (d) Subpart D. As used in Subpart D of
  (18) Regulations 128 means the regu-            this part, unless otherwise expressly
lations approved December 6, 1951 (26             indicated:
CFR (1939) Part 408), as amended, relat-            (1) Act means the Federal Unemploy-
ing to the employee tax and the em-               ment Tax Act.
ployer tax under the Federal Insurance              (2) Railroad Unemployment Insur-
Contributions Act (Subchapter A of                ance Act means the act approved June
Chapter 9 of the Internal Revenue Code            25, 1938 (45 U.S.C. c. 11), as amended.
of 1939) with respect to the period after           (3) Tax means the tax imposed by
1950 and before 1955.                             section 3301 of the Code.
  (19) The cross references in the regu-            (e) Subpart E. As used in Subpart E of
lations in this part to other portions of         this part, unless otherwise expressly
the regulations, when the word ‘‘see’’ is         indicated, tax means the tax required
used, are made only for convenience               to be deducted and withheld from
and shall be given no legal effect.               wages under section 3402 of the Code.
  (b) Subpart B. As used in Subpart B of          [T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
this part, unless otherwise expressly             amended by T.D. 6606, 27 FR 8516, Aug. 25,
indicated—                                        1962; T.D. 6658, 28 FR 6631, June 27, 1963; T.D.
  (1) Act means the Federal Insurance             6983, 33 FR 18013, Dec. 4, 1968; T.D. 7280, 38 FR
                                                  18369, July 10, 1973]
Contributions Act.
  (2) Taxes means the employee tax                § 31.0–3 Scope of regulations.
and the employer tax, as respectively
                                                     (a) Subpart B. The regulations in Sub-
defined in this paragraph.
                                                  part B of this part relate to the imposi-
  (3) Employee tax means the tax (with
                                                  tion of the employee tax and the em-
respect to wages received by an em-
                                                  ployer tax under the Federal Insurance
ployee after Dec. 31, 1965, the taxes) im-
                                                  Contributions Act with respect to
posed by section 3101 of the Code.
                                                  wages paid and received after 1954 for
  (4) Employer tax means the tax (with            employment performed after 1936. In
respect to wages paid by an employer              addition to employment in the case of
after Dec. 31, 1965, the taxes) imposed           remuneration therefor paid and re-
by section 3111 of the Code.                      ceived after 1954, the regulations in
  (c) Subpart C. As used in Subpart C of          Subpart B of this part relate also to
this part, unless otherwise expressly             employment performed after 1954 in the
indicated—                                        case of remuneration therefor paid and
  (1) Act means the Railroad Retire-              received before 1955. The regulations in
ment Tax Act.                                     Subpart B of this part include provi-
  (2) Railway Labor Act means the act             sions relating to the definition of
approved May 20, 1926 (45 U.S.C. c. 8), as        terms applicable in the determination
amended.                                          of the taxes under the Federal Insur-
  (3) Railroad Retirement Act of 1937             ance Contributions Act, such as ‘‘em-
means the act approved June 24, 1937              ployee’’, ‘‘wages’’, and ‘‘employment’’.
(45 U.S.C. 228a and following), as                The provisions of Subpart B of this
amended.                                          part relating to ‘‘employment’’ are ap-
  (4) Railroad Retirement Board means             plicable also, (1) to the extent provided
the board established pursuant to sec-            in § 31.3121(b)–2, to services performed

                                             13
§ 31.0–3                                                    26 CFR Ch. I (4–1–99 Edition)

before 1955 the remuneration for which           terms applicable in the determination
is paid after 1954, and (2) to the extent        of the tax under chapter 24 of the Code,
provided in § 31.3121(k)–3, to services          such as ‘‘employee’’, ‘‘employer’’, and
performed before 1955 the remuneration           ‘‘wages’’. (For prior regulations on
for which was paid before 1955. (For             similar subject matter, see 26 CFR
prior regulations on similar subject             (1939) Part 406 (Regulations 120).)
matter, see 26 CFR (1939) Part 408 (Reg-           (e) Subpart F. The regulations in Sub-
ulations 128).)                                  part F of this part deal with the gen-
   (b) Subpart C. The regulations in Sub-        eral provisions contained in chapter 25
part C of this part relate to the imposi-        of the Code, which relate to the em-
tion of the employee tax, the employee           ployment taxes imposed by chapters 21
representative tax, and the employer             to 24, inclusive, of the Code. (For prior
tax under the Railroad Retirement Tax            regulations on the subject matter of
Act with respect to compensation paid            section 3503, see 26 CFR (1939) 411.802
after 1954, for services rendered after          and 408.803 (Regulations 114 and 128, re-
such date. The regulations in Subpart            spectively). For prior regulations on
C of this part include provisions relat-         the subject matter of section 3504, see
ing to the definition of terms applica-          26 CFR (1939) 406.807 and 408.906 (Regu-
ble in the determination of the taxes
                                                 lations 120 and 128, respectively).)
under the Railroad Retirement Tax
                                                   (f) Subpart G. The regulations in Sub-
Act, such as ‘‘employee’’, ‘‘employee
representative’’,    ‘‘employer’’,    and        part G of this part, which are pre-
‘‘compensation’’. (For prior regulations         scribed under selected provisions of
on similar subject matter, see 26 CFR            subtitle F of the Code, relate to the
(1939) Part 411 (Regulations 114).)              procedural and administrative require-
   (c) Subpart D. The regulations in Sub-        ments in respect of records, returns,
part D of this part relate to the imposi-        deposits, payments, and related mat-
tion on employers of the excise tax              ters applicable to the employment
under the Federal Unemployment Tax               taxes imposed by subtitle C (chapters
Act for the calendar year 1955 and sub-          21 to 25, inclusive) of the Code. In addi-
sequent calendar years with respect to           tion, the provisions of Subpart G of
wages paid after 1954 for employment             this part relate to adjustments and to
performed after 1938. In addition to em-         claims for refund, credit, or abatement,
ployment in the case of remuneration             made after 1954, in connection with the
therefor paid after 1954, the regulations        employment taxes imposed by subtitle
in Subpart D of this part relate also to         C of the Internal Revenue Code of 1954,
employment performed after 1954 in the           by chapter 9 of the Internal Revenue
case of remuneration therefor paid be-           Code of 1939, or by the corresponding
fore 1955. The regulations in Subpart D          provisions of prior law, but not to any
of this part include provisions relating         adjustment reported, or credit taken,
to the definition of terms applicable in         in whole or in part on any return or
the determination of the tax under the           supplemental return filed on or before
Federal Unemployment Tax Act, such               July 31, 1960. The provisions of Subpart
as ‘‘employee’’, ‘‘employer’’, ‘‘employ-         G of this part also relate to deposits of
ment’’, and ‘‘wages’’. The regulations           taxes imposed by subchapter B of chap-
in Subpart D of this part also include           ter 9 of the 1939 Code or by cor-
provisions relating to the credits               responding provisions of prior law with
against the Federal tax for State con-           respect to compensation paid after 1954
tributions. (For prior regulations on            for services rendered before 1955. For
similar subject matter, see 26 CFR               other administrative provisions which
(1939) Part 403 (Regulations 107).)              have application to the employment
   (d) Subpart E. The regulations in Sub-        taxes imposed by subtitle C of the
part E of this part relate to the with-          Code, see Part 301 of this chapter (Reg-
holding under chapter 24 of the Code of          ulations on Procedure and Administra-
income tax at source on wages paid               tion). (The administrative and proce-
after 1954, regardless of when such              dural regulations applicable with re-
wages were earned. The regulations in            spect to a particular employment tax
Subpart E of this part include provi-            for a prior period were combined with
sions relating to the definition of              the substantive regulations relating to

                                            14
Internal Revenue Service, Treasury                                                                                                                                     § 31.3102–1

such tax for such period. For the regu-                                                                                      Calendar year                                          Percent
lations applicable to the respective                                                              1973 .......................................................................          4.85
taxes for prior periods, see paragraphs                                                           1974 to 2010, both inclusive .................................                        4.95
(a), (b), (c), and (d) of this section.)                                                          2011 and subsequent calendar years ...................                                5.95
Subpart G of this part also provides
                                                                                                    (b) Hospital insurance. The rates of
rules relating to the deposit of other
                                                                                                  employee tax for hospital insurance
taxes by electronic funds transfer.
                                                                                                  with respect to wages received in cal-
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as                                                        endar years after 1965 are as follows:
amended by T.D. 6744, 29 FR 8305, July 2, 1964;
T.D. 8723, 62 FR 37493, July 14, 1997]                                                                                       Calendar year                                          Percent

                                                                                                  1966    .......................................................................       0.35
§ 31.0–4 Extent to which the regula-                                                              1967    .......................................................................        .50
     tions in this part supersede prior                                                           1968    to 1972, both inclusive .................................                      .60
     regulations.                                                                                 1973    .......................................................................        1.0
                                                                                                  1974    to 1977, both inclusive .................................                     0.90
   The regulations in this part, with re-                                                         1978    to 1980, both inclusive .................................                     1.10
spect to the subject matter within the                                                            1981    to 1985, both inclusive .................................                     1.35
scope thereof, supersede 25 CFR (1939)                                                            1986    and subsequent calendar years ...................                             1.50
Parts 403, 406, 408, and 411 (Regulations                                                           (c) Computation of employee tax. The
107, 120, 128, and 114, respectively). The                                                        employee tax is computed by applying
Regulation on Monthly Returns and
                                                                                                  to the wages received by the employee
Payment of Employment Taxes (23 FR
                                                                                                  the rate in effect at the time such
5006) are also superseded.
                                                                                                  wages are received.
Subpart   B—Federal    Insurance                                                                    Example. In 1972, employee A performed for
                                                                                                  employer X services which constituted em-
   Contributions Act (Chapter 21,                                                                 ployment (see § 31.3121(b)–2). In 1973 A re-
   Internal Revenue Code of                                                                       ceives from X $1,000 as remuneration for such
   1954)                                                                                          services. The tax is payable at the 5.85 per-
                                                                                                  cent rate (4.85 percent plus 1.0 percent) in ef-
                       TAX ON EMPLOYEES                                                           fect for the calendar year 1973 (the year in
                                                                                                  which the wages are received) and not at the
§ 31.3101–1 Measure of employee tax.                                                              5.2 percent rate which was in effect for the
                                                                                                  calendar year 1972 (the year in which the
   The employee tax is measured by the
                                                                                                  services were performed).
amount of wages received after 1954
with respect to employment after 1936.                                                            [T.D. 7374, 40 FR 30947, July 24, 1975]
See § 31.3121(a)–1, relating to wages; and
§§ 31.3121(b)–1 to 31.3121(b)–4, inclusive,                                                       § 31.3101–3 When employee tax at-
                                                                                                       taches.
relating to employment. For provisions
relating to the time of receipt of                                                                   The employee tax attaches at the
wages, see § 31.3121(a)–2.                                                                        time that the wages are received by the
                                                                                                  employee. For provisions relating to
[T.D. 6744, 29 FR 8305, July 2, 1964]
                                                                                                  the     time    of such   receipt,  see
§ 31.3101–2 Rates and computation of                                                              § 31.3121(a)–2.
     employee tax.
                                                                                                  § 31.3102–1 Collection of, and liability
   (a) Old-age, survivors, and disability in-                                                          for, employee tax; in general.
surance. The rates of employee tax for
                                                                                                     (a) The employer shall collect from
old-age, survivors, and disability insur-
                                                                                                  each of his employees the employee tax
ance with respect to wages received in
                                                                                                  with respect to wages for employment
calendar years after 1954 are as follows:
                                                                                                  performed for the employer by the em-
                          Calendar year                                          Percent          ployee. The employer shall make the
1955   and 1956 .......................................................                  2
                                                                                                  collection by deducting or causing to
1957   and 1958 .......................................................              2.25         be deducted the amount of the em-
1959   .......................................................................         2.5        ployee tax from such wages as and
1960   and 1961 .......................................................                  3        when paid. (For provisions relating to
1962   .......................................................................      3.125
1963   to 1965, both inclusive .................................                    3.625         the time of such payment, see
1966   .......................................................................       3.85         § 31.3121(a)–2.) The employer is required
1967   .......................................................................         3.9        to collect the tax, notwithstanding the
1968   .......................................................................         3.8
1969   and 1970 .......................................................                4.2        wages are paid in something other than
1971   and 1972 .......................................................                4.6        money, and to pay over the tax in

                                                                                             15
§ 31.3102–1                                                     26 CFR Ch. I (4–1–99 Edition)

money. (As to the exclusion from                    ployer is required, regardless of the
wages of remuneration paid in any me-               amount of remuneration paid by him
dium other than cash for certain types              to the employee in the calendar year,
of services, see § 31.3121(a)(7)–1, relating        to collect from the employee any
to such remuneration paid for service               amount of employee tax not previously
not in the course of the employer’s                 deducted. If an employer pays cash re-
trade or business or for domestic serv-             muneration to an employee for two or
ice in a private home of the employer;              more of the types of service referred to
and § 31.3121(a)(8)–1, relating to such re-         in this paragraph, the provisions of
muneration         paid   for  agricultural         this paragraph are to be applied sepa-
labor.) For provisions relating to the              rately to the amount of remuneration
collection of, and liability for, em-               attributable to each type of service.
ployee tax in respect of tips, see                  For provisions relating to the repay-
§ 31.3102–3.                                        ment to an employee, or other disposi-
   (b) The employer is permitted, but               tion, of amounts deducted from an em-
not required, to deduct amounts equiv-              ployee’s remuneration in excess of the
alent to employee tax from payments                 correct amount of employee tax, see
to an employee of cash remuneration                 § 31.6413(a)–1. The application of this
to which the sections referred to in                paragraph may be illustrated by the
this paragraph are applicable prior to              following examples:
the time that the sum of such pay-                    Example 1. In the calendar year 1957 em-
ments equals:                                       ployer X makes several payments of cash re-
   (1) $50 in the calendar quarter, for             muneration to employee A for agricultural
service not in the course of the employ-            labor which constitutes employment. In
er’s trade or business, to which                    March employee A works on some part of
                                                    each of 8 days for which employer X makes
§ 31.3121(a)(7)–1 is applicable; or
                                                    his first payment of such cash remuneration
   (2) $50 in the calendar quarter, for do-         to A in the amount of $40. X deducts 90 cents
mestic service in a private home of the             (21⁄4 percent of $40) as an amount equivalent
employer, to which § 31.3121(a)(7)–1 is             to employee tax. In June A works 5 days for
applicable; or                                      which X makes his second payment of cash
   (3) (i) $100 in the calendar year 1955 or        remuneration to A in the amount of $50. X
1956, for agricultural labor, to which              does not deduct from this payment an
§ 31.3121(a)(8)–1 is applicable; or                 amount equivalent to employee tax. In Octo-
                                                    ber A works 6 days for which X makes his
   (ii) $150 in any calendar year after
                                                    third payment of cash remuneration to A in
1956, for agricultural labor, to which              the amount of $60. This amount brings the
§ 31.3121(a)(8)–1 is applicable, but only           sum of such payments in 1957 to $150, and X
to the extent that such payments are                is now required to collect employee tax from
made prior to the twentieth day in                  A even though A has performed agricultural
such calendar year on which the em-                 labor for X on only 19 days in 1957 and re-
ployee has performed such agricultural              gardless of whether the cash remuneration
                                                    for A’s services is computed on a time basis.
labor for the employer for cash remu-
                                                    The amount of employee tax applicable to
neration computed on a time basis; or               the $150 paid by X to A is $3.38 (21⁄4 percent
   (4) $50 in the calendar quarter, for             of $150). Inasmuch as X previously deducted
service performed as a home worker, to              90 cents in March 1957, X is required to de-
which § 31.3121(a)(10)–1 is applicable.             duct $2.48 ($3.38 minus 90 cents) from the $60
At such time as the sum of the cash                 paid in October 1957.
                                                      Example 2. In the calendar year 1957 em-
payments in the calendar quarter or
                                                    ployer Y makes several payments of cash re-
the calendar year, as the case may be,              muneration to employee B for agricultural
for a type of service referred to in this           labor which constitutes employment. B’s
paragraph equals or exceeds the                     cash remuneration is computed on a time
amount specified, the employer is re-               basis. In January employer Y makes his first
quired to collect from the employee                 payment to employee B in the amount of $20
any amount of employee tax not pre-                 for work performed in 1957 on each of 5 days.
viously deducted. Further, at such                  Y deducts 45 cents (21⁄4 percent of $20) as an
                                                    amount equivalent to employee tax. In April
time in any calendar year after 1956 as             Y makes his second payment of cash remu-
the employee has performed agricul-                 neration to B in the amount of $40 for work
tural labor for the employer on 20 days             performed in 1957 on each of 10 days. Y de-
during such year for cash remuneration              ducts 90 cents (21⁄4 percent of $40) as an
computed on a time basis, the em-                   amount equivalent to employee tax. In May

                                               16
Internal Revenue Service, Treasury                                                    § 31.3102–3
B works for Y on each of 5 days and on the              § 31.3102–3 Collection of, and liability
last of such days Y makes his third payment                   for, employee tax on tips.
of cash remuneration to B in the amount of
$20 for such work. This period of work brings              (a) Collection of tax from employee— (1)
to 20 the number of days in the calendar year           In general. Subject to the limitations
1957 on which B has performed agricultural              set forth in subparagraph (2) of this
labor for Y for cash remuneration computed              paragraph, the employer shall collect
on a time basis, and Y is required to collect           from each of his employees the em-
employee tax from B even though the                     ployee tax on those tips received by the
amount of remuneration paid is less than                employee which constitute wages for
$150. The amount of employee tax applicable             purposes of the tax imposed by section
to the $80 paid by Y to B is $1.80 (21⁄4 percent        3101. (For provisions relating to the
of $80). Inasmuch as Y previously deducted              treatment of tips as wages, see
$1.35 in 1957 (45 cents in January and 90 cents         3121(a)(12) and 3121(q).) The employer
in April), Y is required to deduct 45 cents             shall make the collection by deducting
($1.80 minus $1.35) from the $20 paid in May            or causing to be deducted the amount
1957.                                                   of the employee tax from wages (exclu-
  (c) In collecting employee tax, the                   sive of tips) which are under the con-
employer shall disregard any fractional                 trol of the employer or other funds
part of a cent of such tax unless it                    turned over by the employee to the em-
amounts to one-half cent or more, in                    ployer (see subparagraph (3) of this
which case it shall be increased to 1                   paragraph). For purposes of this sec-
                                                        tion the term ‘‘wages (exclusive of tips)
cent. The employer is liable for the em-
                                                        which are under the control of the em-
ployee tax with respect to all wages
                                                        ployer’’ means, with respect to a pay-
paid by him to each of his employees                    ment of wages, an amount equal to
whether or not it is collected from the                 wages as defined in section 3121(a) ex-
employee. If, for example, the em-                      cept that tips and noncash remunera-
ployer deducts less than the correct                    tion which are wages are not included,
amount of tax, or if he fails to deduct                 less the sum of—
any part of the tax, he is nevertheless                    (i) The tax under section 3101 re-
liable for the correct amount of the                    quired to be collected by the employer
tax. Until collected from him the em-                   in respect of wages as defined in sec-
ployee also is liable for the employee                  tion 3121(a) (exclusive of tips);
tax with respect to all the wages re-                      (ii) The tax under section 3402 re-
ceived by him. Any employee tax col-                    quired to be collected by the employer
lected by or on behalf of an employer is                in respect of wages as defined in sec-
a special fund in trust for the United                  tion 3401(a) (exclusive of tips); and
States. See section 7501. The employer                     (iii) The amount of taxes imposed on
is indemnified against the claims and                   the remuneration of an employee with-
                                                        held by the employer pursuant to State
demands of any person for the amount
                                                        and local law (including amounts with-
of any payment of such tax made by
                                                        held under an agreement between the
the employer to the district director.
                                                        employer and the employee pursuant
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as              to such law) except that the amount of
amended by T.D. 6744, 29 FR 8305, July 2, 1964;         taxes taken into account in this sub-
T.D. 7001, 34 FR 998, Jan. 23, 1969]                    division shall not include any amount
                                                        attributable to tips.
§ 31.3102–2 Manner and time of pay-                        (2) Limitations. An employer is re-
     ment of employee tax.                              quired to collect employee tax on tips
  The employee tax is payable to the                    which constitute wages only in respect
district director in the manner and at                  of those tips which are reported by the
the time prescribed in Subpart G of the                 employee to the employer in a written
regulations in this part. For provisions                statement furnished to the employer
relating to the payment by an em-                       pursuant to section 6053(a). The em-
ployee of employee tax in respect of                    ployer is responsible for the collection
                                                        of employee tax on tips reported to him
tips, see paragraph (d) of § 31.3102–3.
                                                        only to the extent that the employer
[T.D. 7001, 34 FR 998, Jan. 23, 1969]                   can—


                                                   17
§ 31.3102–3                                                  26 CFR Ch. I (4–1–99 Edition)

   (i) During the period beginning at the         amount       of     employee   tax,    see
time the written statement is sub-                § 31.6413(a)–1. (As to the exclusion from
mitted to him and ending at the close             wages of tips of less than $20, see
of the 10th day of the month following            § 31.3121(a)(12)–1.)
the month in which the statement was                 (c) Collection of employee tax on esti-
submitted, or                                     mated basis—(1) In general. Subject to
   (ii) In the case of an employer who            certain limitations and conditions, an
elects to deduct the tax on an esti-              employer may, at his discretion, make
mated basis (see paragraph (c) of this            collection of the employee tax in re-
section), during the period beginning at          spect of tips reported by an employee
the time the written statement is sub-            to the employer on an estimated basis.
mitted to him and ending at the close             An employer who elects to make col-
of the 30th day following the quarter in          lection of the employee tax on an esti-
which the statement was submitted,                mated basis shall:
collect the employee tax by deducting                (i) In respect of each employee, make
it or causing it to be deducted as pro-           an estimate of the amount of tips that
vided in subparagraph (1).                        will be reported, pursuant to section
   (3) Furnishing of funds to employer. If        6053(a), by the employee to the em-
the amount of employee tax in respect             ployer in a calendar quarter.
of tips reported by the employee to the              (ii) Determine the amount which
employer in a written statement (or               must be deducted upon each payment
statements) furnished pursuant to sec-            of wages (exclusive of tips) which are
tion 6053(a) exceeds the wages (exclu-            under the control of the employer to be
sive of tips) which are under the con-            made during the quarter by the em-
trol of the employer, the employee may            ployer to the employee in order to col-
furnish to the employer, within the pe-           lect from the employee during the
riod specified in subparagraph (2) (i) or         quarter an amount equal to the
(ii) of this paragraph (whichever is ap-          amount obtained by multiplying the
plicable), an amount of money equal to            estimated quarterly tips by the sum of
the amount of such excess.                        the rates of tax under subsections (a)
   (b) Less than $20 of tips. Notwith-            and (b) of section 3101.
standing the provisions of paragraph                 (iii) Deduct from any payment of
(a) of this section, if an employee fur-          such employee’s wages (exclusive of
nishes to his employer a written state-           tips) which are under the control of the
ment—                                             employer, or from funds referred to in
   (1) Covering a period of less than 1           paragraph (a)(3) of this section, such
month, and                                        amount as may be necessary to adjust
   (2) The statement is furnished to the          the amount of tax withheld on the esti-
employer prior to the close of the 10th           mated basis to conform to the amount
day of the month following the month              of employee tax imposed upon, and re-
in which the tips were actually re-               quired to be deducted in respect of, tips
ceived by the employee, and                       reported by the employee to the em-
   (3) The aggregate amount of tips re-           ployer during the calendar quarter in
ported in the statement and in all                written statements furnished to the
other statements previously furnished             employer pursuant to section 6053(a). If
by the employee covering periods with-            an adjustment is required, the addi-
in the same month is less than $20, and           tional employee tax required to be col-
the statements, collectively, do not              lected may be deducted upon any pay-
cover the entire month,                           ment of the employee’s wages (exclu-
the employer may deduct amounts                   sive of tips) which are under the con-
equivalent to employee tax on such                trol of the employer during the quarter
tips from wages (exclusive of tips)               and within the first 30 days following
which are under the control of the em-            the quarter or from funds turned over
ployer or other funds turned over by              by the employee to the employer for
the employee to the employer. For pro-            such purposes within such period. For
visions relating to the repayment to an           provisions relating to the repayment to
employee, or other disposition, of                an employee, or other disposition, of
amounts deducted from an employee’s               amounts deducted from an employee’s
remuneration in excess of the correct             remuneration in excess of the correct

                                             18
Internal Revenue Service, Treasury                                                                                      § 31.3111–2

amount        of    employee      tax,   see        respect of uncollected employee tax on
§ 31.6413(a)–1.                                     tips reported to the employer, see
   (2) Estimating tips employee will re-            § 31.6053–2.
port— (i) Initial estimate. The initial es-
                                                    [T.D. 7001, 34 FR 998, Jan. 23, 1969; 34 FR 1554,
timate of the amount of tips that will              Jan. 31, 1969]
be reported by a particular employee in
a calendar quarter shall be made on the                                    TAX ON EMPLOYERS
basis of the facts and circumstances
surrounding the employment of that                  § 31.3111–1                 Measure of employer tax.
employee. However, if a number of em-
ployees are employed under substan-                    The employer tax is measured by the
tially the same circumstances and                   amount of wages paid after 1954 with
working conditions, the initial esti-               respect to employment after 1936. See
mate established for one such em-                   § 31.3121(a)–1, relating to wages, and
ployee may be used as the initial esti-             §§ 31.3121(b)–1 to 31.3121(b)–4, inclusive,
mate for other employees in that                    relating to employment. For provisions
group.                                              relating to time of payment of wages,
   (ii) Adjusting estimate. If the quarterly        see § 31.3121(a)–2.
estimate of tips in respect of a par-               [T.D. 6744, 29 FR 8306, July 2, 1964]
ticular employee continues to differ
substantially from the amount of tips               § 31.3111–2 Rates and computation of
reported by the employee and there are                   employer tax.
no unusual factors involved (for exam-                (a) Old-age, survivors, and disability in-
ple, an extended absence from work due              surance. The rates of employer tax for
to illness) the employer shall make an              old-age, survivors, and disability insur-
appropriate adjustment of his estimate              ance with respect to wages paid in cal-
of the amount of tips that will be re-              endar years after 1954 are as follows:
ported by the employee.
   (iii) Reasonableness of estimate. The                                      Calendar year                                          Percent
employer must be prepared, upon re-
                                                    1955   and 1956 .......................................................                  2
quest of the district director, to dis-             1957   and 1958 .......................................................              2.25
close the factors upon which he relied              1959   .......................................................................         2.5
in making the estimate, and his rea-                1960   and 1961 .......................................................                  3
sons for believing that the estimate is             1962   .......................................................................      3.125
reasonable.                                         1963   to 1965, both inclusive .................................                    3.625
   (d) Employee tax not collected by em-            1966   .......................................................................       3.85
                                                    1967   .......................................................................         3.9
ployer. If—
                                                    1968   .......................................................................         3.8
   (1) The amount of the employee tax               1969   and 1970 .......................................................                4.2
imposed by section 3101 in respect of               1971   and 1972 .......................................................                4.6
those tips received by an employee                  1973   .......................................................................       4.85
which constitute wages exceeds                      1974   to 2010, both inclusive .................................                     4.95
   (2) The amount of employee tax im-               2011   and subsequent calendar years ...................                             5.95
posed by section 3101 (in respect of tips             (b) Hospital insurance. The rates of
reported by the employee to the em-                 employer tax for hospital insurance
ployer) which can be collected by the               with respect to wages paid in calendar
employer from such employee’s wages                 years after 1965 are as follows:
(exclusive of tips) which are under the
control of the employer or from funds                                         Calendar year                                          Percent
referred to in paragraph (a)(3) of this
                                                    1966   .......................................................................       0.35
section,
                                                    1967   .......................................................................        .50
the employee shall be liable for the                1968   to 1972, both inclusive .................................                      .60
payment of tax in an amount equal to                1973   .......................................................................        1.0
such excess. For provisions relating to             1974   to 1977, both inclusive .................................                     0.90
the manner and time of payment of                   1978   to 1980, both inclusive .................................                     1.10
                                                    1981   to 1985, both inclusive .................................                     1.35
employee tax by an employee, see para-
                                                    1986   and subsequent calendar years ...................                             1.50
graph (d) of § 31.6011(a)–1 and paragraph
(a)(4) of § 31.6071(a)–1. For provisions re-          (c) Computation of employer tax. The
lating to statements required to be fur-            employer tax is computed by applying
nished by employers to employees in                 to the wages paid by the employer the

                                               19
§ 31.3111–3                                                        26 CFR Ch. I (4–1–99 Edition)

rate in effect at the time such wages                             GENERAL PROVISIONS
are paid.
                                                        § 31.3121(a)–1   Wages.
[T.D. 6983, 33 FR 18014, Dec. 4, 1968, as amend-
ed by T.D. 7374, 40 FR 30948, July 24, 1975]              (a)(1) Whether remuneration paid
                                                        after 1954 for employment performed
§ 31.3111–3 When employer tax at-                       after 1936 constitutes wages is deter-
     taches.                                            mined under section 3121(a). This sec-
   The employer tax attaches at the                     tion      and       §§ 31.3121(a)(1)–1   to
time that the wages are paid by the                     31.3121(a)(15)–1, inclusive (relating to
employer. For provisions relating to                    the statutory exclusions from wages),
the time of such payment, see                           apply with respect only to remunera-
§ 31.3121(a)–2.                                         tion paid after 1954 for employment
                                                        performed after 1936. Whether remu-
§ 31.3111–4 Liability for employer tax.
                                                        neration paid after 1936 and before 1940
   The employer is liable for the em-                   for employment performed after 1936
ployer tax with respect to the wages                    constitutes wages shall be determined
paid to his employees for employment                    in accordance with the applicable pro-
performed for him.                                      visions of law and of 26 CFR (1939) Part
                                                        401 (Regulations 91). Whether remu-
§ 31.3111–5 Manner and time of pay-
     ment of employer tax.                              neration paid after 1939 and before 1951
                                                        for employment performed after 1936
   The employer tax is payable to the                   constitutes wages shall be determined
district director in the manner and at                  in accordance with the applicable pro-
the time prescribed in Subpart G of the                 visions of law and of 26 CFR (1939) Part
regulations in this part.                               402 (Regulations 106). Whether remu-
§ 31.3112–1 Instrumentalities of the                    neration paid after 1950 and before 1955
     United States specifically exempted                for employment performed after 1936
     from the employer tax.                             constitutes wages shall be determined
   Section 3112 makes ineffectual as to                 in accordance with the applicable pro-
the employer tax imposed by section                     visions of law and of 26 CFR (1939) Part
3111 those provisions of law which                      408 (Regulations 128).
grant to an instrumentality of the                        (2) The term compensation as used in
United States an exemption from tax-                    section 3231(e) of the Internal Revenue
ation, unless such provisions grant a                   Code has the same meaning as the term
specific exemption from the tax im-                     wages as used in this section, deter-
posed by section 3111 by an express ref-                mined without regard to section
erence to such section or the cor-                      3121(b)(9), except as specifically limited
responding section of prior law (section                by the Railroad Retirement Tax Act
1410 of the Internal Revenue Code of                    (chapter 22 of the Internal Revenue
1939). Thus, the general exemptions                     Code) or regulation. The Commissioner
from Federal taxation granted by var-                   may provide any additional guidance
ious statutes to certain instrumental-                  that may be necessary or appropriate
ities of the United States without spe-                 in applying the definitions of sections
cific reference to the tax imposed by                   3121(a) and 3231(e).
section 3111 or by section 1410 of the                    (b) The term ‘‘wages’’ means all re-
1939 Code are rendered inoperative in-                  muneration for employment unless spe-
sofar as such exemptions relate to the                  cifically excepted under section 3121(a)
tax imposed by section 3111. For provi-                 (see §§ 31.3121(a)(1)–1 to 31.3121(a)(15)–1,
sions relating to the exception from                    inclusive) or paragraph (j) of this sec-
employment of services performed in                     tion.
the employ of an instrumentality of                       (c) The name by which the remunera-
the United States specifically exempt-                  tion for employment is designated is
ed from the employer tax, see                           immaterial. Thus, salaries, fees, bo-
§ 31.3121(b)(5)–1. For provisions relating              nuses, and commissions on sales or on
to services performed for an instrumen-                 insurance premiums, are wages if paid
tality exempt on December 31, 1950,                     as compensation for employment.
from the employer tax, see paragraph                      (d) Generally the basis upon which
(c) of § 31.3121 (b) (6)–1.                             the remuneration is paid is immaterial

                                                   20
Internal Revenue Service, Treasury                                                  § 31.3121(a)–1

in determining whether the remunera-                 sonably expected to be incurred in the
tion constitutes wages. Thus, it may be              business of the employer are not wages.
paid on the basis of piecework, or a                 Traveling and other reimbursed ex-
percentage of profits; and it may be                 penses must be identified either by
paid hourly, daily, weekly, monthly, or              making a separate payment or by spe-
annually. See, however, § 31.3121(a)(8)–1            cifically    indicating   the   separate
which relates to the treatment of cash               amounts where both wages and expense
remuneration computed on a time                      allowances are combined in a single
basis for agricultural labor.                        payment. For amounts that are re-
   (e) Generally the medium in which                 ceived by an employee on or after July
the remuneration is paid is also imma-               1, 1990, with respect to expenses paid or
terial. It may be paid in cash or in                 incurred on or after July 1, 1990, see
something other than cash, as for ex-                § 31.3121(a)–3.
ample, goods, lodging, food, or cloth-                  (i) Remuneration for employment,
ing. Remuneration paid in items other                unless such remuneration is specifi-
than cash shall be computed on the                   cally excepted under section 3121(a) or
basis of the fair value of such items at             paragraph (j) of this section, con-
the time of payment. See, however,                   stitutes wages even though at the time
§§ 31.3121     (a)(7)–1,     31.3121(a)(8)–1,        paid the relationship of employer and
31.3121(a)(10)–1, and 31.3121(a)(12)–1, re-          employee no longer exists between the
lating to the treatment of remunera-                 person in whose employ the services
tion paid in any medium other than                   were performed and the individual who
cash for services not in the course of               performed them.
the employer’s trade or business and                   Example. A is employed by B during the
for domestic service in a private home               month of January 1955 in employment and is
of the employer, for agricultural labor,             entitled to receive remuneration of $100 for
for services performed by certain                    the services performed for B, the employer,
homeworkers, and as tips, respectively.              during the month. A leaves the employ of B
                                                     at the close of business on January 31, 1955.
   (f) Ordinarily, facilities or privileges          On February 15, 1955 (when A is no longer an
(such as entertainment, medical serv-                employee of B), B pays A the remuneration
ices, or so-called ‘‘courtesy’’ discounts            of $100 which was earned for the services per-
on purchases), furnished or offered by               formed in January. The $100 is wages and the
an employer to his employees gen-                    taxes are payable with respect thereto.
erally, are not considered as remunera-                 (j) In addition to the exclusions spec-
tion for employment if such facilities               ified in §§ 31.3121(a)(1)–1 to 31.3121(a)(15)–
or privileges are of relatively small                1, inclusive, the following types of pay-
value and are offered or furnished by                ments are excluded from wages:
the employer merely as a means of pro-                  (1) Remuneration for services which
moting the health, good will, content-               do not constitute employment under
ment, or efficiency of his employees.                section 3121(b) and which are not
The term ‘‘facilities or privileges’’,               deemed to be employment under sec-
however, does not ordinarily include                 tion 3121(c) (see § 31.3121(c)–1).
the value of meals or lodging furnished,                (2) Remuneration for services which
for example, to restaurant or hotel em-              are deemed not to be employment
ployees, or to seamen or other employ-               under section 3121(c) (see § 31.3121(c)–1).
ees aboard vessels, since generally                     (3) Tips or gratuities paid, prior to
these items constitute an appreciable                January 1, 1966, directly to an em-
part of the total remuneration of such               ployee by a customer of an employer,
employees.                                           and not accounted for by the employee
   (g) Amounts of so-called ‘‘vacation               to the employer. For provisions relat-
allowances’’ paid to an employee con-                ing to the treatment of tips received by
stitute wages. Thus, the salary of an                an employee after December 31, 1965, as
employee on vacation, paid notwith-                  wages, see §§ 31.3121(a)(12) and 31.3121(q).
standing his absence from work, con-
                                                     [T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
stitutes wages.                                      amended by T.D. 7001, 34 FR 999, Jan. 23, 1969;
   (h) Amounts paid specifically—either              T.D. 7374, 40 FR 30948, July 24, 1975; T.D. 8276,
as advances or reimbursements—for                    54 FR 51027, Dec. 12, 1989; T.D. 8324, 55 FR
traveling or other bona fide ordinary                51696, Dec. 17, 1990; T.D. 8582, 59 FR 66189,
and necessary expenses incurred or rea-              Dec. 23, 1994]

                                                21
§ 31.3121(a)–1T                                              26 CFR Ch. I (4–1–99 Edition)

§ 31.3121(a)–1T Question and answer                (c) (1) The first $50 of cash remunera-
     relating to the definition of wages         tion paid, either actually or construc-
     in section 3121(a) (Temporary).             tively, by an employer to an employee
  The following question and answer              in a calendar quarter for—
relates to the definition of wages in              (i) Service to which § 31.3121(a)(7)–1 is
section 3121(a) of the Internal Revenue          applicable (service not in the course of
Code of 1954, as amended by section              the employer’s trade or business and
531(d)(1)(A) of the Tax Reform Act of            domestic service in a private home of
1984 (98 Stat. 885):                             the employer); or
  Q–1: Are fringe benefits included in             (ii) Service to which § 31.3121(a)(10)–1
the definition of ‘‘wages’’ under section        is applicable (service performed by cer-
3121(a)?                                         tain home workers),
  A–1: Yes, unless specifically excluded         shall be deemed to be paid by the em-
from the definition of ‘‘wages’’ pursu-          ployer to the employee at the first mo-
ant to section 3121(a)(1) through (20).          ment of time in such calendar quarter
For example, a fringe benefit provided           that the sum of such cash payments
to or on behalf of an employee is ex-            made within such quarter is at least
cluded from the definition of ‘‘wages’’          $50.
if at the time such benefit is provided            (2)(i) The first $100 of cash remunera-
it is reasonable to believe that the em-         tion paid, either actually or construc-
ployee will be able to exclude such ben-         tively, by an employer to an employee
efit from income under section 117 or            in the calendar year 1955 or 1956 for ag-
132.                                             ricultural labor to which § 31.3121 (a)(8)–
[T.D. 8004, 50 FR 755, Jan. 7, 1985]             1 is applicable shall be deemed to be
                                                 paid by the employer to the employee
§ 31.3121(a)–2 Wages; when paid and              at the first moment of time in such
     received.                                   calendar year that the sum of such
                                                 cash payments made within such year
   (a) In general, wages are received by
                                                 is at least $100.
an employee at the time that they are
paid by the employer to the employee.              (ii) Cash remuneration paid, either
Wages are paid by an employer at the             actually or constructively, by an em-
time that they are actually or con-              ployer to an employee in a calendar
structively paid unless under para-              year after 1956 for agricultural labor to
graph (c) of this section they are               which § 31.3121(a)(8)–1 is applicable, and
deemed to be subsequently paid. For              before either of the events described in
provisions relating to the time when             (a) or (b) of this subdivision has oc-
tips received by an employee are                 curred, shall be deemed to be paid upon
deemed paid to the employee, see                 the occurrence of the earlier of such
§ 31.3121(q)–1.                                  events, as follows:
   (b) Wages are constructively paid               (a) The first moment of time in such
when they are credited to the account            calendar year that the sum of the pay-
of or set apart for an employee so that          ments of such remuneration is at least
they may be drawn upon by him at any             $150, or
time although not then actually re-                (b) The twentieth day in such cal-
duced to possession. To constitute pay-          endar year on which the employee has
ment in such a case the wages must be            performed such agricultural labor for
credited to or set apart for the em-             the employer for cash remuneration
ployee without any substantial limita-           computed on a time basis.
tion or restriction as to the time or              (3) If an employer pays cash remu-
manner of payment or condition upon              neration to an employee for two or
which payment is to be made, and must            more of the types of service referred to
be made available to him so that they            in this paragraph, the provisions of
may be drawn upon at any time, and               this paragraph are to be applied sepa-
their payment brought within his own             rately to the amount of remuneration
control and disposition. For provisions          attributable to each type of service.
relating to the treatment of deductions          [T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
from remuneration as payments of re-             amended by T.D. 6744, 29 FR 8306, July 2, 1964;
muneration, see § 31.3123–1.                     T.D. 7001, 34 FR 999, Jan. 23, 1969]

                                            22
Internal Revenue Service, Treasury                                              § 31.3121(a)(1)–1

§ 31.3121(a)–3 Reimbursement            and         is subject to withholding and payment
      other expense allowance amounts.              of employment taxes no later than the
   (a) When excluded from wages. If a re-           first payroll period following the pay-
imbursement or other expense allow-                 roll period in which the expenses with
ance arrangement meets the require-                 respect to which the advance was paid
ments of section 62(c) of the Code and              (i.e., the days or miles of travel) are
§ 1.62–2 and the expenses are substan-              substantiated. The Commissioner may,
tiated within a reasonable period of                in his discretion, prescribe special
time, payments made under the ar-                   rules in pronouncements of general ap-
rangement that do not exceed the sub-               plicability regarding the timing of
stantiated expenses are treated as paid             withholding and payment of employ-
under an accountable plan and are not               ment taxes on per diem and mileage al-
wages. In addition, if both wages and               lowances.
the reimbursement or other expense al-                 (2) Nonaccountable plans. If a reim-
lowance are combined in a single pay-               bursement or other expense allowance
ment, the reimbursement or other ex-                arrangement does not satisfy the re-
pense allowance must be identified ei-              quirements of section 62(c) and § 1.62–2
ther by making a separate payment or                (e.g., the arrangement does not require
by specifically identifying the amount              expenses to be substantiated or require
of the reimbursement or other expense               amounts in excess of the substantiated
allowance.                                          expenses to be returned), all amounts
   (b) When included in wages—(1) Ac-               paid under the arrangement are treated
countable plans—(i) General rule. Except            as paid under a nonaccountable plan,
as provided in paragraph (b)(1)(ii) of              are included in wages, and are subject
this section, if a reimbursement or                 to withholding and payment of employ-
other expense allowance arrangement                 ment taxes when paid.
satisfies the requirements of section                  (c) Effective dates. This section gen-
62(c) and § 1.62–2, but the expenses are            erally applies to payments made under
not substantiated within a reasonable               reimbursement or other expense allow-
period of time or amounts in excess of              ance arrangements received by an em-
the substantiated expenses are not re-              ployee on or after July 1, 1990, with re-
turned within a reasonable period of                spect to expenses paid or incurred on or
time, the amount paid under the ar-                 after July 1, 1990. Paragraph (b)(1)(ii) of
rangement in excess of the substan-                 this section applies to payments made
tiated expenses is treated as paid under            under reimbursement or other expense
a nonaccountable plan, is included in               allowance arrangements received by an
wages, and is subject to withholding                employee on or after January 1, 1991,
and payment of employment taxes no                  with respect to expenses paid or in-
later than the first payroll period fol-            curred on or after January 1, 1991.
lowing the end of the reasonable pe-                [T.D. 8324, 55 FR 51696, Dec. 17, 1990]
riod.
   (ii) Per diem or mileage allowances. If a        § 31.3121(a)(1)–1 Annual wage limita-
reimbursement or other expense allow-                     tion.
ance arrangement providing a per diem                  (a) In general. (1) The term ‘‘wages’’
or mileage allowance satisfies the re-              does not include that part of the remu-
quirements of section 62(c) and § 1.62–2,           neration paid by an employer to an em-
but the allowance is paid at a rate for             ployee within any calendar year—
each day or mile of travel that exceeds                (i) After 1954 and before 1959 which
the amount of the employee’s expenses               exceeds the first $4,200 of remunera-
deemed substantiated for a day or mile              tion,
of travel, the excess portion is treated               (ii) After 1958 and before 1966 which
as paid under a nonaccountable plan                 exceeds the first $4,800 of remunera-
and is included in wages. In the case of            tion,
a per diem or mileage allowance paid                   (iii) After 1965 and before 1968 which
as a reimbursement, the excess portion              exceeds the first $6,600 of remunera-
is subject to withholding and payment               tion,
of employment taxes when paid. In the                  (iv) After 1967 and before 1972 which
case of a per diem or mileage allowance             exceeds the first $7,800 of remunera-
paid as an advance, the excess portion              tion,

                                               23
§ 31.3121(a)(1)–1                                                   26 CFR Ch. I (4–1–99 Edition)

   (v) After 1971 and before 1973 which                     (3) If during a calendar year the em-
exceeds the first $9,000 of remunera-                    ployee receives remuneration from
tion,                                                    more than one employer, the annual
   (vi) After 1972 and before 1974 which                 wage limitation does not apply to the
exceeds the first $10,800 of remunera-                   aggregate remuneration received from
tion,                                                    all of such employers, but instead ap-
   (vii) After 1973 and before 1975 which                plies to the remuneration received dur-
exceeds the first $13,200 of remunera-                   ing such calendar year from each em-
tion, or                                                 ployer with respect to employment
   (viii) After 1974 which exceeds the                   after 1936. In such case the first remu-
amount equal to the contribution and                     neration received in any calendar year
benefit base (as determined under sec-                   after 1974 up to the amount equal to
tion 230 of the Social Security Act)                     the contribution and benefit base (as
which is effective for such calendar                     determined under section 230 of the So-
year                                                     cial Security Act) (the first $13,200 re-
(exclusive of remuneration excepted                      ceived in 1974, the first $10,800 received
from wages in accordance with para-                      in 1973, the first $9,000 received in 1972,
graph      (j)    of   § 31.3121(a)–1    or              the first $7,800 received in any calendar
§§ 31.3121(a)(2)–1 to 31.3121(a)(15)–1, in-              year after 1967 and before 1972, the first
clusive) paid within the calendar year                   $6,600 received in any calendar year
by an employer to the employee for                       after 1965 and before 1968, the first
employment performed for him at any                      $4,800 received in any calendar year
time after 1936. For provisions relating                 after 1958 and before 1966, or the first
to the treatment of tips for purposes of                 $4,200 received in any calendar year
the annual wage limitation see                           after 1954 and before 1959) from each
§ 31.3121(q)–1.                                          employer constitutes wages and is sub-
   (2) The annual wage limitation ap-                    ject to the taxes, even though, under
plies only if the remuneration received                  section 6413(c), the employee may be
during any 1 calendar year by an em-                     entitled to a special credit or refund of
ployee from the same employer for em-                    a portion of the employee tax deducted
ployment performed after 1936 exceeds                    from his wages received during the cal-
the amount of such limitation. The                       endar year. In this connection and in
limitation in such case relates to the                   connection with the two examples im-
amount of remuneration received dur-                     mediately following, see § 31.6413(c)–1,
ing any 1 calendar year for employ-                      relating to special credits or refunds of
ment after 1936 and not to the amount                    employee tax. In connection with the
of remuneration for employment per-                      annual wage limitation in the case of
formed in any 1 calendar year.                           remuneration paid for services per-
                                                         formed in the employ of the United
  Example. Employee A, in 1967 receives
$7,000 from employer B in part payment of                States or a wholly owned instrumen-
$8,000 due him from employment performed                 tality thereof, see § 31.3122. In connec-
in 1967. In 1968 A receives from employer B              tion with the annual wage limitation
the balance of $1,000 due him for employment             in the case of remuneration paid for
performed in 1967, and thereafter in 1968 also           services performed in the employ of the
receives $7,000 for employment performed in              Government of Guam, the Government
1968 for employer B. The first $6,600 of the             of American Samoa, the District of Co-
$7,000 received during 1967 is subject to the
taxes in 1967. The remaining $400 received in
                                                         lumbia, a political subdivision of the
1967 is not included as wages and is not sub-            Government of Guam, or the Govern-
ject to the taxes. The balance of $1,000 re-             ment of American Samoa, or any in-
ceived in 1968 for employment during 1967 is             strumentality of any of the foregoing
subject to the taxes during 1968 as is also the          which is wholly owned thereby, see
first $6,800 of the $7,000 thereafter received in        § 31.3125. In connection with the appli-
1968 ($1,000 plus $6,800 totaling $7,800, which          cation of the annual wage limitation,
is the annual wage limitation applicable to
remuneration received in 1968 by an em-
                                                         see also paragraph (b) of this section,
ployee from any one employer). The remain-               relating to the circumstances under
ing $200 received in 1968 is not included as             which wages paid by a predecessor em-
wages and is not subject to the taxes.                   ployer are deemed to be paid by his

                                                    24
Internal Revenue Service, Treasury                                              § 31.3121(a)(1)–1

successor. In connection with the an-                  cessor during such calendar year and
nual wage limitation in the case of re-                prior to the acquisition shall be consid-
muneration paid after December 31,                     ered as having been paid by the suc-
1978, from two or more related corpora-                cessor.
tions that compensate an employee                        (2) The wages paid, or considered as
through a common paymaster, see                        having been paid, by a predecessor to
§ 31.3121(s)–1.                                        an employee shall, for purposes of the
  Example 1. During 1968 employee C receives
                                                       annual wage limitation, be treated as
from employer D a salary of $1,300 a month             having been paid to such employee by a
for employment performed for D during the              successor if:
first 7 months of 1968, or total remuneration            (i) The successor during a calendar
of $9,100. At the end of the 6th month C has           year acquired substantially all the
received $7,800 from employer D, and only              property used in a trade or business, or
that part of his total remuneration from D             used in a separate unit of a trade or
constitutes wages subject to the taxes. The
                                                       business, of the predecessor;
$1,300 received by employee C from employer
D in the 7th month is not included as wages              (ii) Such employee was employed in
and is not subject to the taxes. At the end of         the trade or business of the predecessor
the 7th month C leaves the employ of D and             immediately prior to the acquisition
enters the employ of E. C receives remunera-           and is employed by the successor in his
tion of $1,560 a month from employer E in              trade or business immediately after the
each of the remaining 5 months of 1968, or             acquisition; and
total remuneration of $7,800 from employer               (iii) Such wages were paid during the
E. The entire $7,800 received by C from em-
ployer E constitutes wages and is subject to
                                                       calendar year in which the acquisition
the taxes. Thus, the first $7,800 received from        occurred and prior to such acquisition.
employer D and the entire $7,800 received                (3) The method of acquisition by an
from employer E constitute wages.                      employer of the property of another
  Example 2. During the calendar year 1968 F           employer is immaterial. The acquisi-
is simultaneously an officer (an employee) of          tion may occur as a consequence of the
the X Corporation, the Y Corporation, and              incorporation of a business by a sole
the Z Corporation and during such year re-
                                                       proprietor or a partnership, the con-
ceives a salary of $7,800 from each corpora-
tion. Each $7,800 received by F from each of           tinuance without interruption of the
the Corporations X, Y, and Z (whether or not           business of a previously existing part-
such corporations are related) constitutes             nership by a new partnership or by a
wages and is subject to the taxes.                     sole proprietor, or a purchase or any
  (b) Wages paid by predecessor attrib-                other transaction whereby substan-
uted to successor. (1) If an employer                  tially all the property used in a trade
(hereinafter referred to as a successor)               or business, or used in a separate unit
during any calendar year acquires sub-                 of a trade or business, of one employer
stantially all the property used in a                  is acquired by another employer.
trade or business of another employer                    (4) Substantially all the property
(hereinafter referred to as a prede-                   used in a separate unit of a trade or
cessor), or used in a separate unit of a               business may consist of substantially
trade or business of a predecessor, and                all the property used in the perform-
if immediately after the acquisition                   ance of an essential operation of the
the successor employs in his trade or                  trade or business, or it may consist of
business an individual who imme-                       substantially all the property used in a
diately prior to the acquisition was                   relatively self-sustaining entity which
employed in the trade or business of                   forms a part of the trade or business.
such predecessor, then, for purposes of                  Example 1. The M Corporation which is en-
the application of the annual wage lim-                gaged in the manufacture of automobiles, in-
itation set forth in paragraph (a) of                  cluding the manufacture of automobile en-
this section, any remuneration (exclu-                 gines, discontinues the manufacture of the
sive of remuneration excepted from                     engines and transfers all the property used
wages in accordance with paragraph (j)                 in such manufacturing operation to the N
                                                       Company. The N Company is considered to
of § 31.3121(a)–1 or §§ 31.3121(a)(2)–1 to
                                                       have acquired a separate unit of the trade or
31.3121(a)(15)–1, inclusive) with respect              business of the M Corporation, namely, its
to employment paid (or considered                      engine manufacturing unit.
under this paragraph as having been                      Example 2. The R Corporation which is en-
paid) to such individual by the prede-                 gaged in the operation of a chain of grocery

                                                  25
§ 31.3121(a)(2)–1                                                26 CFR Ch. I (4–1–99 Edition)
stores transfers one of such stores to the S         considered to be its trade or business
Company. The S Company is considered to              for the purpose of determining whether
have acquired a separate unit of the trade or        the transferred property was used in
business of the R Corporation.
                                                     the trade or business of the predecessor
  (5) A successor may receive credit for             and for the purpose of determining
wages paid to an employee by a prede-                whether the employment by the prede-
cessor only if immediately prior to the              cessor and the successor of an indi-
acquisition the employee was employed                vidual whose services were retained by
by the predecessor in his trade or busi-             the successor constitute employment
ness which was acquired by the suc-                  in a trade or business. Thus, if a chari-
cessor and if immediately after the ac-              table or religious organization, subject
quisition such employee is employed                  to the taxes by virtue of its certificate,
by the successor in his trade or busi-               acquires all the property of another
ness (whether or not in the same trade               such organization likewise subject to
or business in which the acquired prop-              the taxes and retains the services of
erty is used). If the acquisition in-                employees of the predecessor, wages
volves only a separate unit of a trade               paid to such employees by the prede-
or business of the predecessor, the em-              cessor in the year of the acquisition
ployee need not have been employed by                (and prior to such acquisition) will be
the predecessor in that unit provided                attributed to the successor for pur-
he was employed in the trade or busi-                poses of the annual wage limitation.
ness of which the acquired unit was a                [T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
part.                                                amended by T.D. 6744, 29 FR 8307, July 2, 1964;
                                                     T.D. 6983, 33 FR 18015, Dec. 4, 1968; T.D. 7374,
  Example. The Y Corporation in 1968 ac-             40 FR 30948, July 24, 1975; T.D. 7660, 44 FR
quires by purchase all the property of the X         75139, Dec. 19, 1979]
Company and immediately after the acquisi-
tion employs in its trade or business em-            § 31.3121(a)(2)–1 Payments under em-
ployee A, who, immediately prior to the ac-               ployers’ plans on account of retire-
quisition, was employed by the X Company.                 ment, sickness or accident dis-
The X Company has in 1968 (the calendar                   ability, medical or hospitalization
year in which the acquisition occurs) and                 expenses, or death.
prior to the acquisition paid $5,000 of wages
to A. The Y Corporation in 1968 pays to A re-           (a) The term ‘‘wages’’ does not in-
muneration of $5,000 with respect to employ-         clude the amount of any payment (in-
ment. Only $2,800 of the remuneration paid           cluding any amount paid by an em-
by the Y Corporation is considered to be             ployer for insurance or annuities, or
wages. For purposes of the $7,800 limitation,        into a fund, to provide for any such
the Y Corporation is credited with the $5,000        payment) made to, or on behalf of, an
paid to A by the X Company. If in the same           employee or any of his dependents
calendar year, the Z Company acquires the            under a plan or system established by
property by purchase from the Y Corporation
and A immediately after the acquistion is
                                                     an employer which makes provision for
employed by the Z Company in its trade or            his employees generally (or for his em-
business, no part of the remuneration paid to        ployees generally and their dependents)
A by the Z Company in the year of the acqui-         or for a class or classes of his employ-
sition will be considered to be wages. The Z         ees (or for a class or classes of his em-
Company will be credited with the remu-              ployees and their dependents), on ac-
neration paid to A by the Y Corporation and          count of—
also with the wages paid to A by the X Com-             (1) An employee’s retirement,
pany (considered for purposes of the applica-           (2) Sickness or accident disability of
tion of the $7,800 limitation as having also
been paid by the Y Corporation).
                                                     an employee or any of his dependents,
                                                        (3) Medical or hospitalization ex-
  (6) Where a corporation described in               penses in connection with sickness or
section 501(c)(3) which is exempt from               accident disability of an employee or
income tax under section 501(a) has in               any of his dependents, or
effect a certificate filed pursuant to                  (4) Death of an employee or any of
section 3121(k), or pursuant to section              his dependents.
1426(1) of the Internal Revenue Code of                 (b) The plan or system established by
1939, waiving its exemption from the                 an employer need not provide for pay-
taxes imposed by the Act, the activity               ments on account of all of the specified
in which such corporation is engaged is              items, but such plan or system may

                                                26
Internal Revenue Service, Treasury                                             § 31.3121(a)(5)–1

provide for any one or more of such                § 31.3121(a)(5)–1 Payments from or to
items. Payments for any one or more                      certain tax-exempt trusts, or under
of such items under a plan or system                     or to certain annuity plans or bond
established by an employer solely for                    purchase plans.
the dependents of his employees are                   (a) Payments from or to certain tax- ex-
not within this exclusion from wages.              empt trusts. The term ‘‘wages’’ does not
  (c) Dependents of an employee in-                include any payment made—
clude the employee’s husband or wife,                 (1) By an employer, on behalf of an
children, and any other members of the             employee or his beneficiary, into a
employee’s immediate family.                       trust, or
                                                      (2) To, or on behalf of, an employee
  (d) It is immaterial for purposes of
                                                   or his beneficiary from a trust.
this exclusion whether the amount or
possibility of such benefit payments is            If at the time of such payment the
taken into consideration in fixing the             trust is exempt from tax under section
amount of an employee’s remuneration               501(a) as an organization described in
                                                   section 401(a). A payment made to an
or whether such payments are re-
                                                   employee of such a trust for services
quired, expressly or impliedly, by the
                                                   rendered as an employee of the trust
contract of service.
                                                   and not as a beneficiary thereof is not
§ 31.3121(a)(3)–1 Retirement payments.             within this exclusion from wages.
                                                      (b) Payments under or to certain annu-
  The term ‘‘wages’’ does not include              ity plans. (1) The term ‘‘wages’’ does
any payment made by an employer to                 not include any payment made after
an employee (including any amount                  December 31, 1962—
paid by an employer for insurance or                  (i) By an employer, on behalf of an
annuities, or into a fund, to provide for          employee or his beneficiary, into an
any such payment) on account of the                annuity plan, or
employee’s retirement. Thus, payments                 (ii) To, or on behalf of, an employee
made to an employee on account of his              or his beneficiary under an annuity
retirement are excluded from wages                 plan, if at the time of such payment
under this exception even though not               the annuity plan is a plan described in
made under a plan or system.                       section 403(a).
                                                      (2) The term ‘‘wages’’ does not in-
§ 31.3121(a)(4)–1 Payments on account              clude any payment made before Janu-
     of sickness or accident disability, or        ary 1, 1963—
     medical or hospitalization ex-                   (i) By an employer, on behalf of an
     penses.                                       employee or his beneficiary, into an
  The term ‘‘wages’’ does not include              annuity plan, or
                                                      (ii) To, or on behalf of, an employee
any payment made by an employer to,
                                                   or his beneficiary under an annuity
or on behalf of, an employee on ac-
                                                   plan,
count of the employee’s sickness or ac-
cident disability or the medical or hos-           if at the time of such payment the an-
pitalization expenses in connection                nuity plan meets the requirements of
                                                   section 401(a)(3), (4), (5), and (6).
with the employee’s sickness or acci-
                                                      (c) Payments under or to certain bond
dent disability, if such payment is
                                                   purchase plans. The term ‘‘wages’’ does
made after the expiration of 6 calendar            not include any payment made after
months following the last calendar                 December 31, 1962—
month in which such employee worked                   (1) By an employer, on behalf of an
for such employer. Such payments are               employee or his beneficiary, into a
excluded from wages under this excep-              bond purchase plan, or
tion even though not made under a                     (2) To, or on behalf of, an employee
plan or system. If the employee does               or his beneficiary under a bond pur-
not actually perform services for the              chase plan,
employer during the requisite period,              if at the time of such payment the plan
the existence of the employer- em-                 is a qualified bond purchase plan de-
ployee relationship during that period             scribed in section 405(a).
is immaterial.
                                                   [T.D. 6876, 31 FR 2596, Feb. 10, 1966]

                                              27
§ 31.3121(a)(6)–1                                             26 CFR Ch. I (4–1–99 Edition)

§ 31.3121(a)(6)–1 Payment by an em-                tors, laundresses, furnacemen, care-
     ployer of employee tax under sec-             takers, handymen, gardeners, footmen,
     tion 3101 or employee contributions           grooms, and chauffeurs of automobiles
     under a State law.                            for family use. The term ‘‘domestic
  The term ‘‘wages’’ does not include              service in a private home of the em-
any payment by an employer (without                ployer’’ does not include the services
deduction from the remuneration of, or             enumerated above unless such services
other reimbursement from, the em-                  are performed in or about a private
ployee) of either (a) the employee tax             home of the employer. Services not of
imposed by section 3101 or the cor-                a household nature, such as services
responding section of prior law, or (b)            performed as a private secretary, tutor,
any payment required from an em-                   or librarian, even though performed in
ployee under a State unemployment                  the employer’s home, are not included
compensation law.                                  within the term ‘‘domestic service in a
                                                   private home of the employer’’. As used
§ 31.3121(a)(7)–1 Payments for services            in this section, the term does not in-
     not in the course of employer’s               clude domestic service in a private
     trade or business or for domestic
     service.                                      home of the employer performed on a
                                                   farm operated for profit or service not
  (a) Meaning of terms—(1) Services not            in the course of the employer’s trade or
in the course of employer’s trade or busi-         business. See paragraph (f) § 31.3121(g)–1
ness. The term ‘‘services not in the               for provisions relating to domestic
course of the employer’s trade or busi-            service in a private home of the em-
ness’’ includes services that do not pro-          ployer performed on a farm operated
mote or advance the trade or business              for profit.
of the employer. Such term does not                  (b) Payments other than in cash. The
include services performed for a cor-              term ‘‘wages’’ does not include remu-
poration. As used in this section, the             neration paid in any medium other
term does not include service not in               than cash (1) for service not in the
the course of the employer’s trade or              course of the employer’s trade or busi-
business performed on a farm operated              ness, or (2) for domestic service in a
for profit or domestic service in a pri-           private home of the employer. Cash re-
vate home of the employer. See para-               muneration includes checks and other
graph (f) of § 31.3121(g)–1 for provisions         monetary media of exchange. Remu-
relating to services not in the course of          neration paid in any medium other
the employer’s trade or business per-              than cash, such as lodging, food, cloth-
formed on a farm operated for profit.              ing, car tokens, transportation passes
  (2) Domestic service in a private home of        or tickets, or other goods or commod-
the employer. Services of a household              ities, for service not in the course of
nature performed by an employee in or              the employer’s trade or business or for
about a private home of the person by              domestic service in a private home of
whom he is employed constitute do-                 the employer does not constitute
mestic service in a private home of the            wages.
employer. A private home is a fixed                  (c) Cash payments. (1) The term
place of abode of an individual or fam-            ‘‘wages’’ does not include cash remu-
ily. A separate and distinct dwelling              neration paid by an employer in any
unit maintained by an individual in an             calendar quarter after 1954 to an em-
apartment house, hotel, or other simi-             ployee for—
lar establishment may constitute a pri-
                                                     (i) Domestic service in a private
vate home. If a dwelling house is used
                                                   home of the employer, or
primarily as a boarding or lodging
house for the purpose of supplying                   (ii) Service not in the course of the
board or lodging to the public as a                employer’s trade or business,
business enterprise, it is not a private           unless the cash remuneration paid in
home. In general, services of a house-             such quarter by the employer to the
hold nature in or about a private home             employee for such service is $50 or
include services performed by cooks,               more.
waiters, butlers, housekeepers, govern-              (2) The test relating to cash remu-
esses, maids, valets, baby sitters, jani-          neration of $50 or more is based on the

                                              28
Internal Revenue Service, Treasury                                             § 31.3121(a)(8)–1

remuneration paid in a calendar quar-                1) as constitutes employment or is
ter rather than on the remuneration                  deemed to constitute employment by
earned during a calendar quarter. It is              reason of the rules relating to included
immaterial whether the remuneration                  and excluded services contained in sec-
was earned before 1955 or after 1954.                tion 3121(c) (see § 31.3121(c)–1) or the
                                                     corresponding section of prior law.
  Example. In the calendar quarter ending
March 31, 1955, employer X pays employee A             (b) Payments other than in cash. The
cash remuneration of $50 for service not in          term ‘‘wages’’ does not include remu-
the course of X’s trade or business. Such re-        neration paid in any medium other
muneration constitutes wages subject to the          than cash for agricultural labor. For
taxes even though $10 thereof represents pay-        meaning of the term ‘‘cash remunera-
ment for such service performed by A for X           tion’’, see paragraph (f) of the regula-
in December 1954.                                    tions in this section.
In determining whether $50 or more has                 (c) Cash payments. (1) The term
been paid either for domestic service in             ‘‘wages’’ does not include cash remu-
a private home of the employer or for                neration paid by an employer in the
service not in the course of the employ-             calendar year 1955 or 1956 to an em-
er’s trade or business, only cash remu-              ployee for agricultural labor unless the
neration for such service shall be taken             cash remuneration paid in such year by
into account. Cash remuneration in-                  the employer to the employee for such
cludes checks and other monetary                     labor is $100 or more.
media of exchange. Remuneration paid                   (2)(i) The term ‘‘wages’’ does not in-
in any other medium, such as lodging,                clude cash remuneration paid by an
food, clothing, car tokens, transpor-                employer in any calendar year after
tation passes or tickets, or other goods             1956 to an employee for agricultural
or commodities, is disregarded in de-                labor unless the cash remuneration
termining whether the cash-remunera-                 paid in such year by the employer to
tion test is met. If an employee re-                 the employee for such labor is $150 or
ceives cash remuneration from an em-                 more, or unless the employee performs
ployer in a calendar quarter for both                agricultural labor for the employer on
types of services the $50 cash-remu-                 20 days or more during such year for
neration test is to be applied sepa-                 cash remuneration computed on a time
rately to each type of service. If an em-            basis.
ployee receives cash remuneration                      (ii) The application of the provisions
from more than one employer in a cal-                of this subparagraph may be illustrated
endar quarter for domestic service in a              by the following example:
private home of the employer or for
                                                       Example. On 18 days in 1957 A performs ag-
service not in the course of the employ-             ricultural labor for X for cash remuneration
er’s trade or business, the $50 cash-re-             of $8 per day, and X pays A $144 in such year.
muneration test is to be applied sepa-               A performs no further service for X. Neither
rately to the remuneration received                  the $150-cash-remuneration test nor the 20-
from each employer. See § 31.3102–1, re-             day test is met. Accordingly, the remunera-
lating to deduction of employee tax or               tion paid by X to A is not subject to the
amounts equivalent to the tax from                   taxes. If in 1957 A had performed agricultural
                                                     labor for X on 20 days for cash remuneration
cash payments for the services de-
                                                     of $7.20 per day, the $144 paid by X to A
scribed in this section; § 31.3121(a)–2, re-         would have been subject to the taxes because
lating to time of payment of wages for               the 20-day test would have been met. Or if A
such services; and § 31.3121(i)–1, relating          had performed the 18 days of agricultural
to computations to the nearest dollar                labor for cash remuneration of $8.50 per day
of any payment of cash remuneration                  and had been paid in full therefor in 1957, his
for domestic service in a private home               cash remuneration of $153 would have been
of the employer.                                     subject to the taxes because the $150-cash-re-
                                                     muneration test would have been met.
§ 31.3121(a)(8)–1 Payments for agricul-                (d) Application of cash-remuneration
     tural labor.                                    test. (1) If an employee receives cash re-
  (a) Scope of this section. For purposes            muneration from an employer both for
of the regulations in this section, the              services which constitute agricultural
term ‘‘agricultural labor’’ means only               labor and for services which do not
such agricultural labor (see § 31.3121(g)–           constitute agricultural labor, only the

                                                29
§ 31.3121(a)(8)–1                                                 26 CFR Ch. I (4–1–99 Edition)

amount of such remuneration which is                  taken into account in determining
attributable to agricultural labor shall              whether an employee performs such
be included in determining whether                    labor for such remuneration on 20 days
cash remuneration of $150 or more ($100               or more during a calendar year after
or more in 1955 or 1956) has been paid in             1956. For purposes of the 20-day test,
the calendar year by the employer to                  the amount of such remuneration is
the employee for agricultural labor.                  immaterial, and it is immaterial if, in
                                                      addition to cash remuneration com-
  Example. Employer X operates a store and
also is engaged in farming operations. Em-            puted on a time basis, the remunera-
ployee A, who regularly performs services for         tion for such labor also includes remu-
X in connection with the operation of the             neration other than cash or remunera-
store, works on X’s farm when additional              tion which is not computed on a time
help is required for the farm activities. In          basis. If cash remuneration paid to an
the calendar year 1957, X pays A $140 in cash         employee after 1956 for agricultural
computed on a time basis for agricultural             labor is computed on a time basis, such
labor performed on 19 different days in such
                                                      cash remuneration does not constitute
year, and $2,260 for services performed in
connection with the operation of the store.           ‘‘wages’’ unless it is paid in a calendar
Since the cash remuneration paid by X to A            year in which either the 20-day test or
in the calendar year 1957 for agricultural            the $150-cash-remuneration test is met.
labor is less than $150, the cash-remunera-
                                                        Example. Employer X employs A to con-
tion test is not met. Since A performed agri-
                                                      struct fences on a farm owned by X. The
cultural labor for X on less than 20 days in
                                                      work constitutes agricultural labor and is
1957, the 20-day test set forth in section
                                                      performed on 50 days in November and De-
3121(a)(8) is not met. The $140 paid by X to A
                                                      cember 1957. A is not employed by X at any
in 1957 for agricultural labor does not con-
                                                      other time. A’s remuneration consists of
stitute wages and is not subject to the taxes.
                                                      meals and lodging, $5 cash per day, and addi-
  (2) The test relating to cash remu-                 tional cash measured by the amount of fence
neration of $150 or more ($100 or more                constructed. X pays A $140 cash in December
in 1955 or 1956) is based on the cash re-             1957 and $160 cash in January 1958, in full
muneration paid in a calendar year                    payment for the work. Inasmuch as A has
                                                      performed agricultural labor for X on 50 days
rather than on the remuneration                       in 1957, for remuneration computed on a time
earned during a calendar year. It is im-              basis, the 20-day test is met for 1957 and the
material if such cash remuneration is                 $140 cash paid in 1957 is subject to the taxes.
paid in a calendar year other than the                It is immaterial that the $150-cash-remu-
year in which the agricultural labor is               neration test is not met for 1957. Inasmuch
performed.                                            as X has paid A $160 cash remuneration in
                                                      1958 for agricultural labor, the $150-cash-re-
  Example. Employer X pays cash remunera-             muneration test is met for 1958 and the $160
tion of $150 in the calendar year 1957 to em-         cash paid in 1958 is subject to the taxes. It is
ployee A for agricultural labor. Such remu-           immaterial that the 20-day test is not met
neration constitutes wages even though $10            for 1958. If the remuneration paid by X to A
of such amount represents payment for agri-           in January 1958 had been in an amount less
cultural labor performed by A for X in De-            than $150, neither the $150-cash-remunera-
cember 1956.                                          tion test nor the 20-day test would have been
  (3) In determining whether $150 or                  met for the calendar year 1958, and the remu-
                                                      neration paid by X to A in such year would
more ($100 or more in 1955 or 1956) has               not have been subject to the taxes.
been paid to an employee for agricul-
tural labor, only cash remuneration for                 (2) For the purpose of determining
such labor shall be taken into account.               whether an employee performs agricul-
If an employee receives cash remunera-                tural labor for an employer on 20 days
tion in any one calendar year from                    or more during any calendar year after
more than one employer for agricul-                   1956, for cash remuneration computed
tural labor, the cash-remuneration test               on a time basis, there shall be counted
is to be applied with respect to the re-              as one day—
muneration received by the employee                     (i) Any day or portion thereof on
from each employer in such calendar                   which the employee actually performs
year for such labor.                                  such labor for cash remuneration com-
  (e) Application of 20-day test. (1) Only            puted one time basis; and
agricultural labor for which cash remu-                 (ii) Any day or portion thereof on
neration is computed on a time basis is               which the employee does not perform

                                                 30
Internal Revenue Service, Treasury                                               § 31.3121(a)(9)–1

agricultural labor but with respect to                 § 31.3121(a)(9)–1 Payments to employ-
which cash remuneration is paid or                          ees for nonwork periods.
payable to the employee for such labor,                  (a) The term ‘‘wages’’ does not in-
such as a day on which the employee is                 clude any payment (other than vaca-
sick or on vacation.                                   tion or sick pay) made by an employer
An employee who on a particular day                    to an employee for a period throughout
reports for work and, at the direction                 which the employment relationship ex-
of his employer, holds himself in readi-               ists between the employer and the em-
ness to perform agricultural labor shall               ployee, but in which the employee does
be considered to be engaged in the ac-                 not work (other than being subject to
tual performance of such labor on that                 call for the performance of work) for
day. For purposes of the regulations in                the employer, if such payment is made
this section, a day is a period of 24                  after the calendar month in which—
hours commencing at midnight and                         (1) The employee attains age 65, if
ending at midnight.                                    the employee is a man to whom the
  Example. During the period of 20 days be-            payment is made before January 1975,
ginning April 11, 1957 and ending April 30,            or if the employee is a woman to whom
1957, employee A was employed by employer              the payment is made before November
X to perform agricultural labor on X’s farm.           1956, or
The agreement provided that A would be fur-
nished room and board at the farm and
                                                         (2) The employee attains age 62, if
would be paid cash wages of $150 per month.            the employee is a man to whom the
On one day during the 20-day period A was              payment is made after December 1974,
sick and unable to work, and on another day            or if the employee is a woman to whom
X directed A to refrain from work because of           the payment is made after October
weather conditions. At the termination of              1956.
A’s employment X paid A cash wages of $100               (b) Vacation or sick pay is not within
for the full 20-day period. The 20-day test had
been met and the $100 cash wages were sub-
                                                       this exclusion from wages. If the em-
ject to the taxes.                                     ployee does any work for the employer
                                                       in the period for which the payment is
  (3) If in any one calendar year an em-               made, no remuneration paid by such
ployee performs agricultural labor for                 employer to such employee with re-
more than one employer, the 20-day                     spect to such period is within this ex-
test is to be applied with respect to the              clusion from wages.
agricultural labor performed by the
employee in such year for each em-                       Example. Mrs. A, an employee of X, at-
ployer.                                                tained the age of 62 on September 15, 1956,
                                                       and discontinued the performance of regular
  (f) Meaning of ‘‘cash remuneration.’’                work for X on September 30, 1956. Their em-
Cash remuneration includes checks and                  ployment relationship continued for several
other monetary media of exchange.                      years until Mrs. A’s death, and X paid Mrs.
Cash remuneration does not include                     A $50 per month as consideration for Mrs. A’s
payments made in any other medium,                     agreement to work when asked by X. The
such as lodging, food, clothing, car to-               payment for each month was made on the
kens, transportation passes or tickets,                first day of each succeeding month. After
farm products, or other goods or com-                  September 30, 1956, the only work performed
modities.                                              by Mrs. A for X was performed on one day in
                                                       October 1956. The payment made by X to
  (g) Cross references. (1) For provisions             Mrs. A on November 1 (for October 1956) is
relating to deductions of employee tax                 not excluded from wages under this excep-
or amounts equivalent to the tax from                  tion, but the payments made thereafter are
cash payments for agricultural labor,                  excluded from wages. The payment on No-
see § 31.3102–1.                                       vember 1 was not excluded because Mrs. A
  (2) For provisions relating to the                   worked for X on one day in October 1956. (In-
time of payment of wages for agricul-                  asmuch as Mrs. A had attained age 62 in Sep-
                                                       tember 1956, the November 1 payment would
tural labor, see § 31.3121(a)–2.
                                                       have been excluded if Mrs. A had not per-
  (3) For provisions relating to records               formed any work for X in October 1956.)
to be kept with respect to agricultural
labor, see paragraph (b) of § 31.6001–2.               [T.D. 6744, 29 FR 8309, July 2, 1964, as amend-
                                                       ed by T.D. 7373, 40 FR 30957, July 24, 1975; 40
[T.D. 6744, 29 FR 8308, July 2, 1964]                  FR 32831, Aug. 5, 1975]

                                                  31
§ 31.3121(a)(10)–1                                                 26 CFR Ch. I (4–1–99 Edition)

§ 31.3121(a)(10)–1 Payments to certain                  for services performed as a home work-
     home workers.                                      er of the character described in para-
   (a) The term ‘‘wages’’ does not in-                  graph (a) of this section, the regula-
clude remuneration paid by an em-                       tions in this section are to be applied
ployer in any calendar quarter to an                    with respect to the remuneration re-
employee—                                               ceived by the employee from each em-
   (1) For services performed after 1954                ployer in such calendar quarter for
as a home worker who is an employee                     such services. This exclusion from
by reason of the provisions of section                  wages has no application to remunera-
3121(d)(3)(C) (see paragraph (d) of                     tion paid for services performed as a
§ 31.3121(d)–1), or                                     home worker who is an employee under
   (2) For services performed after 1950                either section 3121(d)(2)(see paragraph
and before 1955 as a home worker who                    (c) of § 31.3121(d)–1) or section 1426(d)(2)
is an employee by reason of the provi-                  of the 1939 Code, relating to common
sions of section 1426(d)(3)(C) of the In-               law employees.
ternal Revenue Code of 1939. unless the                   (d) Cash remuneration includes
cash remuneration paid in such quarter                  checks and other monetary media of
by the employer to the employee for                     exchange. Remuneration paid in any
such services is $50 or more. The test                  other medium, such as clothing, car to-
relating to cash remuneration of $50 or                 kens, transportation passes or tickets,
more is based on remuneration paid in                   or other goods or commodities, is dis-
a calendar quarter rather than on re-                   regarded in determining whether the
muneration earned during a calendar                     $50 cash-remuneration test is met. If
quarter. If $50 or more of cash remu-                   the cash remuneration paid in any cal-
neration is paid in a particular cal-                   endar quarter by an employer to an
endar quarter, it is immaterial whether                 employee for services performed as a
the $50 is in payment for services per-                 home worker of the character described
formed during the quarter of payment                    in paragraph (a) of this section is $50 or
or during any other quarter.                            more, then no remuneration, whether
   (b) The application of paragraph (a)                 in cash or in any medium other than
of this section may be illustrated by                   cash, paid by the employer to the em-
the following examples:                                 ployee in such calendar quarter for
  Example 1. A, a home worker, performs
                                                        such services is excluded from wages
services for X, a manufacturer, in 1954 and             under this exception.
1955. In the performance of the home work A               (e) For provisions relating to whether
is an employee both in 1954 (by reason of sec-          a home worker is an employee under
tion 1426(d)(3)(C) of the 1939 Code) and in 1955        section 1426(d)(3)(C) of the 1939 Code,
(by reason of section 3121(d)(3)(C)). In March          see § 408.204 of Regulations 128; 26 CFR
1955, A returns to X articles made by A at              (1939) Part 408. See also § 31.3102–1, re-
home from materials received by A from X in             lating to deduction of employee tax or
1954. X pays A cash remuneration of $50 for
                                                        amounts equivalent to the tax from
such work when the finished articles are de-
livered. The $50 includes $10 which represents          cash payments for services performed
remuneration for home work performed by A               as a home worker of the character de-
in 1954. The entire $50 is subject to the taxes.        scribed in paragraph (a) of this section,
  Example 2. Assume that the same trans-                and § 31.3121(a)–2, relating to the time
actions occur, but that A is not subject in             of payment of wages for such services.
1954 to licensing requirements under the laws
of the State in which the home work is per-             § 31.3121(a)(11)–1 Moving expenses.
formed. A, therefore, does not perform home
work in 1954 as an employee of X by reason                 (a) The term ‘‘wages’’ does not in-
of section 1426(d)(3)(C) of the 1939 Code, and          clude remuneration paid on or after
the $10 paid in 1955 for such work is not re-           November 1, 1964, to or on behalf of an
muneration for employment. The remaining                employee, either as an advance or a re-
$40 for the home work performed in 1955 is              imbursement, specifically for moving
remuneration for employment, but is ex-                 expenses incurred or expected to be in-
cluded from wages by application of the $50             curred, if (and to the extent that) at
cash-remuneration test.
                                                        the time of payment it is reasonable to
  (c) In the event an employee receives                 believe that a corresponding deduction
remuneration in any one calendar                        is or will be allowable to the employee
quarter from more than one employer                     under section 217. The reasonable belief

                                                   32
Internal Revenue Service, Treasury                                        § 31.3121(a)(13)–1

contemplated by the statute may be              employee during the month. As to the
based upon any evidence reasonably              time tips are deemed paid, see
sufficient to induce such belief, even          § 31.3121(q)–1. For provisions relating to
though such evidence may be insuffi-            the treatment of tips received by an
cient upon closer examination by the            employee prior to 1966, see paragraph
district director or the courts finally         (j)(3) of § 31.3121 (a)–1.
to establish that a deduction is allow-
able under section 217. The reasonable          [T.D. 7001, 34 FR 999, Jan. 23, 1969]
belief shall be based upon the applica-
                                                § 31.3121(a)(13)–1 Payments under cer-
tion of section 217 and the regulations              tain employers’ plans after retire-
thereunder in Part 1 of this chapter                 ment, disability, or death.
(Income Tax Regulations). When used
in this section, the term ‘‘moving ex-            (a) In general. The term ‘‘wages’’ does
penses’’ has the same meaning as when           not include the amount of any pay-
used in section 217 and the regulations         ment or series of payments made after
thereunder.                                     January 2, 1968, by an employer to, or
  (b) Except as otherwise provided in           on behalf of, an employee or any of his
paragraph (a) of this section, or in a          dependents under a plan established by
numbered paragraph of section 3121(a),          the employer which makes provisions
amounts paid to or on behalf of an em-          for his employees generally (or for his
ployee for moving expenses are wages            employees generally and their depend-
for purposes of section 3121(a).                ents) or for a class or classes of his em-
[T.D. 7375, 40 FR 42350, Sept. 12, 1975]        ployees (or for a class or classes of his
                                                employees and their dependents),
§ 31.3121(a)(12)–1 Tips.                        which is paid or commences to be paid
  The term ‘‘wages’’ does not include           upon or within a reasonable time after
remuneration received by an employee            the termination of an employee’s em-
after December 1965 in the form of tips         ployment relationship because of the
if—                                             employee’s—
  (a) The tips are paid in any medium             (1) Death,
other than cash, or                               (2) Retirement for disability, or
  (b) The cash tips received by an em-            (3) Retirement after attaining an age
ployee in any calendar month in the             specified in the plan established by the
course of his employment by an em-              employer or in a pension plan of the
ployer are less than $20.                       employer at the age at which a person
If the cash tips received by an em-             in the employee’s circumstances is eli-
ployee in a calendar month after De-            gible for retirement.
cember 1965 in the course of his em-            A payment or series of payments made
ployment by an employer amount to               under the circumstances described in
$20 or more, none of the cash tips re-          the preceding sentence is excluded
ceived by the employee in such cal-             from ‘‘wages’’ even if made pursuant to
endar month are excluded from the
                                                an incentive compensation plan which
term ‘‘wages’’ under this section. The
                                                also provides for the making of other
cash tips to which this section applies
include checks and other monetary               types of payments. However, any pay-
media of exchange. Tips received by an          ment or series of payments which
employee in any medium other than               would have been paid if the employee’s
cash, such as passes, tickets, or other         relationship had not been terminated is
goods or commodities do not constitute          not excluded from ‘‘wages’’ under this
wages. If an employee in any calendar           section and section 3121(a)(13). For ex-
month performs services for two or              ample, lump-sum payments for unused
more employers and receives tips in             vacation time or a final paycheck re-
the course of his employment by each            ceived after retirement are payments
employer, the $20 test is to be applied         which the employee would have re-
separately with respect to the cash tips        ceived whether or not he retired and
received by the employee in respect of          therefore are not excluded from
his services for each employer and not          ‘‘wages’’ under this section. Further, if
to the total cash tips received by the

                                           33
§ 31.3121(a)(14)–1                                               26 CFR Ch. I (4–1–99 Edition)

any payment is made upon or after ter-              death, retirement at age 65 (the retirement
mination of employment for any rea-                 age specified in the plan), or retirement for
son other than those set out in sub-                disability. On March 1, 1973, A attains the
paragraphs (1), (2), and (3) of this para-          age of 65 and retires. On March 5, 1973, A re-
                                                    ceives $5,500 from his employer of which
graph such payment is not excludable                $1,500 represents A’s salary for services he
from ‘‘wages’’ by this section. For ex-             performed in February 1973, and $4,000 rep-
ample, if a pension plan provides for re-           resents incentive compensation paid under
tirement upon disability, completion of             the employer’s plan. The amount of $4,000 is
30 years of service, or attainment of               excluded from ‘‘wages’’ under this section.
age 65, and if an employee who is not               The amount of $1,500 is not excluded from
disabled retires at age 61 after 30 years           ‘‘wages’’ under this section.
of service, none of the retirement pay-             [T.D. 7374, 40 FR 30949, July 24, 1975]
ments made to the employee under the
pension plan (including any made after              § 31.3121(a)(14)–1 Payments by em-
he is 65) is excludable from ‘‘wages’’                   ployer to survivor or estate of
under this section. However, if the pen-                 former employee.
sion plan had conditioned retirement
                                                      The term ‘‘wages’’ does not include
after 30 years of service upon attain-
                                                    any payment by an employer to a sur-
ment of age 60, all of the retirement
                                                    vivor or the estate of a former em-
payments would have been excludable.
  (b) Plan. The plan or system estab-               ployee made after 1972 and after the
lished by an employer need not provide              calendar year in which such employee
for payments because of termination of              died.
employment for all the reasons set out              [T.D. 7374, 40 FR 30950, July 24, 1975, as
in paragraphs (a)(1), (2), and (3) of this          amended by T.D. 7373, 40 FR 30957, July 24,
section, but such plan or system may                1975]
provide for payments because of termi-
nation for any one or more of such rea-             § 31.3121(a)(15)–1 Payments by em-
sons. Payments because of termination                    ployer to disabled former employee.
of employment for any one or more of                  The term ‘‘wages’’ does not include
such reasons under a plan or system es-             any payment made after 1972 by an em-
tablished by an employer solely for the             ployer to an employee, if at the time
dependents of his employees are not                 such payment is made such employee is
within this exclusion from wages.                   entitled to disability insurance bene-
  (c) Dependents. Dependents of an em-              fits under section 223(a) of the Social
ployee include the employee’s husband               Security Act and such entitlement
or wife, children, and any other mem-               commenced prior to the calendar year
bers of the employee’s immediate fam-               in which such payment is made, and if
ily.                                                such employee did not perform any
  (d) Benefit payment. It is immaterial
                                                    service for such employer during the
for purposes of this exclusion whether
                                                    period for which such payment is made.
the amount or possibility of benefit
payments is paid on account of services             [T.D. 7374, 40 FR 30950, July 24, 1975, as
rendered or taken into consideration in             amended by T.D. 7373, 40 FR 30957, July 24,
fixing the amount of an employee’s re-              1975]
muneration or whether such payments
are required, expressly or impliedly, by            § 31.3121(a)(18)–1 Payments or benefits
the contract of service.                                 under a qualified educational as-
                                                         sistance program.
  (e) Example. The application of this
section may be illustrated by the fol-                The term ‘‘wages’’ does not include
lowing example:                                     any payment made, or benefit fur-
  Example. A, an employee, receives a salary
                                                    nished, to or for the benefit of an em-
of $1,500 a month, payable on the 5th day of        ployee in a taxable year beginning
the month following the month for which the         after December 31, 1978, if at the time
salary is earned. A’s employer has estab-           of such payment or furnishing it is rea-
lished an incentive compensation plan for a         sonable to believe that the employee
class of his employees, including A, pro-           will be able to exclude such payment or
viding for the payment of deferred com-             benefit from income under section 127.
pensation on termination of employment, in-
cluding termination upon an employee’s              [T.D. 7898, 48 FR 31019, July 6, 1983]

                                               34
Internal Revenue Service, Treasury                                            § 31.3121(b)–2

§ 31.3121(b)–1 Employment; services to             ulations applicable in determining
     which the regulations in this sub-            whether service performed after 1936
     part apply.                                   and before 1955 constitute employment
   (a) The provisions of the regulations           are as follows:
in this subpart relating to the term                  (i) Services performed after 1936 and
‘‘employment’’ apply with respect to               before 1940—26 CFR (1939) Part 401
services performed after 1954. Certain             (Regulations 91).
provisions also apply with respect to                 (ii) Services performed after 1939 and
services performed before 1955 for                 before 1951—26 CFR (1939) Part 402
which the remuneration is paid after               (Regulations 106).
1954 (see paragraph (b) of § 31.3121(b)–2.            (iii) Services performed after 1950 and
For provisions relating generally to               before 1955—26 CFR (1939) Part 408
services performed before 1955, see                (Regulations 128).
paragraph (a) of § 31.3121 (b)–2. For pro-            (b) Certain services performed before
visions relating to the circumstances              1955 the remuneration for which is paid
under which services which do not con-             after 1954. (1) Services of the following
stitute employment are nevertheless
                                                   character performed before 1955, for
deemed to be employment, and relating
                                                   which remuneration is paid after 1954,
to the circumstances under which serv-
                                                   constitute employment under section
ices which constitute employment are
                                                   3121(b):
nevertheless deemed not to be employ-
ment, see § 31.3121 (c)–1. For provisions             (i) Agricultural labor, as defined in
relating to who are employees and who              section 3121(g) (see § 31.3121(g)–1), other
are employers see §§ 31.3121 (d)–1 and             than services of the character de-
31.3121 (d)–2, respectively.                       scribed in section 3121(b)(1) (relating to
   (b) The taxes apply with respect to             services performed in connection with
remuneration paid after 1954 for serv-             the production or harvesting of certain
ices performed before 1955, as well as             oleoresinous products and services per-
for services performed after 1954, to the          formed by certain foreign agricultural
extent that the remuneration and serv-             workers), which, at the time per-
ices constitute wages and employment.              formed, constituted employment under
See §§ 31.3121(a)–1 to 31.3121(a)(13)–1 re-        section 1426(b) of the 1939 Code, or
lating to wages.                                   would have constituted employment
                                                   except for the provisions of section
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
                                                   1426(b)(1) of such Code, as in effect at
amended by T.D. 6983, 33 FR 18015, Dec. 4,
1968]                                              the time the services were performed.
                                                      (ii) Services not in the course of the
§ 31.3121(b)–2 Employment;       services          employers’ trade or business (see para-
      performed before 1955.                       graph (a)(1) of § 31.3121(a)(7)–1) which, at
   (a) General rule. (1) Subject to the            the time performed, constituted em-
provisions of paragraph (b) of this sec-           ployment under section 1426(b) of the
tion:                                              1939 Code, or would have constituted
   (i) Services performed after 1936 and           employment except for the provisions
before 1955 which were employment                  of section 1426(b)(3) of such Code, as in
under the applicable law in effect be-             effect at the time the services were
fore 1955 constitute employment under              performed.
section 3121(b).                                      (2) Services of the character de-
   (ii) Services performed after 1936 and          scribed in paragraphs (a) and (b) of
before 1955 which were not employment              § 31.3121(b)(1)–1, which were performed
under the applicable law in effect be-             by certain foreign agricultural workers
fore 1955 do not constitute employment             before 1955 and the remuneration for
under section 3121(b).                             which is paid after 1954, do not con-
   (2) Except as provided in paragraph             stitute employment under section
(b) of this section, determination of              3121(b), irrespective of whether they
whether services performed before 1955             constituted employment under section
constitute employment shall be made                1426(b) of the 1939 Code, as in effect at
in accordance with the applicable pro-             the time the services were performed.
visions of law in effect before 1955 and              (3) This paragraph has no application
of the regulations thereunder. The reg-            to services performed before 1955 and

                                              35
§ 31.3121(b)–3                                                26 CFR Ch. I (4–1–99 Edition)

the remuneration for which was paid                the vessel or aircraft it touches at a
before 1955.                                       port within the United States; and
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
                                                     (c) The services are not excepted
amended by T.D. 6744, 29 FR 8309, July 2,          under section 3121(b).
1964]                                                (ii) An employee performs services on
                                                   and in connection with the vessel or
§ 31.3121(b)–3 Employment;         services        aircraft if he performs services on such
     performed after 1954.                         vessel or aircraft which are also in con-
   (a) In general. Whether services per-           nection with the vessel or aircraft.
formed after 1954 constitute employ-               Services performed on the vessel by
ment is determined in accordance with              employees as officers or members of
the provisions of section 3121(b).                 the crew, or as employees of conces-
   (b) Services performed within the               sionaires, of the vessel, for example,
United States. Services performed after            are     performed    under    such    cir-
1954 within the United States (see                 cumstances, since such services are
§ 31.3121(e)–1) by an employee for his             also connected with the vessel. Simi-
employer, unless specifically excepted             larly, services performed on the air-
by section 3121(b), constitute employ-             craft by employees as officers or mem-
ment. With respect to services per-                bers of the crew of the aircraft are per-
formed within the United States, the               formed on and in connection with such
place where the contract of service is             aircraft. Services may be performed on
entered into is immaterial. The citi-              the vessel or aircraft, however, which
zenship or residence of the employee or            have no connection with it, as in the
of the employer also is immaterial ex-             case of services performed by an em-
cept to the extent provided in any spe-            ployee while on the vessel or aircraft
cific exception from employment.                   merely as a passenger in the general
Thus, the employee and the employer                sense. For example, the services of a
may be citizens and residents of a for-            buyer in the employ of a department
eign country and the contract of serv-             store while he is a passenger on a ves-
ice may be entered into in a foreign               sel are not in connection with the ves-
country, and yet, if the employee under            sel.
such contract performs services within               (iii) If services are performed by an
the United States, there may be to                 employee ‘‘on and in connection with’’
that extent employment.                            an American vessel or American air-
   (c) Services performed outside the              craft when outside the United States
United States—(1) In general. Except as            and the conditions listed in paragraph
provided in paragraphs (c)(2) and (3) of           (c)(2)(i) (b) and (c) of this section are
this section, services performed outside           met, then the services of that employee
the United States (see § 31.3121(e)–1) do          performed on or in connection with the
not constitute employment.                         vessel or aircraft constitute employ-
   (2) On or in connection with an Amer-           ment. The expression ‘‘on or in connec-
ican vessel or American aircraft. (i) Serv-        tion with’’ refers not only to services
ices performed after 1954 by an em-                performed on the vessel or aircraft but
ployee for an employer ‘‘on or in con-             also to services connected with the ves-
nection with’’ an American vessel or               sel or aircraft which are not actually
American aircraft outside the United               performed on it (for example, shore
States (see § 31.3121(e)–1) constitute em-         services performed as officers or mem-
ployment if:                                       bers of the crew, or as employees of
   (a) The employee is also employed               concessionaires, of the vessel).
‘‘on and in connection with’’ such ves-              (iv) Services performed by a member
sel or aircraft when outside the United            of the crew or other employee whose
States; and                                        contract of service is not entered into
   (b) The services are performed under            within the United States, and during
a contract of service, between the em-             the performance of which and while the
ployee and the employer, which is en-              employee is employed on the vessel or
tered into within the United States, or            aircraft it does not touch at a port
during the performance of the contract             within the United States, do not con-
under which the services are performed             stitute employment under this sub-
and while the employee is employed on              paragraph, notwithstanding services

                                              36
Internal Revenue Service, Treasury                                             § 31.3121(b)–4

performed by other members of the                  § 31.3121(b)–4 Employment;         excepted
crew or other employees on or in con-                   services in general.
nection with the vessel or aircraft may
                                                     (a) Services performed by an em-
constitute employment.
                                                   ployee for an employer do not con-
   (v) A vessel includes every descrip-
tion of watercraft, or other contriv-              stitute employment for purposes of the
ance, used as a means of transportation            taxes if they are specifically excepted
on water. An aircraft includes every               from employment under any of the
description of craft, or other contriv-            numbered paragraphs of section 3121(b).
ance, used as a means of transportation            Services so excepted do not constitute
through the air. In the case of an air-            employment for purposes of the taxes
craft, the term ‘‘port’’ means an air-             even though they are performed within
port. An airport means an area on land             the United States, or are performed
or water used regularly by aircraft for            outside the United States on or in con-
receiving or discharging passengers or             nection with an American vessel or
cargo. For definitions of ‘‘American               American aircraft, or are performed
vessel’’ and ‘‘American aircraft’’, see            outside the United States by a citizen
§ 31.3121(f)–1.                                    of the United States for an American
   (vi) With respect to services per-              employer. If not otherwise provided in
formed outside the United States on or             the regulations relating to the num-
in connection with an American vessel              bered paragraphs of section 3121(b),
or American aircraft, the citizenship or           such regulations apply to services per-
residence of the employee is immate-               formed after 1954.
rial, and the citizenship or residence of
                                                     (b) The exception attaches to the
the employer is material only in case it
                                                   services performed by the employee
has a bearing in determining whether a
vessel is an American vessel.                      and not to the employee as an indi-
   (3) By a citizen of the United States as        vidual; that is, the exception applies
an employee for an American employer.              only to the services in an excepted
Services performed after 1954 outside              class rendered by the employee.
the United States by a citizen of the                 Example. A is an individual who is em-
United States as an employee for an                ployed part time by B to perform services
American employer constitute employ-               which are specifically excepted from employ-
ment provided the services are not spe-            ment under one of the numbered paragraphs
cifically excepted under section 3121(b).          of section 312(b). A is also employed by C
For definitions of ‘‘citizen of the                part time to perform services which con-
United States’’ and ‘‘American em-                 stitute employment. While no tax liability is
ployer’’, see §§ 31.3121(e)–1 and 3121 (h)–        incurred with respect to A’s remuneration
1, respectively.                                   for services performed in the employ of B
   (4) By a citizen of the United States as        (the services being excepted from employ-
                                                   ment), the exception does not embrace the
an employee for a foreign subsidiary cor-
                                                   services performed by A in the employ of C
poration. For provisions relating to the
                                                   (which constitute employment) and the
extension of the Federal old-age, sur-             taxes attached with respect to the wages (see
vivors, and disability insurance system            § 31.3121(a)–1) for such services.
established by title II of the Social Se-
curity Act to certain services not con-               (c) For provisions relating to the cir-
stituting employment which are per-                cumstances under which services which
formed outside the United States by                are excepted are nevertheless deemed
citizens of the United States in the em-           to be employment, and relating to the
ploy of a foreign subsidiary of a domes-           circumstances under which services
tic corporation, see section 3121(1) and           which are not excepted are neverthe-
Part 36 of this chapter (Regulations               less deemed not to be employment, see
Relating to Contract Coverage of Em-               § 31.3121(c)–1.
ployees of Foreign Subsidiaries).
                                                   [T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as         amended by T.D. 6744, 29 FR 8310, July 2,
amended by T.D. 6744, 29 FR 8309, July 2,          1964]
1964]




                                              37
§ 31.3121(b)(1)–1                                                26 CFR Ch. I (4–1–99 Edition)

§ 31.3121(b)(1)–1 Certain services per-             nection with the production or har-
     formed by foreign agricultural                 vesting of crude gum (oleoresin) from a
     workers, or performed before 1959              living tree or the processing of such
     in connection with oleoresinous                crude gum into gum spirits of turpen-
     products.
                                                    tine and gum rosin, provided the proc-
   (a) Services of workers from Mexico.             essing is carried on by the original pro-
Services performed before 1965 by for-              ducer of the crude gum, are expected
eign agricultural workers from the Re-              from employment. However, the serv-
public of Mexico under contracts en-                ices to which this paragraph relates
tered into in accordance with title V of            constitute agricultural labor as defined
the Agricultural Act of 1949, as amend-             in section 3121(g) (see paragraph (d) of
ed, are excepted from employment.                   § 31.3121(g)–1). Thus, any cash remu-
Contracts entered into pursuant to the              neration paid for such services, to the
provisions of such title V may provide              extent that the services are deemed to
for the performance only of services                constitute employment by reason of
which constitute ‘‘agricultural employ-             the rules relating to included and ex-
ment’’. The term ‘‘agricultural employ-
                                                    cluded services continued in section
ment’’ includes certain services which
                                                    3121(c) (see § 31.3121(c)–1), is taken into
do not constitute ‘‘agricultural labor’’
                                                    account in applying the test prescribed
as that term is defined in section
                                                    in section 3121(a)(8)(B) for determining
3121(g) (see § 31.3121(g)–1. For purposes
                                                    whether cash remuneration paid for ag-
of title V of the Agricultural Act of
1949, as amended, the term ‘‘agricul-               ricultural labor constitutes wages (see
tural employment’’ includes services or             paragraph (c) of § 31.3121(a)(8)–1).
activities included within the provi-                  (e) Cross-reference. See paragraph (b)
sions of section 3(f) of the Fair Labor             of § 31.3121(b)–2 for provisions relating
Standards Act of 1938, as amended, or               to the status of services of the char-
section 3121(g) of the Internal Revenue             acter to which paragraphs (a) and (b) of
Code. Under section 507 of the Agricul-             this section apply which were per-
tural Act of 1949, as amended, and as in            formed before 1955 and the remunera-
effect before October 3, 1961, the term             tion for which is paid after 1954.
‘‘agricultural employment’’ included                [T.D. 6744, 29 FR 8310, July 2, 1964]
also horticultural employment, cotton
ginning, compressing and storing,                   § 31.3121(b)(2)–1 Domestic service per-
crushing of oil seeds, and the packing,                  formed by students for certain col-
canning, freezing, drying, or other                      lege organizations.
processing of perishable or seasonable
                                                      (a) Services of a household nature
agricultural products.
                                                    performed in or about the club rooms
   (b) Services of workers from British
                                                    or house of a local college club, or in or
West Indies. Services performed by a
                                                    about the club rooms or house of a
foreign agricultural worker lawfully
                                                    local chapter of a college fraternity or
admitted to the United States from the
Bahamas, Jamaica, or the other Brit-                sorority, by a student who is enrolled
ish West Indies, on a temporary basis               and regularly attending classes at a
to perform form agricultural labor are              school, college, or university are ex-
excepted from employment.                           cepted from employment. For purposes
   (c) Services performed after 1956 by for-        of this exception, the statutory tests
eign workers. Services performed after              are the type of services performed by
1956 by a foreign agricultural worker               the employee, the character of the
lawfully admitted to the United States              place where the services are performed,
from any foreign country or possession              and the status of the employee as a
thereof, including the Republic of Mex-             student enrolled and regularly attend-
ico, on a temporary basis to perform                ing classes at a school, college, or uni-
agricultural labor are excepted from                versity.
employment.                                           (b) In general, services of a household
   (d) Services performed before 1959 in            nature in or about the club rooms or
connection with the production or har-              house of a local college club or local
vesting of certain oleoresinous products.           chapter of a college fraternity or soror-
Services performed before 1959 in con-              ity include services rendered by cooks,

                                               38
Internal Revenue Service, Treasury                                        § 31.3121(b)(3)–1

waiters, butlers, maids, janitors, laun-          quires the personal care and super-
dresses, furnacemen, handymen, gar-               vision of an adult for at least 4 contin-
deners,    housekeepers,       and house-         uous weeks in the calendar quarter in
mothers.                                          which the services are rendered; and (b)
  (c) A local college club or local chap-         the employer is during the calendar
ter of a college fraternity or sorority           quarter in which the services are ren-
does not include an alumni club or                dered:
chapter. If the club rooms or house of              (1) A widow or widower;
a local college club or local chapter of            (2) A divorced person who has not re-
a college fraternity or sorority is used          married; or
primarily for the purpose of supplying              (3) A married person who has a
board or lodging to students or the               spouse living in the home who has a
public as a business enterprise, the              mental or physical condition which re-
services performed therein are not                sults in such spouse’s being incapable
within the exception.                             of caring for such child for at least 4
  (d) The term ‘‘school, college, or uni-         continuous weeks in the calendar quar-
versity’’ within the meaning of this ex-          ter in which the services are rendered;
ception is to be taken in its commonly            and
or generally accepted sense.                        (3) Services performed by a son or
  (e) Services of a household nature are          daughter under the age of 21 in the em-
not within the exception if performed             ploy of his or her father or mother.
in or about rooming or lodging houses,              (b) Under paragraph (a) (1) and (2) (i)
boarding houses, clubs (except local              of this section, the exception is condi-
college clubs) hotels, hospitals, elee-           tioned solely upon the family relation-
mosynary institutions, or commercial              ship between the employee and the in-
offices or establishments.                        dividual employing him. Under para-
  (f) For provisions relating to domes-           graph (a)(2) (ii) and (iii) of this section,
tic service in a private home of the em-          in addition to the family relationship,
ployer, see § 31.3121(a)(7)–1.                    there is a further requirement that the
                                                  services performed after 1960 and before
§ 31.3121(b)(3)–1 Family employment.              1968 for purposes of paragraph (a)(2)(ii)
   (a) Certain services are excepted              and after 1967 for purposes of paragraph
from employment because of the exist-             (a)(2)(iii) shall be services not in the
ence of a family relationship between             course of the employer’s trade or busi-
the employee and the individual em-               ness or shall be domestic service in a
ploying him. The exceptions are as fol-           private home of the employer. The
lows:                                             terms ‘‘services not in the course of the
   (1) Services performed by an indi-             employer’s trade or business’’ and ‘‘do-
vidual in the employ of his or her                mestic service in a private home of the
spouse;                                           employer’’ have the same meaning as
   (2) (i) Services performed before 1961         when used in § 31.3121(a) (7)–1, except
by a father or mother in the employ of            that it is immaterial under paragraphs
his or her son or daughter;                       (a)(2) (ii) and (iii) of this section wheth-
   (ii) Services not in the course of the         er or not such services are performed
employer’s trade or business, or domes-           on a farm operated for profit. The mere
tic service in a private home of the em-          fact that a mental or physical dis-
ployer, performed after 1960 but prior            ability, whether temporary or perma-
to 1968 by a father or mother in the em-          nent, renders a child or spouse incapa-
ploy of his or her son or daughter;               ble of self-support does not necessarily
   (iii) Services not in the course of the        mean that the child requires the per-
employer’s trade or business, or domes-           sonal care and supervision of an adult
tic service in a private home of the em-          or that the spouse is incapable of car-
ployer, performed after 1967 by a father          ing for a child within the meaning of
or mother in the employ of his or her             paragraph (a)(2)(iii) of this section. A
son or daughter unless (a) the employer           written statement by a doctor of the
has a child (including an adopted child           existence of the mental or physical
or stepchild) living in his or her home           condition of the child or spouse which
who is under age 18 or who has a men-             states that the child requires the per-
tal or physical condition which re-               sonal care and supervision of an adult

                                             39
§ 31.3121(b)(4)–1                                                26 CFR Ch. I (4–1–99 Edition)

or that the spouse is incapable of car-                the crew of the aircraft are performed
ing for a child and which sets forth the               on and in connection with such air-
period of time during which the condi-                 craft. Services may be performed on
tion has existed and is likely to exist                the vessel or aircraft, however, which
will usually be sufficient evidence to                 have no connection with it, as in the
establish the existence and duration of                case of services performed by an em-
the condition at the time of the state-                ployee while on the vessel or aircraft
ment. Under paragraph (a)(3) of this                   merely as a passenger in the general
section, in addition to the family rela-               sense. For example, the services of a
tionship, there is a further requirement               buyer in the employ of a department
that the son or daughter shall be under                store while he is a passenger on a ves-
the age of 21, and the exception con-                  sel are not in connection with the ves-
tinues only during the time that the                   sel.
son or daughter is under the age of 21.                  (c) The expression ‘‘on or in connec-
  (c) Services performed in the employ                 tion with’’ refers not only to services
of a corporation are not within the ex-                performed on the vessel or aircraft but
ception. Services performed in the em-                 also to services connected with the ves-
ploy of a partnership are not within                   sel or aircraft which are not actually
the exception unless the requisite fam-                performed on it (for example, shore
ily relationship exists between the em-                services performed as officers or mem-
ployee and each of the partners com-                   bers of the crew, or as employees of
prising the partnership.                               concessionaires, of the vessel).
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
                                                         (d) Services performed within the
amended by T.D. 6744, 29 FR 8311, July 2, 1964;        United States on or in connection with
T.D. 7374, 40 FR 30950, July 24, 1975]                 a non-American vessel or aircraft for
                                                       an employer by an employee who is not
§ 31.3121(b)(4)–1 Services    performed                a citizen of the United States are ex-
     on or in connection with a non-                   cepted from employment, irrespective
     American vessel or aircraft.                      of whether the employer is or is not an
   (a) Services performed within the                   American employer, provided the em-
United States by an employee for an                    ployee also is employed by such em-
employer ‘‘on or in connection with’’ a                ployer on and in connection with the
vessel not an American vessel, or ‘‘on                 vessel or aircraft when outside the
or in connection with’’ an aircraft not                United States. Services performed
an American aircraft, are excepted                     within the United States on or in con-
from employment if—                                    nection with a non-American vessel or
   (1) The employee is employed by such                aircraft by an employee for an em-
employer ‘‘on and in connection with’’                 ployer who is not an American em-
such vessel or aircraft when outside                   ployer also are excepted from employ-
the United States, and                                 ment, irrespective of whether the em-
   (2) (i) The employee is not a citizen               ployee is or is not a citizen of the
of the United States, or (ii) the em-                  United States, provided the employee
ployer is not an American employer.                    also is employed by such employer on
   (b) An employee performs services on                and in connection with the vessel or
and in connection with the vessel or                   aircraft when outside the United
aircraft if he performs services on the                States. Services performed within the
vessel or aircraft when outside the                    United States on or in connection with
United States which are also in connec-                a non-American vessel or aircraft for
tion with the vessel or aircraft. Serv-                an American employer by an employee
ices performed on the vessel outside                   who is a citizen of the United States
the United States by employees as offi-                are not excepted from employment
cers or members of the crew, or by em-                 under section 3121(b)(4), irrespective of
ployees of concessionaires, of the ves-                whether the employee is employed by
sel, for example, are performed under                  such employer on and in connection
such circumstances, since such services                with the vessel or aircraft when out-
are also connected with the vessel.                    side the United States. Further, sec-
Similarly, services performed on the                   tion 3121(b)(4) does not except from em-
aircraft outside the United States by                  ployment services performed within
employees as officers or members of                    the United States for an employer,

                                                  40
Internal Revenue Service, Treasury                                          § 31.3121(b)(6)–1

whether or not an American employer,                 formed in the employ of an instrumen-
on or in connection with a non-Amer-                 tality of the United States unless the
ican vessel or aircraft by an employee,              Congress has granted to such instru-
whether or not a citizen of the United               mentality a specific exemption from
States, who is not also employed by                  the tax imposed by section 3111 or the
such employer on and in connection                   corresponding section of prior law. For
with the vessel or aircraft when out-                provisions which make general exemp-
side the United States.                              tions from Federal taxation ineffectual
   (e) Services performed outside the                as to the employer tax imposed by sec-
United States on or in connection with               tion 3111, see § 31.3112–1. For other ex-
a vessel not an American vessel, or on               ceptions from employment applicable
or in connection with an aircraft not                with respect to services performed in
an American aircraft, by a citizen of                the employ of an instrumentality of
the United States as an employee for                 the United States, see § 31.3121(b)(6)–1.
an American employer are not ex-
cepted from employment under section                 § 31.3121(b)(6)–1 Services in employ of
3121(b)(4), irrespective of whether the                   United States or instrumentality
                                                          thereof.
employee is employed on and in con-
nection with such vessel or aircraft                   (a) In general. This section relates to
when outside the United States. Serv-                services performed in the employ of the
ices performed outside the United                    United States Government or in the
States on or in connection with a ves-               employ of an instrumentality of the
sel not an American vessel or on or in               United States. Particular services
connection with an aircraft not an                   which are not excepted from employ-
American aircraft, either by an em-                  ment under one rule set forth in this
ployee who is not a citizen of the                   section may nevertheless be excepted
United States or for an employer who                 under another rule set forth in this sec-
is not an American employer, do not,                 tion or under § 31.3121(b)(5)–1, relating
in any event, constitute employment.                 to services in the employ of an instru-
See paragraph (c) of § 31.3121(b)–3, relat-          mentality of the United States specifi-
ing to services performed outside the                cally exempted from the employer tax.
United States which constitute em-                   Moreover, services performed in the
ployment.                                            employ of the United States or of any
   (f)   See    paragraph      (c)(2)(v)   of        instrumentality thereof which are not
§ 31.3121(b)–3 for definitions of ‘‘vessel’’         excepted from employment under para-
and ‘‘aircraft’’, § 31.3121(f)–1, for defini-        graph (5) or (6) of section 3121(b) may
tions of ‘‘American vessel’’ and ‘‘Amer-             nevertheless be excepted under some
ican aircraft’’, § 31.3121(e)–1, for defini-         other paragraph of such section. For
tion of ‘‘citizen of the United States’’,            provisions relating generally to the ap-
and § 31.3121(h)–1, for definition of                plication of the taxes in the case of
‘‘American employer’’.                               services performed in the employ of the
                                                     United States or a wholly owned in-
§ 31.3121(b)(5)–1 Services in employ of              strumentality thereof, see 3122. For
     an instrumentality of the United                provisions relating to the computation
     States specifically exempted from               of remuneration for service performed
     the employer tax.                               by an individual as a member of a uni-
   Services performed in the employ of               formed service or for service performed
an instrumentality of the United                     by an individual as a volunteer or vol-
States are excepted from employment                  unteer leader within the meaning of
if such instrumentality is exempt from               the Peace Corps Act, see § 31.3121(i)–2
the employer tax imposed by section                  and § 31.3121(i)–3, respectively.
3111 by virtue of any other provision of               (b) Services covered under a retirement
law which specifically refers to such                system established by a law of the United
section 3111 or the corresponding sec-               States. Services performed in the em-
tion of prior law (section 1410 of the In-           ploy of the United States or in the em-
ternal Revenue Code of 1939) in grant-               ploy of any instrumentality thereof are
ing exemption from the employer tax.                 excepted from employment under sec-
This exception does not operate to ex-               tion 3121(b)(6)(A) if such services are
clude from employment services per-                  covered under a law enacted by the

                                                41
§ 31.3121(b)(6)–1                                             26 CFR Ch. I (4–1–99 Edition)

Congress of the United States which                It is immaterial, for purposes of this
specifically provides for the establish-           exception, whether the exemption from
ment of a retirement system for em-                the employer tax on December 31, 1950,
ployees of the United States or of such            resulted, or would have resulted, from
instrumentality. Determinations as to              a tax exemption as such in effect on
whether services are covered by a re-              December 31, 1950, or from the provi-
tirement system of the requisite char-             sions of section 1426(b) (6) of the Inter-
acter are to be made as of the time                nal Revenue Code of 1939 in effect on
such services are performed. Services              that date, relating to the exception
of an employee who has an option to                from employment of services per-
have his services covered under a re-              formed in the employ of certain instru-
tirement system are not covered under              mentalities of the United States.
such retirement system unless and                    (3) Determinations as to whether
until he exercises such option. The test           services performed in the employ of an
is whether particular services per-                instrumentality referred to in para-
formed by an employee are covered by               graph (c)(1) or (2) of this section are
a retirement system of the requisite               covered by a retirement system estab-
character rather than whether the po-              lished by such instrumentality are to
sition in which such services are per-             be made as of the time such services
formed is covered by such retirement               are performed. Services of an employee
system.                                            who has an option to have his services
   (c) Services performed for an instrumen-        covered under a retirement system es-
tality not subject to employer tax on De-          tablished by the instrumentality are
cember 31, 1950, and covered under a re-           not covered under such retirement sys-
tirement system established by such in-            tem unless and until he exercises such
strumentality. (1) Subject to the provi-           option. The test is whether particular
sions of subparagraph (4) of this para-            services performed by an employee are
graph, services performed in the em-               covered by a retirement system estab-
ploy of an instrumentality of the                  lished by the instrumentality rather
United States are excepted from em-                than whether the position in which
ployment under section 3121(b)(6)(B)               such services are performed is covered
if—                                                by such retirement system.
                                                     (4) The exception from employment
   (i) The particular instrumentality
                                                   provided in section 3121(b)(6)(B) has no
was not subject on December 31, 1950,
                                                   application with respect to any of the
to the employer tax imposed by section
                                                   following classes of services:
1410 of the Internal Revenue Code of
                                                     (i) Services performed in the employ
1939, and
                                                   of a corporation which is wholly owned
   (ii) The services are covered by a re-          by the United States;
tirement system established by such                  (ii) Services performed in the employ
instrumentality.                                   of a production credit association, a
   (2) If the particular instrumentality           Federal Reserve Bank, or a Federal
was not in existence on December 31,               Credit Union; services performed before
1950, but is created thereafter under a            December 31, 1959, in the employ of a
law which was in effect on December                national farm loan association; serv-
31, 1950, services performed in the em-            ices performed after December 30, 1959,
ploy of such instrumentality are ex-               in the employ of a Federal land bank
cepted from employment (unless other-              association; services performed after
wise provided in paragraph (c)(4) of this          December 31, 1959, in the employ of a
section) if—                                       Federal land bank, a Federal inter-
   (i) The instrumentality had it been in          mediate credit bank, or a bank for co-
existence on December 31, 1950, would              operatives; services performed after
not have been subject on that date to              December 31, 1972, in the employ of a
the employer tax imposed by section                Federal home loan bank; and services
1410 of the Internal Revenue Code of               performed after December 31, 1966, and
1939, and                                          before January 1, 1973, in the employ of
   (ii) The services are covered by a re-          a Federal home loan bank, in the case
tirement system established by such                of individuals who are in such employ
instrumentality.                                   on the latter date, provided that an

                                              42
Internal Revenue Service, Treasury                                           § 31.3121(b)(6)–1

amount equal to the taxes imposed by               therapists, assigned or attached to a
sections 3101 and 3111 with respect to             hospital, clinic, or medical or dental
all such services performed by all such            laboratory operated by any depart-
individuals are paid under the provi-              ment, agency, or instrumentality of
sions of section 3122 by July 1, 1973;             the U.S. Government, or by certain
  (iii) Services performed in the em-              other student employees described in
ploy of a State, county, or community              section 5351(2) of title 5, United States
committee under the Commodity Sta-                 Code.
bilization Service;                                  (ii) The provisions of paragraph
  (iv) Services performed by a civilian            (d)(4)(i) of this section have no applica-
employee, not compensated from funds
                                                   tion to services performed after 1965 by
appropriated by the Congress, in the
                                                   medical or dental interns or by medical
Army and Air Force Exchange Service,
Army and Air Force Motion Picture                  or dental residents in training.
Service, Navy Exchanges, Marine Corps                (5) Services performed by an indi-
Exchanges, or other activities, con-               vidual as an employee serving on a
ducted by an instrumentality of the                temporary basis in case of fire, storm,
United States subject to the jurisdic-             earthquake, flood, or other similar
tion of the Secretary of Defense, at in-           emergency; and
stallations of the Department of De-                 (6) (i) Except as provided in para-
fense for the comfort, pleasure, con-              graph (d)(6)(ii) of this section, services
tentment, and mental and physical im-              performed by an individual to whom
provement of personnel of such Depart-             subchapter III of chapter 83 of title 5,
ment; or                                           United States Code (civil service re-
  (v) Services performed by a civilian             tirement) does not apply because he is,
employee, not compensated from funds               with respect to such services, subject
appropriated by the Congress, in the               to another retirement system, estab-
Coast Guard Exchanges or other activi-             lished either by a law of the United
ties, conducted by an instrumentality              States or by the agency or instrumen-
of the United States subject to the ju-            tality of the United States for which
risdiction of the Secretary of the                 such services are performed.
Treasury, at installations of the Coast
                                                     (ii) The provisions of paragraph
Guard for the comfort, pleasure, con-
tentment, and mental and physical im-              (d)(6)(i) of this section have no applica-
provement of personnel of the Coast                tion to service performed by an indi-
Guard.                                             vidual to whom subchapter III of chap-
  (d) Special classes of services. The fol-        ter 83 of title 5, United States Code
lowing classes of services performed ei-           (civil service retirement) does not
ther in the employ of the United States            apply because such individual is sub-
or in the employ of any instrumen-                 ject to the retirement system of the
tality thereof are excepted from em-               Tennessee Valley Authority, if such
ployment under section 3121(b)(6)(C):              service is subject to the plan approved
  (1) Services performed as the Presi-             by the Secretary of Health and Human
dent or Vice President of the United               Services on December 28, 1956, pursuant
States or a Member, Delegate, or Resi-             to section 104 (i)(2) of the Social Secu-
dent Commissioner, of or to the Con-               rity Amendments of 1956 (70 Stat. 827).
gress of the United States;                        See section 201(m)(4) of such amend-
  (2) Services performed in the legisla-           ments for provisions relating to the
tive branch of the United States Gov-              timeliness of payment of tax with re-
ernment;                                           spect to remuneration paid before 1957
  (3) Services performed in a penal in-            for such services, and barring the impo-
stitution of the United States by an in-           sition of interest on the amount of any
mate thereof;                                      such tax due for any period before De-
  (4) (i) Except as provided in para-              cember 28, 1956.
graph (d)(4)(ii) of this section, services
performed by student nurses, medical               [T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
or dental interns, residents in training,          amended by T.D. 6744, 29 FR 8311, July 2, 1964;
student dietitians, student physical               T.D. 6983, 33 FR 18016, Dec. 4, 1968; T.D. 7373,
therapists, or student occupational                40 FR 30957, July 24, 1975]


                                              43
§ 31.3121(b)(7)–1                                              26 CFR Ch. I (4–1–99 Edition)

§ 31.3121(b)(7)–1 Services in employ of            instrumentality thereof, or by certain
     States or their political subdivi-            other student employees described in
     sions or instrumentalities.                   section 5351(2) of title 5, United States
   (a) In general. Except as provided in           Code. This subparagraph does not apply
other paragraphs of this section, serv-            to services performed by medical or
ices performed in the employ of any                dental interns or by medical or dental
State, any political subdivision of a              residents in training described in such
State, or any instrumentality of one or            section 5351(2).
more States or political subdivisions                (3) Services performed by an indi-
thereof which is wholly owned by one               vidual as an employee serving on a
or more States or political subdivisions           temporary basis in case of fire, storm,
are excepted from employment. For                  snow, earthquake, flood, or other simi-
the definition of the term ‘‘State’’, as           lar emergency.
used in this section, see § 31.3121(e)–1.            (4) Services performed by a member
   (b) Covered transportation service. The         of a board, committee, or council of the
exception from employment under sec-               District of Columbia, paid on a per
tion 3121(b)(7) does not apply to covered          diem, meeting, or other fee basis.
transportation service as defined in                 (e) Government of Guam. The excep-
section 3121(j). See that section and              tion from employment under section
31.3121(j)–1.                                      3121(b)(7) does not apply to services
   (c) Government of American Samoa.               performed after 1972 in the employ of
The exception from employment under                the Government of Guam or any in-
section 3121(b)(7) does not apply to               strumentality which is wholly owned
services performed after 1960 in the em-           thereby, by an employee properly clas-
ploy of the Government of American                 sified as a temporary or intermittent
Samoa, any political subdivision there-            employee, if such service is not covered
of, or any instrumentality of such Gov-            by a retirement system established by
ernment or political subdivision, or               a law of Guam. The preceding sentence
combination thereof, which is wholly               shall not apply to the services per-
owned thereby, performed by an officer             formed by an elected official or a mem-
or employee thereof (including a mem-              ber of the legislature or in a hospital or
ber of the legislature of such Govern-             penal institution by a patient or in-
ment or political subdivision).                    mate thereof. For purposes of this
   (d) District of Columbia. The exception         paragraph—
from      employment      under     section
                                                     (1) Any person whose services as an
3121(b)(7) does not apply to services
                                                   officer or employee of such Govern-
performed after September 30, 1965, in
                                                   ment or instrumentality is not covered
the employ of the District of Columbia
                                                   by a retirement system established by
or any instrumentality which is wholly
                                                   a law of the United States shall not,
owned thereby, if such service is not
                                                   with respect to such service, be re-
covered by a retirement system estab-
                                                   garded as an employee of the United
lished by a law of the United States.
                                                   States or any agency or instrumen-
Notwithstanding the preceding sen-
                                                   tality thereof, and
tence the following classes of services
performed either in the employ of the                (2) The remuneration for service de-
District of Columbia or in the employ              scribed in subparagraph (1) (including
of any instrumentality which is wholly             fees paid to a public official) shall be
owned thereby are excepted from em-                deemed to have been paid by such Gov-
ployment:                                          ernment or instrumentality.
   (1) Services performed in a hospital            [T.D. 6744, 29 FR 8312, July 2, 1964, as amend-
or penal institution by a patient or in-           ed by T.D. 6983, 33 FR 18016, Dec. 4, 1968; T.D.
mate thereof.                                      7373, 40 FR 30958, July 24, 1975]
   (2) Services performed by student
nurses, student dietitians, student                § 31.3121(b)(7)–2 Service by employees
physical therapists, or student occupa-                 who are not members of a public re-
tional therapists assigned or attached                  tirement system.
to a hospital, clinic, or medical or den-            (a) Table of contents. This paragraph
tal laboratory operated by the District            contains a listing of the major head-
of Columbia or by any wholly owned                 ings of this § 31.3121(b)(7)–2.

                                              44
Internal Revenue Service, Treasury                                              § 31.3121(b)(7)–2

§ 31.3121(b)(7)–2 Service by employees                foregoing that is wholly owned there-
   who are not members of a public retire-            by, after July 1, 1991, unless the em-
   ment system.                                       ployee is a member of a retirement sys-
                                                      tem of such State, political subdivision
  (a) Table of contents.                              or instrumentality at the time the
  (b) Introduction.                                   service is performed. An employee is
  (c) General rule.                                   not a member of a retirement system
  (1) Inclusion in employment of service by           at the time service is performed unless
employees who are not members of a retire-            at that time he or she is a qualified
ment system.
                                                      participant (as defined in paragraph (d)
  (2) Treatment of individuals employed in
more than one position.                               of this section) in a retirement system
  (d) Definition of qualified participant.            that meets the requirements of para-
  (1) General rule.                                   graph (e) of this section with respect to
  (2) Special rule for part time, seasonal and        that employee.
temporary employees.                                     (2) Treatment of individuals employed
  (3) Alternative lookback rule.                      in more than one position. Under section
  (4) Treatment of former participants.               3121(b)(7)(F), whether an employee is a
  (e) Definition of retirement system.                member of a retirement system is de-
  (1) Requirement that system provide re-             termined on an entity-by-entity rather
tirement-type benefits.
  (2) Requirement that system provide min-
                                                      than a position-by-position basis. Thus,
imum level of benefits.                               if an employee is a member of a retire-
  (f) Transition rules.                               ment system with respect to service he
  (1) Application of qualified participant            or she performs in one position in the
rules during 1991.                                    employ of a State, political subdivision
  (2) Additional transition rules for plans in        or instrumentality thereof, the em-
existence on November 5, 1990.                        ployee is generally treated as a mem-
  (b)    Introduction.   Under   section              ber of a retirement system with respect
3121(b)(7)(F), wages of an employee of a              to all service performed for the same
State or local government are gen-                    State, political subdivision or instru-
erally subject to tax under FlCA after                mentality in any other positions. A
July 1, 1991, unless the employee is a                State is a separate entity from its po-
member of a retirement system main-                   litical subdivisions, and an instrumen-
tained by the State or local govern-                  tality is a separate entity from the
ment entity. This section 31.3121(b)(7)–              State or political subdivision by which
2 provides rules for determining wheth-               it is owned for purposes of this rule.
er an employee is a ‘‘member of a re-                 See paragraph (e)(2) of this section,
tirement system’’. These rules gen-                   however, for rules relating to service
erally treat an employee as a member                  and compensation required to be taken
of a retirement system if he or she par-              into account in determining whether
ticipates in a system that provides re-               an employee is a member of a retire-
                                                      ment system for purposes of this sec-
tirement benefits, and has an accrued
                                                      tion. This rule is illustrated by the fol-
benefit or receives an allocation under
                                                      lowing examples:
the system that is comparable to the
benefits he or she would have or re-                    Example 1. An individual is employed full-
ceive under Social Security. In the                   time by a county and is a qualified partici-
case of part-time, seasonal and tem-                  pant (as defined in paragraph (d) of this sec-
                                                      tion) in its retirement plan with regard to
porary employees, this minimum re-
                                                      such employment. In addition to this full-
tirement benefit is required to be non-               time employment, the individual is em-
forfeitable.                                          ployed part-time in another position with
  (c) General rule—(1) Inclusion in em-               the same county. The part-time position is
ployment of service by employees who are              not covered by the county retirement plan,
not members of a retirement system. Ex-               however, and neither the service nor the
cept in the case of service described in              compensation in the part-time position is
sections 3121(b)(7)(F) (i) through (v),               considered in determining the employee’s re-
                                                      tirement benefit under the county retire-
the exception from employment under
                                                      ment plan. Nevertheless, if the retirement
section 3121(b)(7) does not apply to                  plan meets the requirements of paragraph (e)
service in the employ of a State or any               of this section with respect to the individual,
political subdivision thereof, or of any              the exclusion from employment under sec-
instrumentality of one or more of the                 tion 3121(b)(7) applies to both the employee’s

                                                 45
§ 31.3121(b)(7)–2                                                26 CFR Ch. I (4–1–99 Edition)
full-time and part-time service with the             given credit under the plan for all service
county.                                              with the employer (i.e., if service is credited
  Example 2. An individual is employed full-         for the 6-month waiting period). This is true
time by a State and is a member of its re-           even if the employee makes a required con-
tirement plan. The individual is also em-            tribution in order to gain the retroactive
ployed part-time by a city located in the            credit. The same result also occurs if the em-
State, but does not participate in the city’s        ployee can elect to participate in the plan
retirement plan. The services of the indi-           before the end of the 6-month waiting period,
vidual for the city are not excluded from em-        but does not elect to do so.
ployment under section 3121(b)(7), because             Example 2. A political subdivision main-
the determination of whether services con-           tains a defined benefit plan that is a retire-
stitute employment for such purposes is              ment system within the meaning of para-
made separately with respect to each polit-          graph (e)(1) of this section. Under the terms
ical subdivision for which services are per-         of the plan, service during a plan year is not
formed.                                              credited for accrual purposes unless a partic-
                                                     ipant has at least 1,000 hours of service dur-
   (d) Definition of qualified participant—          ing the year. Benefits that accrue only upon
(1) General rule—(i) Defined benefit re-             satisfaction of this 1,000-hour requirement
tirement systems. Whether an employee                may not be taken into account in deter-
is a qualified participant in a defined              mining whether an employee is a qualified
benefit retirement system is deter-                  participant in the plan before the 1,000-hour
mined as services are performed. An                  requirement is satisfied.
employee is a qualified participant in a               (ii) Defined contribution retirement sys-
defined benefit retirement system                    tems. Whether an employee is a quali-
(within the meaning of paragraph (e)(1)              fied participant in a defined contribu-
of this section) with respect to services            tion retirement system is determined
performed on a given day if, on that                 as services are performed. An employee
day, he or she is or ever has been an ac-            is a qualified participant in a defined
tual participant in the retirement sys-              contribution or other individual ac-
tem and, on that day, he or she actu-                count retirement system (within the
ally has a total accrued benefit under               meaning of paragraph (e)(1) of this sec-
the retirement system that meets the                 tion) with respect to services per-
minimum retirement benefit require-                  formed on a given day if, on that day,
ment of paragraph (e)(2) of this section.            he or she has satisfied all conditions
An employee may not be treated as an                 (other than vesting) for receiving an al-
actual participant or as actually hav-               location to his or her account (exclu-
ing an accrued benefit for this purpose              sive of earnings) that meets the min-
to the extent that such participation                imum retirement benefit requirement
or benefit is subject to any conditions              of paragraph (e)(2) of this section with
(other than vesting), such as a require-             respect to compensation during any pe-
ment that the employee attain a min-                 riod ending on that day and beginning
imum age, perform a minimum period                   on or after the beginning of the plan
of service, make an election in order to             year of the retirement system. This is
participate, or be present at the end of             the case regardless of whether the allo-
the plan year in order to be credited                cations were made or accrued before
with an accrual, that have not been                  the     effective    date     of   section
satisfied. The rules of this paragraph               3121(b)(7)(F). This rule is illustrated by
(d)(1)(i) are illustrated by the following           the following examples:
examples:
                                                       Example 1. A State-owned hospital main-
  Example 1. A State maintains a defined             tains a nonelective defined contribution plan
benefit plan that is a retirement system             that is a retirement system within the
within the meaning of paragraph (e)(1) of            meaning of paragraph (e)(1) of this section.
this section. Under the terms of the plan,           Under the terms of the plan, employees must
employees in positions covered by the plan           be employed on the last day of a plan year in
must complete 6 months of service before be-         order to receive any allocation for the year.
coming participants. The exception from em-          Employees may not be treated as qualified
ployment in section 3121(b)(7) does not apply        participants in the plan before the last day
to services of an employee during the em-            of the year.
ployee’s 6 months of service prior to his or           Example 2. Assume the same facts as in Ex-
her initial entry into the plan. The same re-        ample 1 except that, under the terms of the
sult occurs even if, upon the satisfaction of        plan, an employee who terminates service
this service requirement, the employee is            before the end of a plan year receives a pro

                                                46
Internal Revenue Service, Treasury                                            § 31.3121(b)(7)–2
rata portion of the allocation he or she               A part-time, seasonal or temporary
would have received at the end of the year,            employee is generally not a qualified
e.g., based on compensation earned since the           participant on a given day unless any
beginning of the plan year. If the pro rata al-
                                                       benefit relied upon to meet the require-
location available on a given day would meet
the minimum retirement benefit require-                ments of paragraph (d)(1) of this sec-
ment of paragraph (e)(2) of this section with          tion is 100-percent nonforfeitable on
respect to compensation from the beginning             that day. This requirement may be ap-
of the plan year through that day (or some             plied solely to the portion of an em-
later day), employees are treated as qualified         ployee’s benefit under the retirement
participants in the plan on that day.                  system attributable to compensation
  Example     3.  A    political   subdivision         and service while an employee is a
maintalns an elective defined contribution
                                                       part-time, seasonal or temporary em-
plan that is a retirement system within the
meaning of paragraph (e)(1) of this section.           ployee, provided that such service is
The plan has a calendar year plan year and             taken into account with respect to the
two open seasons—in December and June—                 remaining portion of the benefit for
when employees can change their contribu-              vesting purposes. Rules similar to the
tion elections. In December, an employee               rules in section 411(a)(11) are applicable
elects not to contribute to the plan. In June,         in determining whether a benefit is
the employee elects (beginning July 1) to              nonforfeitable. Thus, a benefit does not
contribute a uniform percentage of com-
                                                       fail to be nonforfeitable solely because
pensation for each pay period to the plan for
the remainder of the plan year. The em-                it can be immediately distributed upon
ployee is not a qualified participant in the           separation of service without the con-
plan during the period January–June, be-               sent of the employee, provided that the
cause no allocations are made to the employ-           present value of the benefit does not
ee’s account with respect to compensation              exceed the cash-out limit in effect
during that time, and it is not certain at             under § 1.411(a)–11T(c)(3)(ii) of this
that time that any allocations will be made.           chapter.
If the level of contributions during the pe-
                                                         (ii) Treatment of employees entitled to
riod July–December meets the minimum re-
tirement benefit requirement of paragraph              certain distributions upon death or sepa-
(e)(2) of this section with respect to com-            ration from service. A part-time, sea-
pensation during that period, however, the             sonal or temporary employee’s benefit
employee is treated as a qualified partici-            under a retirement system is consid-
pant during that period.                               ered nonforfeitable within the meaning
  Example 4. Assume the same facts as in Ex-           of paragraph (d)(2)(i) of this section on
ample 3, except that the plan allows partici-          a given day if on that day the employee
pants to cancel their elections in cases of            is unconditionally entitled under the
economic hardship. In October, the employee
suffers an economic hardship and cancels the
                                                       retirement system to a single-sum dis-
election (effective November 1). If the con-           tribution on account of death or sepa-
tributions during the period July–October              ration from service of an amount that
are high enough to meet the minimum re-                is at least equal to 7.5 percent of the
tirement benefit requirement of paragraph              participant’s compensation (within the
(e)(2) of this section with respect to com-            meaning of paragraph (e)(2)(iii)(B) of
pensation during that period, the employee             this section) for all periods of credited
is treated as a qualified participant during           service taken into account in deter-
that period. In addition, if the contributions
during the period July–October are high
                                                       mining whether the employee’s benefit
enough to meet the requirements for the en-            under the retirement system meets the
tire period July–December, the employee is             minimum retirement benefit require-
treated as a qualified participant in the plan         ment of paragraph (e)(2) of this section.
throughout the period July–December, even              An employee will be considered to be
though no allocations are made to the em-              unconditionally entitled to a single-
ployee’s account in the last two months of             sum distribution notwithstanding the
the year. There is no requirement that the             fact that the distribution may be for-
period used to determine whether an em-
ployee is a qualified participant on a given
                                                       feitable (in whole or in part) upon a
day remain the same from day to day, as                finding of such employee’s criminal
long as the period begins on or after the be-          misconduct. The participant must be
ginning of the plan year and ends on the date          entitled to interest on the distribut-
the determination is being made.                       able amount through the date of dis-
  (2) Special rule for part-time, seasonal             tribution, at a rate meeting the re-
and temporary employees—(i) In general.                quirements of paragraph (e)(2)(iii)(C) of

                                                  47
§ 31.3121(b)(7)–2                                               26 CFR Ch. I (4–1–99 Edition)

this section, as part of the single sum.                (B) Definition of seasonal employee.
See paragraph (f)(2)(i)(C) for a transi-              For purposes of this section, a seasonal
tion rule relating to this nonforfeitable             employee is any employee who nor-
benefit safe harbor. The rule of this                 mally works on a full-time basis less
paragraph (d)(2)(ii) is illustrated by the            than 5 months in a year. Thus, for ex-
following example:                                    ample, individuals who are hired by a
  Example. An employee is required to con-            political subdivision during the tax re-
tribute 7.5 percent of his or her compensa-           turn season in order to process incom-
tion to a State’s defined benefit plan each           ing returns and work full-time over a 3-
year. The contribution is ‘‘picked up’’ by the        month period are seasonal employees.
employer in accordance with section 414(h).
                                                        (C) Definition of temporary employee.
Under the plan, these amounts plus interest
accrued since the date each amount was con-           For purposes of this section, a tem-
tributed are refundable to the employee in            porary employee is any employee per-
all cases upon the employee’s death or sepa-          forming services under a contractual
ration from service with the employer. If the         arrangement with the employer of 2
interest rate meets the requirements of para-         years or less duration. Possible con-
graph (e)(2)(iii)(C) of this section, then the
                                                      tract extensions may be considered in
employee’s benefits under the plan are con-
sidered nonforfeitable and thus meet the re-          determining the duration of a contrac-
quirement of paragraph (d)(2)(i) of this sec-         tual arrangement, but only if, under
tion. Of course, the benefit under the plan           the facts and circumstances, there is a
must still meet the minimum retirement                significant likelihood that the employ-
benefit requirement for defined benefit plans         ee’s contract will be extended. Future
of paragraph (e)(2)(ii) of this section.              contract extensions are considered sig-
  (iii) Definitions of part-time, seasonal            nificantly likely to occur for purposes
and temporary employee—(A) Definition                 of this rule if on average 80 percent of
of part-time employee. For purposes of                similarly situated employees (i.e.,
this section, a part-time employee is                 those in the same or a similar job clas-
any employee who normally works 20                    sification with expiring employment
hours or less per week. A teacher em-                 contracts) have had bona fide offers to
ployed by a post-secondary educational                renew their contracts in the imme-
institution (e.g., a community or jun-                diately preceding 2 academic or cal-
ior college, post-secondary vocational                endar years. In addition, future con-
school, college, university or graduate               tract extensions are considered signifi-
school) is not considered a part-time                 cantly likely to occur if the employee
employee for purposes of this section if              with respect to whom the determina-
he or she normally has classroom hours                tion is being made has a history of con-
of one-half or more of the number of                  tract extensions with respect to his or
classroom hours designated by the edu-                her current position. An employee is
cational institution as constituting                  not considered a temporary employee
full-time employment, provided that                   for purposes of this rule solely because
such designation is reasonable under                  he or she is included in a unit of em-
all the facts and circumstances. In ad-               ployees covered by a collective bar-
dition, elected officials and election                gaining agreement of 2 years or less du-
workers (otherwise described in section               ration.
3121(b)(7)(F)(iv) but paid in excess of                 (D) Treatment of employees partici-
$100 annually) are not considered part-               pating in certain systems. Whether an
time, seasonal or temporary employees                 employee is a part-time, seasonal or
for purposes of this section. The rules               temporary employee with respect to al-
of this paragraph (d)(2)(iii) are illus-              locations or benefits under a retire-
trated by the following example:
                                                      ment system is generally determined
  Example. A community college treats a               based on service in the position in
teacher as a full-time employee if the teach-         which the allocations or benefits were
er is assigned to work 15 classroom hours per         earned, and does not take into account
week. A new teacher is assigned to work 8
                                                      service in other positions with the
classroom hours per week. Because the as-
signed classroom hours of the teacher are at          same or different States, political sub-
least one-half of the school’s definition of          divisions or instrumentalities thereof.
full-time teacher, the teacher is not a part-         All of an employee’s service in other
time employee.                                        positions with the same or different

                                                 48
Internal Revenue Service, Treasury                                             § 31.3121(b)(7)–2

States, political subdivisions or instru-             ployer for calendar year 1996 by reason of
mentalities thereof may be taken into                 section 3121(b)(7)(F). The same result would
account for purposes of determining                   apply if the determination is being made
                                                      with respect to calendar year 1992 and the
whether an employee is a part-time,                   lookback year was the plan year ending May
seasonal or temporary employee with                   31, 1991, even though that plan year ended be-
respect to benefits under the retire-                 fore    the    effective  date    of   section
ment system, however, Provided that:                  3121(b)(7)(F).
The employee’s service in the other po-                 Example 2. A political subdivision main-
sitions is or was covered by the retire-              tains an elective defined contribution plan
ment system; all service aggregated for               described in section 457(b) of the Code. An
purposes of determining whether an                    employee is eligible to participate in the
                                                      plan but does not elect to contribute for a
employee is a part-time, seasonal or                  plan year. Under the general rule of para-
temporary employee (and related com-                  graph (d)(1) of this section, the employee is
pensation) is aggregated under the sys-               not a qualified participant in the plan during
tem for all purposes in determining                   the plan year because contributions suffi-
benefits (including vesting); and the                 cient to meet the minimum retirement ben-
employee is treated at least as favor-                efit requirement of paragraph (e)(2) of this
ably as a full-time employee under the                section are not being made. However, if an
retirement system for benefit accrual                 employee’s status as a qualified participant
                                                      is being determined under the alternative
purposes. The rule of this paragraph                  lookback rule, then the employee is a quali-
(d)(2)(iii)(D) is illustrated by the fol-             fied participant for the calendar year in
lowing example:                                       which the determination is being made if he
  Example. Assume that an employee works              of she was a qualified participant as of the
15 hours per week for a county and 10 hours           end of the plan year that ended in the pre-
per week for a municipality, and that both of         vious calendar year.
these political subdivisions contribute to the          (ii) Application in first year of partici-
same state-wide public employee retirement            pation. If the alternative lookback rule
system. Assume further that the employee’s
                                                      is used, an employee who participates
service in both positions is aggregated under
the system for all purposes in determining            in the retirement system may be treat-
benefits (including vesting). If the employee         ed as a qualified participant on any
is covered under the retirement system with           given day during his or her first plan
respect to both positions and is treated for          year of participation in a retirement
benefit accrual purposes at least as favorably        system (within the meaning of para-
as full-time employees under the retirement           graph (e)(1) of this section) if and only
system, then the employee is not considered
                                                      if it is reasonable on such day to be-
a part-time employee of either the county or
the municipality for purposes of the non-             lieve that the employee will be a quali-
forfeitable benefit requirement of paragraph          fied participant (within the meaning of
(d)(2)(i) of this section.                            paragraphs (d)(1) and (2) of this section)
                                                      on the last day of such plan year. In
  (3) Alternative lookback rule—(i) In                the case of a defined contribution re-
general. An employee may be treated as                tirement system, the determination of
a qualified participant in a retirement               whether the employee is actually (or is
system throughout a calendar year if                  expected to be) a qualified participant
he or she was a qualified participant in              at the end of the plan year must take
such system (within the meaning of                    into account all compensation since
paragraphs (d) (1) and (2) of this sec-               the commencement of participation.
tion) at the end of the plan year of the              See paragraph (d)(3)(iv) of this section.
system ending in the previous calendar                If this reasonable belief is correct, and
year. This rule is illustrated by the fol-            the employee is a qualified participant
lowing examples:                                      on the last day of his or her first plan
  Example 1. A political subdivision main-            year of participation, then the excep-
tains a plan that is a retirement system              tion from employment in section
within the meaning of paragraph (e)(1) of             3121(b)(7) will apply without regard to
this section. An employee is a qualified par-         section 3121(b)(7)(F) to services of the
ticipant within the meaning of paragraph
                                                      employee for the balance of the cal-
(d)(1) of this section in the plan on the last
day of the plan year ending on May 31, 1995.          endar year in which the plan year ends.
If the alternative lookback rule is used to           For     purposes      of  this   paragraph
determine FICA liability, no such liability           (d)(3)(ii), it is not reasonable to assume
exists with respect to the employee or em-            the establishment of a new plan until

                                                 49
§ 31.3121(b)(7)–2                                                  26 CFR Ch. I (4–1–99 Edition)

such establishment actually occurs. In                 ticipation in a retirement system
addition, the rule in this paragraph                   (within the meaning of paragraph (e)(1)
(d)(3)(ii) may not be used to treat an                 of this section) if and only if it is rea-
employee as a qualified participant                    sonable to believe on such day that the
until the employee actually becomes a                  employee, will be a qualified partici-
participant in the retirement system.                  pant (within the meaning of para-
In the case of a retirement system that                graphs (d)(1) and (2) of this section) on
does not permit a new employee to par-                 his or her last day of participation. For
ticipate until the first day of the first              purposes of this paragraph (d)(3)(iii), an
month beginning after the employee’s                   employee’s last year of participation
commencement of service, or some ear-                  means the plan year that the employer
lier date, a new employee who is not a                 reasonably ascertains is the final year
part-time, seasonal or temporary em-                   of such employee’s participation (e.g.,
ployee may be treated as a qualified                   where the employee has a scheduled re-
participant until such date. This 1-                   tirement date or where the employer
month rule of administrative conven-                   intends to terminate the plan).
ience applies without regard to wheth-                   (iv) Special rule for defined contribu-
er the employer has a reasonable belief                tion retirement systems. An employee
that the employee will be a qualified                  may not be treated as a qualified par-
participant. The rules of this para-                   ticipant in a defined contribution re-
graph (d)(3)(ii) are illustrated by the                tirement system under this paragraph
following examples:                                    (d)(3) if compensation for less than a
  Example 1. A political subdivision main-             full plan year or other 12-month period
tains a plan that is a retirement system               is regularly taken into account in de-
within the meaning of paragraph (e)(1) of              termining allocations to the employ-
this section and uses the alternative                  ee’s account for the plan year unless,
lookback rule of this paragraph (d)(3). Under          under all of the facts and cir-
the terms of the plan, service during a plan
                                                       cumstances, such arrangement is not a
year is not credited for accrual purposes un-
less a participant has at least 1,000 hours of         device to avoid the imposition of FICA
service during the year. Assume that an em-            taxes. For example, an arrangement
ployee becomes a participant. If it is reason-         under which compensation taken into
able to believe that the employee will be              account is limited to the contribution
credited with 1,000 hours of service by the            base described in section 3121(x)(1) is
last day of his or her first year of participa-        not considered a device to avoid FICA
tion and thereby become a qualified partici-           taxes by reason of such limitation. See
pant by reason of accruing a benefit that
                                                       paragraph (e)(2)(iii)(B) of this section
meets the minimum retirement benefit re-
quirement of paragraph (e)(2) of this section,         for a rule permitting the use of such
the services of the employee are not subject           limitation. This rule is illustrated by
to FICA tax from the date of initial partici-          the following example:
pation until the end of that plan year. If the
employee is a qualified participant on the               Example. A political subdivision maintains
last day of his or her first plan year of par-         a defined contribution plan that covers all of
ticipation, then the exception from employ-            its full-time employees and is a retirement
ment for purposes of FICA will apply to serv-          system within the meaning of paragraph
ices of the employee for the balance of the            (e)(1) of this section. Under the plan, a por-
calendar year in which the plan year ended.            tion of each participant’s compensation in
  Example 2. Assume the same facts as Exam-            the final month of every plan year is allo-
ple 1, except that the employee is a newly             cated to the participant’s account. Employ-
hired employee and the plan provides that an           ees covered under the plan generally may
employee may not participate until the first           not be treated as qualified participants
day of his or her first full month of employ-          under the alternative lookback rule for any
ment. Under the 1-month rule of conven-                portion of the calendar year following the
ience, the employee may be treated as a                year in which such allocation is made.
qualified participant until the first date on            (v) Consistency requirement. Beginning
which he or she could participate in the plan.
                                                       with calendar year 1992, if the alter-
  (iii) Application in last year of partici-           native lookback rule is used to deter-
pation. If the alternative lookback rule               mine whether an employee is a quali-
is used, an employee may be treated as                 fied participant, it must be used con-
a qualified participant on any given                   sistently from year to year and with
day during his or her last year of par-                respect to all employees of the State,

                                                  50
Internal Revenue Service, Treasury                                        § 31.3121(b)(7)–2

political subdivision or instrumen-              same retirement system as the current
tality thereof making the determina-             employer, provided the employee is a
tion. If a retirement system is spon-            former participant in the system by
sored by more than one State, political          reason of the employee’s former em-
subdivision or instrumentality, this             ployment. Thus, for example, if a
consistency requirement applies sepa-            teacher retires from service with a
rately to each plan sponsor.                     school district that participates in a
   (4) Treatment of former participants—         state-wide teachers’ retirement sys-
(i) In general. In general, the rules of         tem, begins to receive benefits from
this paragraph (d) apply equally to              the system, and later becomes a sub-
former participants who continue to              stitute teacher in another school dis-
perform service for the same State, po-          trict that participates in the same
litical subdivision or instrumentality           state-wide system, the employee is
thereof or who return after a break in           treated as a re-hired annuitant under
service. Thus, for example, a former             this paragraph (d)(4)(ii).
employee of a political subdivision                (e) Definition of retirement system—(1)
with a deferred benefit under a defined          Requirement that system provide retire-
benefit retirement system maintained             ment-type benefits. For purposes of sec-
by the political subdivision who is re-          tion 3121(b)(7)(F), a retirement system
employed by the political subdivision            includes any pension, annuity, retire-
but does not resume participation in             ment or similar fund or system within
the retirement system, may continue              the meaning of section 218 of the Social
to be a qualified participant in the sys-        Security Act that is maintained by a
tem after becoming reemployed if his             State, political subdivision or instru-
or her total accrued benefit under the           mentality thereof to provide retire-
system meets the minimum retirement              ment benefits to its employees who are
benefit requirement of paragraph (e)(2)          participants. Whether a plan is main-
of this section (taking into account all         tained to provide retirement benefits
periods of service (including current            with respect to an employee is deter-
service) required to be taken into ac-           mined under the facts and cir-
count under that paragraph). See also            cumstances of each case. For example,
paragraph (e)(2)(v) of this section for          a plan providing only retiree health in-
situations in which benefits under a re-         surance or other deferred welfare bene-
tirement system may be taken into ac-            fits is not considered a retirement sys-
count even though they relate to serv-           tem for this purpose. The legal form of
ice for another employer.                        the system is generally not relevant.
   (ii) Treatment of re-hired annuitants.        Thus, for example, a retirement system
An employee who is a former partici-             may include a plan described in section
pant in a retirement system main-                401(a), an annuity plan or contract
tained by a State, political subdivision         under section 403 or a plan described in
or instrumentality thereof, who has              section 457(b) or (f) of the Internal Rev-
previously retired from service with             enue Code. In addition, the Social Se-
the State, political subdivision or in-          curity system is not a retirement sys-
strumentality, and who is either in pay          tem for purposes of section 3121(b)(7)(F)
status (i.e., is currently receiving re-         and this section. These rules are illus-
tirement benefits) under the retire-             trated by the following examples:
ment system or has reached nomal re-               Example 1. Under an employment arrange-
tirement age under the retirement sys-           ment, a portion of an employee’s compensa-
tem, is deemed to be a qualified partic-         tion is regularly deferred for 5 years. Be-
ipant in the retirement system without           cause a plan that defers the receipt of com-
regard to whether he or she continues            pensation for a short span of time rather
to accrue a benefit or whether the dis-          than until retirement is not a plan that pro-
tribution of benefits under the retire-          vides retirement benefits, this arrangement
ment system has been suspended pend-             is not a retirement system for purposes of
                                                 section 3121(b)(7)(F).
ing cessation of services. This rule also
                                                   Example 2. An individual holds two posi-
applies in the case of an employee who           tions with the same political subdivision.
has retired from service with another            The wages earned in one position are subject
State, political subdivision or instru-          to FICA tax pursuant to an agreement
mentality thereof that maintains the             (under section 218 of the Social Security Act)

                                            51
§ 31.3121(b)(7)–2                                                 26 CFR Ch. I (4–1–99 Edition)
between the Secretary of Health and Human               (iii) Defined contribution retirement
Services and the State in which the political         systems—(A) In general. A defined con-
subdivision is located. Because the Social
                                                      tribution retirement system main-
Security system is not a retirement system
for purposes of section 3121(b)(7)(F), the ex-        tained by a State, political subdivision
ception    from   employment      in   section        or instrumentality thereof meets the
3121(b)(7) does not apply to service in the           requirements of paragraph (e)(2)(i) of
other position unless the employee is other-          this section with respect to an em-
wise a member of a retirement system of               ployee if and only if allocations to the
such political subdivision.
                                                      employee’s account (not including
  (2) Requirement that system provide                 earnings) for a period are at least 7.5
minimum level of benefits—(i) In general.             percent of the employee’s compensa-
A pension, annuity, retirement or simi-               tion for service for the State, political
lar fund or system is not a retirement                subdivision or instrumentality during
system with respect to an employee                    the period. Matching contributions by
unless it provides a retirement benefit               the employer may be taken into ac-
to the employee that is comparable to                 count for this purpose.
the benefit provided under the Old-Age
                                                        (B) Definition of compensation. The
portion of the Old-Age, Survivor and
                                                      definition of compensation used in de-
Disability Insurance program of Social
Security. Whether a retirement system                 termining whether a defined contribu-
meets this requirement is generally de-               tion retirement system meets the min-
termined on an individual-by-indi-                    imum retirement benefit requirement
vidual basis. Thus, for example, a pen-               must generally be no less inclusive
sion plan that is not a retirement sys-               than the definition of the employee’s
tem with respect to an employee may                   base pay as designated by the employer
nevertheless be a retirement system                   or the retirement system, provided
with respect to other employees cov-                  such designation is reasonable under
ered by the system.                                   all the facts and circumstances. Thus,
  (ii) Defined benefit retirement systems.            for example, a defined contribution re-
A defined benefit retirement system                   tirement system will not fail to meet
maintained by a State, political sub-                 this requirement merely because it dis-
division or instrumentality thereof                   regards for all purposes one or more of
meets the requirements of this para-                  the following: overtime pay, bonuses,
graph (e)(2) with respect to an em-                   or single-sum amounts received on ac-
ployee on a given day if and only if, on              count of death or separation from serv-
that day, the employee has an accrued                 ice under a bona fide vacation, compen-
benefit under the system that entitles                satory time or sick pay plan, or under
the employee to an annual benefit                     severance pay plans. Furthermore, any
commencing on or before his or her So-                compensation remaining after such
cial Security retirement age that is at               amounts are disregarded that is in ex-
least equal to the annual Primary In-                 cess of the contribution base described
surance Amount the employee would                     in section 3121(x)(1) at the beginning of
have under Social Security. For this                  the plan year may also be disregarded.
purpose,     the   Primary      Insurance
                                                      The rules of this paragraph are illus-
Amount an individual would have
                                                      trated by the following example:
under Social Security is determined as
it would be under the Social Security                   Example. A political subdivision maintains
Act if the employee had been covered                  an elective defined contribution plan that is
under Social Security for all periods of              a retirement system within the meaning of
service with the State, political sub-                paragraph (e)(1) of this section. The plan has
division or instrumentality, had never                a calendar year plan year. In 1995, an em-
performed service for any other em-                   ployee contributes to the plan at a rate of 7.5
                                                      percent of base pay. Assume that the em-
ployer, and had been fully insured
                                                      ployee will reach the maximum contribution
within the meaning of section 214(a) of               base described in section 3121(x)(1) in October
the Social Security Act, except that all              of 1995. The employee is a qualified partici-
periods of service with the State, polit-             pant in the plan for all of the 1995 plan year
ical subdivision or instrumentality                   without regard to whether the employee
must be taken into account (i.e., with-               ceases to participate at any time after reach-
out reduction for low-earning years).                 ing the maximum contribution base.

                                                 52
Internal Revenue Service, Treasury                                          § 31.3121(b)(7)–2

  (C) Reasonable interest rate require-              in determining whether the employee’s
ment. A defined contribution retire-                 benefit under the retirement system on
ment system does not satisfy this para-              that day meets the requirements of
graph (e)(2) with respect to an em-                  this paragraph (e)(2), even if the em-
ployee unless the employee’s account is              ployee has other allocations or benefits
credited with earnings at a rate that is             under the same retirement system
reasonable under all the facts and cir-              from service with another State, polit-
cumstances, or employees’ accounts                   ical subdivision or instrumentality
are held in a separate trust that is sub-            thereof. However, an employee’s total
ject to general fiduciary standards and              allocations or benefits under a retire-
are credited with actual earnings on                 ment system maintained by multiple
the trust fund. Whether the interest                 States, political subdivisions or instru-
rate with which an employee’s account                mentalities thereof (including the cur-
is credited is reasonable is determined              rent employer) may be taken into ac-
after reducing the rate to adjust for                count if:
the payment of any administrative ex-                   (A) The compensation and service on
penses. The rule of this paragraph                   which the additional allocations or
(e)(2)(iii)(C) is illustrated by the fol-            benefits are based are also taken into
lowing example:                                      account in determining whether the
  Example. A political subdivision maintains         employee’s allocations or benefits sat-
a defined contribution plan described in sec-        isfy the minimum retirement benefit
tion 457(b). Under the plan, the accounts of         requirement;
participants are credited annually on the               (B) The retirement system takes all
basis of a variable interest rate formula de-        service and compensation of the em-
termined as of the beginning of the plan
                                                     ployee in all positions covered by the
year. The formula requires an interest rate
(after adjustment for administrative expense         system into account for all benefit de-
payments) equal to 100 percent of the Appli-         termination purposes; and
cable Federal Rate for long-term debt instru-           (C) If the employee is a part-time,
ments. This interest rate constitutes a rea-         seasonal or temporary employee, he or
sonable rate of interest.                            she is treated under the plan for ben-
   (iv) Treatment of emloyees employed in            efit accrual purposes in as favorable a
more than one position with the same en-             manner as a full-time employee par-
tity. All service and compensation of an             ticipating in the system.
employee with respect to his or her em-                 (vi) Additional testing methods. Addi-
ployment with a State, political sub-                tional testing methods may be des-
division or instrumentality thereof                  ignated by the Commissioner in rev-
must generally be considered in deter-               enue procedures, revenue rulings, no-
mining whether a benefit meets the re-               tices or other documents of general ap-
quirement of this paragraph (e)(2).                  plicability.
However, for individuals employed si-                   (f) Transition rules—(1) Application of
multaneously in multiple positions                   qualified participant rules during 1991—
with the same entity, this determina-                (i) In general. An employee may be
tion may (but is not required to) be                 treated as a qualified participant in a
made solely by reference to the service              retirement system (within the meaning
and compensation related to a single                 of paragraph (e)(1) of this section) on a
position of the employee with the                    given day during the period July 1
State, political subdivision or instru-              through December 31, 1991, if it is rea-
mentality thereof making the deter-                  sonable on that day to believe that he
mination, provided that the position is              or she will be a qualified participant
not a part-time, seasonal or temporary               under the general rule in paragraphs
position.                                            (d) (1) and (2) of this section by Janu-
   (v) Treatment of employees partici-               ary 1, 1992 (taking into account only
pating in certain systems. In general,               service and compensation on or after
only compensation from and service for               such date). For purposes of this para-
the State, political subdivision or in-              graph (f)(1)(i), given the facts and cir-
strumentality thereof that employs the               cumstances of a particular case, it may
employee (and the allocations or bene-               be reasonable to assume that the terms
fits related to such compensation or                 of a plan will be changed or that a new
service) on a given day are considered               retirement system will be established

                                                53
§ 31.3121(b)(7)–2                                                   26 CFR Ch. I (4–1–99 Edition)

by the end of calendar year 1991, as                    January 1, 1992 through March 31, 1992 is not
long as affirmative steps have been                     excluded from ‘‘employment’’ under section
taken to accomplish this result.                        3121(b)(7)(F), and wages for that period are
                                                        generally subject to FICA taxes even if the
  (ii) Extension of reliance period if legis-
                                                        plan provides retroactive coverage for any
lative action required. If a plan amend-                portion of the period July 1, 1991 to March 31,
ment or other action is necessary in                    1992.
order to treat an employee as a mem-
ber of a retirement system for purposes                   (2) Additional transition rules for plans
of this section, such amendment or                      in existence on November 5, 1990—(i) Ap-
other action may only be taken by a                     plication of minimum retirement benefit
legislative body that does not convene                  requirement to defined benefit retirement
during the period July 1, 1991, through                 systems in plan years beginning before
December 31, 1991, and the other re-                    1993—(A) In general. A defined benefit
quirements of paragraph (f)(1)(i) of this               retirement system maintained by a
section are met, the end of the reason-                 State, political subdivision or instru-
able reliance period (including the rule                mentality thereof on November 5, 1990,
that service and compensation prior to                  is not subject to the minimum retire-
that date may be disregarded) provided                  ment benefit requirement of paragraph
under paragraph (f)(1)(i) of this section               (e)(2) of this section for any plan year
is extended from December 31, 1991, to                  beginning before January 1, 1993, with
the date that is the last day of the first              respect to individuals who were actu-
legislative session commencing after                    ally covered under the system on No-
December 31, 1991. These rules are illus-               vember 5, 1990. Such a retirement sys-
trated by the following examples:                       tem is also not subject to the minimum
                                                        retirement benefit requirement of
  Example 1. A State maintains a defined                paragraph (e)(2) of this section with re-
benefit plan that meets the requirements of             spect to an employee who becomes a
paragraph (e) of this section. The plan does            participant after November 5, 1990, if
not cover a particular class of full-time em-
                                                        he or she is employed in a position that
ployees as of July 1, 1991. However, in light
of the enactment of section 3121(b)(7)(F),              was covered under the retirement sys-
State officials administering the plan for the          tem on November 5, 1990, without re-
State intend to request that the legislature            gard to whether such coverage was
amend the State statute to include that                 mandatory or elective. A retirement
class of employees in the existing plan and             system is not described in this para-
otherwise to modify the terms of the plan to            graph (f)(2)(i)(A) if there has been a
meet      the     requirements     of    section        material decrease in the level of retire-
3121(b)(7)(F) and this section. The State leg-          ment benefits under the retirement
islature meets from January through March
                                                        system pursuant to an amendment
each year, and legislative action is required
to expand coverage under the plan. State of-            adopted subsequent to November 5,
ficials administering the plan have pub-                1990. Whether such a material decrease
licized the proposed amendment providing                in benefits has occurred is determined
for the addition of these employees to the              under the facts and circumstances of
plan. Under the transition rule for 1991, if it         each case. A decrease in benefits is not
is reasonable to believe that the legislature           material to the extent that it does not
will pass this bill in the 1992 session, service        decrease the benefit payable at normal
by the employees who will be covered under              retirement age. These rules are illus-
the plan by reason of the amendment is not
treated as employment by reason of section
                                                        trated by the following examples:
3121(b)(7)(F) during the period prior to April            Example 1. The retirement formula under a
1, 1992. This is true regardless of whether the         retirement plan that was in existence on No-
plan provides retroactive coverage for the              vember 5, 1990, is amended to use career av-
period July 1, 1991 through March 31, 1992.             erage compensation instead of a high 3-year
  Example 2. Assume the same facts as in Ex-            average, without any increase in the benefit
ample 1, except that legislative action is not          formula. This amendment constitutes a ma-
required in order to expand coverage under              terial decrease in the level of benefit under
the plan, and that publication of the pro-              the retirement plan. Therefore, the retire-
posed change to the plan occurs in 1991. As-            ment plan is subject to the minimum retire-
sume further that coverage is expanded                  ment benefit requirement for the plan year
under the plan to include the new class of              for which the amendment is effective and for
full-time employees as of April 1, 1992. De-            all succeeding plan years.
spite this action, in this situation the serv-            Example 2. A defined benefit retirement
ice by those employees during the period                plan that was in existence on November 5,

                                                   54
Internal Revenue Service, Treasury                                               § 31.3121(b)(7)–2
1990, is subsequently amended to include               (e)(2) of this section if it is amended to pro-
part-time employees. Previously, this class            vide benefits sufficient to meet the require-
of employees was not covered under the plan            ments of paragraph (e)(2) of this section
either on a mandatory or on an elective                based on employees’ service and compensa-
basis. The plan is subject to the minimum              tion in plan years beginning after December
retirement benefit requirement with respect            31, 1992.
to the part-time employees because this
class of employees was previously excluded               (C) Treatment of part-time, seasonal or
from coverage under the retirement plan. Of            temporary employees. A defined benefit
course, the nonforfeitable benefit rule ap-            retirement system is not exempt from
plies to the benefit relied upon to meet the           the minimum retirement benefit re-
minimum retirement benefit requirement                 quirement with respect to a part-time,
with respect to any part-time, seasonal or
temporary employee covered during this pe-
                                                       seasonal or temporary employee during
riod.                                                  the transition period provided in para-
                                                       graph (f)(2)(i)(A) of this section unless
  (B) Treatment in plan years beginning                any retirement benefit provided to the
after 1992 of benefits accrued during pre-             employee is 100-percent nonforfeitable
vious plan years. The general rule that                within the meaning of paragraph (d)(2)
a defined benefit retirement system                    of this section. In determining whether
meets the minimum retirement benefit                   the benefit is nonforfeitable, the spe-
requirement on the basis of total bene-                cial rule in paragraph (d)(2)(ii) of this
fits and service accrued to date is                    section is modified in two respects dur-
modified for plans in existence on No-                 ing the transition period: first, the per-
vember 5, 1990. If a defined benefit re-               centage of compensation required to be
tirement system in existence on No-                    available for distribution is reduced
vember 5, 1990, does not meet the min-                 from 7.5 percent to 6 percent; and sec-
imum retirement benefit requirement                    ond, the period of service with respect
solely because the benefits accrued for
                                                       to which compensation must be deter-
an employee (with respect to whom the
                                                       mined is modified to include all periods
system is entitled to relief under para-
                                                       of participation by the employee in the
graph (f)(2)(i)(A) of this section) as of
                                                       system since July 1, 1991.
the last day of the last plan year begin-
                                                         (ii) Application of minimum retirement
ning before January 1, 1993, do not
                                                       benefit requirement to defined contribu-
meet the minimum retirement benefit
                                                       tion retirement systems in plan years be-
requirement of paragraph (e)(2) of this
                                                       ginning before 1993. A defined contribu-
section with respect to service and
                                                       tion retirement system maintained by
compensation before that time, then
                                                       a State, political subdivision or instru-
the retirement system will be deemed
                                                       mentality thereof on November 5, 1990,
to comply with the requirements of
                                                       meets the minimum retirement benefit
paragraph (e)(2) of this section if the
                                                       requirement of paragraph (e) (2) of this
future service accruals would comply
                                                       section with respect to an employee for
with the requirement of paragraph
                                                       any plan year beginning before Janu-
(e)(2) of this section. If retirement ben-
                                                       ary 1, 1993, if mandatory allocations to
efits under a retirement system in ex-
                                                       the employee’s account (not including
istence on November 5, 1990 are materi-
                                                       earnings) for a period are at least 6 per-
ally decreased within the meaning of
                                                       cent (rather than 7.5 percent) of the
paragraph (f)(2)(i)(A) of this section,
                                                       employee’s compensation for service to
then the date the decrease is effective
                                                       the State, political subdivision or in-
is substituted for January 1, 1993 for
                                                       strumentality during the period, and
purposes of this paragraph. The rule of
                                                       the plan otherwise meets the require-
this paragraph (f)(2)(i)(B) is illustrated
                                                       ments of paragraph (e)(2)(iii) of this
by the following example:
                                                       section. This transition rule is only
  Example. A defined benefit plan maintained           available with respect to an employee
by a State was in existence on November 5,             who is actually covered under the sys-
1990. It provides a retirement benefit on the          tem on November 5, 1990, and to an em-
last day of the 1992 plan year that is insuffi-
                                                       ployee who becomes a participant after
cient to meet the requirements of paragraph
(e)(2) of this section based on employees’             November 5, 1990, if he or she is em-
total service and compensation with the                ployed in a position that was covered
State at that time. The plan will neverthe-            under the retirement system on No-
less meet the requirements of paragraph                vember 5, 1990, without regard to

                                                  55
§ 31.3121(b)(8)–1                                                26 CFR Ch. I (4–1–99 Edition)

whether such coverage was mandatory                  ably be expected to accrue a benefit under
or elective. In addition, this transition            the plan by the end of such plan year may be
rule is not available with respect to a              treated as a qualified participant in the plan
part-time, seasonal or temporary em-                 throughout the plan year regardless of the
                                                     actual amount of the accrual.
ployee unless the mandatory allocation
required under this paragraph (f)(2)(ii)             [T.D. 8354, 56 FR 29570, June 28, 1991; 56 FR
is 100-percent nonforfeitable within the             40246, Aug. 14, 1991, as amended by T.D. 8794,
meaning of paragraph (d)(2) of this sec-             63 FR 70338, Dec. 21, 1998]
tion. A retirement system is not de-
scribed in this paragraph (f)(2)(ii) if              § 31.3121(b)(8)–1 Services     performed
there has been a material decrease in                     by a minister of a church or a mem-
                                                          ber of a religious order.
the level of retirement benefits under
the retirement system pursuant to an                    (a) In general. Services performed by
amendment adopted subsequent to No-                  a duly ordained, commissioned, or li-
vember 5, 1990. Whether such a mate-                 censed minister of a church in the exer-
rial decrease in benefits has occurred is            cise of his ministry, or by a member of
determined under all the facts and cir-              a religious order in the exercise of his
cumstances.                                          duties required by such order, are ex-
   (iii) Application of qualified participant        cluded from employment, except that
rules. A participant with respect to                 services performed by a member of
whom relief is granted under paragraph               such an order in the exercise of such
(f)(2)(i)(A) of this section may be treat-           duties (whether performed for the order
ed as a qualified participant in the de-             or for another employer) are included
fined benefit retirement system on a                 in employment if an election of cov-
given day if, on that day, he or she is              erage     under     section   3121(r)   and
actually a participant in the retire-                § 31.3121(r)–1 is in effect with respect to
ment system, and, on that day, it is                 such order or with respect to the au-
reasonable to believe that the partici-              tonomous subdivision thereof to which
pant will actually accrue a benefit be-              such member belongs. For provisions
fore the end of the plan year of such re-            relating to the election available to
tirement system in which the deter-                  certain ministers and members of reli-
mination is made. A participant is not               gious orders with respect to the exten-
treated as accruing a benefit for pur-               sion of the Federal old-age, survivors,
poses of this rule if his or her accrued             and disability insurance system estab-
benefits increase solely as a result of              lished by title II of the Social Security
an increase in compensation. However,                Act to certain services performed by
an employee is treated as a qualified                them, see Part 1 of this chapter (In-
participant for a plan year if the em-               come Tax Regulations).
ployee meets all of the applicable con-                 (b) Service by a minister in the exercise
ditions for accruing the maximum cur-                of his ministry. Except as provided in
rent benefit for such year but fails to              paragraph (c)(3) of this section, service
accrue a benefit solely because of a                 performed by a minister in the exercise
uniformly applicable benefit limit                   of his ministry includes the ministra-
under the plan. In addition, an em-                  tion of sacerdotal functions and the
ployee may be treated as a qualified                 conduct of religious worship, and the
participant in the system on a given                 control, conduct, and maintenance of
day if the employee is a re-hired annu-              religious organizations (including the
itant within the meaning of paragraph                religious boards, societies, and other
(d)(4)(ii) of this section. This rule is il-         integral agencies of such organiza-
lustrated by the following example:                  tions), under the authority of a reli-
  Example. A political subdivision maintains         gious body constituting a church or
a defined benefit plan that is a retirement          church denomination. The following
system within the meaning of paragraph               rules are applicable in determining
(e)(1) of this section but does not meet the         whether services performed by a min-
requirements of paragraph (e)(2) of this sec-        ister are performed in the exercise of
tion. If the plan is not subject to the min-
imum retirement benefit requirement, an
                                                     his ministry:
employee who is a participant in the retire-            (1) Whether service performed by a
ment plan as of the end of a plan year begin-        minister constitutes the conduct of re-
ning before January 1, 1993, and may reason-         ligious worship or the ministration of

                                                56
Internal Revenue Service, Treasury                                            § 31.3121(b)(8)–1

sacerdotal functions depends on the te-              Board is an integral agency of O, a religious
nets and practices of the particular re-             organization operating under the authority
ligious body constituting his church or              of a religious body constituting a church de-
                                                     nomination. M is performing service in the
church denomination.                                 exercise of his ministry.
  (2) Service performed by a minister
in the control, conduct, and mainte-                   (5) (i) If a minister, pursuant to an
nance of a religious organization re-                assignment or designation by a reli-
lates to directing, managing, or pro-                gious body constituting his church,
moting the activities of such organiza-              performs service for an organization
tion. Any religious organization is                  which is neither a religious organiza-
deemed to be under the authority of a                tion nor operated as an integral agency
religious body constituting a church or              of a religious organization, all service
church denomination if it is organized               performed by him, even though such
and dedicated to carrying out the te-                service may not involve the conduct of
nets and principles of a faith in accord-            religious worship or the ministration
ance with either the requirements or                 of sacerdotal functions, is in the exer-
sanctions governing the creation of in-              cise of his ministry.
stitutions of the faith. The term ‘‘reli-              (ii) The rule in paragraph (b)(5)(i) of
gious organization’’ has the same                    this section may be illustrated by the
meaning and application as is given to               following example:
the term for income tax purposes.                      Example. M, a duly ordained minister, is as-
  (3) (i) If a minister is performing                signed by X, the religious body constituting
service in the conduct of religious wor-             his church, to perform advisory service to Y
ship or the ministration of sacerdotal               Company in connection with the publication
functions, such service is in the exer-              of a book dealing with the history of M’s
                                                     church denomination. Y is neither a reli-
cise of his ministry whether or not it is            gious organization nor operated as an inte-
performed for a religious organization.              gral agency of a religious organization. M
  (ii) The rule in paragraph (b)(3)(i) of            performs no other service for X or Y. M is
this section may be illustrated by the               performing service in the exercise of his min-
following example:                                   istry.
  Example. M, a duly ordained minister, is             (c) Service by a minister not in the exer-
engaged to perform service as chaplain at N          cise of his ministry. (1) Section
University. M devotes his entire time to per-        3121(b)(8)(A) does not except from em-
forming his duties as chaplain which include         ployment service performed by a duly
the conduct of religious worship, offering           ordained, commissioned, or licensed
spiritual counsel to the university students,
                                                     minister of a church which is not in
and teaching a class in religion. M is per-
forming service in the exercise of his min-          the exercise of his ministry.
istry.                                                 (2) (i) If a minister is performing
                                                     service for an organization which is
  (4) (i) If a minister is performing                neither a religious organization nor op-
service for an organization which is op-             erated as an integral agency of a reli-
erated as an integral agency, of a reli-             gious organization and the service is
gious organization under the authority               not performed pursuant to an assign-
of a religious body constituting a                   ment or designation by his ecclesias-
church or church denomination, all                   tical superiors, then only the service
service performed by the minister in                 performed by him in the conduct of re-
the conduct of religious worship, in the             ligious worship or the ministration of
ministration of sacerdotal functions, or             sacerdotal functions is in the exercise
in the control conduct, and mainte-                  of his ministry. See, however, para-
nance of such organization (see para-                graph (c)(3) of this section.
graph (b)(2) of this section) is in the ex-            (ii) The rule in paragraph (c)(2)(i) of
ercise of his ministry.                              this section may be illustrated by the
  (ii) The rule in paragraph (b)(4)(i) of            following example:
this section may be illustrated by the
following example:                                     Example. M, a duly ordained minister, is
                                                     engaged by N University to teach history
  Example. M, a duly ordained minister, is           and mathematics. He performs no other serv-
engaged by the N Religious Board to serve as         ice for N although from time to time he per-
director of one of its departments. He per-          forms marriages and conducts funerals for
forms no other service. The N Religious              relatives and friends. N University is neither

                                                57
§ 31.3121(b)(8)–2                                                 26 CFR Ch. I (4–1–99 Edition)
a religious organization nor operated as an           not apply to services with respect to
integral agency of a religious organization.          which a certificate, filed pursuant to
M is not performing the service for N pursu-          section 3121 (k) or (r), or section 1426(l)
ant to an assignment or designation by his
ecclesiastical superiors. The service per-
                                                      of the Internal Revenue Code of 1939, is
formed by M for N University is not in the            in effect. For provisions relating to the
exercise of his ministry. However, service            services with respect to which such a
performed by M in performing marriages and            certificate is in effect, see §§ 31.3121(k)–
conducting funerals is in the exercise of his         1 and 31.3121(r)–1.
ministry.                                               (b) For provisions relating to exemp-
  (3) Service performed by a duly or-                 tion from income tax of an organiza-
dained, commissioned, or licensed min-                tion described in section 501(c)(3), see
ister of a church as an employee of the               Part 1 of this chapter (Income Tax Reg-
United States, or a State, Territory, or              ulations). For provisions relating to
possession of the United States, or the               waiver by an organization of its exemp-
District of Columbia, or a foreign gov-               tion from the taxes imposed by sec-
ernment, or a political subdivision of                tions 3101 and 3111, see § 31.3121(k)–1.
any of the foregoing, is not considered               See also § 31.3121(b)(8)–1, relating to
to be in the exercise of his ministry for             services performed by a minister of a
purposes of the taxes, even though such               church in the exercise of his ministry
service may involve the ministration                  or by a member of a religious order in
of sacerdotal function or the conduct of              the exercise of duties required by such
religious worship. Thus, for example,                 order; § 31.3121(b)(10)–1, relating to serv-
service performed by an individual as a               ices for remuneration of less than $50
chaplain in the Armed Forces of the                   for calendar quarter in the employ of
United States is considered to be per-                certain organizations exempt from in-
formed by a commissioned officer in                   come tax; § 31.3121(b)(10)–2, relating to
his capacity as such, and not by a min-               services performed in the employ of a
ister in the exercise of his ministry.                school, college, or university by cer-
Similarly, service performed by an em-                tain students; and § 31.3121(b)(13)–1, re-
ployee of a State as a chaplain in a                  lating to services performed by certain
State prison is considered to be per-                 student nurses and hospital interns.
formed by a civil servant of the State                [T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR
and not by a minister in the exercise of              14021, Dec. 31, 1960, as amended by T.D. 7280,
his ministry.                                         38 FR 18369, July 10, 1973]
  (d) Service in the exercise of duties re-
                                                      § 31.3121(b)(9)–1 Railroad         industry;
quired by a religious order. Service per-                  services performed by an employee
formed by a member of a religious                          or an employee representative as
order in the exercise of duties required                   defined in section 3231.
by such order includes all duties re-
                                                         Services performed by an individual
quired of the member by the order. The
                                                      as an ‘‘employee’’ or as an ‘‘employee
nature or extent of such service is im-               representative’’, as those terms are de-
material so long as it is a service which             fined in section 3231, are excepted from
he is directed or required to perform by              employment. For definitions of em-
his ecclesiastical superiors.                         ployee and employee representatives,
[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR         see §§ 31.3231(b)–1 and 31.3231(c)–1.
14021, Dec. 31, 1960, as amended by T.D. 7280,
38 FR 18369, July 10, 1973]                           § 31.3121(b)(10)–1 Services for remu-
                                                           neration of less than $50 for cal-
§ 31.3121(b)(8)–2 Services in employ of                    endar quarter in the employ of cer-
     religious, charitable, educational,                   tain organizations exempt from in-
     or certain other organizations ex-                    come tax.
     empt from income tax.                               (a) Services performed by an em-
   (a) Services performed by an em-                   ployee in a calendar quarter in the em-
ployee in the employ of a religious,                  ploy of an organization exempt from
charitable, educational, or other orga-               income tax under section 501(a) (other
nization described in section 501(c)(3)               than an organization described in sec-
which is exempt from income tax under                 tion 401(a)) or under section 521 are ex-
section 501(a) are excepted from em-                  cepted from employment if the remu-
ployment. However, this exception does                neration for the services is less than

                                                 58
Internal Revenue Service, Treasury                                              § 31.3121(b)(10)–2

$50. The test relating to remuneration                 by A in any calendar quarter during the year
of $50 is based on the remuneration                    are excepted if the portion of the $120 attrib-
earned during a calendar quarter rath-                 utable to services performed in that quarter
er than on the remuneration paid in a                  is less than $50. If, however, the portion of
                                                       the $120 attributable to services performed in
calendar quarter. The exception applies                any calendar quarter during the year is not
separately with respect to each organi-                less than $50, the services during that quar-
zation for which the employee renders                  ter are not excepted, and the taxes attach
services in a calendar quarter. The                    with respect to that portion of the remu-
type of services performed by the em-                  neration attributable to his services in that
ployee and the place where the services                quarter.
are performed are immaterial; the stat-
                                                         (b) See § 31.3121(b)(8)–2, relating to
utory tests are the character of the or-
ganization in the employ of which the                  services performed in the employ of re-
services are performed and the amount                  ligious, charitable, educational, and
of the remuneration for services per-                  certain other organizations exempt
formed by the employee in the cal-                     from income tax; § 31.3121(b)(8)–1, relat-
endar quarter. For provisions relating                 ing to services performed by a minister
to exemption from income tax under                     of a church in the exercise of his min-
section 501(a) or 521, see Part 1 of this              istry or by a member of a religious
chapter (Income Tax Regulations).                      order in the exercise of duties required
                                                       by such order; § 31.3121(b)(10)–2, relating
  Example 1. X is a local lodge of a fraternal         to services performed by certain stu-
organization and is exempt from income tax
                                                       dents in the employ of a school, col-
under section 501(a) as an organization of the
character described in section 501(c)(8). X has        lege, or university or of a nonprofit or-
two paid employees, A, who serves exclu-               ganization auxiliary to a school, col-
sively as recording secretary for the lodge,           lege, or university; and § 31.3121(b)(13)–
and B, who performs services for the lodge as          1, relating to services performed by
janitor of its clubhouse. For services per-            certain student nurses and hospital in-
formed during the first calendar quarter of            terns.
1955 (that is, January 1, 1955, through March
31, 1955, both dates inclusive) A earns a total        [T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR
of $30. For services performed by certain stu-         14021, Dec. 31, 1960, as amended by T.D. 7373,
dent quarter B earns $180. Since the remu-             40 FR 30958, July 24, 1975]
neration for the services performed by A dur-
ing such quarter is less than $50, all of such         § 31.3121(b)(10)–2 Services performed
services are expected, and the taxes do not                 by certain students in the employ of
attach with respect to any of the remunera-                 a school, college, or university, or of
tion for such services. Since the remunera-                 a nonprofit organization auxiliary
tion for the services performed by B during                 to a school, college, or university.
such quarter, however, is not less than $50,
none of such services are excepted, and the               (a) (1) Services performed in the em-
taxes attached with respect to all of the re-          ploy of a school, college, or university
muneration for such services (that is, $180)           (whether or not such organization is
as and when paid.                                      exempt from income tax) are excepted
  Example 2. The facts are the same as in ex-          from employment, if the services are
ample 1, above, except that on April 1, 1955,
A’s salary is increased and, for services per-         performed by a student who is enrolled
formed during the calendar quarter begin-              and is regularly attending classes at
ning on that date (that is, April 1, 1955,             such school, college, or university.
through June 30, 1955, both dates inclusive),             (2) Services performed after 1972 in
A earns a total of $60. Although all of the            the employ of an organization which
services performed by A during the first               is—
quarter were excepted, none of A’s services
performed during the second quarter are ex-               (i) Described in section 509(a)(3) and
cepted since the remuneration for such serv-           § 1.509(a)–4;
ices is not less than $50. The taxes attach               (ii) Organized, and at all times there-
with respect to all of the remuneration for            after operated, exclusively for the ben-
services performed during the second quarter           efit of, to perform the functions of, or
(that is, $60) as and when paid.                       to carry out the purposes of a school,
  Example 3. The facts are the same as in ex-
ample 1, above, except that A earns $120 for
                                                       college, or university; and
services performed during the year 1955, and              (iii) Operated, supervised, or con-
such amount is paid to him in a lump sum at            trolled by or in connection with such
the end of the year. The services performed            school, college, or university;

                                                  59
§ 31.3121(b)(11)–1                                            26 CFR Ch. I (4–1–99 Edition)

are excepted from employment, if the                 (d) The term ‘‘school, college, or uni-
services are performed by a student               versity’’ within the meaning of this ex-
who is enrolled and is regularly attend-          ception is to be taken in its commonly
ing classes at such school, college, or           or generally accepted sense.
university. The preceding sentence                   (e) For provisions relating to domes-
shall not apply to services performed in          tic service performed by a student in a
the employ of a school, college, or uni-          local college club, or local chapter of a
versity of a State or a political subdivi-        college fraternity or sorority, see
sion thereof by a student referred to in          § 31.3121(b)(2)–1.
section 218(c)(5) of the Social Security          [T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR
Act (42 U.S.C. 418(c)(5)) if such services        14021, Dec. 31, 1960, as amended by T.D. 7373,
are covered under the agreement be-               40 FR 30958, July 24, 1975]
tween the Secretary of Health, Edu-
cation, and Welfare and such State en-            § 31.3121(b)(11)–1 Services in the em-
tered into pursuant to section 218 of                  ploy of a foreign government.
such Act. For the definitions of ‘‘oper-             (a) Services performed by an em-
ated, supervised, or controlled by’’,             ployee in the employ of a foreign gov-
‘‘supervised or controlled in connection          ernment are excepted from employ-
with’’, and ‘‘operated in connection              ment. The exception includes not only
with’’, see paragraphs (g), (h), and (i),         services performed by ambassadors,
respectively, of § 1.509(a)–4.                    ministers, and other diplomatic offi-
   (b) For purposes of this exception,            cers and employees but also services
the amount of remuneration for serv-              performed as a consular or other officer
ices performed by the employee in the             or employee of a foreign government,
calendar quarter, the type of services            or as a nondiplomatic representative
performed by the employee, and the                thereof.
place where the services are performed               (b) For purposes of this exception,
are immaterial. The statutory tests are           the citizenship or residence of the em-
(1) the character of the organization in          ployee is immaterial. It is also imma-
the employ of which the services are              terial whether the foreign government
performed as a school, college, or uni-           grants an equivalent exemption with
versity, or as an organization described          respect to similar services performed
in paragraph (a)(2) of this section, and          in the foreign country by citizens of
(2) the status of the employee as a stu-          the United States.
dent enrolled and regularly attending
classes at the school, college, or uni-           § 31.3121(b)(12)–1 Services in employ
versity by which he is employed or                     of wholly owned instrumentality of
with which his employer is affiliated.                 foreign government.
   (c) The status of the employee as a               (a) Services performed by an em-
student performing the services shall             ployee in the employ of certain instru-
be determined on the basis of the rela-           mentalities of a foreign government
tionship of such employee with the or-            are excepted from employment. The ex-
ganization for which the services are             ception includes all services performed
performed. An employee who performs               in the employ of an instrumentality of
services in the employ of a school, col-          the government of a foreign country,
lege, or university, as an incident to            if—
and for the purpose of pursuing a                    (1) The instrumentality is wholly
course of study at such school, college,          owned by the foreign government;
or university has the status of a stu-               (2) The services are of a character
dent in the performance of such serv-             similar to those performed in foreign
ices. An employee who performs serv-              countries by employees of the United
ices in the employ of an organization             States Government or of an instrumen-
described in paragraph (a)(2) of this             tality thereof; and
section, as an incident to and for the               (3) The Secretary of State certifies to
purpose of pursuing a course of study             the Secretary of the Treasury that the
at a school, college, or university with          foreign government, with respect to
which such organization is affiliated,            whose instrumentality and employees
has the status of a student in the per-           thereof exemption is claimed, grants
formance of such services.                        an equivalent exemption with respect

                                             60
Internal Revenue Service, Treasury                                            § 31.3121(b)(15)–1

to services performed in the foreign                and at the time of, the sale of news-
country by employees of the United                  papers or magazines to ultimate con-
States Government and of instrumen-                 sumers under an arrangement under
talities thereof.                                   which the newspapers or magazines are
  (b) For purposes of this exception,               to be sold by him at a fixed price, his
the citizenship or residence of the em-             compensation being based on the reten-
ployee is immaterial.                               tion of the excess of such price over the
                                                    amount at which the newspapers or
§ 31.3121(b)(13)–1 Services of student              magazines are charged to him, are ex-
     nurse or hospital intern.                      cepted from employment. The services
   (a) Services performed as a student              are excepted whether or not the em-
nurse in the employ of a hospital or a              ployee is guaranteed a minimum
nurses’ training school are excepted                amount of compensation for such serv-
from employment, if the student nurse               ices, or is entitled to be credited with
is enrolled and regularly attending                 the unsold newspapers or magazines
classes in a nurses’ training school and            turned back. Moreover, the services are
such nurses’ training school is char-               excepted without regard to the age of
tered or approved pursuant to State                 the employee. Services performed
law.                                                other than at the time of sale to the ul-
   (b) Services performed before 1966 as            timate consumer are not within the ex-
an intern (as distinguished from a resi-            ception. Thus, the services of a re-
dent doctor), in the employ of a hos-               gional distributor which are ante-
pital are excepted from employment, if              cedent to but not immediately part of
the intern has completed a 4 years’                 the sale to the ultimate consumer are
course in a medical school chartered or             not within the exception. However, in-
approved pursuant to State law.                     cidental services by the employee who
                                                    makes the sale to the ultimate con-
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as          sumer, such as services in assembling
amended by T.D. 6983, 33 FR 18017, Dec. 4,
1968]
                                                    newspapers or in taking newspapers or
                                                    magazines to the place of sale, are con-
§ 31.3121(b)(14)–1 Services in delivery             sidered to be within the exception.
     or distribution of newspapers, shop-
     ping news, or magazines.                       § 31.3121(b)(15)–1 Services in employ
                                                         of international organization.
   (a) Services of individuals under age 18.
Services performed by an employee                      (a) Subject to the provisions of sec-
under the age of 18 in the delivery or              tion 1 of the International Organiza-
distribution of newspapers or shopping              tions Immunities Act (22 U.S.C. 288),
news, not including delivery or dis-                services performed in the employ of an
tribution (as, for example, by a re-                international organization as defined
gional distributor) to any point for                in section 7701(a)(18) are excepted from
subsequent delivery or distribution, are            employment.
excepted from employment. Thus, the                    (b) (1) Section 7701(a)(18) provides as
services performed by an employee                   follows:
under the age of 18 in making house-to-               SEC. 7701. Definitions. (a) When used in this
house delivery or sale of newspapers or             title, where not otherwise distinctly ex-
shopping news, including handbills and              pressed or manifestly incompatible with the
other similar types of advertising ma-              intent thereof—
terial, are excepted from employment.
The services are excepted irrespective                   *        *       *        *       *
of the form or method of compensation.                 (18) International organization. The term
Incidental services by the employees                ‘‘international organization’’ means a public
who makes the house-to-house deliv-                 international organization entitled to enjoy
ery, such as services in assembling                 privileges, exemptions, and immunities as an
newspapers, are considered to be within             international organization under the Inter-
the exception. The exception continues              national Organizations Immunities Act (22
                                                    U.S.C. 288–288f).
only during the time that the employee
is under the age of 18.                               (2) Section 1 of the International Or-
   (b) Services of individuals of any age.          ganizations Immunities Act provides as
Services performed by an employee in,               follows:

                                               61
§ 31.3121(b)(16)–1                                                    26 CFR Ch. I (4–1–99 Edition)
   SEC. 1 [International Organizations Immuni-             (b) If the arrangement between the
ties Act.] For the purposes of this title [Inter-        parties provides that the individual
national Organizations Immunities Act], the
                                                         who undertakes to produce a crop or
term ‘‘international organization’’ means a
public international organization in which               livestock is to be compensated at a
the United States participates pursuant to               specified rate of pay or is to receive a
any treaty or under the authority of any Act             fixed sum of money or a stipulated
of Congress authorizing such participation or            quantity of the commodities to be pro-
making an appropriation for such participa-              duced, without regard to the amount
tion, and which shall have been designated               actually produced, as distinguished
by the President through appropriate Execu-
tive order as being entitled to enjoy the                from a proportionate share of the crop
privileges, exemptions, and immunities here-             or livestock, or the proceeds therefrom,
in provided. The President shall be author-              the services performed by such indi-
ized, in the light of the functions performed            vidual in the production of such crop or
by any such international organization, by               livestock is not within the exception.
appropriate Executive order to withhold or
                                                           (c) For provisions relating to the sta-
withdraw from any such organization or its
officers or employees any of the privileges,             tus, under the Self-Employment Con-
exemptions, and immunities provided for in               tributions Act of 1954, of the services
this title (including the amendments made                which are excepted from ‘‘employ-
by this title) or to condition or limit the en-          ment’’ under this section, see the regu-
joyment by any such organization or its offi-            lations under section 1402(a) in Part 1
cers or employees of any such privilege, ex-             of this chapter (Income Tax Regula-
emption, or immunity. The president shall
be authorized, if in his judgment such action
                                                         tions).
should be justified by reason of the abuse by            [T.D. 6744, 29 FR 8313, July 2, 1964]
an international organization or its officers
and employees of the privileges, exemptions,             § 31.3121(b)(17)–1 Services in employ
and immunities herein provided or for any                     of Communist organization.
other reason, at any time to revoke the des-
ignation of any international organization                 The term ‘‘employment’’ does not in-
under this section, whereupon the inter-                 clude services performed in the employ
national organization in question shall cease            of any organization in any calendar
to be classed as an international organiza-
tion for the purposes of this title.
                                                         quarter beginning after June 30, 1956,
                                                         and during any part of which such or-
                                                         ganization is registered, or there is in
§ 31.3121(b)(16)–1 Services performed                    effect a final order of the Subversive
     under share-farming arrangement.
                                                         Activities Control Board requiring
   (a) The term ‘‘employment’’ does not                  such organization to register, under
include services performed by an indi-                   the Internal Security Act of 1950 (50
vidual under an arrangement with the                     U.S.C. 781 et seq.), as amended, as a
owner or tenant of land pursuant to                      Communist-action      organization,    a
which—                                                   Communist-front organization, or a
   (1) Such individual undertakes to                     Communist-infiltrated organization.
produce agricultural or horticultural
commodities (including livestock, bees,                  [T.D. 6744, 29 FR 8313, July 2, 1964]
poultry, and fur-bearing animals and
wildlife) on such land,                                  § 31.3121(b)(18)–1 Services performed
   (2) The agricultural or horticultural                      by a resident of the Republic of the
commodities produced by such indi-                            Philippines while temporarily in
                                                              Guam.
vidual, or the proceeds therefrom, are
to be divided between such individual                      (a) Services performed after 1960 by a
and such owner or tenant, and                            resident of the Republic of the Phil-
   (3) The amount of such individual’s                   ippines while in Guam on a temporary
share depends on the amount of the ag-                   basis as a nonimmigrant alien admit-
ricultural or horticultural commod-                      ted to Guam pursuant to section
ities produced.                                          101(a)(15)(H)(ii) of the Immigration and
For purposes of this exception, the ar-                  Nationality Act (8 U.S.C. 1101) are ex-
rangement pursuant to which the indi-                    cepted from employment.
vidual’s services are performed must                       (b) Section 101(a)(15)(H) of the Immi-
meet the specified statutory condi-                      gration and Nationality Act provides
tions.                                                   as follows:

                                                    62
Internal Revenue Service, Treasury                                                § 31.3121(b)(19)–1
  SEC. 101. Definitions. [Immigration and Na-          (J) of section 101(a)(15) of the Immigra-
tionality Act (66 Stat. 166)]                          tion and Nationality Act, as amended,
  (a) As used in this chapter—
                                                       the services are not deemed for pur-
                                                       poses of this section to be performed to
      *        *        *        *      *              carry out a purpose for which such in-
  (15) The term ‘‘immigrant’’ means every              dividual was admitted. The services of
alien except an alien who is within one of the         such spouse or child are excepted from
following classes of nonimmigrant aliens—              employment under this section only if
                                                       the spouse or child was admitted for a
      *        *        *        *      *              purpose specified in such subparagraph
  (H) An alien having a residence in a foreign         (F) or (J) and if the services are per-
country which he has no intention of aban-             formed to carry out such purpose.
doning (i) who is of distinguished merit and             (b) Section 101 of the Immigration
ability and who is coming temporarily to the           and Nationality Act (8 U.S.C. 1101), as
United States to perform temporary services
of an exceptional nature requiring merit and
                                                       amended, provides in part as follows:
ability; or (ii) who is coming temporarily to            SEC. 101. Definitions. [Immigration and Na-
the United States to perform other tem-                tionality Act (68 Stat. 166)]
porary services or labor, if unemployed per-             (a) As used in this chapter—* * *
sons capable of performing such service or
                                                         (15) The term ‘‘immigrant’’ means every
labor cannot be found in this country; or (iii)
who is coming temporarily to the United                alien except an alien who is within one of the
States as an industrial trainee;                       following classes of nonimmigrant aliens—

[T.D. 6744, 29 FR 8313, July 2, 1964]
                                                             *        *       *        *        *
§ 31.3121(b)(19)–1 Services of certain                   (F) (i) An alien having a residence in a for-
     nonresident aliens.                               eign country which he has no intention of
   (a) (1) Services performed after 1961               abandoning, who is a bona fide student quali-
by a nonresident alien individual who                  fied to pursue a full course of study and who
is temporarily present in the United                   seeks to enter the United States temporarily
States as a nonimmigrant under sub-                    and solely for the purpose of pursuing such a
paragraph (F) or (J) of section 101(a)(15)             course of study at an established institution
                                                       of learning or other recognized place of study
of the Immigration and Nationality
                                                       in the United States, particularly designated
Act (8 U.S.C. 1101), as amended, are ex-               by him and approved by the Attorney Gen-
cepted from employment if the services                 eral after consultation with the Office of
are performed to carry out a purpose                   Education of the United States, which insti-
for which the individual was admitted.                 tution or place of study shall have agreed to
For purposes of this section an alien                  report to the Attorney General the termi-
individual who is temporarily present                  nation of attendance of each nonimmigrant
in the United States as a non-                         student, and if any such institution of learn-
immigrant under such subparagraph                      ing or place of study fails to make reports
(F) or (J) is deemed to be a nonresident               promptly the approval shall be withdrawn,
alien individual. The preceding sen-                   and (ii) the alien spouse and minor children
tence does not apply to the extent it is               of any such alien if accompanying him or fol-
                                                       lowing to join him;
inconsistent with section 7701(b) and
the regulations under that section. A
nonresident alien individual who is                          *        *       *        *        *
temporarily present in the United                        (J) An alien having a residence in a foreign
States as a nonimmigrant under such                    country which he has no intention of aban-
subparagraph (J) includes an alien indi-               doning who is a bona fide student, scholar,
vidual admitted to the United States                   trainee, teacher, professor, research assist-
as an ‘‘exchange visitor’’ under section               ant, specialist, or leader in a field of special-
201 of the United States Information                   ized knowledge or skill, or other person of
and Educational Exchange Act of 1948                   similar description, who is coming tempo-
                                                       rarily to the United States as a participant
(22 U.S.C. 1446).
                                                       in a program designated by the Secretary of
   (2) If services are performed by a non-             State, for the purpose of teaching, instruct-
resident alien individual’s alien spouse               ing or lecturing, studying, observing, con-
or minor child, who is temporarily                     ducting research, consulting, demonstrating
present in the United States as a non-                 special skills, or receiving training, and the
immigrant under subparagraph (F) or                    alien spouse and minor children of any such

                                                  63
§ 31.3121(b)(20)–1                                                 26 CFR Ch. I (4–1–99 Edition)
alien if accompanying him or following to                  (3) The operating crew of a boat in-
join him.                                                cludes all persons on the boat (includ-
                                                         ing the captain) who receive any form
      *        *       *        *        *               of remuneration in exchange for serv-
                                                         ices rendered while on a boat engaged
[Sec. 101, Immigration and Nationality Act,
as amended by sec. 101, Act of June 27, 1952,            in catching fish. See § 1.6050A–1 for re-
66 Stat. 166; sec. 109, Act of Sept. 21, 1961, 75        porting requirements for the operator
Stat. 534]                                               of a boat engaged in catching fish with
                                                         respect to individuals performing serv-
[T.D. 6744, 29 FR 8313, July 2, 1964, as amend-          ices described in this section.
ed by T.D. 8411, 57 FR 15241, Apr. 27, 1992]               (4) During the same return period,
                                                         service performed by a crew member
§ 31.3121(b)(20)–1 Service    performed
     on a boat engaged in catching fish.                 may be excepted from employment by
                                                         section 3121(b)(20) and this section for
   (a) In general. (1) Service performed                 one voyage and not so excepted on a
on or after December 31, 1954, by an in-                 subsequent voyage on the same or on a
dividual on a boat engaged in catching                   different boat.
fish or other forms of aquatic animal                      (5) During the same voyage, service
life (hereinafter ‘‘fish’’) are excepted                 performed by one crew member may be
from employment if—                                      excepted from employment by section
   (i) The individual receives a share of                3121(b)(20) and this section but service
the boat’s (or boats’ for a fishing oper-                performed by another crew member
ation involving more than one boat)                      may not be so excepted.
catch of fish or a share of the proceeds                   (b) Special rule. Services performed
from the sale of the catch,                              after December 31, 1954, and before Oc-
   (ii) The amount of the individual’s                   tober 4, 1976, on a boat by an individual
share depends solely on the amount of                    engaged in catching fish are not ex-
the boat’s (or boats’ for a fishing oper-                cepted from employment for any voy-
ation involving more than one boat)                      age (for purposes of section 3121(b) and
catch of fish.                                           the corresponding regulations), even
   (iii) The individual does not receive                 though the individual satisfies the re-
and is not entitled to receive, any cash                 quirements of paragraphs (a)(1)(i)
remuneration, other than remunera-                       through (iv) of this section, if the
tion that is described in sub-division (1)               owner or operator of the boat engaged
of this subparagraph, and                                in catching fish treated the individual
   (iv) The crew of the boat (or of each                 as an employee. For purposes of this
boat from which the individual re-                       subparagraph, the individual was treat-
ceives a share of the catch) normally is                 ed as an employee if—
made up of fewer than 10 individuals.                      (1) Form 941 was voluntarily filed by
   (2) The requirement of paragraph                      the boat operator or owner, regardless
(a)(1)(ii) is not satisfied if there exists              of whether the tax imposed by chapter
an agreement with the boat’s (or                         21 was withheld. For purposes of this
boats’) owner or operator by which the                   subdivision, the filing of Form 941 is
individual’s remuneration is deter-                      not voluntary if the filing was the re-
mined partially or fully by a factor not                 sult of action taken by the Service pur-
dependent on the size of the catch. For                  suant to section 6651(a) (relating to ad-
example, if a boat is operated under a                   dition to the tax for failure to file tax
remuneration arrangement, e.g., a col-                   return or to pay tax);
lective agreement which specifies that                     (2) The boat owner or operator with-
crew members, in addition to receiving                   held from the individual’s share the tax
a share of the catch, are entitled to an                 imposed by chapter 21, regardless of
hourly wage for repairing nets, regard-                  whether the tax was paid over to the
less of whether this wage is actually                    Service; or
paid, then all the crew members cov-                       (3) The boat owner or operator made
ered by the arrangement are entitled                     full or partial payment of the tax im-
to receive cash remuneration other                       posed by chapter 21, unless the pay-
than a share of the catch and their                      ment was made pursuant to section
services are not excepted from employ-                   7422(a) (relating to no civil actions for
ment by section 3121(b)(20).                             refund prior to filing claim for refund).

                                                    64
Internal Revenue Service, Treasury                                                 § 31.3121(c)–1

However, for purposes of this para-                   university, to perform domestic service for
graph crew members whose services,                    the club and to keep the club’s books. The
but for paragraphs (a)(1)(i) through                  domestic services performed by D for the AB
(iii), would have been excepted from                  Club do not constitute employment, and his
                                                      services as the club’s bookkeeper constitute
employment by section 3121(b)(20) are
                                                      employment. D receives a payment at the
not required to pay self-employment                   end of each month for all services which he
tax on income earned in performing                    performs for the club. During a particular
those services. See § 1.1402(c)–3(g).                 month D spends 60 hours in performing do-
Moreover, in such cases the employer                  mestic service for the club and 40 hours as
is not entitled to a refund of the em-                the club’s bookkeeper. None of D’s services
ployer’s share of any tax imposed by                  during the month are deemed to be employ-
chapter 21 that was paid.                             ment, since less than one-half of his services
                                                      during the month constitutes employment.
[T.D. 7716, 45 FR 57123, Aug. 27, 1980]               During another month D spends 35 hours in
                                                      the performance of domestic services and 60
§ 31.3121(c)–1 Included and excluded                  hours in keeping the club’s books. All of D’s
     services.                                        services during the month are deemed to be
   (a) If a portion of the services per-              employment, since one-half or more of his
formed by an employee for an employer                 services during the month constitutes em-
during a pay period constitutes em-                   ployment.
ployment, and the remainder does not                     (e) For purposes of this section, a
constitute employment, all the serv-                  ‘‘pay period’’ is the period (of not more
ices performed by the employee for the                than 31 consecutive calendar days) for
employer during the period shall for                  which a payment of remuneration is
purposes of the taxes be treated alike,               ordinarily made to the employee by the
that is, either all as included or all as             employer. Thus, if the periods for
excluded. The time during which the                   which payments of remuneration are
employee performs services which                      made to the employee by the employer
under section 3121(b) constitute em-
                                                      are of uniform duration, each such pe-
ployment, and the time during which
                                                      riod constitutes a ‘‘pay period’’. If,
he performs services which under such
                                                      however, the periods occasionally vary
section do not constitute employment,
                                                      in duration, the ‘‘pay period’’ is the pe-
within the pay period, determine
whether all the services during the pay               riod for which a payment of remunera-
period shall be deemed to be included                 tion is ordinarily made to the em-
or excluded.                                          ployee by the employer, even though
   (b) If one-half or more of the employ-             that period does not coincide with the
ee’s time in the employ of a particular               actual period for which a particular
person in a pay period is spent in per-               payment of remuneration is made. For
forming services which constitute em-                 example, if an employer ordinarily
ployment, then all the services of that               pays a particular employee for each
employee for that person in that pay                  calendar week at the end of the week,
period shall be deemed to be employ-                  but the employee receives a payment
ment.                                                 in the middle of the week for the por-
   (c) If less than one-half of the em-               tion of the week already elapsed and
ployee’s time in the employ of a par-                 receives the remainder at the end of
ticular person in a pay period is spent               the week, the ‘‘pay period’’ is still the
in performing services which con-                     calendar week; or if, instead, that em-
stitute employment, then none of the                  ployee is sent on a trip by such em-
services of that employee for that per-               ployer and receives at the end of the
son in that pay period shall be deemed                third week a single remuneration pay-
to be employment.                                     ment for three weeks’ services, the
   (d) The application of the provisions              ‘‘pay period’’ is still the calendar week.
of paragraphs (a), (b), and (c) of this                  (f) If there is only one period (and
section may be illustrated by the fol-                such period does not exceed 31 consecu-
lowing example:                                       tive calendar days) for which a pay-
  Example. The AB Club, which is a local col-         ment of remuneration is made to the
lege club within the meaning of section               employee by the employer, such period
3121(b)(2), employs D, a student who is en-           is deemed to be a ‘‘pay period’’ for pur-
rolled and is regularly attending classes at a        poses of this section.

                                                 65
§ 31.3121(d)–1                                               26 CFR Ch. I (4–1–99 Edition)

  (g) The rules set forth in this section            (2) Section 3121(d) contains three sep-
do not apply (1) with respect to any              arate and independent tests for deter-
services performed by the employee for            mining who are employees. Paragraphs
the employer if the periods for which             (b), (c), and (d) of this section relate to
such employer makes payments of re-               the respective tests. Paragraph (b) re-
muneration to the employee vary to                lates to the test for determining
the extent that there is no period ‘‘for          whether an officer of a corporation is
which a payment of remuneration is                an employee of the corporation. Para-
ordinarily made to the employee’’, or             graph (c) relates to the test for deter-
(2) with respect to any services per-             mining whether an individual is an em-
formed by the employee for the em-                ployee under the usual common law
ployer if the period for which a pay-             rules. Paragraph (d) relates to the test
ment of remuneration is ordinarily                for determining which individuals in
made to the employee by such em-                  certain occupational groups who are
ployer exceeds 31 consecutive calendar            not employees under the usual common
days, or (3) with respect to any service          law rules are included as employees. If
performed by the employee for the em-             an individual is an employee under any
ployer during a pay period if any of              one of the tests, he is to be considered
such service is excepted by section               an employee for purposes of the regula-
3121(b)(9) (see § 31.3121(b)(9)–1).               tions in this subpart whether or not he
  (h) If during any period for which a            is an employee under any of the other
person makes a payment of remunera-               tests.
tion to an employee only a portion of                (3) If the relationship of employer
the employee’s services constitutes               and employee exists, the designation or
employment, but the rules prescribed              description of the relationship by the
in this section are not applicable, the           parties as anything other than that of
taxes attach with respect to such serv-           employer and employee is immaterial.
ices as constitute employment as de-              Thus, if such relationship exists, it is
fined in section 3121(b).                         of no consequence that the employee is
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as        designated as a partner, coadventurer,
amended by T.D. 6744, 29 FR 8313, July 2,         agent, independent contractor, or the
1964]                                             like.
                                                     (4) All classes or grades of employees
§ 31.3121(d)–1 Who are employees.                 are included within the relationship of
   (a) In general. (1) Whether an indi-           employer and employee. Thus, super-
vidual is an employee with respect to             intendents, managers, and other super-
services performed after 1954 is deter-           visory personnel are employees.
mined in accordance with section                     (5) Although an individual may be an
3121(d) and (o) and section 3506. This            employee under this section, his serv-
section of the regulations applies with           ices may be of such a nature, or per-
respect only to services performed                formed under such circumstances, as
after 1954. Whether an individual is an           not to constitute employment (see
employee with respect to services per-            § 31.3121(b)–3).
formed after 1936 and before 1940 shall              (b) Corporate officers. Generally, an
be determined in accordance with the              officer of a corporation is an employee
applicable provisions of law and of 26            of the corporation. However, an officer
CFR (1939) Part 401 (Regulations 91).             of a corporation who as such does not
Whether an individual is an employee              perform any services or performs only
with respect to services performed                minor services and who neither re-
after 1939 and before 1951 shall be deter-        ceives nor is entitled to receive, di-
mined in accordance with the applica-             rectly or indirectly, any remuneration
ble provisions of law and of 26 CFR               is considered not to be an employee of
(1939) Part 402 (Regulations 106).                the corporation. A director of a cor-
Whether an individual is an employee              poration in his capacity as such is not
with respect to services performed                an employee of the corporation.
after 1950 and before 1955 shall be deter-           (c) Common law employees. (1) Every
mined in accordance with the applica-             individual is an employee if under the
ble provisions of law and of 26 CFR               usual common law rules the relation-
(1939) Part 408 (Regulations 128).                ship between him and the person for

                                             66
Internal Revenue Service, Treasury                                         § 31.3121(d)–1

whom he performs services is the legal              (i) As an agent-driver or commission-
relationship of employer and employee.            driver engaged in distributing meat
  (2) Generally such relationship exists          products, vegetable products, fruit
when the person for whom services are             products, bakery products, beverages
performed has the right to control and            (other than milk), or laundry or dry-
direct the individual who performs the            cleaning services for his principal;
services, not only as to the result to be           (ii) As a full-time life insurance
accomplished by the work but also as              salesman;
to the details and means by which that              (iii) As a home worker performing
result is accomplished. That is, an em-           work, according to specifications fur-
ployee is subject to the will and con-            nished by the person for whom the
trol of the employer not only as to               services are performed, on materials or
what shall be done but how it shall be            goods furnished by such person which
done. In this connection, it is not nec-          are required to be returned to such per-
essary that the employer actually di-             son or a person designated by him; or
rect or control the manner in which                 (iv) As a traveling or city salesman,
the services are performed; it is suffi-          other than as an agent-driver or com-
cient if he has the right to do so. The           mission-driver, engaged upon a full-
right to discharge is also an important           time basis in the solicitation on behalf
factor indicating that the person pos-            of, and the transmission to, his prin-
sessing that right is an employer.                cipal (except for side-line sales activi-
Other factors characteristic of an em-            ties on behalf of some other person) of
ployer, but not necessarily present in            orders from wholesalers, retailers, con-
every case, are the furnishing of tools           tractors, or operators of hotels, res-
and the furnishing of a place to work,            taurants, or other similar establish-
to the individual who performs the                ments for merchandise for resale or
services. In general, if an individual is         supplies for use in their business oper-
subject to the control or direction of            ations.
another merely as to the result to be               (2) In order for an individual to be an
accomplished by the work and not as               employee under this paragraph, the in-
to the means and methods for accom-               dividual must perform services in an
plishing the result, he is an inde-               occupation falling within one of the
pendent contractor. An individual per-            enumerated groups. If the individual
forming services as an independent                does not perform services in one of the
contractor is not as to such services an          designated occupational groups, he is
employee under the usual common law               not an employee under this paragraph.
rules. Individuals such as physicians,            An individual who is not an employee
lawyers, dentists, veterinarians, con-            under this paragraph may nevertheless
struction contractors, public stenog-             be an employee under paragraph (b) or
raphers, and auctioneers, engaged in              (c) of this section. The language used
the pursuit of an independent trade,              to designate the respective occupa-
business, or profession, in which they            tional groups relates to fields of en-
offer their services to the public, are           deavor in which particular designa-
independent contractors and not em-               tions are not necessarily in universal
ployees.                                          use with respect to the same service.
  (3) Whether the relationship of em-             The designations are addressed to the
ployer and employee exists under the              actual services without regard to any
usual common law rules will in doubt-             technical or colloquial labels which
ful cases be determined upon an exam-             may be attached to such services.
ination of the particular facts of each           Thus, a determination whether services
case.                                             fall within one of the designated occu-
  (d) Special classes of employees. (1) In        pational groups depends upon the facts
addition to individuals who are em-               of the particular situation.
ployees under paragraph (b) or (c) of               (3) The factual situations set forth
this section, other individuals are em-           below are illustrative of some of the in-
ployees if they perform services for re-          dividuals falling within each of the
muneration under certain prescribed               above enumerated occupational groups.
circumstances in the following occupa-            The illustrative factual situations are
tional groups:                                    as follows:

                                             67
§ 31.3121(d)–1                                                26 CFR Ch. I (4–1–99 Edition)

   (i) Agent-driver or commission-driver.           (iv) Traveling or city salesman. (a) This
This occupational group includes                  occupational group includes a city or
agent-drivers or commission-drivers               traveling salesman who is engaged
who are engaged in distributing meat              upon a full-time basis in the solicita-
or meat products, vegetables or vege-             tion on behalf of, and the transmission
table products, fruit or fruit products,          to, his principal (except for side-line
bakery products, beverages (other than            sales activities on behalf of some other
milk), or laundry or dry-cleaning serv-           person or persons) of orders from
ices for their principals. An agent-driv-         wholesalers, retailers, contractors, or
er or commission-driver includes an in-           operators of hotels, restaurants, or
dividual who operates his own truck or            other similar establishments for mer-
the truck of the person for whom he               chandise for resale or supplies for use
performs services, serves customers               in their business operations. An agent-
designated by such person as well as              driver or commission-driver is not
those solicited on his own, and whose             within this occupational group. City or
compensation is a commission on his               traveling salesmen who sell to retailers
sales or the difference between the               or to the others specified, operate off
price he charges his customers and the            the premises of their principals, and
price he pays to such person for the              are generally compensated on a com-
product or service.                               mission basis, are within this occupa-
   (ii) Full-time life insurance salesman.        tional group. Such salesmen are gen-
An individual whose entire or principal           erally not controlled as to the details
business activity is devoted to the so-           of their services or the means by which
licitation of life insurance or annuity           they cover their territories, but in the
contracts, or both, primarily for one             ordinary case they are expected to call
life insurance company is a full-time             on regular customers with a fair degree
life insurance salesman. Such a sales-            of regularity.
man ordinarily uses the office space                (b) In order for a city or traveling
provided by the company or its general            salesman to be included within this oc-
agent, and stenographic assistance,               cupational group, his entire or prin-
telephone facilities, forms, rate books,          cipal business activity must be devoted
and advertising materials are usually             to the solicitation of orders for one
made available to him without cost. An            principal. Thus, the multiple-line
individual who is engaged in the gen-             salesman generally is not within this
eral insurance business under a con-              occupational group. However, if the
tract or contracts of service which do            salesman solicits orders primarily for
not contemplate that the individual’s             one principal, he is not excluded from
principal business activity will be the           this occupational group solely because
solicitation of life insurance or annuity         of side-line sales activities on behalf of
contracts, or both, for one company, or           one or more other persons. In such a
any individual who devotes only part              case, the salesman is within this occu-
time to the solicitation of life insur-           pational group only with respect to the
ance contracts, including annuity con-            services performed for the person for
tracts, and is principally engaged in             whom he primarily solicits orders and
other endeavors, is not a full-time life          not with respect to the services per-
insurance salesman.                               formed for such other persons. The fol-
   (iii) Home workers. This occupational          lowing examples illustrate the applica-
group includes a worker who performs              tion of the foregoing provisions:
services off the premises of the person             Example 1. Salesman A’s principal business
for whom the services are performed,              activity is the solicitation of orders from re-
according to specifications furnished             tail pharmacies on behalf of the X Wholesale
by such person, on materials or goods             Drug Company. A also occasionally solicits
furnished by such person which are re-            orders for drugs on behalf of the Y and Z
quired to be returned to such person or           Companies. A is within this occupational
                                                  group with respect to his services for the X
a person designated by him. For provi-
                                                  Company but not with respect to his services
sions relating to the determination of            for either the Y Company or the Z Company.
wages in the case of a home worker to               Example 2. Salesman B’s principal business
whom this subdivision is applicable,              activity is the solicitation of orders from re-
see § 31.3121(a)(10)–1.                           tail hardware stores on behalf of the R Tool

                                             68
Internal Revenue Service, Treasury                                                 § 31.3121(d)–2
Company and the S Cooking Utensil Com-                ance of services for another person has
pany. B regularly solicits orders on behalf of        no significance under this paragraph,
both companies. B is not within this occupa-
                                                      since such investment is comparable to
tional group with respect to the services per-
formed for either the R Company or the S              outlays for transportation by an indi-
Company.                                              vidual performing similar services who
  Example 3. Salesman C’s principal business          does not own an automobile. Moreover,
activity is the house-to-house solicitation of        the investment in facilities for the
orders on behalf of the T Brush Company. C            transportation of the goods or com-
occasionally solicits such orders from retail         modities to which the services relate is
stores and restaurants. C is not within this
occupational group.                                   to be excluded in determining the in-
                                                      vestment in a particular case. If an in-
  (4)(i) The fact that an individual falls            dividual has a substantial investment
within one of the enumerated occupa-                  in facilities of the requisite character,
tional groups, however, does not make                 he is not an employee within the mean-
such individual an employee under this                ing of this paragraph, since a substan-
paragraph unless (a) the contract of                  tial investment of the requisite char-
service contemplates that substan-                    acter standing alone is sufficient to ex-
tially all the services to which the con-             clude the individual from the employee
tract relates in the particular des-                  concept under this paragraph.
ignated occupation are to be performed
                                                        (iv) If the services are not performed
personally by such individual, (b) such
                                                      as part of a continuing relationship
individual has no substantial invest-
                                                      with the person for whom the services
ment in the facilities used in connec-
tion with the performance of such serv-               are performed, but are in the nature of
ices (other than in facilities for trans-             a single transaction, the individual
portation) and (c) such services are                  performing such services is not an em-
part of a continuing relationship with                ployee of such person within the mean-
the person for whom the services are                  ing of this paragraph. The fact that the
performed and are not in the nature of                services are not performed on consecu-
a single transaction.                                 tive workdays does not indicate that
  (ii) The term ‘‘contract of service’’,              the services are not performed as part
as used in this paragraph, means an ar-               of a continuing relationship.
rangement, formal or informal, under                  [T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
which the particular services are per-                amended by T.D. 6744, 29 FR 8314, July 2, 1964;
formed. The requirement that the con-                 T.D. 7691, 45 24129, Apr. 9, 1980]
tract of service shall contemplate that
substantially all the services to which               § 31.3121(d)–2   Who are employers.
the contract relates in the particular                  (a) Every person is an employer if he
designated occupation are to be per-                  employs one or more employees. Nei-
formed personally by the individual                   ther the number of employees em-
means that it is not contemplated that
                                                      ployed nor the period during which any
any material part of the services to
                                                      such employee is employed is material
which the contract relates in such oc-
                                                      for the purpose of determining whether
cupation will be delegated to any other
                                                      the person for whom the services are
person by the individual who under-
                                                      performed is an employer.
takes under the contract to perform
such services.                                          (b) An employer may be an indi-
  (iii) The facilities to which reference             vidual, a corporation, a partnership, a
is made in this paragraph include                     trust, an estate, a joint-stock com-
equipment and premises available for                  pany, an association, or a syndicate,
the work or enterprise as distinguished               group, pool, joint venture, or other un-
from education, training, and experi-                 incorporated organization, group, or
ence, but do not include such tools, in-              entity. A trust or estate, rather than
struments, equipment, or clothing, as                 the fiduciary acting for on behalf of the
are commonly or frequently provided                   trust or estate, is generally the em-
by employees. An investment in an                     ployer.
automobile by an individual which is                    (c) Although a person may be an em-
used primarily for his own transpor-                  ployer under this section, services per-
tation in connection with the perform-                formed in his employ may be of such a

                                                 69
§ 31.3121(e)–1                                              26 CFR Ch. I (4–1–99 Edition)

nature, or performed under such cir-               (c) For provisions relating to services
cumstances, as not to constitute em-             performed outside the United States on
ployment (see § 31.3121(b)–3).                   or in connection with an American ves-
                                                 sel or American aircraft, see paragraph
§ 31.3121(e)–1 State, United States, and         (c)(2) of § 31.3121(b)–3.
     citizen.
                                                 [T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
  (a) When used in the regulations in            amended by T.D. 6744, 29 FR 8314, July 2,
this subpart, the term ‘‘State’’ includes        1964]
the District of Columbia, the Common-
wealth of Puerto Rico, the Virgin Is-            § 31.3121(g)–1 Agricultural labor.
lands, the Territories of Alaska and                (a) In general. (1) The term ‘‘agricul-
Hawaii before their admission as                 tural labor’’ as defined in section
States, and (when used with respect to           3121(g) includes services of the char-
services performed after 1960) Guam              acter described in paragraph (b), (c),
and American Samoa.                              (d), (e), and (f) of this section. In gen-
  (b) When used in the regulations in            eral, however, the term does not in-
this   subpart,    the   term    ‘‘United        clude services performed in connection
States’’, when used in a geographical            with forestry, lumbering, or land-
sense, means the several states (includ-         scaping.
ing the Territories of Alaska and Ha-               (2) The term ‘‘farm’’ as used in the
waii before their admission as States),          regulations in this subpart includes
the District of Columbia, the Common-            stock, dairy, poultry, fruit, fur-bearing
wealth of Puerto Rico, and the Virgin            animal, and truck farms, plantations,
Islands. When used in the regulations            ranches, nurseries, ranges, orchards,
in this subpart with respect to services         and such greenhouses and other similar
performed after 1960, the term ‘‘United          structures as are used primarily for the
States’’ also includes Guam and Amer-            raising of agricultural or horticultural
ican Samoa when the term is used in a            commodities. Greenhouses and other
geographical sense. The term ‘‘citizen           similar structures used primarily for
of the United States’’ includes a citizen        other purposes (for example, display,
of the Commonwealth of Puerto Rico               storage, and fabrication of wreaths,
or the Virgin Islands, and, effective            corsages, and bouquets) do not con-
January 1, 1961, a citizen of Guam or            stitute ‘‘farms’’.
American Samoa.                                     (3) For provisions relating to the ex-
                                                 ception from employment provided
[T.D. 6744, 29 FR 8314, July 2, 1964]            with respect to services performed by
                                                 certain foreign agricultural workers
§ 31.3121(f)–1 American vessel and air-          and to services performed before 1959 in
     craft.
                                                 connection with the production or har-
   (a) The term ‘‘American vessel’’              vesting of certain oleoresinous prod-
means any vessel which is documented             ucts, see § 31.3121(b)(1)–1. For provisions
(that is, registered, enrolled, or li-           relating to the exclusion from wages of
censed) or numbered in conformity                remuneration paid in any medium
with the laws of the United States. It           other than cash for agricultural labor
also includes any vessel which is nei-           and to the test for determining wheth-
ther documented nor numbered under               er cash remuneration paid for agricul-
the laws of the United States, nor doc-          tural labor constitutes wages, see
umented under the laws of any foreign            § 31.3121(a)(8)–1.
country, if the crew of such vessel is              (b) Services described in section
employed solely by one or more citi-             3121(g)(1). (1) Services performed on a
zens or residents of the United States           farm by an employee of any person in
or corporations organized under the              connection with any of the following
laws of the United States or of any              activities      constitute     agricultural
State. (For provisions relating to the           labor:
terms ‘‘State’’ and ‘‘citizen’’, see                (i) The cultivation of the soil;
§ 31.3121 (e)–1.)                                   (ii) The raising, shearing, feeding,
   (b) The term ‘‘American aircraft’’            caring for, training, or management of
means any aircraft registered under              livestock, bees, poultry, fur-bearing
the laws of the United States.                   animals, or wildlife; or

                                            70
Internal Revenue Service, Treasury                                        § 31.3121(g)–1

   (iii) The raising or harvesting of any          (1) The ginning of cotton;
other agricultural or horticultural                (2) The operation or maintenance of
commodity.                                       ditches, canals, reservoirs, or water-
   (2) Services performed in connection          ways, not owned or operated for profit,
with the production or harvesting of             used exclusively for supplying or stor-
maple sap, or in connection with the             ing water for farming purposes; or
raising or harvesting of mushrooms, or             (3) The production or harvesting of
in connection with the hatching of               crude gum (oleoresin) from a living
poultry constitute agricultural labor            tree or the processing of such crude
only if such services are performed on           gum into gum spirits of turpentine and
a farm. Thus, services performed in              gum rosin, provided such processing is
connection with the operation of a               carried on by the original producer of
hatchery, if not operated as part of a           such crude gum.
poultry or other farm, do not con-                 (e) Services described in section
stitute agricultural labor.                      3121(g)(4). (1) Services performed by an
   (c) Services described in section             employee in the handling, planting,
3121(g)(2). (1) The following services           drying, packing, packaging, processing,
performed by an employee in the em-              freezing, grading, storing, or delivering
ploy of the owner or tenant or other             to storage or to market or to a carrier
operator of one or more farms con-               for transportation to market, of any
stitute agricultural labor, provided the         agricultural or horticultural com-
major part of such services is per-              modity constitute agricultural labor if:
formed on a farm:                                  (i) Such services are performed by
   (i) Services performed in connection          the employee in the employ of an oper-
with the operation, management, con-             ator of a farm or in the employ of a
servation, improvement, or mainte-               group of operators of farms (other than
nance of any of such farms or its tools          a cooperative organization);
or equipment; or                                   (ii) Such services are performed with
   (ii) Services performed in salvaging          respect to the commodity in its un-
timber, or clearing land of brush and            manufactured state; and
other debris, left by a hurricane.                 (iii) Such operator produced more
   (2) The services described in para-           than one-half of the commodity with
graph (c)(1)(i) of this section may in-          respect to which such services are per-
clude, for example, services performed           formed during the pay period, or such
by carpenters, painters, mechanics,              group of operators produced all of the
farm supervisors, irrigation engineers,          commodity with respect to which such
bookkeepers, and other skilled or semi-          services are performed during the pay
skilled workers, which contribute in             period.
any way to the conduct of the farm or              (2) The term ‘‘operator of a farm’’ as
farms, as such, operated by the person           used in this paragraph means an owner,
employing them, as distinguished from            tenant, or other person, in possession
any other enterprise in which such per-          of a farm and engaged in the operation
son may be engaged.                              of such farm.
   (3) Since the services described in             (3) The services described in this
this paragraph must be performed in              paragraph do not constitute agricul-
the employ of the owner or tenant or             tural labor if performed in the employ
other operator of the farm, the term             of a cooperative organization. The
‘‘agricultural labor’’ does not include          term ‘‘organization’’ includes corpora-
services performed by employees of a             tions, joint-stock companies, and asso-
commercial painting concern, for ex-             ciations which are treated as corpora-
ample, which contracts with a farmer             tions pursuant to section 7701(a)(3) of
to renovate his farm properties.                 the Internal Revenue Code. For pur-
   (d) Services described in section             poses of this paragraph, any unincor-
3121(g)(3). Services performed by an em-         porated group of operators shall be
ployee in the employ of any person in            deemed a cooperative organization if
connection with any of the following             the number of operators comprising
operations      constitute   agricultural        such group is more than 20 at any time
labor without regard to the place                during the calendar quarter in which
where such services are performed:               the services involved are performed.

                                            71
§ 31.3121(h)–1                                              26 CFR Ch. I (4–1–99 Edition)

  (4) Processing services which change           ple, include services performed as ste-
the commodity from its raw or natural            nographers, bookkeepers, clerks, and
state do not constitute agricultural             other office employees, even though
labor. For example the extraction of             such services may be in connection
juices from fruits or vegetables is a            with such activities. However, to the
processing operation which changes the           extent that the services of such indi-
character of the fruits or vegetables            viduals are performed in the employ of
from their raw or natural state and,             the owner or tenant or other operator
therefore, does not constitute agricul-          of a farm and are rendered in major
tural labor. Likewise, services per-             part on a farm, they may be within the
formed in the processing of maple sap            provisions of paragraph (c) of this sec-
into maple sirup or maple sugar do not           tion.
constitute agricultural labor. On the               (f) Services described in section
other hand, services rendered in the             3121(g)(5). (1) Service not in the course
cutting and drying of fruits or vegeta-          of the employer’s trade or business (see
bles are processing operations which do          paragraph (a)(1) of § 31.3121(a)(7)–1) or
not change the character of the fruits           domestic service in a private home of
or vegetables and, therefore, constitute         the employer (see paragraph (a)(2) of
agricultural labor, if the other req-            § 31.3121(a)(7)–1) constitutes agricul-
uisite conditions are met. Services per-         tural labor if such service is performed
formed with respect to a commodity               on a farm operated for profit. The de-
after its character has been changed             termination whether remuneration for
from its raw or natural state by a proc-         any such service performed on a farm
essing operation do not constitute agri-         operated for profit constitutes wages is
cultural labor.                                  to be made under § 31.3121(a)(8)–1 rather
  (5) The term ‘‘commodity’’ refers to a         than under § 31.3121(a)(7)–1. For provi-
single agricultural or horticultural             sions relating to the exception from
product, for example, all apples are to          employment provided with respect to
be treated as a single commodity,                any such service performed after 1960
while apples and peaches are to be               by a father or mother in the employ of
treated as two separate commodities.             his or her son or daughter, see
The services with respect to each such           § 31.3121(b)(3)–1.
commodity are to be considered sepa-                (2) Generally, a farm is not operated
rately in determining whether the con-           for profit if it is occupied by the em-
dition set forth in paragraph (e)(1)(iii)        ployer primarily for residential pur-
of this section has been satisfied. The          poses, or is used primarily for the
portion of the commodity produced by             pleasure of the employer or his family
an operator or group of operators with           such as for the entertainment of guests
respect to which the services described          or as a hobby of the employer or his
in this paragraph are performed by a             family.
particular employee shall be deter-              [T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
mined on the basis of the pay period in          amended by T.D. 6744, 29 FR 8315, July 2,
which such services were performed by            1964]
such employee.
  (6) The services described in this             § 31.3121(h)–1 American employer.
paragraph do not include services per-              (a) The term ‘‘American employer’’
formed in connection with commercial             means an employer which is (1) the
canning or commercial freezing or in             United States or any instrumentality
connection with any commodity after              thereof, (2) an individual who is a resi-
its delivery to a terminal market for            dent of the United States, (3) a partner-
distribution for consumption. More-              ship, if two-thirds or more of the part-
over, since the services described in            ners are residents of the United States,
this paragraph must be rendered in the           (4) a trust, if all of the trustees are
actual handling, planting, drying,               residents of the United States, or (5) a
packing, packaging, processing, freez-           corporation organized under the laws
ing, grading, storing, or delivering to          of the United States or of any State.
storage or to market or to a carrier for         For provisions relating to the terms
transportation to market, of the com-            ‘‘State’’ and ‘‘United States’’, see
modity, such services do not, for exam-          § 31.3121(e)–1.

                                            72
Internal Revenue Service, Treasury                                                 § 31.3121(i)–4

  (b) For provisions relating to services          tax and employer tax with respect to
performed outside the United States by             such wage payments.
a citizen of the United States as an em-
ployee for an American employer, see               § 31.3121(i)–2 Computation of remu-
paragraph (c)(3) of § 31.3121(b)–3 and                  neration for service performed by
paragraph (e) of § 31.3121(b)(4)–1.                     an individual as a member of a uni-
                                                        formed service.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as            In the case of an individual per-
amended by T.D. 6744, 29 FR 8315, July 2,
1964]
                                                   forming service after December 31, 1956,
                                                   as a member of a uniformed service
§ 31.3121(i)–1 Computation to nearest              (see section 31.3121(n)), to which the
     dollar of cash remuneration for do-           provisions of section 3121(m)(1) (see
     mestic service.                               § 31.3121(m)) are applicable, the term
  An employer may, for purposes of the             ‘‘wages’’ shall, subject to the provi-
act, elect to compute to the nearest               sions     of    section   3121(a)(1) (see
dollar any payment of cash remunera-               § 31.3121(a)–1), include as the individ-
tion for domestic service described in             ual’s remuneration for such service
section 3121(a)(7)(B) (see § 31.3121(a)(7)–        only his basic pay as described in sec-
1) which is more or less than a whole-             tion 102(10) of the Servicemen’s and
dollar amount. For the purpose of the              Veterans’ Survivor Benefits Act (38
                                                   U.S.C. 401(1), 403; 72 Stat. 1126).
computation to the nearest dollar, the
payment of a fractional part of a dollar           [T.D. 6744, 29 FR 8315, July 2, 1964]
shall be disregarded unless it amounts
to one-half dollar or more, in which               § 31.3121(i)–3 Computation of remu-
case it shall be increased to one dollar.               neration for service performed by
For example, any amount actually paid                   an individual as a volunteer or vol-
                                                        unteer leader within the meaning
between $4.50 and $5.49, inclusive, may                 of the Peace Corps Act.
be treated as $5 for purposes of the
taxes imposed by the act. If an em-                   In the case of an individual per-
ployer elects this method of computa-              forming service in his capacity as a
tion with respect to any payment of                volunteer or volunteer leader within
cash remuneration made in a calendar               the meaning of the Peace Corps Act
quarter for domestic service in his pri-           (see section 31.3121(p)), the term
vate home, he must use the same meth-              ‘‘wages’’ shall, subject to the provi-
od in computing each payment of cash               sions     of    section   3121(a)(1) (see
remuneration of more or less than a                § 31.3121(a)–1), include as such individ-
whole-dollar amount made to each of                ual’s remuneration for such service
his employees in such calendar quarter             only amounts paid pursuant to section
for domestic service in his private                5(c) or section 6(1) of the Peace Corps
home. Moreover, if an employer elects              Act (22 U.S.C. 2501; 75 Stat. 612).
this method of computation with re-                [T.D. 6744, 29 FR 8315, July 2, 1964]
spect to payments of the prescribed
character made in any calendar quar-               § 31.3121(i)–4 Computation of remu-
ter, the amount of each payment of                      neration for service performed by
cash remuneration so computed to the                    certain members of religious or-
nearest dollar shall, in lieu of the                    ders.
amount actually paid, be deemed to                   In any case where an individual is a
constitute the amount of cash remu-                member of a religious order (as defined
neration for purposes of the act. Thus,            in section 3121(r)(2) and paragraph (b)
the amount of cash payments so com-                of § 31.3121(r)–1) performing service in
puted to the nearest dollar shall be               the exercise of duties required by such
used for purposes of determining                   order, and an election of coverage
whether such payments constitute                   under section 3121(r) and § 31.3121(r)–1 is
wages; for purposes of applying the em-            in effect with respect to such order or
ployee and employer tax rates to the               the autonomous subdivision thereof to
wage payments; for purposes of any re-             which such member belongs, the term
quired record keeping; and for purposes            ‘‘wages’’ shall, subject to the provi-
of reporting and paying the employee               sions of section 3121(a)(1) (relating to

                                              73
§ 31.3121(i)–4                                                    26 CFR Ch. I (4–1–99 Edition)

definition of wages), include as such in-             university for its fair market value of $2,000
dividual’s remuneration for such serv-                for the school year. Such lodging and board
ice the fair market value of any board,               is essentially the same as that provided by N
                                                      at its seminary to N’s members subject to a
lodging, clothing, and other perquisites              vow of poverty. Accordingly, the amount to
furnished to such member by such                      be included in the ‘‘wages’’ of such members
order or subdivision or by any other                  with respect to lodging and board for the
person or organization pursuant to an                 same period of time is $2,000.
agreement (whether written or oral)                     Example 3. O is a religious order which re-
with such order or subdivision. Such                  quires its members to take a vow of poverty
other perquisites shall include any                   and to observe silence, and which has made
                                                      an election under section 3121(r). O operates
cash either paid by such order or sub-                a monastery in a remote rural area. Under
division or paid by another employer                  section 3121(i)(4), O must include in the
and not required by such order or sub-                wages of its members assigned to this mon-
division to be remitted to it. For pur-               astery the fair market value of the board and
poses of this section, perquisites shall              lodging furnished to them. In making a de-
be considered to be furnished over the                termination of the fair market value of such
period during which the member re-                    board and lodging, the remoteness of the
                                                      monastery, as well as the smallness of the
ceives the benefit of them. (See exam-                rooms and the simplicity of their fur-
ple 4 of this section.) In no case shall              nishings, affect this determination. However,
the amount included as such individ-                  the facts that the facility is used by a reli-
ual’s remuneration under this para-                   gious order as a monastery and that the or-
graph be less than $100 a month. All                  der’s members maintain silence do not affect
relevant facts and elements of value                  the fair market value of such items.
shall be considered in every case.                      Example 4. P is a religious order which re-
                                                      quires its members to take a vow of poverty
Where the fair market value of any
                                                      and which has made an election under sec-
board, lodging, clothing, and other per-              tion 3121(r). Several of P’s members are at-
quisites furnished to all members of an               tending a university on a full-time basis. The
electing religious order or autonomous                fair market value of the board and lodging of
subdivision (or to all in a group of                  each of such members at the university is
members) does not vary significantly,                 $1,000 per semester. P pays the university
such order or subdivision may treat all               $1,000 at the beginning of each semester for
                                                      the board and lodging of each of such mem-
of its members (or all in such group of
                                                      bers. In addition, P gives each such member
members) as having a uniform wage.                    a $400 cash advance to cover his miscella-
The provisions of this section may be                 neous expenses during the semester. Under
illustrated by the following examples                 section 3121(i)(4), P must prorate the fair
of the treatment of particular per-                   market value of such members’ board and
quisites:                                             lodging, as well as the miscellaneous items,
                                                      over the semester and include such value in
  Example 1. M is a religious order which re-         the determination of ‘‘wages’’.
quires its members to take a vow of poverty             Example 5. Q is a religious order which is a
and which has made an election under sec-             corporation organized under the laws of Wis-
tion 3121(r). Under section 3121(i)(4), M must        consin, which requires its members to take a
include in the wages of its members the fair          vow of poverty, and which has made an elec-
market value of the clothing it provides for          tion under section 3121(r). Q has convents in
its members. M and several other religious            rural South America and in suburbs and cen-
orders using essentially the same type of re-         tral city areas of the United States. Charac-
ligious habit purchase clothing for their             teristically, in the United States its subur-
members from either of two suppliers in               ban convents provide somewhat larger and
arms-length transactions. The fair market             newer rooms for its members than do its con-
value of such clothing (i.e., the price at            vents in city areas. Moreover, its suburban
which such items would change hands be-               convents have more extensive grounds and
tween a willing buyer and a willing seller,           somewhat more elaborate facilities than do
neither being under any compulsion to buy             its older convents in city areas. However,
or to sell) is determined by reference to the         both types of convents limit resident mem-
actual sales price of these suppliers to the          bers to a single, plainly furnished room and
religious orders.                                     provide them meals which are comparable.
  Example 2. N is a religious order which re-         Q’s members in South America live in ex-
quires its members to take a vow of poverty           tremely primitive dwellings and otherwise
and which has made an election under sec-             have extremely modest perquisites. Under
tion 3121(r). N operates a seminary adjacent          section 3121(i)(4), Q may report a uniform
to a university. Students at the university           wage for its members who live in suburban
obtain lodging and board on campus from the           convents and city convents in the United

                                                 74
Internal Revenue Service, Treasury                                              § 31.3121(j)–1
States, as the board, lodging, and perquisites        the State, which forbids such diminu-
furnished these members do not vary signifi-          tion or impairment.
cantly from one convent to the other. Q may             (3) Additions to certain transportation
report another uniform wage (but not less
than $100 per month apiece) for its members
                                                      systems by acquisition after 1950. This
who are citizens of the United States and             subparagraph is applicable only in case
who reside in South America based on the              of an acquisition after 1950 from pri-
fair market value of the perquisites fur-             vate ownership of an addition to an ex-
nished these individuals, as the fair market          isting public transportation system
value of the perquisites furnished these indi-        which was acquired in whole or in part
viduals varies significantly from that of             by a State or political subdivision
those furnished its members who live in its
domestic convents but does not vary signifi-
                                                      thereof from private ownership after
cantly among members in South America                 1936 and before 1951 and then only in
whose wages are subject to tax.                       case service for such existing transpor-
                                                      tation system did not constitute cov-
[T.D. 7280, 38 FR 18369, July 10, 1973]
                                                      ered transportation service by reason
§ 31.3121(j)–1 Covered transportation                 of the provisions of subparagraph (2) of
     service.                                         this paragraph. Service in connection
   (a) Transportation systems acquired in             with the operation of such transpor-
whole or in part after 1936 and before                tation system (including any additions
1951—(1) In general. Except as provided               acquired after 1950) constitutes covered
in subparagraph (2) of this paragraph,                transportation service commencing
all service performed in the employ of                with the first day of the third calendar
a State or political subdivision thereof              quarter following the calendar quarter
in connection with its operation of a                 in which the addition to the existing
public transportation system con-                     transportation system was acquired, if
stitutes covered transportation service               such service is performed by an em-
if any part of the transportation sys-                ployee who became an employee of the
tem was acquired from private owner-                  State or political subdivision in con-
ship after 1936 and before 1951. For pur-             nection with and at the time of its ac-
poses of this subparagraph, it is imma-               quisition from private ownership of
terial whether any part of the trans-                 such addition and who before the ac-
portation system was acquired before                  quisition of such addition rendered
1937 or after 1950, whether the em-                   service in employment in connection
ployee was hired before, during, or                   with the operation of the addition so
after 1950, or whether the employee had               acquired by such State or political sub-
been employed by the employer from                    division. However, service performed
whom the State or political subdivision               by such employee in connection with
acquired its transportation system or                 the operation of the transportation
any part thereof.                                     system does not constitute covered
   (2) General retirement system protected            transportation service if, on the first
by State constitution. Except as provided             day of the third calendar quarter fol-
in paragraph (a)(3) of this section, serv-            lowing the calendar quarter in which
ice performed in the employ of a State                the addition was acquired, such service
or political subdivision in connection                is covered by a general retirement sys-
with its operation of a public transpor-              tem which does not, with respect to
tation system acquired in whole or in                 such employee, contain special provi-
part from private ownership after 1936                sions applicable only to employees who
and before 1951 does not constitute cov-              became employees of the State or po-
ered transportation service, if substan-              litical subdivision in connection with
tially all service in connection with                 and at the time of its acquisition of
the operation of the transportation                   such addition.
system was, on December 31, 1950, cov-                  (b) Transportation systems in operation
ered under a general retirement system                on December 31, 1950, no part of which
providing benefits which are protected                was acquired after 1936 and before 1951—
from diminution or impairment under                   (1) In general. Except as provided in
the State constitution by reason of an                paragraph (b)(2) of this section, no
express provision, dealing specifically               service performed in the employ of a
with retirement systems established by                State or a political subdivision thereof
the State or political subdivisions of                in connection with its operation of a

                                                 75
§ 31.3121(k)–1                                              26 CFR Ch. I (4–1–99 Edition)

public transportation system con-                 time of its first acquisition after 1950
stitutes covered transportation service           from private ownership of any part of
if no part of such transportation sys-            its transportation system, the State or
tem operated by the State or political            political subdivision did not have a
subdivision on December 31, 1950, was             general retirement system covering
acquired from private ownership after             substantially all service performed in
1936 and before 1951.                             connection with the operation of the
  (2) Additions acquired after 1950. This         transportation system.
subparagraph is applicable only in case             (d) Definitions. For purposes of this
of an acquisition after 1950 from pri-            section:
vate ownership of an addition to an ex-             (1) The term ‘‘general retirement sys-
isting public transportation system               tem’’ means any pension, annuity, re-
which was operated by a State or polit-           tirement, or similar fund or system es-
ical subdivision on December 31, 1950,            tablished by a State or by a political
but no part of which was acquired from            subdivision thereof for employees of
private ownership after 1936 and before           the State, political subdivision, or
1951. Service in connection with the op-          both; but such term does not include
eration of such transportation system             such a fund or system which covers
(including any additions acquired after           only service performed in positions
1950) constitutes covered transpor-               connected with the operation of its
tation service commencing with the                public transportation system.
first day of the third calendar quarter             (2) A transportation system or a part
following the calendar quarter in which           thereof is considered to have been ac-
the addition to the existing transpor-            quired by a State or political subdivi-
tation system was acquired, if such               sion from private ownership if prior to
service is performed by an employee               the acquisition service performed by
who became an employee of the State               the employees in connection with the
or political subdivision in connection            operation of the system or an acquired
with and at the time of its acquisition           part thereof constituted employment
from private ownership of such addi-              under the act or under subchapter A of
tion and who before the acquisition of            chapter 9 of the Internal Revenue Code
such addition rendered service in em-             of 1939 or was covered by an agreement
ployment in connection with the oper-             entered into pursuant to section 218 of
ation of the addition so acquired by              the Social Security Act (42 U.S.C. 418),
such State or political subdivision.              and some of such employees became
However, service performed by such                employees of the State or political sub-
employee in connection with the oper-             division in connection with and at the
ation of the transportation system                time of such acquisition.
does not constitute covered transpor-               (3) The term ‘‘political subdivision’’
tation service if, on the first day of the        includes an instrumentality of a State,
third calendar quarter following the              of one or more political subdivisions of
calendar quarter in which the addition            a State, or of a State and one or more
was acquired, such service is covered             of its political subdivisions.
by a general retirement system which                (4) The term ‘‘employment’’ includes
does not, with respect to such em-                service covered by an agreement en-
ployee, contain special provisions ap-            tered into pursuant to section 218 of
plicable only to employees who became             the Social Security Act.
employees of the State or political sub-
division in connection with and at the            § 31.3121(k)–1 Waiver of exemption
time of its acquisition of such addition.              from taxes.
  (c) Transportation systems acquired                (a) Who may file a waiver certificate—
after 1950. All service performed in the          (1) In general. If services performed in
employ of a State or political subdivi-           the employ of an organization are ex-
sion thereof in connection with its op-           cepted from employment under section
eration of a public transportation sys-           3121(b)(8)(B), the organization may file
tem constitutes covered transportation            a waiver certificate on Form SS–15, to-
service if the transportation system              gether with a list on Form SS–15a, cer-
was not operated by the State or polit-           tifying that it desires to have the Fed-
ical subdivision before 1951 and, at the          eral old-age, survivors, and disability

                                             76
Internal Revenue Service, Treasury                                                 § 31.3121(k)–1

insurance system established by title II              ployees of the organization within the
of the Social Security Act extended to                meaning      of    section     3121(d)   (see
services performed by its employees.                  § 31.3121(d)–1) shall be included in deter-
(For provisions relating to the excep-                mining whether two-thirds of the em-
tion under section 3121(b)(8)(B), see                 ployees of the organization concurred
that section and § 31.3121(b)(8)–2.) A cer-           in the filing of the certificate; except
tificate in effect under section 1426(1)              that there shall not be included (i)
of the Internal Revenue Code of 1939 on               those employees who at the time of the
December 31, 1954, remains in effect                  filing of the certificate were per-
under, and is subject to the provisions               forming for the organization services
of, section 3121(k). If the period covered            only of the character specified in para-
by a certificate filed under section                  graphs (8)(A), (10)(B), and (13) of section
3121(k), or under section 1426(l) of the              3121(b)         (see       §§ 31.3121(b)(8)–1,
Internal Revenue Code of 1939, is termi-              31.3121(b)(10)–2, and 31.3121(b)(13)–1, re-
nated by an organization, a certificate               spectively), (ii) those alien employees
may not thereafter be filed by the or-                who at the time of the filing of the cer-
ganization under section 3121(k). For                 tificate were performing services for
regulations relating to certificates                  such organization under an arrange-
filed under section 1426(l) of the Inter-             ment which provided for the perform-
nal Revenue Code of 1939, see 26 CFR                  ance only of services outside the
(1939) 408.216 (Regulations 128).                     United States not on or in connection
   (2) Organizations having two separate
                                                      with an American vessel or American
groups of employees. If an organization
                                                      aircraft, and (iii) in connection with
is eligible to file a certificate under
                                                      certificates filed after August 28, 1958,
section 3121(k), and the organization
                                                      those employees who at the time of the
employs both individuals who are in
                                                      filing of the certificate were in a group
positions covered by a pension, annu-
ity, retirement, or similar fund or sys-              to which such certificate was not appli-
tem established by a State or by a po-                cable because of the provisions of sec-
litical subdivision thereof and individ-              tion 3121(k)(1)(E). (See paragraph (a)(2)
uals who are not in such positions, the               of this section.) As used in this sub-
organization shall divide its employees               paragraph, the term ‘‘alien employee’’
into two separate groups for purposes                 does not include an employee who was
of any certificate filed after August 28,             a citizen of the Commonwealth of
1958. One group shall consist of all em-              Puerto Rico or a citizen of the Virgin
ployees who are in positions covered by               Islands, and the term ‘‘United States’’
such a fund or system and (i) are mem-                includes Puerto Rico and the Virgin Is-
bers of such fund or system, or (ii) are              lands.
not members of such fund or system                       (b) Execution and amendment of cer-
but are eligible to become members                    tificate—(1) Use of prescribed forms. An
thereof. The other group shall consist                organization filing a certificate pursu-
of all remaining employees. An organi-                ant to section 3121(k) shall use Form
zation which has so divided its employ-               SS–15, in accordance with the regula-
ees into two groups may file a certifi-               tions and instructions applicable there-
cate after August 28, 1958, with respect              to. The certificate may be filed only if
to the employees in either group, or                  it is accompanied by a list on Form
may file a separate certificate after                 SS–15a, containing the signature, ad-
such date with respect to employees in                dress, and social security account num-
each group.                                           ber, if any, of each employee, if any,
   (3) Certificates filed before September 14,        who concurs in the filing of the certifi-
1960. A certificate filed before Sep-                 cate. (For provisions relating to ac-
tember 14, 1960, is void unless at least              count numbers, see § 31.6011(b)–2.) If no
two-thirds of the employees, deter-                   employee concurs in a certificate filed
mined on the basis of the facts which                 after September 13, 1960, that fact
existed as of the date the certificate                should be stated on the Form SS–15a.
was filed, concurred in the filing of the             (For provisions relating to the concur-
certificate, and the organization cer-                rence of employees in certificates filed
tified to such concurrence in the cer-                before September 14, 1960, see para-
tificate. All individuals who were em-                graph (a)(3) of this section.)

                                                 77
§ 31.3121(k)–1                                                 26 CFR Ch. I (4–1–99 Edition)

   (2) Amendment of list on Form SS–                services performed by an employee as a
15a—(i) Certificate filed after August 28,          member of the other group; and the
1958. The list on Form SS–15a accom-                provisions of this subparagraph shall
panying a certificate filed after August            apply as if each group were separately
28, 1958, under section 3121(k), may be             employed by a different organization.
amended at any time before the expira-              A certificate is not terminated if the
tion of the twenty-fourth month fol-                organization loses its exemption under
lowing the calendar quarter in which                section 501(a) as an organization of the
the certificate is filed, by filing a sup-          character described in section 501(c)(3),
plemental list or lists on Form SS–15a              but continues effective with respect to
Supplement, containing the signature,               any subsequent periods during which
address, and social security account                the organization is so exempt. The cer-
number, if any, of each additional em-              tificate of an organization may be in
ployee who concurs in the filing of the             effect without being applicable to serv-
certificate.                                        ices performed by every employee of
   (ii) Certificate filed before August 29,         the organization. Subparagraph (2) of
1958. The list on Form SS–15a which ac-             this paragraph relates to the beginning
companied a certificate filed before Au-            of the period for which a certificate is
gust 29, 1958, under section 3121(k) or             in effect. Subparagraph (3) of this para-
under section 1426(l) of the Internal               graph relates to the services with re-
Revenue Code of 1939, may be amended                spect to which a certificate is in effect.
by filing a supplemental list or lists on           Even though a certificate is in effect
Form SS–15a Supplement at any time                  with respect to the services of an em-
after August 31, 1954, and before the ex-           ployee, such services may be excepted
piration of the twenty-fourth month                 from employment under some provi-
following the first calendar quarter for            sion of section 3121(b) other than para-
which the certificate was in effect, or             graph (8)(B) thereof. For example, serv-
before January 1, 1959, whichever is the            ice performed in any calendar quarter
later.                                              in the employ of an organization de-
   (3) Where to file certificate or amend-          scribed in section 501(c)(3) and exempt
ment. The certificate on Form SS–15                 from income tax under section 501(a) is
and accompanying list on Form SS–15a                excepted from employment under sec-
of an organization which is required to             tion 3121(b)(10)(A) if the remuneration
make a return on Form 941 pursuant to               for such service is less than $50, regard-
§ 31.6011(a)–1 or § 31.6011(a)–4 shall be           less of whether the organization files a
filed with the internal revenue officer             certificate.
designated in the instructions applica-                (2) Beginning of effective period of
ble to Form SS–15 and Form SS–15a.                  waiver—(i) Certificate filed after July 30,
The Form SS–15 and Form SS–15a of                   1965. A certificate filed after July 30,
any other organization shall be filed in            1965, by an organization pursuant to
accordance with the provisions of                   section 3121(k) shall be in effect for the
§ 31.6091–1 which are otherwise applica-            period beginning with one of the fol-
ble to returns. Each Form SS–15a Sup-               lowing dates, which shall be designated
plement shall be filed with the internal            by the organization on the certificate:
revenue officer with whom the related                  (a) The first day of the calendar quar-
Forms SS–15 and SS–15a were filed.                  ter in which the certificate is filed,
   (c) Effect of waiver—(1) In general. The            (b) The first day of the calendar quar-
exception from employment under sec-                ter immediately following the quarter
tion 3121(b)(8)(B) does not apply to                in which the certificate is filed, or
services with respect to which a certifi-              (c) The first day of any calendar
cate, filed pursuant to section 3121(k),            quarter preceding the calendar quarter
or section 1426(l) of the Internal Rev-             in which the certificate is filed, except
enue Code of 1939, is in effect. (See               that such date may not be earlier than
§§ 31.3121(b)(8) and 31.3121(b)(8)–2). If an        the first day of the 20th calendar quar-
organization has divided its employees              ter preceding the quarter in which such
into two groups, as set forth in para-              certificate is filed. Thus, a certificate
graph (a)(2) of this section, a certifi-            filed in December 1965 may be made ef-
cate filed with respect to either group             fective, pursuant to this paragraph
shall have no effect with respect to                (c)(2)(i)(c), for the period beginning

                                               78
Internal Revenue Service, Treasury                                               § 31.3121(k)–1

with the first day of the calendar quar-             3121(k) be in effect with respect to serv-
ter beginning October 1, 1960, or the                ices performed before January 1, 1955.
first day of any other calendar quarter              (For regulations relating to waiver cer-
beginning after October 1, 1960, and be-             tificates filed under section 1426(l) of
fore October 1, 1965.                                the Internal Revenue Code of 1939, see
   (ii) Certificate filed after August 28,           26 CFR (1939) 408.216 (Regulations 128).)
1958, and before July 31, 1965. A certifi-             (3) Services to which certificate ap-
cate filed after August 28, 1958, and be-            plies—(i) In general. If an organiza-
fore July 31, 1965, by an organization               tion’s certificate is in effect (see para-
pursuant to section 3121(k) shall be in              graph (c)(2) of this section), the certifi-
effect for the period beginning with one             cate becomes effective with respect to
of the following dates, which shall be               services performed in its employ by
designated by the organization on the                each individual (a) who enters the em-
certificate:                                         ploy of the organization after the cal-
   (a) The first day of the calendar quar-           endar quarter in which the certificate
ter in which the certificate is filed,               is filed, as set forth in paragraph
   (b) The first day of the calendar quar-           (c)(3)(ii) of this section, or (b) whose
ter immediately following the quarter                signature appears on the list on Form
in which the certificate is filed, or                SS–15a, as set forth in paragraph
   (c) The first day of any calendar                 (c)(3)(iii) of this section, or (c) whose
quarter preceding the calendar quarter               signature appears on a Form SS–15a
in which the certificate is filed, except            Supplement, as set forth in paragraph
that, in the case of a certificate filed             (c)(3)(iv) or (v) of this section. The first
before 1960, such date may not be ear-               date on which such a certificate be-
lier than January 1, 1956, and in the                comes effective with respect to an em-
case of a certificate filed after 1959 (but          ployee’s services shall be the earliest
before July 31, 1965), such date may not             date applicable under this subpara-
be earlier than the first day of the                 graph. An organization’s certificate is
fourth calendar quarter preceding the                not effective with respect to the serv-
quarter in which the certificate is                  ices of an employee who is in its em-
filed. Thus, a certificate filed in De-              ploy in the calendar quarter in which
cember 1959 may be made effective for                the certificate is filed and who does not
the calendar quarter beginning Janu-                 sign Form SS–15a or Form SS–15a Sup-
ary 1, 1956; but a certificate filed in              plement, so long as his employment re-
January 1960 may not be made effective               lationship with the organization, at
for a calendar quarter beginning before              the close of the calendar quarter in
January 1, 1959.                                     which the certificate is filed and there-
   (iii) Certificate filed after 1956 and be-        after, continues without interruption.
fore August 29, 1958. A certificate filed              (ii) Employee hired after quarter in
by an organization after 1956 and before             which certificate is filed. If an individual
August 29, 1958 pursuant to section                  enters the employ of an organization
3121(k), became effective for the period             on or after the first day following the
beginning with one of the following                  close of the calendar quarter in which
dates, as designated by the organiza-                the organization files a certificate pur-
tion on the certificate:                             suant to section 3121(k), the certificate
   (a) The first day of the calendar quar-           shall be in effect with respect to serv-
ter in which the certificate was filed,              ices performed by the individual in the
or                                                   employ of the organization on and
   (b) The first day of the calendar quar-           after the day he enters the employ of
ter immediately following the quarter                the organization. A former employee of
in which the certificate was filed.                  the organization who is rehired on or
   (iv) Certificate filed before 1957. A cer-        after the first day following the close
tificate filed before 1957 pursuant to               of the calendar quarter in which such a
section 3121(k) became effective for the             certificate is filed shall be considered
period beginning with the first day fol-             to have entered the employ of the orga-
lowing the close of the calendar quar-               nization after such calendar quarter,
ter in which the certificate was filed.              regardless of whether such individual
In no case, however, shall a certificate             concurred in the filing of the certifi-
filed under the provisions of section                cate.

                                                79
§ 31.3121(k)–1                                                26 CFR Ch. I (4–1–99 Edition)

   (iii) Employee who signs Form SS–15a.           first calendar quarter for which the
A certificate on Form SS–15 filed by an            certificate was in effect, or
organization      pursuant     to   section           (b) On and after the first day fol-
3121(k) shall be in effect with respect to         lowing the close of the calendar quar-
services performed by an individual in             ter in which the supplemental list was
the employ of the organization on and              filed, but not before January 1, 1955, if
after the first day for which the certifi-         such list was filed after the close of the
cate is in effect, if such individual’s            first month following the first calendar
signature appears on the list on Form              quarter for which the certificate is in
SS–15a which accompanies such certifi-             effect.
cate.                                                 (4) Administrative provisions applicable
   (iv) Employee who signs Form SS–15a             when certificate has retroactive effect.
Supplement to concur in certificate filed          For purposes of computing interest and
after August 28, 1958. If the list on Form         for purposes of section 6651 (relating to
SS–15a accompanying a certificate                  addition to tax for failure to file tax re-
filed after August 28, 1958, by an orga-           turn), in any case in which a certificate
nization pursuant to section 3121(k) is            filed pursuant to section 3121(k)(1) is
amended in accordance with paragraph               effective      pursuant      to    section
(b)(2)(i) of this section by the filing of         3121(k)(1)(B)(iii) (as originally enacted
a supplemental list on Form SS–15a                 and as amended by section 316(a) of the
Supplement, the certificate shall be in            Social Security Amendments of 1965)
effect with respect to the services of             for one or more calendar quarters prior
each individual whose signature ap-                to the quarter in which the certificate
pears on the supplemental list, per-               is filed, the due date for the return and
formed in the employ of the organiza-              payment of the tax for such prior cal-
tion—                                              endar quarters resulting from the filing
   (a) On and after the first day for              of such certificate shall be the last day
which the certificate is in effect, if the         of the calendar month following the
supplemental list is filed on or before            calendar quarter in which the certifi-
the last day of the month following the            cate is filed. The statutory period for
calendar quarter in which the certifi-             the assessment of the tax for such prior
cate is filed, or                                  calendar quarters shall not expire be-
   (b) On and after the first day of the           fore the expiration of 3 years from such
calendar quarter in which the supple-              due date. A waiver certificate (as de-
mental list is filed, if such list is filed        scribed in section 3121(k)(1) and this
after the close of the first month fol-            section) furnished to the Internal Rev-
lowing the calendar quarter in which               enue Service after February 12, 1976,
the certificate is filed.                          shall not be considered filed with the
   (v) Employee who signed Form SS–15a             Internal Revenue Service unless inter-
Supplement to concur in certificate filed          est paid to the organization (or cred-
before August 29, 1958. If the list on             ited to its account) in connection with
Form SS–15a which accompanied a cer-               a claim for credit or refund of taxes,
tificate filed before August 29, 1958, by          which claim was based upon the exemp-
an organization pursuant to section                tion from taxes the organization is
3121(k), or pursuant to section 1426(l) of         waiving by such certificate, is repaid.
the Internal Revenue Code of 1939, was             The interest so paid must be repaid
amended in accordance with paragraph               only to the extent such interest relates
(b)(2)(ii) of this section by the filing of        to any taxes for which the organization
a supplemental list on Form SS–15a                 or its employees would be liable by rea-
Supplement, the certificate shall be in            son of the waiver certificate. Further-
effect with respect to the services of             more, when a waiver certificate has
each individual whose signature ap-                been filed prior to the payment of a re-
pears on the supplemental list, per-               fund of taxes based upon the exemption
formed in the employ of the organiza-              from taxes the organization in waiving,
tion—                                              no credit or refund in respect of the
   (a) On and after the first day for              taxes for which the exemption has been
which the certificate is in effect, if the         waived shall be allowed. If repayment
supplemental list was filed on or before           of the interest is made as required by
the last day of the month following the            this subparagraph, on or before the last

                                              80
Internal Revenue Service, Treasury                                            § 31.3121(k)–2

day of the calendar month following              filed. The notice of revocation shall be
the calendar quarter in which the cer-           signed by the president or other prin-
tificate is furnished to the Internal            cipal officer of the organization. Such
Revenue Service, such certificate shall          notice shall be dated and shall show (i)
be considered to have been filed on the          the title of the officer signing the no-
date it was originally furnished. If re-         tice, (ii) the name, address, and identi-
payment occurs after that day, such              fication number of the organization,
certificate shall be considered to have          and (iii) the date of the notice of termi-
been filed on the date of the repay-             nation to be revoked. No particular
ment. References in this subparagraph            form is prescribed for the notice of rev-
to a waiver certificate refer also to any        ocation.
supplement to such a certificate.                   (e) Termination of waiver by Commis-
   (d) Termination of waiver by organiza-        sioner. (1) The period for which a cer-
tion. (1) The period for which a certifi-        tificate filed pursuant to section
cate filed pursuant to section 3121(k),          3121(k), or pursuant to section 1426(l) of
or pursuant to section 1426(l) of the In-        the Internal Revenue Code of 1939, is in
ternal Revenue Code of 1939, is in effect        effect may be terminated by the Com-
may be terminated by the organization            missioner, with the prior concurrence
upon giving to the district director             of the Secretary of Health, Education,
with whom the organization is filing             and Welfare, upon a finding by the
returns 2 years’ advance notice in writ-         Commissioner that the organization
ing of its desire to terminate the effect        has failed to comply substantially with
of the certificate at the end of a speci-        the requirements applicable with re-
fied calendar quarter, but only if, at           spect to the taxes imposed by the act
the time of the receipt of such notice           (or the corresponding provisions of
by the district director, the certificate        prior law) or is no longer able to com-
has been in effect for a period of not           ply therewith. The Commissioner shall
less than 8 years. The notice of termi-          give the organization not less than 60
nation shall be signed by the president          days’ advance notice in writing that
or other principal officer of the organi-        the period covered by the certificate
zation. Such notice shall be dated and           will terminate at the end of the cal-
shall show (i) the title of the officer          endar quarter specified in the notice of
signing the notice, (ii) the name, ad-           termination.
dress, and identification number of the             (2) The notice of termination may be
organization, (iii) the district director        revoked by the Commissioner, with the
with whom the certificate was filed,             prior concurrence of the Secretary of
(iv) the date on which the certificate           Health, Education, and Welfare, by giv-
became effective, and (v) the date on            ing written notice of revocation to the
which the certificate is to be termi-            organization before the close of the
nated. No particular form is prescribed          calendar quarter specified in the notice
for the notice of termination.                   of termination.
   (2) In computing the effective period         [T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
which must precede the date of receipt           amended by T.D. 6983, 33 FR 18018, Dec. 4,
of the notice of termination, there              1968; T.D. 7012, 34 FR 7693, May 15, 1969; T.D.
shall be disregarded any period or peri-         7476, 42 FR 17874, Apr. 4, 1977]
ods as to which the organization was
not exempt from income tax under sec-            § 31.3121(k)–2 Waivers of exemption;
tion 501(a) as an organization of the                 original effective date changed
character described in section 501(c)(3)              retroactively.
or under section 101(6) of the Internal             (a) Certificates filed after 1955 and be-
Revenue Code of 1939.                            fore August 29, 1958. (1) An organization
   (3) The notice of termination may be          which filed a certificate under section
revoked by the organization by giving,           3121(k) after 1955 and before August 29,
prior to the close of the calendar quar-         1958, may file a request on Form SS–15b
ter specified in the notice of termi-            at any time before 1960 to have such
nation, a written notice of such revoca-         certificate made effective, with respect
tion. The notice of revocation shall be          to the services of individuals who con-
filed with the district director with            curred in the filing of such certificate
whom the notice of termination was               (initially, or by signing a supplemental

                                            81
§ 31.3121(k)–3                                                    26 CFR Ch. I (4–1–99 Edition)

list on Form SS–15a Supplement which                 calendar quarter for which the certifi-
was filed before Aug. 29, 1958) and                  cate originally was effective only with
whose signatures also appeared on such               respect to the services of individuals
request on Form SS–15b, for the period               who concurred in the filing of the cer-
beginning with the first day of any cal-             tificate (initially, or by signing a sup-
endar quarter after 1955 which preceded              plemental list on Form SS–15a Supple-
the first calendar quarter for which the             ment which was filed prior to the date
certificate originally was effective.                on which the Certificate For Retro-
   (2) For purposes of computing inter-              active Coverage was filed) and whose
est and for purposes of section 6651 (re-            signatures also appear on the Certifi-
lating to addition to tax for failure to             cate For Retroactive Coverage on
file tax return), the due date for the re-           Form SS–15b. A Certificate For Retro-
turn and payment of the tax for any                  active Coverage shall be filed with the
calendar quarter resulting from the fil-             district director with whom the related
ing of a request referred to in para-                Form SS–15 was filed.
graph (a)(1) of this section shall be the               (2) For purposes of computing inter-
last day of the calendar month fol-                  est and for purposes of section 6651 (re-
lowing the calendar quarter in which                 lating to addition to tax for failure to
the request is filed. The statutory pe-              file tax return), the due date for the re-
riod for the assessment of such tax                  turn and payment of the tax for any
shall not expire before the expiration               calendar quarter resulting from the fil-
of 3 years from such due date.                       ing of an amendment referred to in
   (b) Certificate filed before 1966. (1) An         paragraph (b)(1) of this section shall be
organization which filed a certificate               the last day of the calendar month fol-
on     Form      SS–15     under     section         lowing the calendar quarter in which
3121(k)(1)(A) before January 1, 1966,                the amendment is filed. The statutory
may amend such certificate during 1965               period for the assessment of such tax
or 1966 to make the certificate effective            shall not expire before the expiration
beginning with the first day of a cal-               of 3 years from such due date.
endar quarter preceding the date des-                [T.D. 6983, 33 FR 18018, Dec. 4, 1968]
ignated by the organization on the cer-
tificate    (see    paragraph     (c)(2)   of        § 31.3121(k)–3 Request for coverage of
§ 31.3121(k)–1). The amendment of the                     individual employed by exempt or-
certificate shall be made by filing a                     ganization before August 1, 1956.
Certificate For Retroactive Coverage                    (a) Application of this section. This
on Form SS–15b. A certificate on Form                section is applicable to requests made
SS–15 may be amended to be effective                 after July 31, 1956, and before Sep-
for the period beginning with the first              tember 14, 1960, under section 403 of the
day of any calendar quarter which pre-               Social Security Amendments of 1954, as
cedes the calendar quarter for which                 amended, except that nothing in this
the certificate was originally effective,            section shall render invalid any act
except that such a certificate may not               performed pursuant to, and in accord-
be made effective, through an amend-                 ance with, Revenue Ruling 57–11, Cu-
ment, for any calendar quarter which                 mulative Bulletin 1957–1, page 344, or
begins earlier than the 20th calendar                Revenue Ruling 58–514, Cumulative
quarter preceding the calendar quarter               Bulletin 1958–2, page 733. (For regula-
in which the organization files a Cer-               tions relating to requests made before
tificate For Retroactive Coverage on                 August 1, 1956, under section 403 of the
Form SS–15b. Thus, if a Certificate For              Social Security Amendments of 1954,
Retroactive Coverage is filed in May                 see 26 CFR (1939) 408.216(c) and (d) (Reg-
1966 in respect of a certificate on Form             ulations 128).)
SS–15 filed in 1965, the certificate on                 (b) Organization which did not have
Form SS–15 may not be made effective                 waiver certificate in effect—(1) Coverage
for a calendar quarter preceding the                 requested by employee before August 27,
quarter beginning April 1, 1961. A cer-              1958. Pursuant to section 403(a) of the
tificate on Form SS–15 which is amend-               Social Security Amendments of 1954, as
ed by a Certificate For Retroactive                  amended by section 401 of the Social
Coverage on Form SS–15b will be effec-               Security Amendments of 1956, any indi-
tive for the period preceding the first              vidual who, as an employee, performed

                                                82
Internal Revenue Service, Treasury                                          § 31.3121(k)–3

services after December 31, 1950, and            of 1956, by the Act of August 27, 1958
before August 1, 1956, for an organiza-          (Pub. L. 85–785, 72 Stat. 938), and by sec-
tion described in section 501(c)(3) which        tion 105(b)(6) of the Social Security
was exempt from income tax under sec-            Amendments of 1960. Any individual
tion 501(a), or which was exempt from            who, as an employee, performed serv-
income tax under section 101(6) of the           ices after December 31, 1950, and before
Internal Revenue Code of 1939, but               August 1, 1956, for an organization de-
which failed to file, before August 1,           scribed in section 501(c)(3) which was
1956, a valid waiver certificate under           exempt from income tax under section
section 3121(k), or under section 1426(l)        501(a), or which was exempt from in-
of the Internal Revenue Code of 1939,            come tax under section 101(6) of the In-
may request after July 31, 1956, and be-         ternal Revenue Code of 1939, but which
fore August 27, 1958, that such part of          did not have in effect during the entire
the remuneration received by him for             period in which the individual was so
services performed in the employ of the          employed a valid waiver certificate
organization after 1950 and before 1957          under section 3121(k), or under section
with respect to which employee and               1326(l) of the Internal Revenue Code of
employer taxes were paid be deemed to            1939, may request after August 26, 1958,
constitute remuneration for employ-              and before September 14, 1960, that
ment, if:                                        such part of the remuneration received
  (i) Any of the services performed by           by him for services performed in the
the individual after December 31, 1950,          employ of the organization after 1950
and before January 1, 1957, would have           and before 1957 with respect to which
constituted employment if such a cer-            employee and employer taxes were paid
tificate on Form SS–15 filed by the or-          be deemed to constitute remuneration
ganization had been in effect for the            for employment, if:
period during which the services were              (i) Any of the services performed by
performed and the individual’s signa-            the individual after December 31, 1950,
ture had appeared on the accom-                  and before January 1, 1957, would have
panying list on Form SS–15a;                     constituted employment if such a cer-
  (ii) The employee and employer taxes           tificate on Form SS–15 filed by the or-
were paid with respect to any part of            ganization had been in effect for the
the remuneration received by the indi-           period during which the services were
vidual from the organization for such            performed and the individual’s signa-
services;                                        ture had appeared on the accom-
  (iii) A part of such taxes was paid be-        panying list on Form SS–15a;
fore August 1, 1956;                               (ii) The employee and employer taxes
  (iv) Such taxes as were paid before            were paid with respect to any part of
August 1, 1956, were paid by the organi-         the remuneration received by the indi-
zation in good faith and upon the as-            vidual from the organization for such
sumption that it had filed a valid cer-          services performed during the period in
tificate under section 3121(k), or under         which the organization did not have a
section 1426(l) of the Internal Revenue          valid waiver certificate in effect;
Code of 1939; and                                  (iii) A part of such taxes was paid be-
  (v) No refund (or credit) of such taxes        fore August 1, 1956;
had been obtained by either the em-                (iv) Such taxes as were paid before
ployee or the employer, exclusive of             August 1, 1956, were paid by the organi-
any refund (or credit) which would               zation in good faith, and either without
have been allowable if the services per-         knowledge that a waiver certificate
formed by the individual had con-                was necessary or upon the assumption
stituted employment.                             that it had filed a valid certificate
  (2) Coverage requested by employee             under section 3121(k), or under section
after August 26, 1958, and before Sep-           1426(l) of the Internal Revenue Code of
tember 14, 1960. Requests may be made            1939; and
after August 26, 1958, and before Sep-             (v) No refund (or credit) of such taxes
tember 14, 1960, pursuant to section             has been obtained by either the em-
403(a) of the Social Security Amend-             ployee or the employer, exclusive of
ments of 1954, as amended by section             any refund (or credit) which would be
401 of the Social Security Amendments            allowable if the services performed by

                                            83
§ 31.3121(k)–3                                                26 CFR Ch. I (4–1–99 Edition)

the individual had constituted employ-             that the statement is correct to the
ment.                                              best of his knowledge and belief. If the
   (3) Execution and filing of request. (i)        statement of the organization is not
Except where the alternative procedure             submitted with the individual’s re-
set forth in paragraph (b)(3)(ii) of this          quest, the individual shall include in
section is followed, the request of an             his request an explanation of his in-
individual under section 403(a) of the             ability to submit the statement. Other
Social Security Amendments of 1954, as             information may be required, but
amended, is required to be made and                should be submitted only upon receipt
filed as provided in this subdivision.             of a specific request therefore. No par-
The request shall be made in writing,              ticular form is prescribed for the re-
be signed and dated by the individual,             quest of the individual or the state-
and include:                                       ment of the organization required to be
   (a) The name and address of the orga-           submitted with the request. The indi-
nization for which the services were               vidual’s request should be filed with
performed;                                         the district director with whom the or-
   (b) The name, address, and social se-           ganization files returns on Form 941. If
curity account number of the indi-                 the individual is deceased or mentally
vidual;                                            incompetent and the request is made
   (c) A statement that the individual             by the legal representative of the indi-
has not obtained refund or credit                  vidual or other person authorized to
(other than a refund or credit which               act on his behalf, the request shall be
would have been allowable if the serv-             accompanied by evidence showing such
ices had constituted employment) from              person’s authority to make the re-
the district director of any part of the           quest.
employee tax paid with respect to re-                 (ii) An organization which has or had
muneration received by him from the                in its employ individuals with respect
organization for services performed                to whom section 403(a) of the Social Se-
after 1950 and before 1957; and                    curity Amendments of 1954, as amend-
   (d) A request that all remuneration             ed, is applicable may, if it so desires,
received by him from the organization              prepare a form or forms for use by any
for such services with respect to which            such individual or individuals in mak-
employee and employer taxes had been               ing requests under such section. Any
paid shall be deemed to constitute re-             such form shall provide space for the
muneration for employment to the ex-               signature of the individual or individ-
tent authorized by section 403(a) of the           uals and contain such information as
Social Security Amendments of 1954, as             required to be included in a request
amended.                                           (see paragraph (b)(3)(i) of this section).
The request of an individual shall be              Any such form used by more than one
accompanied by a statement of the or-              individual, and any such form used by
ganization incorporating the substance             one individual which is signed and re-
of each of the five conditions listed in           turned to the organization, shall be
paragraph (b)(1) or (2), whichever is ap-          submitted by the organization, to-
propriate, of this section. The state-             gether with its statement (as required
ment of the organization shall show                in paragraph (b)(3)(i) of this section),
also that the individual performed                 to the district director with whom the
services for the organization after De-            organization files its returns on Form
cember 31, 1950, and before August 1,              941. An individual is not required to use
1956; that the organization was an orga-           a form prepared by the organization
nization described in section 501(c)(3)            but may, at his election, file his re-
which was exempt from income tax                   quest in accordance with the provisions
under section 501(a) or was exempt                 of paragraph (b)(3)(i) of this section.
from income tax under section 101(6) of               (4) Optional tax payments by organiza-
the Internal Revenue Code of 1939, and             tion. An organization which prior to
the district director with whom re-                August 1, 1956, reported and paid em-
turns on Form 941 were filed. The orga-            ployee and employer taxes with respect
nization’s statement shall be signed by            to any portion of the remuneration
the president or other principal officer           paid to an individual, who is eligible to
of the organization who shall certify              file a request under section 403(a) of

                                              84
Internal Revenue Service, Treasury                                           § 31.3121(k)–3

the Social Security Amendments of                    (i) Any of the services performed by
1954, as amended, for services per-                the individual after December 31, 1950,
formed by him after 1950 and before                and before August 1, 1956, would have
1957, may report and pay such taxes be-            constituted employment if the signa-
fore September 14, 1960, with respect to           ture of such individual had appeared on
any remaining portion of such remu-                the list of employees who concurred in
neration which would have constituted              the filing of the certificate;
wages if a certificate had been in effect            (ii) The employee and employer taxes
with respect to such services. Such                were paid before August 1, 1956, with
taxes may be reported as an adjust-                respect to any part of the remunera-
ment without interest in the manner                tion received by the individual from
prescribed in Subpart G of the regula-             the organization for such services; and
tions in this part.                                  (iii) No refund (or credit) of such
  (5) Effect of request. If a request is           taxes has been obtained either by the
made and filed under the conditions                employee or the employer, exclusive of
stated in this paragraph with respect              any refund (or credit) which would be
to one or more individuals, remunera-              allowable if the services performed by
tion for services performed by each                the individual had constituted employ-
such individual after 1950 and before              ment.
1957, with respect to which the em-                  (2) Execution and filing of request. (i)
ployee and employer taxes are paid on              Except where the alternative procedure
or before the date on which the request            set forth in subdivision (ii) of this sub-
was filed with the district director, will         paragraph is followed, the request of an
be deemed to constitute remuneration               individual under section 403(b) of the
for employment to the extent that                  Social Security Amendments of 1954, as
such services would have constituted               amended, shall be made and filed as
employment as defined in section                   provided in this subdivision. The re-
3121(b), or in section 1426(b) of the In-          quest shall be filed on or before Janu-
ternal Revenue Code of 1939, if a certifi-         ary 1, 1959, be made in writing, be
cate had been in effect with respect to            signed and dated by the individual, and
such services. However, the provisions             include:
of section 3121(a) and §§ 31.3121(a)–1 to            (a) The name and address of the orga-
31.3121(a)(10)–1, inclusive, of the regula-        nization for which the services were
tions in this part or the provisions of            performed;
section 1426(a) of the Internal Revenue              (b) The name, address, and social se-
Code of 1939 and the regulations in 26             curity account number of the indi-
CFR (1939) 408.226 and 408.227 (Regula-            vidual;
tions 128), as the case may be, are ap-              (c) A statement that the individual
plicable in determining the extent to              has not obtained a refund or credit
which such remuneration for employ-                (other than a refund or credit which
ment constitutes wages for purposes of             would be allowable if the services had
the employee and employer taxes.                   constituted employment) from the dis-
  (c) Individual who failed to sign list of        trict director of any part of the em-
concurring employees—(1) In general.               ployee tax paid before August 1, 1956,
Pursuant to section 403(b) of the Social           with respect to remuneration received
Security Amendments of 1954, as                    by him from the organization;
amended, any individual who, as an                   (d) A request that all remuneration
employee, performed services after De-             received by the individual from the or-
cember 31, 1950, and before August 1,              ganization for services performed after
1956, for an organization which filed a            1950 and before August 1, 1956, with re-
valid certificate under section 3121(k),           spect to which employee and employer
or under section 1426(l) of the Internal           taxes were paid before August 1, 1956,
Revenue Code of 1939, but who failed to            shall be deemed to constitute remu-
sign the list of employees concurring in           neration for employment to the extent
the filing of such certificate, may re-            authorized by section 403(b) of the So-
quest on or before January 1, 1959, that           cial Security Amendments of 1954, as
the remuneration received by him for               amended; and
such services be deemed to constitute                (e) A statement that the individual
remuneration for employment, if:                   understands that, upon the filing of

                                              85
§ 31.3121(k)–3                                                26 CFR Ch. I (4–1–99 Edition)

such request with the district director,         ed, is applicable, may, if it so desires,
(1) he will be deemed to have concurred          prepare a form or forms for use by any
in the certificate which was previously          such individual or individuals in mak-
filed by the organization, and (2) the           ing requests under such section. Any
employee and employer taxes will be              such form shall provide space for the
applicable to all wages received, and to         signature of the individual or individ-
be received, by him for services per-            uals and contain such information as is
formed for the organization on or after          required by paragraph (c)(1)(i) of this
the effective date of such certificate to
                                                 section to be included in a request. Any
the extent that such taxes would have
                                                 such form used by more than one indi-
been applicable if he had signed the list
on Form SS–15a submitted with the                vidual, and any such form used by one
certificate.                                     individual, and any such form used by
                                                 one individual which is signed and re-
The request of an individual shall be
                                                 turned to the organization, shall be
accompanied by a statement of the or-
ganization incorporating the substance           submitted by the organization, to-
of each of the three conditions listed in        gether with its statement (as required
paragraph (c)(1) of this section. The            in paragraph (c)(1)(i) of this section), to
statement of the organization should             the district director with whom the or-
also show that the individual per-               ganization files returns on Form 941.
formed services for the organization             An individual is not required to use a
after December 31, 1950, and before Au-          form prepared by the organization but
gust 1, 1956; that the organization filed        may, at his election, file his request in
a valid certificate under section                accordance with the provisions of sub-
3121(k), or under section 1426(l) of the         divisions (i) of this subparagraph.
Internal Revenue Code of 1939; and the             (3) Effect of request. An individual who
district director with whom returns on           makes and files a request under the
Form 941 are filed. Such statement               conditions stated in this paragraph
shall be signed by the president or              with respect to services performed as
other principal officer of the organiza-         an employee of an organization de-
tion who shall certify that the state-           scribed in section 501(c)(3) which was
ment is correct to the best of his               exempt from income tax under section
knowledge and belief. If the statement           501(a), or which was exempt from in-
of the organization is not submitted
                                                 come tax under section 101(6) of the In-
with the individual’s request, the indi-
                                                 ternal Revenue Code of 1939, will be
vidual shall include in his request an
                                                 deemed to have signed the list accom-
explanation of his inability to submit
such statement. Other information                panying the certificate filed by the or-
may be required, but should be sub-              ganization under section 3121(k), or
mitted only upon receipt of a specific           under section 1426(l) of the Internal
request therefor. No particular form is          Revenue Code of 1939. Accordingly, all
prescribed for the request of the indi-          services performed by the individual
vidual or the statement of the organi-           for the organization on and after the
zation required to be submitted with             effective date of the certificate will
the request. The individual’s request            constitute employment to the same ex-
should be filed with the district direc-         tent as if he had, in fact, signed the
tor with whom the organization files             list. The employee tax and employer
returns on Form 941. If the individual           tax are applicable with respect to any
is deceased or mentally incompetent              remuneration paid to the employee by
and the request is made by the legal             the organization which constitutes
representative of the individual or              wages. If less than the correct amount
other person authorized to act on his            of such taxes has been paid, the addi-
behalf, the request shall be accom-              tional amount due should be reported
panied by evidence showing such per-             as an adjustment without interest
sons’ authority to make the request.             within the time specified in subpart G
   (ii) An organization which has or had         of the regulations in this part.
in its employ individuals with respect
to whom section 403(b) of the Social Se-         [T.D. 6744, 29 FR 8318, July 2, 1964]
curity Amendments of 1954, as amend-

                                            86
Internal Revenue Service, Treasury                                             § 31.3121(k)–4

§ 31.3121(k)–4 Constructive filing of                purposes of section 210(a)(8)(B) of the
      waivers of exemption from social               Social Security Act and section
      security taxes by certain tax-ex-              3121(b)(8)(B). The waiver certificate
      empt organizations.                            shall be deemed to have been filed on
   (a) Constructive filing of waiver certifi-        the first day of the period described in
cate where no refund or credit has been              paragraph (a)(1)(iii) of this section and
allowed. (1) This paragraph applies (ex-             shall be effective on the first day of the
cept as provided in subparagraph (3) of              calendar quarter in which such period
this paragraph) to an organization if                began. However, such waiver is effec-
all of the following four conditions are             tive only with respect to remuneration
met.                                                 for services performed after 1950.
   (i) The organization is one described               (ii) The waiver certificate shall be
in section 501(c)(3) of the Internal Rev-            deemed to have been accompanied by a
enue Code of 1954, which is exempt                   list containing the signature, address,
from income tax under section 501(a) of              and social security number (if any) of
the Code.                                            each employee with respect to whom
   (ii) The organization did not file a              the taxes imposed by sections 3101 and
valid waiver certificate under section               3111 were paid as described in para-
3121(k)(1) of the Internal Revenue Code              graph (a)(1)(iii) of this section. Each
of 1954 (or the corresponding provision              such employee shall be deemed to have
of prior law) as of the later of October             concurred in the filing of the certifi-
19, 1976, or the earliest date on which it           cate for purposes of section 210(a)(8)(B)
satisfies paragraph (a)(1)(iii) of this              of the Social Security Act and section
section.                                             3121(b)(8)(B). A statement containing
   (iii) The taxes imposed by sections               the name, address, and employer iden-
3101 and 3111 of the Code were paid with             tification number of the organization,
respect to remuneration paid by the or-              and the name, last known address, and
ganization to its employees, as though               social security number (if any) of each
such certificate had been filed, during              employee described in the preceding
any period that includes all or part of              sentence shall be filed by the organiza-
at least three consecutive calendar                  tion at the request of the Internal Rev-
quarters and that did not terminate be-              enue Service.
fore the end of the third calendar quar-               (iii) The services of all employees en-
ter of 1973.                                         tering or reentering the employ of an
   (iv) The Internal Revenue Service did             organization on or after the first day
not allow (or erroneously allowed) a re-             following the close of the calendar
fund or credit of any part of the taxes              quarter in which the organization is
paid as described in subdivision (iii) of            deemed to have filed the waiver certifi-
this subparagraph with respect to re-                cate, performed on or after the day of
muneration for services performed on                 such entry or reentry, shall be covered
or after April 1, 1973. For purposes of              by the certificate.
the previous sentence, a refund or cred-               (3) This paragraph (a) shall not apply
it which would have been allowed, even               to an organization if—
if a valid waiver certificate filed under              (i) Prior to the end of the period re-
section 3121(k)(1) had been in effect,               ferred to in paragraph (a)(1)(iii) (and,
shall be disregarded. A refund or credit             in addition, in the case of an organiza-
will be regarded as having been erro-                tion organized on or before October 9,
neously allowed if it was credited by                1969, prior to October 19, 1976), the or-
the Internal Revenue Service to the                  ganization had applied for a ruling or
taxpayer account of the organization                 determination letter acknowledging it
or any of its employees on or after Sep-             to be exempt from income tax under
tember 9, 1976, even though it was prop-             section 501(c)(3);
erly made under the law in effect when                 (ii) The organization subsequently re-
made.                                                ceived such ruling or determination
   (2) (i) An organization to which this             letter;
paragraph applies shall be deemed to                   (iii) The organization did not pay any
have filed a valid waiver certificate                taxes under sections 3101 and 3111 with
under section 3121(k)(1) (or the cor-                respect to any employee for any cal-
responding provision of prior law) for               endar quarter ending after the twelfth

                                                87
§ 31.3121(k)–4                                               26 CFR Ch. I (4–1–99 Edition)

month following the date of mailing of            after October 19, 1976, but prior to De-
the ruling or determination letter; and           cember 20, 1977), shall not be due or
  (iv) The organization did not pay any           payable (or, if paid, shall be refunded).
taxes under sections 3101 and 3111 with           The waiver certificate, which an orga-
respect to any calendar quarter begin-            nization described in this subparagraph
ning after the later of December 31,              is deemed to have filed, shall not apply
1975, or the date on which the ruling or          to any service with respect to remu-
determination letter was issued.                  neration for which the taxes imposed
  (4) In the case of an organization              by sections 3101 and 3111 are not due or
which is deemed under this paragraph              payable (or are refunded) by reason of
to have filed a valid waiver certificate          this subparagraph.
under section 3121(k)(1), if the period              (6) This subparagraph allows certain
with respect to which the taxes im-               employees to obtain social security
posed by sections 3101 and 3111 were              coverage for service not covered by a
paid by the organization (as described            deemed-filed waiver certificate by rea-
in paragraph (a)(1)(iii) of this section)         son of section 3121(k)(4)(C) and para-
terminated prior to October 1, 1976,              graph (a)(4) or (5) of this section. To
taxes under sections 3101 and 3111 with           qualify under this subparagraph, all of
respect to remuneration paid by the or-           the following conditions must be met.
ganization after the termination of                  (i) An individual performed service as
such period and prior to July 1, 1977,            an employee of an organization which
which remained unpaid on December                 is deemed under this paragraph to have
20, 1977 (or which were paid after Octo-          filed a waiver certificate under section
ber 19, 1976, but prior to December 20,           3121(k)(1), on or after the first day of
1977), shall not be due or payable (or, if        the period described in paragraph
paid, shall be refunded). Similarly, an           (a)(1)(iii) of this section and before
organization that received a refund or            July 1, 1977.
credit of the taxes described in para-               (ii) The service performed by the in-
graph (a)(1)(iii) of this section after           dividual does not constitute employ-
September 8, 1976, shall not be liable            ment (as defined in section 210 (a) of
for the taxes imposed by sections 3101            the Social Security Act and section
and 3111 with respect to remuneration             3121(b) of the Code) because the waiver
paid by it prior to July 1, 1977, for             certificate which the organization is
which the organization received the re-           deemed to have filed is inapplicable to
fund or credit. The waiver certificate,           such service by reason of section
which an organization described in this           3121(k)(4)(C), but would constitute em-
subparagraph is deemed to have filed,             ployment (as so defined) in the absence
shall not apply to any service with re-           of section 3121(k)(4)(C).
spect to the remuneration for which                  (iii) The individual files a request on
the taxes imposed by sections 3101 and            or before April 15, 1980, in the manner
3111 are not due or payable (or are re-           and form, and with such official, as
funded) by reason of this subparagraph.           may be prescribed by regulations under
  (5) In the case of an organization              title II of the Social Security Act.
which is deemed under this paragraph                 (iv) That request is accompanied by
to have filed a valid waiver certificate          full payment of the taxes, which would
under section 3121(k)(1), if the taxes            have been paid under section 3101 with
imposed by sections 3101 and 3111 were            respect to the remuneration for the
not paid during the period referred to            service described in paragraph (a)(6)(ii)
in paragraph (a)(1)(iii) of this section          of this section but for the application
(whether the period has terminated or             of section 3121(k)(4)(C) (or by satisfac-
not) with respect to remuneration paid            tory evidence that appropriate ar-
by the organization to individuals who            rangements have been made for the
became its employees after the close of           payment of such taxes in installments
the calendar quarter in which such pe-            as provided in section 3121(k)(8) and
riod began, taxes under sections 3101             paragraph (d) of this section).
and 3111 with respect to remuneration             If these conditions are satisfied, the re-
paid prior to July 1, 1977, to such em-           muneration paid for the service de-
ployees, which remain unpaid on De-               scribed in paragraph (a)(6)(i) of this
cember 20, 1977 (or which were paid               section shall be deemed to constitute

                                             88
Internal Revenue Service, Treasury                                            § 31.3121(k)–4

remuneration for employment. In any                 have been actually filed by such orga-
case where remuneration paid by an or-              nization prior to that date.
ganization to an individual is deemed                  (4) Where an organization is deemed
under this subparagraph to constitute               under this paragraph to have filed a
remuneration for employment, such or-               waiver certificate on April 1, 1978, the
ganization shall be liable (notwith-                due date for the return and payment of
standing any other provision of the                 the taxes imposed by sections 3101 and
Code or regulations) for payment of the             3111 for wages paid prior to April 1,
taxes it would have been required to                1978, with respect to services consti-
pay under section 3111 with respect to              tuting employment by reason of such
such remuneration but for the applica-              certificate shall be August 1, 1978. How-
tion of section 3121(k)(4)(C). The due              ever, see paragraph (d) of this section
date for the return and payment by the              which permits the payment of these
organization of the taxes described in              taxes in installments. Such taxes
the preceding sentence shall be the last            (along with the amount of any interest
day of the calendar month following                 paid in connection with the refund or
the calendar quarter in which the orga-             credit described in paragraph (b)(1) of
nization is notified in writing of the              this section) shall be a liability of such
employee’s request. However, see para-              organization, payable from its own
graph (d) of this section which permits             funds. No portion of such taxes (or in-
the payment of these taxes in install-              terest) shall be deducted from the
ments.                                              wages of (or otherwise collected from)
  (b) Constructive filing of waiver certifi-        the individuals who performed such
cate where refund or credit has been al-            services, and those individuals shall
lowed and new certificate is not filed. (1)         have no liability for the payment
This paragraph applies to an organiza-              thereof.
tion which meets two conditions. First,                (5) This subparagraph allows certain
it must be an organization to which                 employees of organizations covered
paragraph (a) of this section would                 under this paragraph to obtain social
apply but for its failure to satisfy the            security coverage for periods prior to
requirement of paragraph (a)(1)(iv) of              those covered by a deemed-filed waiver
this section because a refund or credit             certificate. To qualify under this sub-
of taxes was allowed before September               paragraph, all of the following condi-
9, 1976. Second, it must not have filed             tions must be met.
an actual valid waiver certificate                     (i) An individual performed service,
under section 3121(k)(1) in accordance              as an employee of an organization
with the requirements of paragraph (c)              deemed under this paragraph to have
of this section.                                    filed a waiver certificate under section
  (2) An organization to which this                 3121(k)(1), at any time prior to the pe-
paragraph applies shall be deemed, for              riod for which such certificate is effec-
purposes of section 210(a)(8)(B) of the             tive.
Social Security Act and section                        (ii) The taxes imposed by sections
3121(b)(8)(B), to have filed a valid waiv-          3101 and 3111 were paid with respect to
er certificate under section 3121(k)(1)             remuneration paid for such service, but
on April 1, 1978. Such certificate shall            such service (or any part thereof ) does
be effective for the period beginning on            not constitute employment (as defined
the first day of the first calendar quar-           in section 210(a) of the Social Security
ter with respect to which the refund or             Act and section 3121(b)) because the ap-
credit referred to in paragraph (b)(1) of           plicable taxes so paid were refunded or
this section was allowed (or, if later, on          credited (otherwise than through a re-
July 1, 1973).                                      fund or credit which would have been
  (3) If an organization is deemed under            allowed if a valid waiver certificate
this paragraph to have filed a waiver               filed under section 3121(k)(1) had been
certificate on April 1, 1978, the provi-            in effect) prior to September 9, 1976.
sions of paragraph (a)(2)(ii) and (iii) of             (iii) Any portion of such service (with
this section (relating to employees cov-            respect to which taxes were paid and
ered by a deemed-filed waiver certifi-              refunded or credited as described in
cate) shall apply. Such certificate shall           paragraph (b)(5)(ii) of this section)
supersede any certificate which may                 would constitute employment (as so

                                               89
§ 31.3121(k)–4                                                  26 CFR Ch. I (4–1–99 Edition)

defined) if the organization had actu-               the first calendar quarter with respect
ally filed under section 3121(k)(1) a                to which a refund or credit described in
valid waiver certificate effective as                paragraph (b)(1) of this section was al-
provided in paragraph (c)(2) of this sec-            lowed (or, if later, with the first day of
tion (with such individual’s signature               the earliest calendar quarter for which
appearing on the accompanying list).                 such certificate may be in effect under
If this subparagraph applies, the remu-              section 3121(k)(1)(B)(iii)). Such waiver
neration paid for the portion of such                certificate must have been accom-
service      described     in    paragraph           panied by a list described in section
(b)(5)(iii) of this section shall be                 3121(k)(1)(A), containing the signature,
deemed to constitute remuneration for                address, and social security number of
employment (as defined in section                    each concurring employee (if any).
210(a) of the Social Security Act and                   (3) Such a waiver certificate shall be
section 3121(b)), where such individual              valid only if the organization complied
filed a request on or before April 15,               with the following notification require-
1980 (in the manner and form, and with               ments and, on or before April 30, 1978,
such official, as may be prescribed by               filed (with the service center of the In-
regulations under title II of the Social             ternal Revenue Service with which the
Security Act), accompanied by full re-               waiver certificate was filed) a certifi-
payment of the taxes which were paid                 cation that it had complied with these
under section 3101 with respect to such              notification requirements. However,
remuneration and were refunded or                    these requirements shall be conclu-
credited (or by satisfactory evidence                sively presumed to have been met with
that arrangements have been made for                 respect to any employees who con-
the payment of such taxes in install-                curred in the filing of the waiver cer-
ments as provided in section 3121(k)(8)              tificate.
and paragraph (d) of this section). In                  (i) Written notification of the option
any case where remuneration paid by                  to obtain social security coverage for
an organization to an individual is                  the retroactive period covered by the
deemed under this subparagraph to                    waiver certificate is required to have
constitute remuneration for employ-                  been given to all current and former
ment such organization shall be liable               employees of the organization with re-
(notwithstanding any other provision                 spect to whose remuneration taxes im-
of the Code or regulations) for repay-               posed by sections 3101 and 3111 were
ment of any taxes which it paid under                paid for any part of the period covered
section 3111 with respect to such remu-              by the waiver certificate. For purposes
neration and which were refunded or                  of the preceding sentence, in the case
credited to it. Any interest received by             of a former employee a mailing of noti-
the organization or its employees in                 fication to his or her last known ad-
connection with a refund or credit with              dress shall constitute delivery to the
respect to such taxes shall be remitted              former employee. This notification
with the repayment of taxes pursuant                 must have been given at least 30 days
to this subparagraph.                                prior to the date by which the em-
   (c) Actual filing of waiver certificate by        ployee was required to inform the orga-
April 1, 1978, where refund or credit has            nization whether he or she elects the
been allowed. (1) An organization may                retroactive social security coverage.
file an actual waiver certificate in ac-                (ii) The notification required by this
cordance with paragraphs (c)(2) and (3)              subparagraph must have stated the
of this section if it is an organization             earliest date for which the waiver cer-
to which paragraph (a) of this section               tificate is effective and the date by
would apply but for its failure to meet              which the employee must have in-
the condition set forth in paragraph                 formed the organization of a decision
(a)(1)(iv) of this section.                          to elect the retroactive coverage. In
   (2) An organization described in para-            addition, the notification must have
graph (c)(1) of this section was per-                advised the employee how to obtain in-
mitted to file an actual waiver certifi-             formation as to the quarters of social
cate on or before April 1, 1978. This cer-           security coverage to be obtained and
tificate must be effective for the period            any taxes or interest for which the em-
beginning on or before the first day of              ployee would be liable if the election

                                                90
Internal Revenue Service, Treasury                                             § 31.3121(k)–4

was made. The organization must have                  (3) An individual files a request under
provided this information to any inter-             paragraph (a)(6) or (b)(5) to have serv-
ested employee at least 14 days prior to            ice treated as constituting remunera-
the last day on which such employee                 tion for employment (as defined in sec-
was to have informed the organization               tion 210(a) of the Social Security Act
of any election.                                    and section 3121(b)).
   (iii) If the notification resulted in
                                                    If this paragraph applies, the taxes due
any employee electing the retroactive
                                                    under sections 3101 and 3111 (together
coverage whose signature did not ap-
                                                    with any additions to tax or interest
pear on the list of concurring employ-
ees which accompanied a previously                  other than interest described in para-
filed waiver certificate, the certifi-              graph (c)(4)) with respect to service
cation that was supplied on or before               constituting employment by reason of
April 30, 1978, must have been accom-               the waiver certificate for any period
panied by a special amendment to that               prior to the first day of the calendar
list. Any employee whose name appears               quarter in which the certificate is filed
on this special amended list shall be               or deemed filed, or with respect to
treated as if his or her name appeared              service constituting employment by
on the list of concurring employees                 reason of an employee request, may be
filed with the waiver certificate. The              paid in installments over an appro-
preceding sentence shall only apply                 priate period of time, as determined by
with respect to amended lists of con-               the district director. In determining
curring employees filed to comply with              the appropriate period of time, the dis-
the requirements of this subparagraph.              trict director shall exercise forbear-
   (4) Any interest received in connec-             ance and, to the extent possible, grant
tion with a refund or credit described              the organization an installment agree-
in paragraph (b)(1) of this section must            ment that will allow it sufficient funds
have been repaid on or before April 30,             to carry out its basic mission. If any
1978, with respect to each employee                 installment is not paid on or before the
who concurs in the filing of a waiver               date fixed for its payment, the total
certificate pursuant to this paragraph.             unpaid amount shall become payable
Notwithstanding the provisions of                   immediately and shall be paid upon no-
paragraph (c)(4) of § 31.3121(k)–1, if such         tice and demand.
interest was repaid on or before April                (e) Application of certain provisions to
30, 1978, the waiver certificate shall be           cases of constructive filing. (1) Except as
considered to have been filed on the
                                                    provided in paragraphs (e)(2) and (3) of
date it was originally furnished to the
                                                    this section, all of the provisions of
Internal Revenue Service.
                                                    section 3121(k) (other than subpara-
   (d) Installment payment of taxes for ret-
                                                    graphs (B), (F), and (H) of section
roactive coverage. This paragraph ap-
                                                    3121(k)(1)) and the regulations there-
plies if—
   (1) An organization is deemed under              under (including the provisions requir-
paragraph (a) of this section to have               ing the payment of taxes under sec-
filed a valid waiver certificate, but the           tions 3101 and 3111 with respect to the
applicable period described in para-                services involved), shall apply with re-
graph (a)(1)(iii) has terminated and all            spect to any certificate which is
or part of the taxes imposed by sec-                deemed to have been filed under para-
tions 3101 and 3111, with respect to re-            graph (a) or (b) of this section, in the
muneration paid by such organization                same way they would apply if the cer-
to its employees after the close of such            tificate had been actually filed on that
period, remains payable notwith-                    day under section 3121(k)(1).
standing section 3121(k)(4)(C) and para-              (2)   The    provisions      of   section
graph (a)(4) of this section; or                    3121(k)(1)(E) shall not apply unless the
   (2) An organization described in para-           taxes described in paragraph (a)(1)(iii)
graph (c) files a valid waiver certificate          of this section were paid by the organi-
by March 31, 1978, or, not having filed             zation as though a separate certificate
the certificate by that date, is seemed             had been filed with respect to one or
to have filed the certificate on April 1,           both of the groups to which such provi-
1978, under paragraph (b); or                       sions relate.

                                               91
§ 31.3121(l)–1                                                 26 CFR Ch. I (4–1–99 Edition)

  (3) The action of the organization in           ment between such individual and the
obtaining the refund or credit de-                person for whom the agricultural labor
scribed in paragraph (b)(1) of this sec-          is performed whereby such individual is
tion shall not be considered a termi-             designated as an employee of such per-
nation of such organization’s coverage            son. Whether or not such individual is
period for purposes of section 3121(k)(3).        an employee will be determined under
  (4) Any organization which is deemed            the usual common-law rules (see para-
to have filed a waiver certificate under          graph (c) of § 31.3121(d)–1).
paragraph (a) or (b) of this section              [T.D. 6744, 29 FR 8320, July 2, 1964]
shall be considered for purposes of sec-
tion 3102(b) to have been required to de-         § 31.3121(q)–1 Tips included for em-
duct the taxes imposed by section 3101                 ployee taxes.
with respect to the services involved.               (a) In general. Except as otherwise
[T.D. 7647, 44 FR 59524, Oct. 16, 1979]           provided in paragraph (b) of this sec-
                                                  tion, tips received after 1965 by an em-
§ 31.3121(l)–1 Agreements entered into            ployee in the course of his employment
     by domestic corporations with re-            shall be considered remuneration for
     spect to foreign subsidiaries.
                                                  employment. (For definition of the
   For provisions relating to the exten-          term ‘‘employee’’ see 3121(d) and
sion of the Federal old-age, survivors,           § 31.3121(d)–1.) Tips reported by an em-
and disability insurance system estab-            ployee to his employer in a written
lished by title II of the Social Security         statement furnished to the employer
Act to certain services performed out-            pursuant to section 6053(a) (see
side the United States by citizens of             § 31.6053–1) shall be deemed to be paid to
the United States in the employ of a              the employee at the time the written
foreign subsidiary of a domestic cor-             statement is furnished to the em-
poration, see the Regulations Relating            ployer. Tips received by an employee
to Contract Coverage of Employees of              which are not reported to his employer
Foreign Subsidiaries (part 36 of this             in a written statement furnished pur-
chapter).                                         suant to section 6053(a) shall be deemed
                                                  to be paid to the employee at the time
§ 31.3121(o)–1 Crew leader.                       the tips are actually received by the
   The term ‘‘crew leader’’ means an in-          employee. For provisions relating to
dividual who furnishes individuals to             the collection of employee tax in re-
perform agricultural labor for another            spect of tips from the employee, see
person, if such individual pays (either           § 31.3102–3.
on his own behalf or on behalf of such               (b) Tips not included for employer
person) the individuals so furnished by           taxes. Tips received after 1965 by an em-
him for the agricultural labor per-               ployee in the course of his employment
formed by them and if such individual             do not constitute remuneration for em-
has not entered into a written agree-             ployment for purposes of computing
ment with such person whereby such                wages subject to the taxes imposed by
individual has been designated as an              subsections (a) and (b) of section 3111.
employee of such person. For purposes                (c) Tips received by an employee in
of this chapter a crew leader is deemed           course of his employment. Tips are con-
to be the employer of the individuals             sidered to be received by an employee
furnished by him to perform agricul-              in the course of his employment for an
tural labor, after 1956, for another per-         employer regardless of whether the tips
son, and the crew leader is deemed not            are received by the employee from a
to be an employee of such other person            person other than his employer or are
with respect to the performance of                paid to the employee by the employer.
services by him after 1956 in furnishing          However, only those tips which are re-
such individuals or as a member of the            ceived by an employee on his own be-
crew. An individual is not a crew leader          half (as distinguished from tips re-
within the meaning of section 3121(o)             ceived on behalf of another employee)
and of this section if he does not pay            shall be considered as remuneration
the agricultural workers furnished by             paid to the employee. Thus, where em-
him to perform agricultural labor for             ployees practice tip splitting (for ex-
another person, or if there is an agree-          ample, where waiters pay a portion of

                                             92
Internal Revenue Service, Treasury                                               § 31.3121(r)–1

the tips received by them to the bus-                 Act extended to services performed by
boys), each employee who receives a                   its members in the exercise of duties
portion of a tip left by a customer of                required by such order or subdivision.
the employer is considered to have re-                See section 3121(i)(4) and § 31.3121(i)–4
ceived tips in the course of his employ-              for provisions relating to the computa-
ment.                                                 tion of the amount of remuneration of
   (d) Computation of annual wage limita-             such members. For purposes of this
tion. In connection with the application              section, a subdivision of a religious
of the annual wage limitation (see                    order is autonomous if it directs and
§ 31.3121(a)(1)–1), tips reported by an               governs its members, if it is respon-
employee to his employer in a written
                                                      sible for its members’ care and mainte-
statement furnished to the employer
                                                      nance, if it is responsible for the mem-
pursuant to section 6053(a) shall be
taken into account for purposes of the                bers’ support and maintenance in re-
tax imposed by section 3101. However,                 tirement, and if the members live
since tips received by an employee in                 under the authority of a religious supe-
the course of his employment do not                   rior who is elected by them or ap-
constitute remuneration for employ-                   pointed by higher authority.
ment for purposes of the tax imposed                    (b) Definition of member—(1) In gen-
by section 3111, they are disregarded                 eral. For purposes of section 3121(r) and
for purposes of the annual wage limita-               this section, a member of a religious
tion in respect of such tax. Accord-                  order means any individual who is sub-
ingly, separate computations for pur-                 ject to a vow of poverty as a member of
poses of the annual wage limitation                   such order, who performs tasks usually
may be required in respect of an em-                  required (and to the extent usually re-
ployee who receives tips. The provi-                  quired) of an active member of such
sions of this paragraph may be illus-                 order, and who is not considered re-
trated by the following example:                      tired because of old age or total dis-
  Example. During 1966, A is employed as a            ability.
waiter by X restaurant and is paid wages by             (2) Retirement because of old age—(i) In
X restaurant at the rate of $100 a week. At           general. For purposes of section
the end of October 1966, A has been paid              3121(r)(2) and this paragraph, an indi-
weekly wages in the amount of $4,300 and has
reported tips in the amount of $2,200. On No-         vidual is considered retired because of
vember 6, 1966, A is paid an additional week’s        old age if (A) in view of all the services
wages in the amount of $100 and on Novem-             performed by the individual and the
ber 9, 1966, A furnishes X restaurant a report        surrounding circumstances it is reason-
of tips actually received by him during Octo-         able to consider him to be retired, and
ber. The annual wage limitation of $6,600             (B) his retirement occurred by reason
(weekly wages of $4,400 ($4,300 plus $100) and
tips of $2,200) had been reached for purposes
                                                      of old age. Even though an individual
of the tax imposed by section 3101 prior to           performs some services in the exercise
November 9 and, accordingly, no portion of            of duties required by the religious
the tips included in the report furnished on          order, the first test (the retirement
that date constitutes wages. However, since           test) is met where it is reasonable to
tips do not constitute remuneration for em-           consider the individual to be retired.
ployment for purposes of the tax imposed by
section 3111, the weekly wages paid to A dur-           (ii) Factors to be considered. In deter-
ing the remainder of 1966 will be subject to          mining whether it is reasonable to con-
the tax imposed by section 3111.                      sider an individual to be retired, con-
[T.D. 7001, 34 FR 1000, Jan. 23, 1969]                sideration is first to be given to all of
                                                      the following factors:
§ 31.3121(r)–1 Election of coverage by                  (A) Nature of services. Consideration is
     religious orders.                                given to the nature of the services per-
   (a) In general. A religious order whose            formed by the individual in the exer-
members are required to take a vow of                 cise of duties required by his religious
poverty, or any autonomous subdivi-                   order. The more highly skilled and val-
sion of such an order, may elect to                   uable such services are, the more like-
have the Federal old-age, survivors,                  ly the individual rendering such serv-
and disability insurance system estab-                ices is not reasonably considered re-
lished by title II of the Social Security             tired. Also, whether such services are

                                                 93
§ 31.3121(r)–1                                                    26 CFR Ch. I (4–1–99 Edition)

of a type performed principally by re-                are markedly less skilled than those profes-
tired members of the individual’s reli-               sional services which she previously per-
gious order may be significant.                       formed, are of a type performed principally
                                                      by retired members of her order, and are per-
  (B) Amount of time. Consideration is                formed at a location to which members fre-
also given to the amount of time the                  quently retire.
individual devotes to the performance                   Example 2. Assume the same facts as in ex-
of services in the exercise of duties re-             ample 1 except that A is not reassigned to a
quired by his religious order. This time              mother house. Instead, she is reassigned to
includes all the time spent by him in                 full-time duties in a hospital not utilizing
any activity in connection with serv-                 her nursing skills. Whether A has met the re-
ices that might appropriately be per-                 tirement test requires consideration of the
formed in the exercise of duties re-                  nature of her work. If A’s new duties are al-
                                                      most entirely of a make-work nature pri-
quired of active members by the order.                marily to occupy her body and mind, she is
Normally, an individual who, solely by                reasonably considered retired. However, if
reason of his advanced age, performs                  they are essential to the operation of the
services of less than 45 hours per                    hospital, she is not reasonably considered re-
month shall be considered retired. In                 tired.
no event shall an individual who, solely                Example 3. B is a member of a religious
by reason of his advanced age, performs               order who is subject to a vow of poverty. As
                                                      such, he provides supportive services to his
services of less than 15 hours per                    order, such as housekeeping, cooking, and
month not be considered retired.                      gardening. By reason of having attained the
  (C) Comparison of services rendered be-             age of 62, he reduces the number of hours
fore and after retirement. In addition,               spent per day in these services from 8 hours
consideration is given to the nature                  to 2 hours. B is reasonably considered retired
and extent of the services rendered by                in view of the large reduction in the amount
the individual before he ‘‘retired,’’ as              of time he devotes to his duties.
                                                        Example 4. C is a member of a religious
compared with the services performed                  order who is subject to a vow of poverty. In
thereafter. A large reduction in the im-              his capacity as a member of the order, he
portance or amount of services per-                   performs duties as president of a university.
formed by the individual in the exer-                 Upon attaining the age of 65, C is relieved of
cise of duties required by his religious              his duties as president of the university and
order tends to show that the individual               instead becomes a member of its faculty,
is retired; absence of such reduction                 teaching two courses whereas full-time
                                                      members of the faculty normally teach four
tends to show that the individual is not              comparable courses. Although C’s duties are
retired. Normally, an individual who                  no longer as demanding as those he pre-
reduces by at least 75 percent the                    viously performed, and although the amount
amount of services performed shall be                 of his time required for them is less than full
considered retired.                                   time, he is nonetheless performing duties re-
                                                      quiring a high degree of skill for a substan-
Where consideration of the factors de-                tial amount of time. Accordingly, C is not
scribed in paragraph (b)(2)(ii) of this               reasonably considered retired.
section does not establish whether an                   Example 5. Assume the same facts as in ex-
individual is or is not reasonably con-               ample 4, except that C teaches only one
sidered retired, all other factors are                course upon being relieved of his position as
considered.                                           president by reason of age. C is reasonably
  (iii) Examples. The rules of this sub-              considered retired.
                                                        Example 6. D is a member of a contem-
paragraph may be illustrated by the                   plative order who is subject to a vow of pov-
following examples:                                   erty. In accordance with the practices of his
  Example 1. A is a member of a religious             order, upon attaining the age of 70, D reduces
order who is subject to a vow of poverty. A’s         by 50 percent the amount of time spent per-
religious order is principally engaged in pro-        forming the normal duties of active members
viding nursing services, and A has been fully         of his order. D is not reasonably considered
trained in the nursing profession. In accord-         retired.
ance with the practices of her order, upon at-          Example 7. Assume the same facts as in ex-
taining the age of 65, A is relieved of her           ample 6, except that because of his age D no
nursing duties by reason of her age, and is           longer participates in the more rigorous li-
assigned to a mother house where she is re-           turgical services of the order and that the
quired to perform only such duties as light           amount of time which he spends in all duties
housekeeping and ordinary gardening. A is             which might appropriately be performed by
reasonably considered retired since the serv-         active members of his order is reduced by 75
ices she is performing are simple in nature,          percent. D is reasonably considered retired

                                                 94
Internal Revenue Service, Treasury                                                § 31.3121(r)–1
in view of the large reduction in his partici-        with an appropriate official of the In-
pation in the usual devotional routine of his         ternal Revenue Service. Such a docu-
order.                                                ment shall be given the effect it would
  (3) Retirement because of total dis-                have if it were a certificate of election
ability.   For    purposes    of   section            containing the provisions required by
3121(r)(2) and this paragraph, an indi-               paragraph (c)(2) of this section. How-
vidual is considered retired because of               ever, it should subsequently be supple-
total disability (i) if he is unable, by              mented by a Form SS–16.
reason of a medically determinable                       (2) Provisions of certificates. Each cer-
physical or mental impairment, to per-                tificate of election shall provide that—
form the tasks usually required of an                    (i) Such election of coverage by such
active member of his order to the ex-                 order or subdivision shall be irrev-
tent necessary to maintain his status                 ocable,
as an active member, and (ii) if such                    (ii) Such election shall apply to all
impairment is reasonably expected to                  current and future members of such
prevent his resumption of the perform-                order, or in the case of a subdivision
ance of such tasks to such extent. A                  thereof to all current and future mem-
physical or mental impairment is an                   bers of such order who belong to such
impairment that results from anatom-                  subdivision,
ical, physiological, or psychological ab-
                                                         (iii) All services performed by a
normalities which are demonstrable by
                                                      member of such order or subdivision in
medically acceptable clinical and lab-
                                                      the exercise of duties required by such
oratory diagnostic techniques. State-
                                                      order or subdivision shall be deemed to
ments of the individual, including his
                                                      have been performed by such member
own description of his impairment
                                                      as an employee of such order or sub-
(symptoms), are, alone, insufficient to
                                                      division, and
establish the presence of a physical or
mental impairment.                                       (iv) The wages of each member, upon
  (4) Evidentiary requirements with re-               which such order or subdivision shall
spect to retirement. There shall be at-               pay the taxes imposed on employees
tached to the return of taxes paid pur-               and employers by sections 3101 and
suant to an election under section                    3111, will be determined as provided in
3121(r) a summary of the facts upon                   section 3121(i)(4).
which any determination has been                         (d) Effective date of election—(1) In
made by the religious order or autono-                general. Except as provided in para-
mous subdivision that one or more of                  graph (e) of this section, a certificate
its members retired during the period                 of election of coverage filed by a reli-
covered by such return. Each summary                  gious order or its subdivision pursuant
shall contain the name and social secu-               to section 3121(r) and this section shall
rity number of each such retired mem-                 be in effect, for purposes of section
ber as well as the date of his retire-                3121(b)(8)(A) and for purposes of section
ment. Such order or subdivision shall                 210(a)(8)(A) of the Social Security Act,
maintain records of the details relating              for the period beginning with which-
to each such ‘‘retirement’’ sufficient to             ever of the following may be des-
show whether or not such member or                    ignated by the electing religious order
members has in fact retired.                          or subdivision:
  (c) Certificates of election—(1) In gen-               (i) The first day of the calendar quar-
eral. A religious order or an autono-                 ter in which the certificate is filed,
mous subdivision of such an order de-                    (ii) The first day of the calendar
siring to make an election of coverage                quarter immediately following the
pursuant to section 3121(r) and this sec-             quarter in which the certificate is
tion shall file a certificate of election             filed, or
on Form SS–16 in accordance with the                     (iii) The first day of any calendar
instructions thereto. However, in the                 quarter preceding the calendar quarter
case of an election made before August                in which the certificate is filed, except
9, 1973, a document other than Form                   that such date may not be earlier than
SS–16 shall constitute a certificate of               the first day of the 20th calendar quar-
election if it purports to be a binding               ter preceding the quarter in which such
election of coverage and if it is filed               certificate is filed.

                                                 95
§ 31.3121(s)–1                                                   26 CFR Ch. I (4–1–99 Edition)

   (2) Retroactive elections. Whenever a            emption required under this paragraph
date is designated as provided in para-             shall be filed notwithstanding the pro-
graph (d)(1)(iii) of this section, the              visions of section 3121(k)(3) (relating to
election shall apply to services per-               no renewal of the waiver of exemption)
formed before the quarter in which the              which otherwise would prohibit the fil-
certificate is filed only if the member             ing of a waiver of exemption if an ear-
performing such services was a member               lier waiver of exemption had pre-
at the time such services were per-                 viously been terminated. If at the time
formed and is living on the first day of            the certificate of election of coverage
the quarter in which such certificate is            is filed a certificate of waiver of ex-
filed. Thus, the election applies to an             emption is in effect with respect to the
individual who is no longer a member                electing religious order or autonomous
of a religious order on the first day of            subdivision, the filing of the certificate
such quarter if he performed services               of election shall constitute an amend-
as a member at any time on or after                 ment of the certificate of waiver of ex-
the date so designated and is living on             emption making the latter certificate
the first day of the quarter in which               irrevocable.
such certificate is filed. For purposes
of computing interest and for purposes              [T.D. 7280, 38 FR 18370, July 10, 1973]
of section 6651 (relating to additions to
tax for failure to file tax return or to            § 31.3121(s)–1 Concurrent employment
                                                         by related corporations with com-
pay tax), in any case in which such a                    mon paymaster.
date is designated the due date for the
return and payment of the tax, for cal-               (a) In general. For purposes of sec-
endar quarters prior to the quarter in              tions 3102, 3111, and 3121(a)(1), except as
which the certificate is filed, resulting           otherwise provided in paragraph (c) of
from the filing of such certificate shall           this section, when two or more related
be the last day of the calendar month               corporations concurrently employ the
following the calendar quarter in which             same individual and compensate that
the certificate is filed. The statutory             individual through a common pay-
period for the assessment of the tax for            master which is one of the related cor-
such prior calendar quarters shall not              porations that employs the individual,
expire before the expiration of 3 years             each of the corporations is considered
from such due date.                                 to have paid only the remuneration it
   (e) Coordination with coverage of lay            actually disburses to that individual.
employees. If at the time the certificate           This rule applies whether the remu-
of election of coverage is filed by a reli-         neration was paid with respect to the
gious order or autonomous subdivision,              employment relationship of the indi-
a certificate of waiver of exemption                vidual with the disbursing corporation
under section 3121(k) (extending cov-               or was paid on behalf of another re-
erage to any lay employees) is not in               lated corporation. Accordingly, if all of
effect, the certificate of election shall           the remuneration to the individual
not become effective unless the order               from the related corporations is dis-
or subdivision files a Form SS–15, and              bursed through the common pay-
a Form SS–15a to accompany the cer-                 master, the total amount of taxes im-
tificate on Form SS–15, as provided by              posed with respect to the remuneration
section     3121(k)   and    §§ 31.3121(k)–1        under sections 3102 and 3111 is deter-
through 31.3121(k)–3. The preceding sen-            mined as though the individual has
tence applies even though an order or               only one employer (the common pay-
subdivision has no lay employees at                 master). The common paymaster is re-
the time it files a certificate of elec-            sponsible for filing information and tax
tion of coverage. The effective date of             returns and issuing Forms W–2 with re-
the certificate of waiver of exemption              spect to wages it is considered to have
must be no later than the date on                   paid under this section. Section 3121(s)
which the certificate of election be-               and this section apply only to remu-
comes effective, and it must be speci-              neration disbursed in the form of
fied on the certificate of waiver of ex-            money, check or similar instrument by
emption that such certificate is irrev-             one of the related corporations or its
ocable. The certificate of waiver of ex-            agent.

                                               96
Internal Revenue Service, Treasury                                                  § 31.3121(s)–1

   (b) Definitions. The definitions con-              are related corporations, because C is not
tained in this paragraph are applicable               employed by X Corporation, the common
only for purposes of this section and                 paymaster. Individual A also is treated as
§ 31.3306(p)–1.                                       having two employers for the purposes of
                                                      these sections because X and Y Corporations
   (1) Related corporations. Corporations
                                                      are treated as one employer, and Z Corpora-
shall be considered related corpora-                  tion is treated as a second employer (since it
tions for an entire calendar quarter (as              is not related to the paymaster, X Corpora-
defined in § 31.0–2(a)(9)) if they satisfy            tion). Of course, individuals D, E, F, G, H, I,
any one of the following four tests at                J, K, L, and M are not concurrently em-
any time during that calendar quarter:                ployed by two or more corporations, and, ac-
   (i) The corporations are members of a              cordingly, section 3121 (s) is inapplicable to
‘‘controlled group of corporations’’, as              them.
defined in section 1563 of the Code, or                 Example 2. M and N Corporations are both
would be members if section 1563(a)(4)                related to Corporation O but are not related
and (b) did not apply and if the phrase               to each other. Individual A is concurrently
                                                      employed by all three corporations and paid
‘‘more than 50 percent’’ were sub-
                                                      by O, their common paymaster. Although M
stituted for the phrase ‘‘at least 80 per-            and N are not related, O is treated as the em-
cent’’ wherever it appears in section                 ployer for A’s employment with M, N, and O.
1563(a).                                                Example 3. Corporations X, Y, and Z meet
   (ii) In the case of a corporation that             the definition of related corporations for the
does not issue stock, either fifty per-               first time on April 12, 1979, and cease to meet
cent or more of the members of one                    it on July 5, 1979. A is concurrently employed
corporation’s board of directors (or                  by X, Y, and Z throughout 1979. In each of
other governing body) are members of                  the four calendar quarters of 1979, A’s remu-
the other corporation’s board of direc-               neration from X, Y, and Z is $2,000, $10,000,
                                                      and $30,000, respectively. All of the remu-
tors (or other governing body), or the
                                                      neration to A from X, Y, and Z for the year
holders of fifty percent or more of the               is disbursed by X, the common paymaster.
voting power to select such members                   Under these circumstances, the amount of
are concurrently the holders of more                  wages subject to sections 3102 and 3111 is as
than fifty percent of that power with                 follows:
respect to the other corporation.                       For the first calendar quarter
   (iii) Fifty percent or more of one cor-
poration’s officers are concurrently of-                     X               Y               Z
ficers of the other corporation.                           $2,000         $10,000         $22,900
   (iv) Thirty percent or more of one
corporation’s employees are concur-
rently employees of the other corpora-                  For the second calendar quarter
tion.
                                                             X               Y               Z
The following examples illustrate the
application of this paragraph:                            $20,900            0               0

  Example 1. (a) X Corporation employs indi-          ($22,900¥$2,000)
viduals A, B, D, E, F, G, and H. Y Corpora-
tion employs individuals A, B, and C. Z Cor-            For the third calendar quarter
poration employs individuals A, C, I, J, K, L,
and M. X Corporation is the paymaster for                    X               Y               Z
all thirteen individuals. The corporations                   0               0               0
have no officers or stockholders in common.
  (b) X and Y are related corporations be-
cause at least 30 percent of Y’s employees
are also employees of X. Y and Z are related            For the fourth calendar quarter
corporations because at least 30 percent of
                                                             X               Y               Z
Y’s employees are also employees of Z. X and
Z are not related corporations because nei-                  0            $10,000            0
ther corporation has 30 percent of its em-
ployees concurrently employed by the other
corporation.
  (c) For purposes of determining the                 Of course, if the corporations had been re-
amount of the tax liability under sections            lated throughout all of 1979, only $22,900 of
3102 and 3111, individual B is treated as hav-        X’s first quarter disbursement would have
ing one employer. Individual C has two em-            constituted wages subject to sections 3102
ployers for these purposes, although Y and Z          and 3111.

                                                 97
§ 31.3121(s)–1                                                     26 CFR Ch. I (4–1–99 Edition)

  (2) Common paymaster—(i) In general.                 year. The four corporations arrange for Z to
A common paymaster of a group of re-                   disburse remuneration to the sixty execu-
lated corporations is any member                       tives who are concurrently employed by two
thereof that disburses remuneration to                 or more of the corporations. W and X ar-
                                                       range for X to disburse remuneration to the
employees of two or more of those cor-
                                                       artisans who are concurrently employed by
porations on their behalf and that is                  W and X.
responsible for keeping books and                        (b) A is an executive who is concurrently
records for the payroll with respect to                employed only by W, Y, and Z during the cal-
those employees. The common pay-                       endar year. Under these facts, Z is a common
master is not required to disburse re-                 paymaster for W, Y, and Z with respect to A.
muneration to all the employees of                     Assuming that the other requirements of
those two or more related corpora-                     this section are met, the amount of the tax
tions, but the provisions of this section              liability under sections 3102 and 3111 is deter-
do not apply to any remuneration to an                 mined as if Z were A’s only employer for the
employee that is not disbursed through                 calendar quarter.
a common paymaster. The common                           (c) B is a skilled artisan who is concur-
                                                       rently employed only by W and X during the
paymaster may pay concurrently em-
                                                       calendar year. Under these facts, X is a com-
ployed individuals under this section                  mon paymaster for S and X with respect to
by one combined paycheck, drawn on a                   B. Assuming that the other requirements of
single bank account, or by separate                    this section are met, the amount of the tax
paychecks, drawn by the common pay-                    liability under sections 3102 and 3111 is deter-
master on the accounts of one or more                  mined as if X were B’s only employer for the
employing corporations.                                calendar quarter.
  (ii) Multiple common paymasters. A
                                                         (3) Concurrent employment. For pur-
group of related corporations may have
                                                       poses of this section, the term ‘‘concur-
more than one common paymaster.
                                                       rent employment’’ means the contem-
Some of the related corporations may
                                                       poraneous existence of an employment
use one common paymaster and others
                                                       relationship (within the meaning of
of the related corporations use another
common paymaster with respect to a                     section 3121(b)) between an individual
certain class of employees. A corpora-                 and two or more corporations. Such a
tion that uses a common paymaster to                   relationship contemplates the perform-
disburse remuneration to certain of its                ance of services by the employee for
employees may use a different common                   the benefit of the employing corpora-
paymaster to disburse remuneration to                  tion (not merely for the benefit of the
other employees.                                       group of corporations), in exchange for
  (iii) Examples. The rules of this sub-               remuneration which, if deductible for
paragraph are illustrated by the fol-                  the purposes of Federal income tax,
lowing examples:                                       would be deductible by the employing
                                                       corporation. The contemporaneous ex-
  Example 1. S, T, U, and V are related cor-
                                                       istence of an employment relationship
porations with 2,000 employees collectively.
Forty of these employees are concurrently              with each corporation is the decisive
employed by two or more of the corpora-                factor; if it exists, the fact that a par-
tions, during a calendar quarter. The four             ticular employee is on leave or other-
corporations arrange for S to disburse remu-           wise temporarily inactive is immate-
neration to thirty of these forty employees            rial. However, employment is not con-
for their services. Under these facts, S is the        current with respect to one of the re-
common paymaster of S, T, U, and V with re-
                                                       lated corporations if the employee’s
spect to the thirty employees. S is not a
common paymaster with respect to the re-               employment relationship with that
maining employees.                                     corporation is completely nonexistent
  Example 2. (a) W, X, Y, and Z are related            during periods when the employee is
corporations. The corporations collectively            not performing services for that cor-
have 20,000 employees. Two hundred of the              poration. An employment relationship
employees are top-level executives and man-            is completely nonexistent if all rights
agers, sixty of whom are concurrently em-
                                                       and obligations of the employer and
ployed by two or more of the corporations
during a calendar quarter. Six thousand of             employee with respect to employment
the employees are skilled artisans, all of             have terminated, other than those that
whom are concurrently employed by two or               customarily exist after employment re-
more of the corporations during the calendar           lationships terminate. Examples of

                                                  98
Internal Revenue Service, Treasury                                                 § 31.3121(s)–1

rights and obligations that custom-                  with respect to officers. Their respective
arily exist after employment relation-               headquarters are located in three separate
ships terminate include those with re-               cities several hundred miles apart. A is an
                                                     officer of M, N, and O who performs substan-
spect to remuneration not yet paid,                  tial services for each corporation. A does not
employer’s property used by the em-                  work a set length of time at each corporate
ployee not yet returned to the em-                   headquarters, and when A leaves one cor-
ployer, severance pay, and lump-sum                  porate headquarters, it is not known when A
termination payments from a deferred                 will return, although it is expected that A
compensation plan. Circumstances that                will return. Under these facts, A is concur-
suggest that an employment relation-                 rently employed by the three corporations.
ship has become completely non-                        Example 2. P, Q, and R are related corpora-
                                                     tions whose geographical zones of business
existent include unconditional termi-                activity do not overlap. P, Q, and R have a
nation of participation in deferred                  common pension plan and arrange for Q to be
compensation plans of the employer,                  a common paymaster for managers and ex-
forfeiture of seniority claims, and for-             ecutives. All three corporations maintain
feiture of unused fringe benefits such               cafeterias for the use of their employees. B is
as vacation or sick pay. Of course, the              a cafeteria manager who has worked at P’s
continued existence of an employment                 headquarters for 3 years. On June 1, 1980, B
relationship between an individual and               is transferred from P to the position of cafe-
                                                     teria manager of R. There are no plans for
a corporation is not necessarily estab-
                                                     B’s return to P. B’s accrued pension benefits,
lished by the individual’s continued                 vacation and sick pay, do not change as a re-
participation in a deferred compensa-                sult of the transfer. The decision to transfer
tion plan, retention of seniority rights,            B was made by Q, the parent corporation.
etc., since continuation of those bene-              Under these facts, B is not concurrently em-
fits may be attributable to employ-                  ployed by P and R, because B’s employment
ment with a second corporation related               relationship with P was completely non-
to the first corporation if the corpora-             existent during B’s employment with R. Fur-
tions have common benefits plans or if               thermore, section 3121(s) is inapplicable
                                                     since B also was not employed by Q, the
the benefits are continued as a matter
                                                     common paymaster, because B never con-
of corporate reciprocity. An individual              tracted to perform services for remuneration
who does not perform substantial serv-               from Q, and Q did not have the right to con-
ices in exchange for remuneration from               trol the day-to-day duties of B’s work.
a corporation is presumed not em-                      Example 3. C is employed by two related
ployed by that corporation. Concurrent               corporations, S and T. C was concurrently
employment need not exist for any par-               employed by these corporations between
ticular length of time to meet the re-               April 1, 1979, and June 30, 1979. The corpora-
                                                     tions used T as the common paymaster with
quirements of this section, but this
                                                     respect to C’s wages between May 1, 1979, and
section only applies to remuneration                 September 30, 1979. T pays C on May 15 for
disbursed by a common paymaster to                   services performed between April 1 and April
an individual who is concurrently em-                30, on July 15 for services performed between
ployed by the common paymaster and                   June 1 and June 30, and on August 15 for
at least one other related corporation               services performed between July 1 and July
at the time the individual performs the              31. Section 3121 (s) applies to the first two
services for which the remuneration is               payments but does not apply to the third
                                                     payment (there was no concurrent employ-
paid. If the employment relationship is
                                                     ment). However, if the third payment was
nonexistent during a quarter, that em-               made by T for services performed for T, T
ployee may not be counted towards the                counts the amounts previously disbursed to
30-percent test set forth in paragraph               C in 1979 while C was concurrently employed
(b)(1)(iv) of this section; however, even            by S and T towards the wage base (see sec-
if the employment relationship is non-               tion 3121 (a)(1)).
existent, section 3121(s) of the Code                  (c) Allocation of employment taxes—(1)
would apply to remuneration paid to                  Responsibility to pay tax. If the require-
the former employee for services ren-                ments of this section are met, the com-
dered while the employee was a com-                  mon paymaster has the primary re-
mon employee. The principles of this                 sponsibility for remitting taxes pursu-
subparagraph are illustrated by the fol-             ant to sections 3102 and 3111 with re-
lowing examples.                                     spect to the remuneration it disburses
  Example 1. M, N, and O are related corpora-        as the common paymaster. The com-
tions which use N as a common paymaster              mon paymaster computes these taxes

                                                99
§ 31.3121(s)–1                                                                                                           26 CFR Ch. I (4–1–99 Edition)

as though it were the sole employer of                                                                     which is the total amount of the com-
the concurrently employed individuals.                                                                     mon paymaster’s liability under sec-
If the common paymaster fails to                                                                           tion 3121(s), both determined without
remit these taxes (in whole or in part),                                                                   regard to any prior tax payments.
it remains liable for the full amount of                                                                   These rules apply whether or not the
the unpaid portion of these taxes. In                                                                      tax on employees was withheld from
addition, each of the other related cor-                                                                   the employees’ wages.
porations using the common paymaster                                                                         (2) Allocation of tax—(i) In general. If
is jointly and severally liable for its                                                                    the related corporations maintain a
appropriate share of these taxes. That                                                                     record of the remuneration disbursed
share is an amount equal to the lesser                                                                     to the employee for services performed
of:                                                                                                        for each corporation, the remunera-
  (i) The amount of the liability of the
                                                                                                           tion-based allocation rules of para-
common paymaster under section
                                                                                                           graph (c)(2)(ii) of this section apply. If
3121(s), after taking account of any tax
payments made, or                                                                                          the related corporations do not main-
  (ii) The amount of the liability under                                                                   tain this record of remuneration, the
sections 3102 and 3111 which, but for                                                                      group-wide allocation rules of para-
section 3121(s), would have existed with                                                                   graph (c)(2)(iii) of this section apply. In
respect to the remuneration from such                                                                      all cases, allocations must be made
other related corporation, reduced by                                                                      with respect to each payment of wages.
an allocable portion of any taxes pre-                                                                     The allocation of employment tax li-
viously paid by the common paymaster                                                                       abilities pursuant to this subparagraph
with respect to that remuneration.                                                                         also determines which related corpora-
The portion of taxes previously paid by                                                                    tion may be entitled to income tax de-
the common paymaster that is allo-                                                                         ductions with respect to the payments
cable to each related corporation is de-                                                                   of those taxes.
termined by multiplying the amount of                                                                        (ii)   Remuneration-based      allocation
taxes paid by a fraction, the numerator                                                                    rules. Under the remuneration-based
of which is the portion of the amount                                                                      method of allocation, each related cor-
of employment tax liability of the                                                                         poration that remunerates an em-
common paymaster under section                                                                             ployee through a common paymaster
3121(s) that is allocable to such related                                                                  has allocated to it for each pay period
corporation under paragraph (c)(2) of                                                                      an amount of tax determined according
this section, and the denominator of                                                                       to the following formula:

Portion of wage payment constituting re-
 muneration to the employee for services                                                                    Tax on employees under section 3102 and
 performed for the corporation                                                                               tax on employers under section 3111
———————————————————————                                                                                ×     that the common paymaster is required
Total wage payment constituting remu-                                                                        to remit with respect to the wage pay-
 neration to the employee for all services                                                                   ment
 performed for the related corporations
 using the common paymaster
  If the remuneration disbursed to an employee for services performed for a cor-
poration is inappropriate, the district director may adjust the remuneration
records of the related corporations to reflect appropriate remuneration. The dis-
trict director may use the principles of § 1.482–2(b) in making the adjustments.
  Example. (i) X and Y are related corporations which use Y as common pay-
master for their executives. A is a concurrently employed executive who performs
services during the first quarter of 1979 for X and Y. Y remunerates $4,000 gross
pay every week to A, calculated as follows:
                                                                              Remuneration                                                Tax on em-
                                                                                                                          Tax on em-     ployees with-
            Wage payments                                                                                                ployers under                   Total
                                                                                                                                          held under
                                                              X                        Y                      Total      section 3111    section 3102

1 ................................................              $3,000                   $1,000                 $4,000        $245.20         $245.20     $490.40
2–3 ............................................     ......................                8,000                 8,000         490.40          490.40      980.80
4 ................................................                1,000                    3,000                 4,000         245.20          245.20      490.40
5 ................................................                4,000       ......................             4,000         245.20          245.20      490.40


                                                                                               100
Internal Revenue Service, Treasury                                                                                § 31.3121(s)–1

                                                              Remuneration                                  Tax on em-
                                                                                            Tax on em-     ployees with-
            Wage payments                                                                  ployers under                   Total
                                                                                                            held under
                                                     X             Y            Total      section 3111    section 3102

6 ................................................    2,000          2,000         4,000         177.77          177.77      355.54
7–13 ..........................................      10,000         18,000        28,000              0               0           0

             Total ............................      20,000         32,000        52,000       1,403.77        1,403.77    2,807.54

  The amounts of remuneration to A are determined by the district director to
be appropriate. Under these facts, the tax is allocated to X and Y in the following
amounts:




  (ii) If Y remits none of the taxes to
the Internal Revenue Service, X is lia-
ble for $2,452.00 (the entire amount due
pursuant to sections 3102 and 3111 with
respect to the remuneration to A from
X) (12.26% × $20,000). Any amount re-
mitted by X to the Internal Revenue                                            (iii) Group-wide allocation rules. Under
Service under these circumstances is                                         the group-wide method of allocation,
also credited against the liability of                                       the district director may allocate the
the common paymaster, Y. However,                                            taxes imposed by sections 3102 and 3111
only the portion of the employment                                           in an appropriate manner to a related
taxes allocated to X under (i) above                                         corporation that remunerates an em-
may be deducted by X as employment                                           ployee through a common paymaster if
taxes paid by it in respect of wages                                         the common paymaster fails to remit
paid by it to its employees.                                                 the taxes to the Internal Revenue Serv-
  (iii) If Y remits $1,000.00 of the total                                   ice. Allocation in an appropriate man-
$2,807.54 due, Y as common paymaster                                         ner varies according to the cir-
remains liable for $1,807.54 ($2,807.54                                      cumstances. It may be based on sales,
minus $1,000). X’s liability is the lesser                                   property, corporate payroll, or any
of $1,807.54 (the liability of the common                                    other basis that reflects the distribu-
paymaster), or X’s total liability, in                                       tion of the services performed by the
the absence of section 3121 (s), on wages                                    employee, or a combination of the fore-
paid through the common paymaster                                            going bases. To the extent practicable,
($2,452.00) minus a credit for an allo-                                      the district director may use the prin-
cable part of the amount remitted by                                         ciples of § 1.482–2(b) in making the allo-
Y. The part is $412.66                                                       cations.


                                                                       101
§ 31.3121(v)(2)-1                                          26 CFR Ch. I (4–1–99 Edition)

  (d) Effective date. This section is ef-       ther the amount taken into account
fective with respect to wages paid after        nor the income attributable to the
December 31, 1978.                              amount taken into account (within the
[T.D. 7660, 44 FR 75139, Dec. 19, 1979; 45 FR
                                                meaning of paragraph (d)(2) of this sec-
17986, Mar. 20, 1980]                           tion) is treated as wages for FICA tax
                                                purposes at any time thereafter.
§ 31.3121(v)(2)-1 Treatment of amounts            (iv) Benefits that do not result from a
      deferred under certain nonqualified       deferral of compensation. If a non-
      deferred compensation plans.              qualified deferred compensation plan
   (a) Timing of wage inclusion—(1) Gen-        (within the meaning of paragraph (b)(1)
eral timing rule for wages. Remuneration        of this section) provides both a benefit
for employment that constitutes wages           that results from the deferral of com-
within the meaning of section 3121(a)           pensation (within the meaning of para-
generally is taken into account for pur-        graph (b)(3) of this section) and a ben-
poses of the Federal Insurance Con-             efit that does not result from the defer-
tributions Act (FICA) taxes imposed             ral of compensation, the benefit that
under sections 3101 and 3111 at the time        does not result from the deferral of
the remuneration is actually or con-            compensation is not subject to the spe-
structively paid. See § 31.3121(a)-2(a).        cial timing rule described in this para-
   (2) Special timing rule for an amount        graph (a)(2). For example, if a non-
deferred under a nonqualified deferred          qualified deferred compensation plan
compensation plan—(i) In general. To the        provides retirement benefits which re-
extent that remuneration deferred               sult from the deferral of compensation
under a nonqualified deferred com-              and disability pay (within the meaning
pensation plan constitutes wages with-          of paragraph (b)(4)(iv)(C) of this sec-
in the meaning of section 3121(a), the          tion) which does not result from the
remuneration is subject to the special          deferral of compensation, the retire-
timing rule described in this paragraph         ment benefits provided under the plan
(a)(2). Remuneration is considered de-          are subject to the special timing rule
ferred under a nonqualified deferred            in this paragraph (a)(2) and the dis-
compensation plan within the meaning            ability pay is not.
of section 3121(v)(2) and this section            (v) Remuneration that does not con-
only if it is provided pursuant to a plan       stitute wages. If remuneration under a
described in paragraph (b) of this sec-         nonqualified deferred compensation
tion. The amount deferred under a non-          plan does not constitute wages within
qualified deferred compensation plan is         the meaning of section 3121(a), then
determined under paragraph (c) of this          that remuneration is not taken into
section.                                        account as wages for FICA tax pur-
   (ii) Special timing rule. Except as oth-     poses under either the general timing
erwise provided in this section, an             rule described in paragraph (a)(1) of
amount deferred under a nonqualified            this section or the special timing rule
deferred compensation plan is required          described in this paragraph (a)(2). For
to be taken into account as wages for           example, benefits under a death benefit
FICA tax purposes as of the later of—           plan described in section 3121(a)(13) do
   (A) The date on which the services           not constitute wages for FICA tax pur-
creating the right to that amount are           poses. Therefore, these benefits are not
performed (within the meaning of para-          included as wages under the general
graph (e)(2) of this section); or               timing rule described in paragraph
   (B) The date on which the right to           (a)(1) of this section or the special tim-
that amount is no longer subject to a           ing rule described in this paragraph
substantial risk of forfeiture (within          (a)(2), even if the death benefit plan
the meaning of paragraph (e)(3) of this         would otherwise be considered a non-
section).                                       qualified deferred compensation plan
   (iii) Inclusion in wages only once (non-     within the meaning of paragraph (b)(1)
duplication rule). Once an amount de-           of this section.
ferred under a nonqualified deferred              (b) Nonqualified deferred compensation
compensation plan is taken into ac-             plan—(1) In general. For purposes of
count (within the meaning of para-              this section, the term nonqualified de-
graph (d)(1) of this section), then nei-        ferred compensation plan means any

                                            102
Internal Revenue Service, Treasury                                    § 31.3121(v)(2)-1

plan or other arrangement, other than        accordance with paragraph (b)(2)(i) of
a plan described in section 3121(a)(5),      this section.
that is established (within the meaning        (iii) Transition rule for written plan re-
of paragraph (b)(2) of this section) by      quirement. For purposes of this section,
an employer for one or more of its em-       an unwritten plan that was adopted
ployees, and that provides for the de-       and effective before March 25, 1996, is
ferral of compensation (within the           treated as established under this sec-
meaning of paragraph (b)(3) of this sec-     tion as of the later of the date on
tion). A nonqualified deferred com-          which it was adopted or became effec-
pensation plan may be adopted unilat-        tive, provided that the material terms
erally by the employer or may be nego-       of the plan are set forth in writing be-
tiated among or agreed to by the em-         fore January 1, 2000.
ployer and one or more employees or            (3) Plan must provide for the deferral of
employee representatives. A plan may         compensation—(i) Deferral of compensa-
constitute a nonqualified deferred com-      tion defined. A plan provides for the de-
pensation plan under this section with-      ferral of compensation with respect to an
out regard to whether the deferrals
                                             employee only if, under the terms of
under the plan are made pursuant to an
                                             the plan and the relevant facts and cir-
election by the employee or whether
                                             cumstances, the employee has a legally
the amounts deferred are treated as de-
                                             binding right during a calendar year to
ferred compensation for income tax
                                             compensation that has not been actu-
purposes (e.g., whether the amounts
are subject to the deduction rules of        ally or constructively received and
section 404). In addition, a plan may        that, pursuant to the terms of the plan,
constitute a nonqualified deferred com-      is payable to (or on behalf of) the em-
pensation plan under this section            ployee in a later year. An employee
whether or not it is an employee ben-        does not have a legally binding right to
efit plan under section 3(3) of the Em-      compensation if that compensation
ployee Retirement Income Security            may be unilaterally reduced or elimi-
Act of 1974 (ERISA), as amended (29          nated by the employer after the serv-
U.S.C. 1002(3)). For purposes of this sec-   ices creating the right to the com-
tion, except where the context indi-         pensation have been performed. For
cates otherwise, the term plan includes      this purpose, compensation is not con-
a plan or other arrangement.                 sidered subject to unilateral reduction
  (2) Plan establishment—(i) Date plan is    or elimination merely because it may
established. For purposes of this sec-       be reduced or eliminated by operation
tion, a plan is established on the latest    of the objective terms of the plan, such
of the date on which it is adopted, the      as the application of an objective pro-
date on which it is effective, and the       vision creating a substantial risk of
date on which the material terms of          forfeiture (within the meaning of sec-
the plan are set forth in writing. For       tion 83). Similarly, an employee does
purposes of this section, a plan will be     not fail to have a legally binding right
deemed to be set forth in writing if it      to compensation merely because the
is set forth in any other form that is       amount of compensation is determined
approved by the Commissioner. The            under a formula that provides for bene-
material terms of the plan include the       fits to be offset by benefits provided
amount (or the method or formula for         under a plan that is qualified under
determining the amount) of deferred          section 401(a), or because benefits are
compensation to be provided under the        reduced due to investment losses or, in
plan and the time when it may or will        a final average pay plan, subsequent
be provided.                                 decreases in compensation.
  (ii) Plan amendments. In the case of         (ii) Compensation payable pursuant to
an amendment that increases the
                                             the employer’s customary payment timing
amount deferred under a nonqualified
                                             arrangement. There is no deferral of
deferred compensation plan, the plan is
                                             compensation (within the meaning of
not considered established with respect
                                             this paragraph (b)(3)) merely because
to the additional amount deferred until
the plan, as amended, is established in      compensation is paid after the last day

                                         103
§ 31.3121(v)(2)-1                                       26 CFR Ch. I (4–1–99 Edition)

of a calendar year pursuant to the tim-      one or more shares of employer stock
ing arrangement under which the em-          that, to the extent exercised, entitles
ployer ordinarily compensates employ-        the employee to a payment for each
ees for services performed during a          share of stock equal to the excess, or a
payroll period described in section          percentage of the excess, of the value
3401(b).                                     of a share of the employer’s stock on
  (iii) Short-term deferrals. If, under a    the date of exercise over a specified
nonqualified deferred compensation           price (greater than zero).
plan, there is a deferral of compensa-         Thus, for example, the term stock
tion (within the meaning of this para-       value right does not include a phantom
graph (b)(3)) that causes an amount to       stock or other arrangement under
be deferred from a calendar year to a        which an employee is awarded the
date that is not more than a brief pe-       right to receive a fixed payment equal
riod of time after the end of that cal-      to the value of a specified number of
endar year, then, at the employer’s op-      shares of employer stock.
tion, that amount may be treated as if         (iii) Restricted property. If an em-
it were not subject to the special tim-      ployee receives property from, or pur-
ing rule described in paragraph (a)(2) of    suant to, a plan maintained by an em-
this section. An employer may apply          ployer, there is no deferral of com-
this option only if the employer does so     pensation (within the meaning of sec-
for all employees covered by the plan        tion 3121(v)(2)) merely because the
and all substantially similar non-           value of the property is not includible
qualified deferred compensation plans.       in income (under section 83) in the year
For     purposes    of   this   paragraph    of receipt by reason of the property
(b)(3)(iii), whether compensation is de-     being nontransferable and subject to a
ferred to a date that is not more than       substantial risk of forfeiture. However,
a brief period of time after the end of a    a plan under which an employee ob-
calendar year is determined in accord-       tains a legally binding right to receive
ance with § 1.404(b)–1T, Q&A–2, of this      property (whether or not the property
chapter.                                     is restricted property) in a future year
  (4) Plans, arrangements, and benefits      may provide for the deferral of com-
that do not provide for the deferral of      pensation within the meaning of para-
compensation—(i) In general. Notwith-        graph (b)(3) of this section and, accord-
standing paragraph (b)(3)(i) of this sec-    ingly, may constitute a nonqualified
tion, an amount or benefit described in      deferred compensation plan, even
any of paragraphs (b)(4)(ii) through         though benefits under the plan are or
(viii) of this section is not treated as     may be paid in the form of property.
resulting from the deferral of com-            (iv) Certain welfare benefits—(A) In
pensation for purposes of section            general. Vacation benefits, sick leave,
3121(v)(2) and this section and, thus, is    compensatory time, disability pay, sev-
not subject to the special timing rule       erance pay, and death benefits do not
of paragraph (a)(2) of this section.         result from the deferral of compensa-
  (ii) Stock options, stock appreciation     tion for purposes of section 3121(v)(2),
rights, and other stock value rights. The    even if those benefits constitute wages
grant of a stock option, stock apprecia-     within the meaning of section 3121(a).
tion right, or other stock value right         (B) Severance pay. Benefits that are
does not constitute the deferral of com-     provided under a severance pay ar-
pensation for purposes of section            rangement (within the meaning of sec-
3121(v)(2). In addition, amounts re-         tion 3(2)(B)(i) of ERISA) that satisfies
ceived as a result of the exercise of a      the conditions in 29 CFR 2510.3–
stock option, stock appreciation right,      2(b)(1)(i) through (iii) are considered
or other stock value right do not result     severance pay for purposes of this para-
from the deferral of compensation for        graph (b)(4)(iv). If benefits are provided
purposes of section 3121(v)(2) if such       under a severance pay arrangement
amounts are actually or constructively       (within     the   meaning     of   section
received in the calendar year of the ex-     3(2)(B)(i) of ERISA), but do not satisfy
ercise. For purposes of this paragraph       one or more of the conditions in 29 CFR
(b)(4)(ii), a stock value right is a right   2510.3–2(b)(1)(i) through (iii), then
granted to an employee with respect to       whether those benefits are severance

                                         104
Internal Revenue Service, Treasury                                   § 31.3121(v)(2)-1

pay within the meaning of this para-         regarding any benefits that are payable
graph (b)(4)(iv) depends upon the rel-       only in the event of disability and de-
evant facts and circumstances. For this      termined separately with respect to
purpose, relevant facts and cir-             each form of distribution or other elec-
cumstances include whether the bene-         tion that may apply with respect to
fits are provided over a short period of     the employee.
time commencing immediately after               (3) Disability benefits payable defined.
(or shortly after) termination of em-        For       purposes        of     paragraph
ployment or for a substantial period of      (b)(4)(iv)(C)(1) of this section, the term
time following termination of employ-        disability benefits payable under a plan
ment and whether the benefits are pro-       means the present value of the benefits
vided after any termination or only          payable to or on behalf of the employee
after retirement (or another specified       under the plan, including benefits pay-
type of termination). Benefits provided      able in the event of the employee’s dis-
under a severance pay arrangement            ability but excluding death benefits
(within     the   meaning     of   section   within the meaning of this paragraph
3(2)(B)(i) of ERISA) are in all cases sev-   (b)(4)(iv).
erance pay within the meaning of this           (4) Lifetime benefits payable defined.
paragraph (b)(4)(iv) if the benefits pay-    For       purposes        of     paragraph
able under the plan upon an employee’s       (b)(4)(iv)(C)(1) of this section, the term
termination of employment are pay-           lifetime benefits payable under a plan
able only if that termination is invol-      means the present value of the benefits
untary.
                                             that could be payable to the employee
   (C) Death benefits and disability pay—
                                             under the plan during the employee’s
(1) General definition. Payments made
                                             lifetime, determined under the plan’s
under a nonqualified deferred com-
                                             optional form of distribution or other
pensation plan in the event of death
                                             election that is or was available to the
are death benefits within the meaning
                                             employee at any time with respect to
of this paragraph (b)(4)(iv), but only to
                                             the amount deferred and that provides
the extent the total benefits payable
                                             the largest present value to the em-
under the plan exceed the lifetime ben-
                                             ployee during the employee’s lifetime
efits payable under the plan. Similarly,
                                             of any such form or election so avail-
payments made under a nonqualified
deferred compensation plan in the            able.
event of disability are disability pay          (5) Rules of application. For purposes
within the meaning of this paragraph         of determining present value under this
(b)(4)(iv), but only to the extent the       paragraph (b)(4)(iv)(C), present value is
disability benefits payable under the        determined as of the time immediately
plan exceed the lifetime benefits pay-       preceding the time the amount de-
able under the plan. Accordingly, any        ferred under a nonqualified deferred
benefits that a nonqualified deferred        compensation plan is required to be
compensation plan provides in the            taken into account under paragraph (e)
event of death or disability that are as-    of this section, using actuarial assump-
sociated with an amount deferred             tions that are reasonable as of that
under this section are disregarded in        date but taking into consideration only
applying this section to the extent the      benefits that result from the deferral of
benefits payable under the plan in the       compensation, as determined under
event of death or in the event of dis-       this paragraph (b), and benefits payable
ability have a value in excess of the        in the event of death or disability. In
lifetime benefits payable under the          addition, for purposes of paragraph
plan.                                        (b)(4)(iv)(C)(4) of this section, present
   (2) Total benefits payable defined. For   value must be determined without any
purposes of paragraph (b)(4)(iv)(C)(1) of    discount for the probability that the
this section, the term total benefits pay-   employee may die before benefit pay-
able under a plan means the present          ments commence and without regard
value of the total benefits payable to       to any benefits payable solely in the
or on behalf of the employee (including      event of disability.
benefits payable in the event of the            (v) Certain benefits provided in connec-
employee’s death) under the plan, dis-       tion with impending termination—(A) In

                                         105
§ 31.3121(v)(2)-1                                       26 CFR Ch. I (4–1–99 Edition)

general. Benefits provided in connec-        pending termination of employment,
tion with impending termination of           without regard to whether it con-
employment          under       paragraph    stitutes a window benefit, if—
(b)(4)(v)(B) or (C) of this section do not     (1) An employee’s termination of em-
result from the deferral of compensa-        ployment occurs within 12 months of
tion within the meaning of section           the establishment of the plan (or
3121(v)(2).                                  amendment) providing the benefit; and
  (B) Window benefits—(1) In general.          (2) The facts and circumstances indi-
For purposes of this paragraph (b)(4)(v),    cate that the plan (or amendment) is
except as provided in paragraph              established in contemplation of the
(b)(4)(v)(B)(3) of this section, a window    employee’s impending termination of
benefit is provided in connection with       employment.
impending termination of employment.           (vi) Benefits established after termi-
For this purpose, a window benefit is        nation. Benefits established with re-
an early retirement benefit, retire-         spect to an employee after the employ-
ment-type subsidy, social security sup-      ee’s termination of employment do not
plement, or other form of benefit made       result from a deferral of compensation
available by an employer for a limited       within      the    meaning   of    section
period of time (no greater than one          3121(v)(2). However, cost-of-living ad-
year) to employees who terminate em-         justments on benefit payments under a
ployment during that period or to em-        nonqualified deferred compensation
ployees who terminate employment             plan (within the meaning of paragraph
during that period under specified cir-      (b) of this section) shall not be consid-
cumstances.                                  ered benefits established after the em-
  (2) Special rule for recurring window      ployee’s termination of employment
benefits. A benefit will not be consid-      for purposes of this paragraph (b)(4)(vi)
ered a window benefit if an employer         merely because the employee does not
establishes a pattern of repeatedly pro-     obtain the right to the adjustment
viding for similar benefits in similar       until after the employee’s termination
situations for substantially consecu-        of employment. For purposes of the
tive, limited periods of time. Whether       preceding sentence, cost-of-living adjust-
the recurrence of these benefits con-        ments are payments that satisfy condi-
stitutes a pattern of amendments is de-      tions similar to those of 29 CFR 2510.3–
termined based on the facts and cir-         2(g)(1)(ii) and (iii).
cumstances. Although no one factor is          (vii) Excess parachute payments. An
determinative, relevant factors include      excess parachute payment (as defined
whether the benefits are on account of       in section 280G(b)) under an agreement
a specific business event or condition,      entered into or renewed after June 14,
the degree to which the benefits relate      1984, in taxable years ending after such
to the event or condition, and whether       date, does not result from the deferral
the event or condition is temporary or       of compensation within the meaning of
discrete or is a permanent aspect of the     section 3121(v)(2). For this purpose, any
employer’s business.                         contract entered into before June 15,
  (3) Transition rule for window benefits.   1984, that is amended after June 14,
In the case of a window benefit that is      1984, in any relevant significant aspect,
made available for a period of time          is treated as a contract entered into
that begins before January 1, 2000, an       after June 14, 1984.
employer may choose to treat the win-          (viii) Compensation for current services.
dow benefit as a benefit that results        A plan does not provide for the deferral
from the deferral of compensation if         of compensation within the meaning of
the sole reason the window benefit           section 3121(v)(2) if, based on the rel-
would otherwise fail to be provided          evant facts and circumstances, the
pursuant to a nonqualified deferred          compensation is paid for current serv-
compensation plan is the application of      ices.
paragraph (b)(4)(v)(B)(1) of this section.     (5) Examples. This paragraph (b) is il-
  (C) Termination within 12 months of es-    lustrated by the following examples:
tablishment of a benefit or plan. For pur-     Example 1. (i) In December of 2001, Em-
poses of this paragraph (b)(4)(v), a ben-    ployer L tells Employee A that, if specified
efit is provided in connection with im-      goals are satisfied for 2002, Employee A will

                                         106
Internal Revenue Service, Treasury                                            § 31.3121(v)(2)-1
receive a bonus on July 1, 2003, equal to a         section 3121(a)(5). Accordingly, the plan is a
specified percentage of 2002 compensation.          nonqualified deferred compensation plan
Because Employee A meets the specified              within the meaning of section 3121(v)(2) and
goals, Employer L pays the bonus to Em-             paragraph (b)(1) of this section.
ployee A on July 1, 2003, consistent with its         (iii) However, the general timing rule of
oral commitment.                                    paragraph (a)(1) of this section and the spe-
  (ii) This arrangement is not a nonqualified       cial timing rule of paragraph (a)(2) of this
deferred compensation plan under this sec-          section apply only to remuneration for em-
tion because its terms were not set forth in        ployment that constitutes wages. Under sec-
writing and, therefore, it was not established      tion 3121(b)(7), certain service performed in
in accordance with paragraph (b)(2) of this         the employ of a state, or any political sub-
section.                                            division of a state, is not employment. Thus,
  Example 2. (i) In 2004, Employer M estab-         even though the plan is a nonqualified de-
lishes a compensation arrangement for Em-           ferred compensation plan, the extent to
ployee B under which Employer M agrees to           which section 3121(v)(2) applies to a partici-
pay Employee B a specified amount based on          pating employee will depend on whether or
a percentage of his salary for 2004. The            not the service performed for Employer O is
amount due is to be paid out of the general         excluded from the definition of employment
assets of Employer M and is payable in 2008.        under section 3121(b)(7).
  (ii) Employee B has a legally binding right         Example 5. (i) In 2000, Employer P estab-
during 2004 to an amount of compensation            lishes a plan that provides for bonuses to be
that has not been actually or constructively        paid to employees based on an objective for-
received and that, pursuant to the terms of         mula that takes into account the employees’
the arrangement, is payable in a later year.        performance for the year. Employer P does
Therefore, the arrangement provides for the         not have the discretion to reduce the amount
deferral of compensation.                           of any employee’s bonus after the end of the
  Example 3. (i) Employer N establishes a           year. The bonus is not actually calculated
nonqualified deferred compensation plan             until March 1 of the following year, and is
(within the meaning of paragraph (b)(1) of          paid on March 15 of that following year.
this section) for Employee C in 1984. The             (ii) The plan provides for the deferral of
plan is amended on January 1, 2001, to in-          compensation because the employees have a
crease benefits, and the amendment provides         legally binding right, as of the last day of a
that the increase in benefits is on account of      calendar year, to an amount of compensation
Employee C’s performance of services for            that has not been actually or constructively
Employer N from 1985 through 2000.                  received and, pursuant to the terms of the
  (ii) The additional benefits that resulted        plan, that compensation is payable in a later
from the plan amendment cannot be taken             year. However, because the bonuses under
into account as amounts deferred for 1985           the plan are paid within a brief period of
through 2000, even though the plan was es-          time after the end of the calendar year from
tablished before then. Pursuant to para-            which they are deferred, Employer P may
graphs (b)(2)(ii) and (e)(1) of this section, the   choose, pursuant to paragraph (b)(3)(iii) of
additional benefits cannot be taken into ac-        this section, to treat all the bonuses as if
count before the latest of the date on which        they are not subject to the special timing
the amendment is adopted, the date on               rule of paragraph (a)(2) of this section.
which the amendment is effective, or the              (iii) If the employer uses the special timing
date on which the material terms of the             rule, the amount deferred would be taken
plan, as amended, are set forth in writing.         into account as wages on December 31, 2000.
  Example 4. (i) In 2002, Employer O, a state       If the employer chooses not to use the spe-
or local government, establishes a plan for         cial timing rule, the amount of the bonus is
certain employees that provides for the de-         wages on the date it is actually or construc-
ferral of compensation and that is subject to       tively paid, March 15, 2000.
section 457(a).                                       Example 6. (i) Employer Q establishes a
  (ii) Paragraph (b)(1) of this section pro-        plan under which bonuses based on perform-
vides that nonqualified deferred compensa-          ance in one year may be paid on February 1
tion plan means any plan that is established        of the following year at the discretion of the
by an employer and that provides for the de-        board of directors. The board of directors
ferral of compensation, other than a plan de-       meets in January of each year to determine
scribed     in    section   3121(a)(5).  Section    the amount, if any, of the bonuses to be paid
3121(a)(5) lists, among other plans, an exempt      based on performance in the prior year.
governmental deferred compensation plan as            (ii) Because an employee does not have a
defined in section 3121(v)(3). Under section        legally binding right to any bonus until Jan-
3121(v)(3)(A), this definition does not include     uary of the year in which the bonus is paid,
any plan to which section 457(a) applies.           any bonus paid under the plan in that year is
Thus, the plan established by Employer O is         not deferred from the preceding calendar
not an exempt governmental deferred com-            year, and the plan does not provide for the
pensation plan described in section 3121(v)(3)      deferral of compensation within the meaning
and, consequently, is not a plan described in       of paragraph (b)(3)(i) of this section.

                                                107
§ 31.3121(v)(2)-1                                             26 CFR Ch. I (4–1–99 Edition)
  Example 7. (i) Employer R maintains a plan      ment. The amount of the payments to an
for employees that provides nonqualified          employee is based on the length of contin-
stock options described in § 1.83–7(a) of this    uous active service with Employer U at the
chapter. Under the plan, employees are            time of dismissal, and is paid in monthly in-
granted in 2001 the option to acquire shares      stallments over a period of three years.
of employer stock at the fair market value of        (ii) Because benefits payable under the
the shares on the date of grant ($50 per          plan upon termination of employment are
share). The options can be exercised at any       payable only upon an employee’s involun-
time from the date of grant through 2010.         tary termination, the plan is a severance pay
The options do not have a readily ascertain-      plan within the meaning of paragraph
able fair market value for purposes of sec-       (b)(4)(iv)(B) of this section. Thus, the bene-
tion 83 at the date of grant, and shares are      fits are not treated as resulting from the de-
issued upon the exercise of the options with-     ferral of compensation for purposes of sec-
out being subject to a substantial risk of for-   tion 3121(v)(2).
feiture within the meaning of section 83. In         Example 10. (i) Employer V establishes a
2005, when the fair market value of a share of    nonqualified deferred compensation plan
employer stock is $80, Employee D exercises       under which employees will receive benefit
an option to acquire 1,000 shares.                payments commencing at age 65 as a life an-
  (ii) Under paragraph (b)(4)(ii) of this sec-
                                                  nuity or in one of several actuarially equiva-
tion, neither the grant of a stock option nor
                                                  lent annuity forms. If an employee dies be-
amounts received currently as a result of the
                                                  fore benefit payments commence under the
exercise of a stock option result from the de-
                                                  plan, a benefit is payable to the employee’s
ferral of compensation for purposes of sec-
                                                  designated beneficiary in a single lump sum
tion 3121(v)(2). Thus, under the general tim-
                                                  payment equal to the present value of the
ing rule of paragraph (a)(1) of this section,
                                                  employee’s annuity benefit. This benefit
the $30,000 spread between the amount paid
                                                  (sometimes called a full reserve death ben-
for the shares ($50,000) and the fair market
                                                  efit) is calculated using the applicable inter-
value of the shares on the date of exercise
($80,000) is taken into account as wages for      est rate specified in section 417(e) and, for
FICA tax purposes in the year of exercise.        the period after age 65, the applicable mor-
  (iii) If the options had been granted at $45    tality table specified in section 417(e), both
per share, $5 per share below the fair market     of which are reasonable actuarial assump-
value on date of grant, the $35,000 spread be-    tions. During 2002, Employee E obtains a le-
tween the amount paid for the shares              gally binding right to an annuity benefit
($45,000) and the fair market value of the        under the plan, payable at age 65. This annu-
shares on the date of exercise ($80,000) would    ity benefit has a present value of $10,000 at
similarly be taken into account as wages for      the end of 2002, determined using the same
FICA tax purposes in the year of exercise.        assumptions as are used under the plan to
  Example 8. (i) Employer T establishes a         calculate the full reserve death benefit.
phantom stock plan for certain employees.            (ii) The present value, at the end of 2002, of
Under the plan, an employee is credited on        the total benefits payable to or on behalf of
the last day of each calendar year with a dol-    Employee E (i.e., the sum of the present
lar amount equal to the fair market value of      value of the annuity benefit commencing at
1,000 shares of employer stock. Upon termi-       age 65, and the present value of the full re-
nation of employment for any reason, each         serve death benefit, with both determined
employee is entitled to receive the value on      using the actuarial assumptions described in
the date of termination, in cash or employer      paragraph (i) of this Example 10, except also
stock, of the shares with which he or she has     taking into account the probability of death
been credited.                                    prior to age 65) is $10,000. This present value
  (ii) Because compensation to which the          does not exceed the present value of the an-
employee has a legally binding right as of        nuity benefits that could be payable to Em-
the last day of one year is paid in a subse-      ployee E under the plan during Employee E’s
quent year, the phantom stock plan provides       lifetime determined without a discount for
for the deferral of compensation. The phan-       the possibility that Employee E might die
tom stock plan does not provide stock value       before age 65 (also $10,000). Thus, the benefit
rights within the meaning of paragraph            payable in the event of Employee E’s death
(b)(4)(ii) of this section because it provides    is not a death benefit for purposes of para-
for awards equal in value to the full fair        graph (b)(4)(iv) of this section.
market value of a specified number of shares         (iii) The same result would apply in the
of Employer T stock, rather than the excess       case of a plan that bases benefits on an inter-
of that fair market value over a specified        est bearing account balance and pays the ac-
price.                                            count balance at termination of employment
  Example 9. (i) Employer U establishes a sev-    or death (because the sum of the deferred
erance pay arrangement (within the meaning        benefits payable in the future if the em-
of section 3(2)(b)(i) of ERISA) which provides    ployee terminates employment before death
for payments solely upon an employee’s            with a discount for the probability of death
death, disability, or dismissal from employ-      before that date plus the present value of the

                                              108
Internal Revenue Service, Treasury                                           § 31.3121(v)(2)-1
benefit payable in the event of death nec-          (ii) The facts and circumstances indicate
essarily equals the present value of the de-      that the plan was not established in con-
ferred benefits payable with no discount for      templation of impending termination. Thus,
the probability of death).                        even though Employee G terminated em-
  Example 11. (i) The facts are the same as in    ployment within 12 months of the establish-
Example 10, except that, in lieu of the full      ment of the plan, the plan is not considered
reserve death benefit, the plan provides a        to be established in connection with impend-
monthly life annuity benefit to an employ-        ing termination within the meaning of para-
ee’s spouse in the event of the employee’s        graph (b)(4)(v) of this section. Benefits pro-
death before benefit payments commence            vided under the plan are treated as resulting
equal to 100 percent of the monthly annuity       from the deferral of compensation for pur-
that would be payable to the employee at          poses of section 3121(v)(2).
age 65 under the life annuity form. Employee        Example 14. (i) Employer Y establishes a
E is age 63 and has a spouse who is age 51.       plan to provide supplemental retirement
The sum of the present value of Employee          benefits to a group of management employ-
E’s annuity benefit commencing at age 65 de-      ees who are at various stages of their ca-
termined with a discount for the possibility      reers. All employees covered by the plan are
that Employee E might die before age 65 and       subject to the same benefit formula. Em-
the present value of the 100 percent annuity      ployee H is planning to (and actually does)
death benefit for Employee E’s spouse ex-         retire within six months of the date on
ceeds $10,000.                                    which the plan is established.
  (ii) The amount deferred for 2002 is $10,000      (ii) Even though Employee H terminated
(because the 100 percent annuity death ben-       employment within 12 months of the estab-
efit for Employee E’s spouse is disregarded       lishment of the plan, the plan is not consid-
to the extent that the total benefits payable     ered to have been established in connection
to or on behalf of Employee E exceeds the         with Employee H’s impending termination
present value of the annuity benefits that        within the meaning of paragraph (b)(4)(v) of
could be payable to Employee E under the          this section because the facts and cir-
plan during Employee E’s lifetime without a       cumstances indicate otherwise.
discount for the probability of Employee E’s        Example 15. (i) Employee J owns 100 percent
death before benefit payments commence).          of Employer Z, a corporation that provides
  Example 12. (i) On January 1, 2001, Em-         consulting services. Substantially all of Em-
ployer W establishes a plan that covers only      ployer Z’s revenue is derived as a result of
Employee F, who owns a significant portion        the services performed by Employee J. In
of the business and who has 30 years of serv-     each of 2001, 2002, and 2003, Employer Z has
ice as of that date. The plan provides that,      gross receipts of $180,000 and expenses (other
upon Employee F’s termination of employ-          than salary) of $80,000. In each of 2001 and
ment at any time, he will receive $200,000 per    2002, Employer Z pays Employee J a salary
year for each of the immediately succeeding       of $100,000 for services performed in each of
five years. Employee F terminates employ-         those years. On December 31, 2002, Employer
ment on March 1, 2001.                            Z establishes a plan to pay Employee J
                                                  $80,000 in 2003. The plan recites that the pay-
  (ii) Because Employee F terminates em-
                                                  ment is in recognition of prior services. In
ployment within 12 months of the establish-
                                                  2003, Employer Z pays Employee J a salary
ment of the plan and the facts and cir-
                                                  of $20,000 and the $80,000 due under the plan.
cumstances set forth above indicate that the
                                                    (ii) The facts and circumstances described
plan was established in contemplation of im-
                                                  above indicate that the $80,000 paid pursuant
pending termination of employment, the
                                                  to the plan is based on services performed by
plan is considered to be established in con-
                                                  Employee J in 2003 and, thus, is paid for cur-
nection with impending termination within
                                                  rent services within the meaning of para-
the meaning of paragraph (b)(4)(v) of this
                                                  graph (b)(4)(viii) of this section. Accordingly,
section. Therefore, the benefits provided
                                                  the plan does not provide for the deferral of
under the plan are not treated as resulting
                                                  compensation within the meaning of section
from the deferral of compensation for pur-
                                                  3121(v)(2), and the $80,000 payment is included
poses of section 3121(v)(2).
                                                  as wages in 2003 under the general timing
  Example 13. (i) Employer X establishes a        rule of paragraph (a)(1) of this section.
plan on January 1, 2004, to supplement the
qualified retirement benefits of recently           (c) Determination of the amount de-
hired 55-year old Employee G, who forfeited       ferred—(1) Account balance plans—(i)
retirement benefits with her former em-           General rule. For purposes of this sec-
ployer in order to accept employment with         tion, if benefits for an employee are
Employer X. The plan provides that Em-
                                                  provided under a nonqualified deferred
ployee G will receive $50,000 per year for life
beginning at age 65, regardless of when she       compensation plan that is an account
terminates employment. On April 15, 2004,         balance plan, the amount deferred for a
Employee G unexpectedly terminates em-            period equals the principal amount
ployment.                                         credited to the employee’s account for

                                              109
§ 31.3121(v)(2)-1                                     26 CFR Ch. I (4–1–99 Edition)

the period, increased or decreased by      it provides an optional form of benefit
any income attributable to the prin-       that is not actuarially equivalent to
cipal amount through the date the          the account balance using actuarial as-
principal amount is required to be         sumptions that are reasonable. For
taken into account as wages under          this purpose, the determination of
paragraph (e) of this section.             whether forms are actuarially equiva-
  (ii) Definitions—(A) Account balance     lent using actuarial assumptions that
plan. For purposes of this section, an     are reasonable is determined under the
account balance plan is a nonqualified     rules applicable to nonaccount balance
deferred compensation plan under the       plans under paragraph (c)(2)(iii) of this
terms of which a principal amount (or      section.
amounts) is credited to an individual        (2) Nonaccount balance plans—(i) Gen-
account for an employee, the income        eral rule. For purposes of this section, if
attributable to each principal amount      benefits for an employee are provided
is credited (or debited) to the indi-      under a nonqualified deferred com-
vidual account, and the benefits pay-      pensation plan that is not an account
able to the employee are based solely      balance plan (a nonaccount balance
on the balance credited to the indi-       plan), the amount deferred for a period
vidual account.                            equals the present value of the addi-
  (B) Income. For purposes of this sec-    tional future payment or payments to
tion, income means any increase or de-     which the employee has obtained a le-
crease in the amount credited to an        gally binding right (as described in
employee’s account that is attributable    paragraph (b)(3)(i) of this section)
to amounts previously credited to the      under the plan during that period.
employee’s account, regardless of            (ii) Present value defined. For pur-
whether the plan denominates that in-      poses of this section, present value
crease or decrease as income.              means the value as of a specified date
  (iii) Additional rules—(A) Commingled    of an amount or series of amounts due
accounts. A plan does not fail to be an    thereafter, where each amount is mul-
account balance plan merely because,       tiplied by the probability that the con-
under the terms of the plan, benefits      dition or conditions on which payment
payable to an employee are based sole-     of the amount is contingent will be sat-
ly on a specified percentage of an ac-     isfied, and is discounted according to
count maintained for all (or a portion     an assumed rate of interest to reflect
of) plan participants under which prin-    the time value of money. For purposes
cipal amounts and income are credited      of this section, the present value must
(or debited) to such account.              be determined as of the date the
  (B) Bifurcation permitted. An employer   amount deferred is required to be
may treat a portion of a nonqualified      taken into account as wages under
deferred compensation plan as a sepa-      paragraph (e) of this section using ac-
rate account balance plan if that por-     tuarial assumptions and methods that
tion satisfies the requirements of this    are reasonable as of that date. For this
paragraph (c)(1) and the amount pay-       purpose, a discount for the probability
able to employees under that portion is    that an employee will die before com-
determined      independently    of  the   mencement of benefit payments is per-
amount payable under the other por-        mitted, but only to the extent that
tion of the plan.                          benefits will be forfeited upon death. In
  (C) Actuarial equivalents. A plan does   addition, the present value cannot be
not fail to be an account balance plan     discounted for the probability that
merely because the plan permits em-        payments will not be made (or will be
ployees to elect to receive their bene-    reduced) because of the unfunded sta-
fits under the plan in a form of benefit   tus of the plan, the risk associated
other than payment of the account bal-     with any deemed or actual investment
ance, provided the amount of benefit       of amounts deferred under the plan, the
payable in that other form is actuari-     risk that the employer, the trustee, or
ally equivalent to payment of the ac-      another party will be unwilling or un-
count balance using actuarial assump-      able to pay, the possibility of future
tions that are reasonable. Conversely,     plan amendments, the possibility of a
a plan is not an account balance plan if   future change in the law, or similar

                                       110
Internal Revenue Service, Treasury                                    § 31.3121(v)(2)-1

risks or contingencies. Nor is the            at the time the amount is deferred.
present value affected by the possi-          Thus, a plan that provides for every op-
bility that some of the payments due          tional form to be actuarially equiva-
under the plan will be eligible for one       lent       satisfies    this     paragraph
of the exclusions from wages in section       (c)(2)(iii)(B) if it provides for actuarial
3121(a).                                      equivalence to be determined—
  (iii) Treatment of actuarially equivalent     (1) When an optional form is selected
benefits—(A) In general. In the case of a     or when benefit payments under the
nonaccount balance plan that permits          optional form commence, based on as-
employees to receive their benefits in        sumptions that are reasonable then;
more than one form or commencing at             (2) Based on an index that reflects
more than one date, the amount de-            market rates of interest from time to
ferred is determined by assuming that         time (for example, the plan specifies
payments are made in the normal form          that all benefits will be actuarially
of benefit commencing at normal com-          equivalent using the applicable inter-
mencement date if the requirements of         est rate and applicable mortality table
paragraph (c)(2)(iii)(B) of this section      specified in section 417(e)); or
are satisfied. Accordingly, in the case         (3) Based on actuarial assumptions
of a nonaccount balance plan that per-        specified in the plan and provides for
mits employees to receive their bene-         those assumptions to be revised to be
fits in more than one form or com-            reasonable assumptions if they cease to
mencing at more than one date, unless         be reasonable assumptions.
the      requirements     of    paragraph       (C) Fixed mortality assumptions per-
(c)(2)(iii)(B) of this section are satis-     mitted. A plan does not fail to satisfy
fied, the amount deferred is treated as       paragraph (c)(2)(iii)(B) of this section
not reasonably ascertainable under the        merely because the plan specifies a
rules of paragraph (e)(4)(i)(B) of this       fixed mortality assumption that is rea-
section until a form of benefit and a         sonable at the time the amount is de-
time of commencement are selected.            ferred, even if that assumption is not
  (B) Use of normal form commencing at        reasonable at the time the optional
normal commencement date. The require-        form is selected. (But see paragraph
ments of this paragraph (c)(2)(iii)(B)        (c)(2)(iii)(E) of this section for addi-
are satisfied by a nonaccount balance         tional rules that apply if the mortality
plan if the plan has a single normal          assumption is not reasonable at the
form of benefit commencing at normal          time the optional form is selected.)
commencement date for the amount                (D) Normal form of benefit commencing
deferred and each other optional form         at normal commencement date defined.
is actuarially equivalent to the normal       For     purposes     of   this   paragraph
form of benefit commencing at normal          (c)(2)(iii), the normal form of benefit
commencement date using actuarial             commencing at normal commencement
assumptions that are reasonable. For          date under the plan is the form, and
this purpose, each form of benefit for        date of commencement, under which
payment of the amount deferred com-           the payments due to the employee
mencing at a date is a separate op-           under the plan are expressed, prior to
tional form. For purposes of this para-       adjustments for form or timing of com-
graph (c)(2)(iii)(B), each optional form      mencement of payments.
is actuarially equivalent to the normal         (E) Rule applicable if actuarial assump-
form of benefit commencing at normal          tions cease to be reasonable. If the terms
commencement date only if the terms           of the plan in effect when an amount is
of the plan in effect when the amount         deferred provide for actuarial assump-
is deferred provide for every optional        tions to determine actuarial equiva-
form to be actuarially equivalent and         lency that will be reasonable at the
further provide for actuarial assump-         time the optional form is selected or
tions to determine actuarial equiva-          payments commence as provided in
lency that will be reasonable at the          paragraph (c)(2)(iii)(B) of this section,
time the optional form is selected,           but, at that time, the actuarial as-
without regard to whether market in-          sumptions used under the plan are not
terest rates are higher or lower at the       reasonable, the employee will be treat-
time the optional form is selected than       ed as obtaining a legally binding right

                                          111
§ 31.3121(v)(2)-1                                           26 CFR Ch. I (4–1–99 Edition)

at that time (or, if earlier, at the date       year is equal to 10 percent of annual com-
on which the plan is amended to pro-            pensation.
vide actuarial assumptions that are               Example 2. (i) Employer N establishes a
                                                nonqualified deferred compensation plan for
not reasonable) to any additional bene-         Employee B. Under the plan, 2.5 percent of
fits that result from the use of an un-         annual compensation is credited quarterly
reasonable actuarial assumption. This           on behalf of Employee B. In addition, a rea-
might occur, for example, if the plan           sonable rate of interest is credited quarterly
specifies that the actuarial assump-            on the balance credited to Employee B’s ac-
tions will be reasonable assumptions to         count as of the last day of the preceding
be set at the time the optional form is         quarter. All amounts credited under the plan
                                                are 100 percent vested, and the benefits pay-
selected and the assumptions used are           able to Employee B are based solely on the
in fact not reasonable at that time.            balance credited to Employee B’s account.
  (3) Separate determination for each pe-       As permitted by paragraph (e)(5) of this sec-
riod. The amount deferred under this            tion, any amount deferred under the plan for
paragraph (c) is determined separately          the calendar year is taken into account as
for each period for which there is an           wages on the last day of the year.
amount deferred under the plan. In ad-            (ii) The plan is an account balance plan.
                                                Thus, pursuant to paragraph (c)(1) of this
dition, paragraphs (d) and (e) of this          section, the amount deferred for a calendar
section are applied separately with re-         year equals 10 percent of annual compensa-
spect to the amount deferred for each           tion (i.e., the sum of the principal amounts
such period. Thus, for example, the             credited to Employee B’s account for the
fraction      described    in  paragraph        year) plus the interest credited with respect
(d)(1)(ii)(B) of this section and the           to that 10 percent principal amount through
amount of the true-up at the resolution         the last day of the calendar year. If Em-
                                                ployer N had not chosen to apply paragraph
date described in paragraph (e)(4)(ii)(B)       (e)(5) of this section and, thus, had taken
of this section are determined sepa-            into account 2.5 percent of compensation
rately with respect to each amount de-          quarterly, the interest credited with respect
ferred. See paragraph (e)(4)(ii)(D) of          to those quarterly amounts would not have
this section for special rules for allo-        been treated as part of the amount deferred
cating amounts deferred over more               for the year.
than one year.                                    Example 3. (i) Employer O establishes a
                                                nonqualified deferred compensation plan for
  (4) Examples. This paragraph (c) is il-       a group of five employees. Under the plan, a
lustrated by the following examples.            specified sum is credited to an account for
(The examples illustrate the rules in           the benefit of the group of employees on July
this paragraph (c) and include various          31 of each year. Income on the balance of the
interest rate and mortality table as-           account is credited annually at a rate that is
sumptions, including the applicable             reasonable for each year. The benefit pay-
section 417(e) mortality table, the GAM         able to an employee is equal to one-fifth of
                                                the account balance and is payable, at the
83 (male) mortality table, and UP–84            employee’s option, in a lump sum or in 10 an-
mortality table. These tables can be            nual installments that reflect income on the
obtained from the Society of Actuaries          balance.
at    its    internet   site  at   http://        (ii) The plan is an account balance plan
www.soa.org.) The examples are as fol-          notwithstanding the fact that the employ-
lows:                                           ee’s benefit is equal to a specified percentage
                                                of an account maintained for a group of em-
  Example 1. (i) Employer M establishes a       ployees.
nonqualified deferred compensation plan for       Example 4. (i) The facts are the same as in
Employee A. Under the plan, 10 percent of       Example 3, except that the plan also permits
annual compensation is credited on behalf of    an employee to elect a life annuity that is
Employee A on December 31 of each year. In      actuarially equivalent to the account bal-
addition, a reasonable rate of interest is      ance based on the applicable interest rate
credited quarterly on the balance credited to   and applicable mortality table specified in
Employee A as of the last day of the pre-       section 417(e) at the time the benefit is elect-
ceding quarter. All amounts credited under      ed by the employee.
the plan are 100 percent vested and the bene-     (ii) Under paragraphs (c)(1)(iii)(C) and
fits payable to Employee A are based solely     (c)(2)(iii) of this section, the plan does not
on the balance credited to Employee A’s ac-     fail to be an account balance plan merely be-
count.                                          cause the plan permits employees to elect to
  (ii) The plan is an account balance plan.     receive their benefits under the plan in a
Thus, pursuant to paragraph (c)(1) of this      form that is actuarially equivalent to pay-
section, the amount deferred for a calendar     ment of the account balance using actuarial

                                            112
Internal Revenue Service, Treasury                                                                                                               § 31.3121(v)(2)-1
assumptions that are reasonable at the time                                                              ($4,080 × the present value factor for a de-
the form is selected.                                                                                    ferred annuity payable at age 65, using the
  Example 5. (i) Employer P establishes a                                                                specified actuarial assumptions for 2003).
nonqualified deferred compensation plan for                                                              Similarly, during 2004, Employee C has
a group of employees. Under the plan, each                                                               earned a legally binding right to additional
participating employee has a fully vested                                                                lifetime payments of $2,620 (2 percent × 27
right to receive a life annuity, payable                                                                 years × $105,000, minus $54,080) per year be-
monthly beginning at age 65, equal to the                                                                ginning at age 65. The amount deferred for
product of 2 percent for each year of service                                                            2004 is the present value, as of December 31,
and the employee’s highest average annual                                                                2004, of these additional payments, which is
compensation for any 3-year period. The plan                                                             $18,845 ($2,620 × the present value factor for a
also provides that, if an employee dies before                                                           deferred annuity payable at age 65, using the
age 65, the present value of the future pay-                                                             specified actuarial assumptions for 2004).
ments will be paid to his or her beneficiary.                                                               Example 6. (i) Employer Q establishes a
As permitted under paragraph (e)(5) of this
                                                                                                         nonqualified deferred compensation plan for
section, any amount deferred under the plan
                                                                                                         Employee D on January 1, 2001, when Em-
for a calendar year is taken into account as
                                                                                                         ployee D is age 63. During 2001, Employee D
FICA wages as of the last day of the year. As
                                                                                                         obtains a fully vested right to receive a life
of December 31, 2002, Employee C is age 60,
has 25 years of service, and high 3-year aver-                                                           annuity under the nonqualified deferred
age compensation of $100,000 (the average for                                                            compensation plan equal to the excess of
the years 2000 through 2002). As of December                                                             $200,000 over the life annuity benefits pay-
31, 2003, Employee C is age 61, has 26 years of                                                          able to Employee D under a qualified defined
service, and has high 3-year average com-                                                                benefit pension plan sponsored by Employer
pensation of $104,000. As of December 31, 2004,                                                          Q. The life annuity benefit payable annually
Employee C is age 62, has 27 years of service,                                                           under the qualified plan is the lesser of
and has high 3-year average compensation of                                                              $200,000 and the section 415(b)(1)(A) limita-
$105,000. The assumptions that Employer P                                                                tion in effect for the year, where the section
uses to determine the amount deferred for                                                                415(b)(1)(A) limitation is automatically ad-
2003 (a 7 percent interest rate and, for the pe-                                                         justed to reflect changes in the cost of liv-
riod after commencement of benefit pay-                                                                  ing. Benefits under both the qualified and
ments, the GAM 83 (male) mortality table)                                                                nonqualified plan are payable monthly be-
and for 2004 (a 7.5 percent interest rate and,                                                           ginning at age 65. For purposes of this exam-
for the period after commencement of ben-                                                                ple, the section 415(b)(1)(A) limit for 2001 is
efit payments, the GAM 83 (male) mortality                                                               assumed to be $140,000. The nonqualified plan
table) are assumed, solely for purposes of                                                               provides no benefits in the event Employee D
this example, to be reasonable actuarial as-                                                             dies prior to commencement of benefit pay-
sumptions.                                                                                               ments. As permitted under paragraph (e)(5)
  (ii) As of December 31, 2002, Employee C                                                               of this section, any amount deferred under
has a legally binding right to receive life-                                                             the plan for a calendar year is taken into ac-
time payments of $50,000 (2 percent × 25 years                                                           count as FICA wages as of the last day of the
× $100,000) per year. As of December 31, 2003,                                                           year. The assumptions that Employer Q uses
Employee C has a legally binding right to re-                                                            to determine the amount deferred for 2001 (a
ceive lifetime payments of $54,080 (2 percent                                                            7 percent interest rate, a 3 percent increase
× 26 years × $104,000) per year. Thus, during                                                            in the cost of living and the GAM 83 (male)
2003, Employee C has earned a legally bind-                                                              mortality table) are assumed, solely for pur-
ing right to additional lifetime payments of                                                             poses of this example, to be reasonable actu-
$4,080 ($54,080¥$50,000) per year beginning at                                                           arial assumptions. As of December 31, 2001,
age 65. The amount deferred for 2003 is the                                                              Employee D has a legally binding right to re-
present value, as of December 31, 2003, of                                                               ceive lifetime payments as set forth in the
these additional payments, which is $28,767                                                              following table:

                                                                                                                                              Assumed
                                                                                                                                            qualified plan     Net annual
                                                                                                                             Annual gross    annual pay-     payment under
                                                        Year                                                                   amount       ment (based       nonqualified
                                                                                                                                              on cost of          plan
                                                                                                                                                living)

2003   ...................................................................................................................       $200,000        $145,000          $55,000
2004   ...................................................................................................................        200,000         150,000           50,000
2005   ...................................................................................................................        200,000         155,000           45,000
2006   ...................................................................................................................        200,000         160,000           40,000
2007   ...................................................................................................................        200,000         165,000           35,000
2008   ...................................................................................................................        200,000         170,000           30,000
2009   ...................................................................................................................        200,000         175,000           25,000
2010   ...................................................................................................................        200,000         180,000           20,000
2011   ...................................................................................................................        200,000         185,000           15,000
2012   ...................................................................................................................        200,000         190,000           10,000
2013   ...................................................................................................................        200,000         195,000            5,000


                                                                                                 113
§ 31.3121(v)(2)-1                                                                                                   26 CFR Ch. I (4–1–99 Edition)

                                                                                                                                   Assumed
                                                                                                                                 qualified plan     Net annual
                                                                                                                  Annual gross    annual pay-     payment under
                                                    Year                                                            amount       ment (based       nonqualified
                                                                                                                                   on cost of          plan
                                                                                                                                     living)

2014 and thereafter ...........................................................................................        200,000      205,000 or               0
                                                                                                                                       greater



  (ii) The amount deferred for 2001 is the                                                      after FICA tax is paid on all other
present value, as of December 31, 2001, of the                                                  wages for the year.
net lifetime payments under the non-                                                              (ii) Amounts not taken into account—
qualified plan, or $223,753.                                                                    (A) Failure to take an amount deferred
  (d) Amounts taken into account and in-                                                        into account under the special timing
come attributable thereto—(1) Amounts                                                           rule. If an amount deferred for a period
taken into account—(i) In general. For                                                          (as determined under paragraph (c) of
purposes of this section, an amount de-                                                         this section) is not taken into account,
ferred under a nonqualified deferred                                                            then the nonduplication rule of para-
compensation plan is taken into ac-                                                             graph (a)(2)(iii) of this section does not
count as of the date it is included in                                                          apply, and benefit payments attrib-
computing the amount of wages as de-                                                            utable to that amount deferred are in-
fined in section 3121(a), but only to the                                                       cluded as wages in accordance with the
extent that any additional FICA tax                                                             general timing rule of paragraph (a)(1)
that results from such inclusion (in-                                                           of this section. For example, if an
cluding any interest and penalties for                                                          amount deferred is required to be
late payment) is actually paid before                                                           taken into account in a particular year
the expiration of the applicable period                                                         under paragraph (e) of this section, but
                                                                                                the employer fails to pay the addi-
of limitations for the period in which
                                                                                                tional FICA tax resulting from that
the amount deferred was required to be
                                                                                                amount, then the amount deferred and
taken into account under paragraph (e)
                                                                                                the income attributable to that
of this section. Because an amount de-
                                                                                                amount must be included as wages
ferred for a calendar year is combined
                                                                                                when actually or constructively paid.
with the employee’s other wages for                                                               (B) Failure to take a portion of an
the year for purposes of computing                                                              amount deferred into account under the
FICA taxes with respect to the em-                                                              special timing rule. If, as of the date an
ployee for the year, if the employee has                                                        amount deferred is required to be
other wages that equal or exceed the                                                            taken into account, only a portion of
wage base limitations for the Old-Age,                                                          the amount deferred (as determined
Survivors, and Disability Insurance                                                             under paragraph (c) of this section) has
(OASDI) portion (or, in the case of                                                             been taken into account, then a por-
years before 1994, the Hospital Insur-                                                          tion of each subsequent benefit pay-
ance (HI) portion) of FICA for the year,                                                        ment that is attributable to that
no portion of the amount deferred will                                                          amount is excluded from wages pursu-
actually result in additional OASDI (or                                                         ant to the nonduplication rule of para-
HI) tax. However, because there is no                                                           graph (a)(2)(iii) of this section and the
wage base limitation for the HI portion                                                         balance is subject to the general tim-
of FICA for years after 1993, the entire                                                        ing rule of paragraph (a)(1) of this sec-
amount deferred (in addition to all                                                             tion. The portion that is excluded from
other wages) is subject to the HI tax                                                           wages is fixed immediately before the
for the year and, thus, will not be con-                                                        attributable benefit payments com-
sidered taken into account for purposes                                                         mence (or, if later, the date the
of this section unless the HI tax relat-                                                        amount deferred is required to be
ing to the amount deferred is actually                                                          taken into account) and is determined
paid. In determining whether any addi-                                                          by multiplying each such payment by a
tional FICA tax relating to the amount                                                          fraction, the numerator of which is the
deferred is actually paid, any FICA tax                                                         amount that was taken into account
paid in a year is treated as paid with                                                          (plus income attributable to that
respect to an amount deferred only                                                              amount determined under paragraph

                                                                                         114
Internal Revenue Service, Treasury                                     § 31.3121(v)(2)-1

(d)(2) of this section through the date        with the plan before the beginning of
the portion is fixed) and the denomi-          the period. For this purpose, an ac-
nator of which is the present value of         count balance plan can determine in-
the future benefit payments attrib-            come based on the rate of return of a
utable to the amount deferred, deter-          predetermined actual investment re-
mined as of the date the portion is            gardless of whether assets associated
fixed. For this purpose, if the require-       with the plan or the employer are actu-
ments of paragraph (c)(2)(iii)(B) of this      ally invested therein and regardless of
section are satisfied, the present value       whether that investment is generally
is determined by assuming that pay-            available to the public. For example,
ments are made in the normal form of           an account balance plan could provide
benefit commencing at normal com-              that income on the account balance is
mencement date. In addition, if the            determined based on an employee’s
employer       demonstrates     that    the    prospective election among various in-
amount deferred was determined using           vestment alternatives that are avail-
reasonable actuarial assumptions as            able under the employer’s section
determined by the Commissioner, the            401(k) plan, even if one of those invest-
present value of the future benefit pay-       ment alternatives is not generally
ments attributable to the amount de-           available to the public. In addition, an
ferred is determined using those as-           actual investment includes an invest-
sumptions. In any other case, see para-        ment identified by reference to any
graph (d)(2)(iii) of this section.             stock index with respect to which there
  (2) Income attributable to the amount        are positions traded on a national secu-
taken into account—(i) Account balance         rities exchange described in section
plans—(A) In general. For purposes of          1256(g)(7)(A).
the nonduplication rule of paragraph             (2) Certain rates of return not based on
(a)(2)(iii) of this section, in the case of    predetermined actual investment. A rate
an account balance plan, the income at-        of return will not be treated as the rate
tributable to the amount taken into ac-        of return on a predetermined actual in-
count means any amount credited on             vestment within the meaning of this
behalf of an employee under the terms          paragraph (d)(2)(i)(B) if the rate of re-
of the plan that is income (within the         turn (to any extent or under any condi-
meaning of paragraph (c)(1)(ii)(B) of          tions) is based on the greater of the
this section) attributable to an amount        rate of return of two or more actual in-
previously taken into account (within          vestments, is based on the greater of
the meaning of paragraph (d)(1) of this        the rate of return on an actual invest-
section), but only if the income reflects      ment and a rate of interest (whether or
a rate of return that does not exceed          not the rate of interest would other-
either the rate of return on a predeter-       wise be reasonable under paragraph
mined actual investment (as deter-             (d)(2)(i)(C) of this section), or is based
mined in accordance with paragraph             on the rate of return on an actual in-
(d)(2)(i)(B) of this section) or, if the in-   vestment that is not predetermined.
come does not reflect the rate of return       For example, if a plan bases the rate of
on a predetermined actual investment           return on the greater of the rate of re-
(as so determined), a reasonable rate of       turn on a predetermined actual invest-
interest (as determined in accordance          ment (such as the value of the employ-
with paragraph (d)(2)(i)(C) of this sec-       er’s stock), and a 0 percent interest
tion).                                         rate (i.e., without regard to decreases
  (B) Rules relating to actual invest-         in the value of that investment), the
ment—(1) In general. For purposes of           plan is using a rate of return that is
this paragraph (d)(2)(i), the rate of re-      not a rate of return on a predetermined
turn on a predetermined actual invest-         actual investment within the meaning
ment for any period means the rate of          of this paragraph (d)(2)(i)(B).
total return (including increases or de-         (C) Rules relating to reasonable interest
creases in fair market value) that             rates—(1) In general. If income for a pe-
would apply if the account balance             riod is credited to an account balance
were, during the applicable period, ac-        plan on a basis other than the rate of
tually invested in one or more invest-         return on a predetermined actual in-
ments that are identified in accordance        vestment (as determined in accordance

                                           115
§ 31.3121(v)(2)-1                                       26 CFR Ch. I (4–1–99 Edition)

with paragraph (d)(2)(i)(B) of this sec-     tributable to that amount will be sub-
tion), then, except as otherwise pro-        ject to FICA tax when paid.
vided in this paragraph (d)(2)(i)(C), the      (iii) Unreasonable rates of return—(A)
determination of whether the income          Account balance plans. This paragraph
for the period is based on a reasonable      (d)(2)(iii)(A) applies to an account bal-
rate of interest will be made at the         ance plan under which the income cred-
time the amount deferred is required to      ited is based on neither a predeter-
be taken into account and annually           mined actual investment, within the
thereafter.                                  meaning of paragraph (d)(2)(i)(B) of
  (2) Fixed rates permitted. If, with re-    this section, nor a rate of interest that
spect to an amount deferred for a pe-        is reasonable, within the meaning of
riod, an account balance plan provides       paragraph (d)(2)(i)(C) of this section, as
for a fixed rate of interest to be cred-     determined by the Commissioner. In
ited, and the rate is to be reset under      that event, the employer must cal-
the plan at a specified future date that     culate the amount that would be cred-
is not later than the end of the fifth       ited as income under a reasonable rate
calendar year that begins after the be-      of interest, determine the excess (if
ginning of the period, the rate is rea-      any) of the amount credited under the
                                             plan over the income that would be
sonable at the beginning of the period,
                                             credited using the reasonable rate of
and the rate is not changed before the
                                             interest, and take that excess into ac-
reset date, then the rate will be treated
                                             count as an additional amount deferred
as reasonable in all future periods be-
                                             in the year the income is credited. If
fore the reset date.
                                             the employer fails to calculate the
  (ii) Nonaccount balance plans. For         amount that would be credited as in-
purposes of the nonduplication rule of       come under a reasonable rate of inter-
paragraph (a)(2)(iii) of this section, in    est and to take the excess into account
the case of a nonaccount balance plan,       as an additional amount deferred in the
the income attributable to the amount        year the income is credited, or the em-
taken into account means the increase,       ployer otherwise fails to take the full
due solely to the passage of time, in        amount deferred into account, then the
the present value of the future pay-         excess of the income credited under the
ments to which the employee has ob-          plan over the income that would be
tained a legally binding right, the          credited using AFR will be treated as
present value of which constituted the       an amount deferred in the year the in-
amount taken into account (deter-            come is credited. For purposes of this
mined as of the date such amount was         section, AFR means the mid-term ap-
taken into account), but only if the         plicable federal rate (as defined pursu-
amount taken into account was deter-         ant to section 1274(d)) for January 1 of
mined using reasonable actuarial as-         the calendar year, compounded annu-
sumptions and methods. Thus, for each        ally. In addition, pursuant to para-
year, there will be an increase (deter-      graph (d)(1)(ii) of this section, the ex-
mined using the same interest rate           cess over the income that would result
used to determine the amount taken           from the application of AFR and any
into account) resulting from the short-      income attributable to that excess are
ening of the discount period before the      subject to the general timing rule of
future payments are made, plus, if ap-       paragraph (a)(1) of this section.
plicable, an increase in the present           (B) Nonaccount balance plans. If any
value resulting from the employee’s          actuarial assumption or method used
survivorship during the year. As a re-       to determine the amount taken into
sult, if the amount deferred for a pe-       account under a nonaccount balance
riod is determined using a reasonable        plan is not reasonable, as determined
interest rate and other reasonable ac-       by the Commissioner, then the income
tuarial assumptions and methods, and         attributable to the amount taken into
the amount is taken into account when        account is limited to the income that
required under paragraph (e) of this         would result from the application of
section, then, under the nonduplication      the AFR and, if applicable, the applica-
rule of paragraph (a)(2)(iii) of this sec-   ble mortality table under section
tion, none of the future payments at-        417(e)(3)(A)(ii)(I) (the 417(e) mortality

                                         116
Internal Revenue Service, Treasury                                          § 31.3121(v)(2)-1

table), both determined as of the Janu-           ing payment of any applicable interest and
ary 1 of the calendar year in which the           penalties).
amount was taken into account. In ad-               (ii) Because the HI tax resulting from the
                                                  $20,000 amount deferred is paid, that amount
dition, paragraph (d)(1)(ii)(B) of this           deferred is considered taken into account for
section applies and, in calculating the           2002. Thus, in accordance with paragraph
fraction     described     in   paragraph         (a)(2)(iii) of this section, neither the amount
(d)(1)(ii)(B) of this section (at the date        deferred nor the income attributable to the
specified in paragraph (d)(1)(ii)(B) of           amount taken into account will be treated as
this section), the numerator is the               wages for FICA tax purposes at any time
amount taken into account plus in-                thereafter.
come (as limited under this paragraph               Example 3. (i) Employer N establishes a
                                                  nonqualified deferred compensation plan
(d)(2)(iii)(B)), and the present value in         under which all benefits are 100 percent vest-
the denominator is determined using               ed. Under the plan, an employee’s account is
the AFR, the 417(e) mortality table,              credited with a contribution equal to 10 per-
and reasonable assumptions as to cost             cent of salary on December 31 of each year.
of living, each determined as of the              The employee’s account balance also is in-
time the amount deferred was required             creased each December 31 by interest on the
to be taken into account.                         total amounts credited to the employee’s ac-
  (3) Examples. This paragraph (d) is il-         count as of the preceding December 31. The
                                                  interest rate specified in the plan results in
lustrated by the following examples:              income credits that are not based on the rate
  Example 1. (i) In 2001, Employer M estab-       of return on a predetermined actual invest-
lishes a nonqualified deferred compensation       ment within the meaning of paragraph
plan for Employee A under which all benefits      (d)(2)(i)(B) of this section, and that are
are 100 percent vested. In 2002, Employee A       greater than the income that would result
has $200,000 of current annual compensation       from application of a reasonable rate of in-
from Employer M that is subject to FICA           terest within the meaning of paragraph
tax. The amount deferred under the plan on        (d)(2)(i)(C) of this section. Employer N fails
behalf of Employee A for 2002 is $20,000. Thus,   to take into account an additional amount
Employee A has total wages for FICA tax           for the excess of the income credited under
purposes of $220,000. Because Employee A has      the plan over a reasonable rate of interest.
other wages that exceed the OASDI wage              (ii) Pursuant to paragraph (d)(2)(iii)(A) of
base for 2002, no additional OASDI tax is due     this section, the income credits in excess of
as a result of the $20,000 amount deferred.       the income that would be credited using the
Because there is no wage base limitation for      AFR are considered additional amounts de-
the HI portion of FICA, additional HI tax li-     ferred in the year credited.
ability results from the $20,000 amount de-         Example 4. (i) The facts are the same as in
ferred. However, Employer M fails to pay the      Example 3, except that the annual increase is
additional HI tax.                                based on Moody’s Average Corporate Bond
  (ii) Under paragraph (d)(1)(i) of this sec-     Yield.
tion, an amount deferred is considered taken        (ii) Because this index reflects a reasonable
into account as wages for FICA tax purposes       rate of interest, the income credited under
as of the date it is included in computing        the plan is considered income attributable to
FICA wages, but only if any additional FICA       the amount taken into account within the
tax liability that results from inclusion of      meaning of paragraph (d)(2)(i) of this section.
the amount deferred is actually paid. Be-           Example 5. (i) The facts are the same as in
cause the HI tax resulting from the $20,000       Example 3, except that the annual increase
amount deferred was not paid, that amount         (or decrease) is based on the rate of total re-
deferred was not taken into account within        turn on Employer N’s publicly traded com-
the meaning of paragraph (d)(1) of this sec-      mon stock.
tion. Thus, pursuant to paragraph (d)(1)(ii) of     (ii) Because the income credited under the
this section, benefit payments attributable       plan does not exceed the actual rate of re-
to the $20,000 amount deferred will be in-        turn on a predetermined actual investment,
cluded as wages in accordance with the gen-       the income credited is considered income at-
eral timing rule of paragraph (a)(1) of this      tributable to the amount taken into account
section and will be subject to the HI portion     within the meaning of paragraph (d)(2)(i) of
of FICA tax when actually or constructively       this section.
paid (and the OASDI portion of FICA tax to          Example 6. (i) The facts are the same as in
the extent Employee A’s wages do not exceed       Example 3, except that the annual rate of in-
the OASDI wage base limitation).                  crease or decrease is equal to the greater of
  Example 2. (i) The facts are the same as in     the rate of total return on a specified aggres-
Example 1, except that Employer M takes all       sive growth mutual fund or the rate of re-
actions necessary to correct its failure to       turn on a specified income-oriented mutual
pay the additional tax before the applicable      fund. Employer N fails to take into account
period of limitations expires for 2002 (includ-   an additional amount for the excess of the

                                              117
§ 31.3121(v)(2)-1                                               26 CFR Ch. I (4–1–99 Edition)
income credited under the plan over a rea-         plan over the income determined using AFR
sonable rate of interest.                          is an additional amount deferred for 2005.
  (ii) Because the rate of increase or de-           Example 9. (i) Employer O establishes a
crease is based on the greater of two rates of     nonqualified deferred compensation plan for
returns, the increase is not based on the re-      Employee B. Under the plan, if Employee B
turn on a predetermined actual investment          survives until age 65, he has a fully vested
within the meaning of paragraph (d)(2)(i)(B)       right to receive a lump sum payment at that
of this section. Thus, if the rate of return       age, equal to the product of 10 percent per
credited under the plan (i.e., the greater of      year of service and Employee B’s highest av-
the rates of return of the two mutual funds)       erage annual compensation for any 3-year
exceeds the income that would be credited          period, but no benefits are payable in the
using the AFR, the excess is not considered        event Employee B dies prior to age 65. As
income attributable to the amount taken            permitted under paragraph (e)(5) of this sec-
into account within the meaning of para-           tion, any amount deferred under the plan for
graph (d)(2)(i) of this section and, pursuant      the calendar year is taken into account as
to paragraph (d)(2)(iii)(A) of this section, is    wages as of the last day of the year. As of
considered an additional amount deferred.          December 31, 2002, Employee B has 25 years
  Example 7. (i) The facts are the same as in      of service and Employee B’s high 3-year aver-
Example 6, except that the annual increase or      age compensation is $100,000 (the average for
decrease with respect to 50 percent of the         the years 2000 through 2002). As of December
employee’s account is equal to the rate of         31, 2002, Employee B has a legally binding
total return on the specified aggressive           right to receive a payment at age 65 of
growth mutual fund and the annual increase         $250,000 (10 percent × 25 years × $100,000). As of
or decrease with respect to the other 50 per-      December 31, 2003, Employee B is age 63, has
cent of the employee’s account is equal to         26 years of service, and has high 3-year aver-
the increase or decrease in the Standard &         age compensation of $104,000. As of December
Poor’s 500 Index.                                  31, 2003, Employee B has a legally binding
  (ii) Because the increase or decrease at-        right to receive a payment at age 65 of
tributable to any portion of the employee’s        $270,400 (10 percent × 26 years × $104,000).
account is based on the return on a predeter-      Thus, during 2003, Employee B has earned a
mined actual investment, the entire increase       legally binding right to an additional pay-
or decrease is considered income attrib-           ment at age 65 of $20,400 ($270,400¥$250,000).
utable to the amount taken into account            The assumptions that Employer O uses to
within the meaning of paragraph (d)(2)(i) of       determine the amount deferred for 2003 are a
this section.                                      7 percent interest rate and the GAM 83
  Example 8. (i) The facts are the same as in      (male) mortality table, which, solely for pur-
Example 3, except that, pursuant to the terms      poses of this example, are assumed to be rea-
of the plan, before the beginning of each          sonable actuarial assumptions. The amount
year, the board of directors of Employer N         deferred for 2003 is the present value, as of
designates a specific investment on which          December 31, 2003, of the $20,400 payment,
the following year’s annual increase or de-        which is $17,353. Employer O takes this
crease will be based. The board is authorized      amount into account by including it in Em-
to switch investments more frequently on a         ployee B’s FICA wages for 2003 and paying
prospective basis. Before the beginning of         the additional FICA tax.
2004, the board designates Company A stock           (ii) Under paragraph (d)(2)(ii) of this sec-
as the investment for 2004. Before the begin-      tion, the income attributable to the amount
ning of 2005, the board designates Company B       that was taken into account is the increase
stock as the investment for 2005. At the end       in the present value of the future payment
of 2005, the board determines that the return      due solely to the passage of time, because
on Company B stock was lower than ex-              the amount deferred was determined using
pected and changes its designation for 2005 to     reasonable actuarial assumptions and meth-
the rate of return on Company C stock,             ods. As of the payment date at age 65, the
which had a higher return during 2005. Em-         present value of the future payment earned
ployer N fails to take into account an addi-       during 2003 is $20,400. The entire difference
tional amount for the excess of the income         between the $20,400 and the $17,353 amount
credited under the plan over a reasonable          deferred ($3,047) is the increase in the present
rate of interest.                                  value of the future payment due solely to the
  (ii) The annual increase or decrease for 2004    passage of time, and thus constitutes income
is based on the return of a predetermined ac-      attributable to the amount taken into ac-
tual investment. Although the annual in-           count. Because the amount deferred was
crease or decrease for 2005 is based on an ac-     taken into account, the entire payment of
tual investment, the actual investment is          $20,400 represents either an amount deferred
not predetermined since it was not des-            that was previously taken into account
ignated before the beginning of 2005. Pursu-       ($17,353) or income attributable to that
ant to paragraph (d)(2)(iii)(A) of this section,   amount ($3,047). Accordingly, pursuant to
the excess of the income credited under the        the nonduplication rule of paragraph

                                               118
Internal Revenue Service, Treasury                                         § 31.3121(v)(2)-1
(a)(2)(iii) of this section, none of the pay-      Example 12. (i) Employer P establishes an
ment is included in wages.                       account balance plan on January 1, 2002,
  Example 10. (i) The facts are the same as in   under which all benefits are 100 percent vest-
Example 9, except that, instead of providing a   ed. The plan provides that amounts deferred
lump sum equal to 10 percent of average          will be credited annually with interest be-
compensation per year of service, the plan       ginning in 2002 at a rate that is greater than
provides Employee B with a fully vested          a reasonable rate of interest. Employer P
right to receive a life annuity, payable         treats the excess over the applicable interest
monthly beginning at age 65, equal to the        rate in section 417(e) as an additional
product of 2 percent for each year of service    amount deferred for 2002 and in each year
and Employee B’s highest average annual          thereafter, and takes the additional amount
compensation for any 3-year period. The plan     into account by including it in FICA wages
also provides that, if Employee B dies before    and paying the additional FICA tax for the
age 65, the present value of the future pay-     year.
ments will be paid to his or her beneficiary.      (ii) Under the nonduplication rule in para-
As of December 31, 2002, Employee B has a le-    graph (a)(2)(iii) of this section, the benefits
gally binding right to receive lifetime pay-     paid under the plan will be excluded from
ments of $50,000 (2 percent × 25 years ×         wages for FICA tax purposes.
$100,000) per year. As of December 31, 2003,       Example 13. (i) The facts are the same as in
Employee B has a legally binding right to re-    Example 9, except that, in determining the
ceive lifetime payments of $54,080 (2 percent    amount deferred, Employer O uses a 15 per-
× 26 years × $104,000) per year. Thus, during    cent interest rate, which, solely for purposes
2003, Employee B has earned a legally bind-      of this example, is assumed not to be a rea-
ing right to additional lifetime payments of     sonable interest rate. Employer O deter-
$4,080 ($54,080¥$50,000) per year beginning at   mines that the amount deferred for 2003 is
age 65. The amount deferred for 2003 is          the present value, as of December 31, 2003, of
$32,935, which is the present value, as of De-   the $20,400 payment, which is $15,023. Em-
cember 31, 2003, of these additional pay-        ployer O includes $15,023 in wages and pays
ments, determined using the same actuarial       any resulting FICA tax. Solely for purposes
assumptions and methods used in Example 9,       of this example, it is assumed that the AFR
except that there is no discount for the prob-   as of January 1, 2003, is 7 percent.
ability of death prior to age 65. Employer O       (ii) Under paragraph (d)(2)(iii)(B) of this
takes this amount into account by including      section, if any actuarial assumption or
it in Employee B’s FICA wages for 2003 and       method is not reasonable, then the income
paying the additional FICA tax.                  attributable to the amount taken into ac-
  (ii) Under paragraph (d)(2)(ii) of this sec-   count is limited to the income that would re-
tion, the income attributable to the amount      sult from application of the AFR and, if ap-
that was taken into account is the increase      plicable, the 417(e) mortality table. Because
in the present value of the future payments      the 15 percent interest rate is unreasonable,
due solely to the passage of time, because       the income attributable to the amount taken
the amount deferred was determined using         into account is limited to the income that
reasonable actuarial assumptions and meth-       would result from using a 7 percent interest
ods. Because the amount deferred was taken       rate and, in this case, an increase for survi-
into account, each annual payment of $4,080      vorship using the 417(e) mortality table.
attributable to the amount deferred in 2003      Under these assumptions, the income attrib-
represents either an amount deferred that        utable to the $15,023 amount taken into ac-
was previously taken into account or income      count for 2003 is $1,199 in 2004 and $1,313 in
attributable to that amount. Accordingly,        2005. Under paragraph (d)(1)(ii) of this sec-
pursuant to the nonduplication rule of para-     tion, the sum of these amounts ($17,535) is ex-
graph (a)(2)(iii) of this section, none of the   cluded from Employee B’s wages pursuant to
payments are included in wages.                  the nonduplication rule of paragraph
  Example 11. (i) The facts are the same as in   (a)(2)(iii) of this section, and the balance of
Example 10, except that no amount is taken       the payment ($2,865) is subject to the general
into account for 2003 because Employer O         timing rule of paragraph (a)(1) of this section
fails to pay the additional FICA tax.            and, thus, is included in Employee B’s wages
  (ii) Under paragraph (d)(1)(ii)(A) of this     when actually or constructively paid.
section, if an amount deferred for a period is     (iii) The same result can be reached by
not taken into account, then the benefit pay-    multiplying the attributable benefit pay-
ments attributable to that amount deferred       ments by a fraction, the numerator of which
are included as wages in accordance with the     is the amount taken into account, and the
general timing rule of paragraph (a)(1) of       denominator of which is the amount deferred
this section. In this case, assuming that the    that would have been taken into account at
amounts deferred in other periods were           the same time had the amount deferred been
taken into account, $4,080 of each year’s        calculated using the AFR and the 417(e) mor-
total benefit payments will be included in       tality table. These assumptions are deter-
wages when actually or constructively paid,      mined as of January 1 of the calendar year in
in accordance with the general timing rule.      which the amount was taken into account.

                                             119
§ 31.3121(v)(2)-1                                                  26 CFR Ch. I (4–1–99 Edition)
In this Example 13, the fraction would be             ment ($1,964) is subject to the general timing
$15,023 divided by $17,478, which equals .85954.      rule of paragraph (a)(1) of this section and is
The $20,400 payment is multiplied by this             included in wages when actually or construc-
fraction to determine the amount of the pay-          tively paid.
ment that is excluded from wages pursuant               (iii) The same result can be reached by
to the nonduplication rule of paragraph               multiplying the attributable benefit pay-
(a)(2)(iii) of this section. Thus, $17,535 ($20,400   ments by a fraction the numerator of which
x .85954) is excluded from wages and the bal-         is the amount taken into account, and the
ance ($2,865) is subject to FICA tax when ac-         denominator of which is the amount deferred
tually or constructively paid.                        that would have been taken into account at
   Example 14. (i) The facts are the same as          the same time had the amount deferred been
Example 10, except that Employer O cal-               calculated using the AFR and the 417(e) mor-
culates the amount deferred for 2003 as               tality table. These assumptions are deter-
$18,252 and takes that amount into account            mined as of January 1 of the calendar year in
by including that amount in wages and pay-            which the amount was taken into account.
ing any resulting FICA tax. The assumptions           In this Example 14, the fraction would be
that Employer O uses to determine the                 $18,252 divided by $35,185, which equals .51875.
amount deferred are a 15 percent interest             The $4,080 annual payment is multiplied by
rate and, for the period after commencement           this fraction to determine the amount of the
of benefit payments, the GAM 83 (male) mor-           payment that is excluded from wages pursu-
tality table. The 15 percent interest rate is         ant to the nonduplication rule of paragraph
assumed, solely for purposes of this example,         (a)(2)(iii) of this section. Thus, $2,116 ($4,080 ×
not to be a reasonable actuarial assumption.          .51875) is excluded from wages and the bal-
Solely for purposes of this example, it is as-        ance ($1,964) is subject to FICA tax when ac-
sumed that the AFR as of January 1, 2003, is          tually or constructively paid.
7 percent.
   (ii) Under paragraph (d)(2)(iii)(B) of this          (e) Time amounts deferred are required
section, if any actuarial assumption or               to be taken into account—(1) In general.
method used is not reasonable, then the in-           Except as otherwise provided in this
come attributable to the amount taken into            paragraph (e), an amount deferred
account is limited to the income that would           under a nonqualified deferred com-
result from application of the AFR and, if            pensation plan must be taken into ac-
applicable, the 417(e) mortality table. Be-           count as wages for FICA tax purposes
cause the 15 percent interest rate is not rea-
sonable, the income attributable to the
                                                      as of the later of the date on which
amount taken into account is equal to the             services creating the right to the
income that would result from using a 7 per-          amount deferred are performed (within
cent interest rate and the amount taken into          the meaning of paragraph (e)(2) of this
account is treated as if it represented a por-        section) or the date on which the right
tion of the amount deferred for purposes of           to the amount deferred is no longer
applying paragraph (d)(1)(ii)(B) of this sec-         subject to a substantial risk of for-
tion. Under these assumptions, the income             feiture (within the meaning of para-
attributable to the $18,252 amount taken into
account for 2003 is $1,278 in 2004 and $1,367 in
                                                      graph (e)(3) of this section). However,
2005. Under paragraph (d)(1)(ii)(B) of this sec-      in no event may any amount deferred
tion, the portion of each benefit payment at-         under a nonqualified deferred com-
tributable to the amount deferred that is ex-         pensation plan be taken into account
cluded from wages pursuant to the non-                as wages for FICA tax purposes prior to
duplication rule of paragraph (a)(2)(iii) of          the establishment of the plan providing
this section is determined at benefit com-            for the amount deferred (or, if later,
mencement by multiplying each benefit pay-            the plan amendment providing for the
ment by a fraction, the numerator of which
                                                      amount deferred). Therefore, if an
is the amount taken into account (plus in-
come attributable to that amount) and the             amount is deferred pursuant to the
denominator of which is the present value of          terms of a legally binding agreement
future benefit payments attributable to the           that is not put in writing until after
amount deferred. Because the interest rate            the amount would otherwise be taken
assumption is not reasonable, not only is the         into account under this paragraph
income limited to the application of the              (e)(1), the amount deferred (including
AFR, but the present value in the denomi-             any attributable income) must be
nator must be determined using the AFR and            taken into account as wages for FICA
(if applicable) the 417(e) mortality table. In
this case, the present value is $40,283 and
                                                      tax purposes as of the date the mate-
thus the fraction is $20,897 divided by $40,283,      rial terms of the plan are put in writ-
or .51875. Thus, $2,116 (.51875 × $4,080) of each     ing.
year’s benefit payment is excluded from                 (2) Services creating the right to an
wages and the balance of each year’s pay-             amount deferred. For purposes of this

                                                  120
Internal Revenue Service, Treasury                                  § 31.3121(v)(2)-1

section, services creating the right to     be calculated on that date or merely
an amount deferred under a non-             because the exact amount of the ben-
qualified deferred compensation plan        efit payable depends on future changes
are considered to be performed as of        in the cost of living. If the exact
the date on which, under the terms of       amount of the benefit payable depends
the plan and all the facts and cir-         on future changes in the cost of living,
cumstances, the employee has per-           the amount deferred must be deter-
formed all of the services necessary to     mined using a reasonable assumption
obtain a legally binding right (as de-      as to the future changes in the cost of
scribed in paragraph (b)(3)(i) of this      living. For example, the amount of a
section) to the amount deferred.            benefit is treated as known even if the
  (3) Substantial risk of forfeiture. For   exact amount of the benefit payable
purposes of this section, the determina-    cannot be determined until future
tion of whether a substantial risk of       changes in the cost of living are re-
forfeiture exists must be made in ac-       flected in the section 415 limitation on
cordance with the principles of section     benefits payable under a qualified re-
83 and the regulations thereunder.          tirement plan.
  (4) Amount deferred that is not reason-     (ii) Earlier inclusion permitted—(A) In
ably ascertainable under a nonaccount
                                            general. With respect to an amount de-
balance plan—(i) In general—(A) Date re-
                                            ferred that is not reasonably ascertain-
quired to be taken into account. Notwith-
                                            able, an employer may choose to take
standing any other provision of this
                                            an amount into account at any date or
paragraph (e), an amount deferred
                                            dates (an early inclusion date or dates)
under a nonaccount balance plan is not
                                            before the resolution date (but not be-
required to be taken into account as
                                            fore the date described in paragraph
wages under the special timing rule of
paragraph (a)(2) of this section until      (e)(1) of this section with respect to the
the first date on which all of the          amount deferred). Thus, for example,
amount deferred is reasonably ascer-        with respect to an amount deferred
tainable (the resolution date). In this     under a nonaccount balance plan that
case, the amount required to be taken       is not reasonably ascertainable because
into account as of the resolution date      the plan permits employees to receive
is determined in accordance with para-      their benefits in more than one form or
graph (c)(2) of this section.               commencing at more than one date
  (B) Definition of reasonably ascertain-   (and the requirements of paragraph
able. For purposes of this paragraph        (c)(2)(iii) of this section are not satis-
(e)(4), an amount deferred is considered    fied), an employer may choose to take
reasonably ascertainable on the first       an amount into account on the date
date on which the amount, form, and         otherwise described in paragraph (e)(1)
commencement date of the benefit pay-       of this section before the form and
ments attributable to the amount de-        commencement date are selected
ferred are known, and the only actu-        (based on assumptions as to the form
arial or other assumptions regarding        and commencement date for the ben-
future events or circumstances needed       efit payments) or may choose to wait
to determine the amount deferred are        until the form and commencement
interest and mortality. For this pur-       date of the benefit payments are se-
pose, the form and commencement             lected. An employer that chooses to
date of the benefit payments attrib-        take an amount into account at an
utable to the amount deferred are           early inclusion date under this para-
treated as known if the requirements        graph (e)(4)(ii) for an employee under a
of paragraph (c)(2)(iii)(B) of this sec-    plan is not required until the resolu-
tion (under which payments are treat-       tion date to identify the period to
ed as being made in the normal form of      which the amount taken into account
benefit commencing at normal com-           relates.
mencement date) are satisfied. In addi-       (B) True-up at resolution date. If, with
tion, an amount deferred does not fail      respect to an amount deferred for a pe-
to be reasonably ascertainable on a         riod, an employer chooses to take an
date merely because the exact amount        amount into account as of an early in-
of the benefit payable cannot readily       clusion date in accordance with this

                                        121
§ 31.3121(v)(2)-1                                       26 CFR Ch. I (4–1–99 Edition)

paragraph (e)(4)(ii) and the benefit pay-    after the early inclusion date must be
ments attributable to the amount de-         disregarded.
ferred exceed the benefit payments             (3) Early retirement subsidies. An early
that are actuarially equivalent to the       retirement subsidy that the employee
amount taken into account at the             ultimately receives may be taken into
early inclusion date (payable in the         account at an early inclusion date if
same form and using the same com-            the employee would have a legally
mencement date as the benefit pay-           binding right to the subsidy at the
ments attributable to the amount de-         early inclusion date but for any condi-
ferred), then the present value of the       tion that the employee continue to
difference in the benefits, determined       render services. Accordingly, an em-
in accordance with paragraph (c)(2) of       ployer may take into account at an
this section, must be taken into ac-         early inclusion date any early retire-
count as of the resolution date.             ment subsidy that the employee ulti-
  (C) Actuarial assumptions. For pur-        mately receives to the extent that
poses of determining the benefits that       elimination or reduction of that sub-
are actuarially equivalent to the            sidy      would        violate      section
amount taken into account as of an           411(d)(6)(B)(i) if that section applied to
early inclusion date, the amount taken       the plan.
into account is converted to an actu-          (4) Allocation with respect to offsets. In
arially equivalent benefit payable in        any case in which a series of amounts
the same form and commencing on the          are deferred over more than one period,
same date as the actual benefit pay-         the amounts deferred are not reason-
ments attributable to the amount de-         ably ascertainable until a single reso-
ferred using an interest rate, and, if ap-   lution date and the benefit payments
plicable, mortality and cost-of-living       attributable to the entire series are de-
assumptions, that were reasonable as         termined under a formula that provides
of the early inclusion date. Thus, with      a gross benefit that in the aggregate is
respect to an amount deferred for a pe-      subject to an objective reduction for
riod, the amount required to be taken        future events under the terms of the
into account as of the resolution date       plan, such as an offset for the aggre-
is the present value (determined using       gate benefits payable under a plan
an interest rate, and, if applicable,        qualified under section 401(a), the attri-
mortality and cost-of-living assump-         bution of benefit payments to the
tions, that are reasonable as of the res-    amount deferred in each period is de-
olution date) of the excess, if any, of      termined under the rules of this para-
the future benefit payments attrib-          graph (e)(4)(ii)(D)(4). In a case de-
utable to the amount deferred over the       scribed in the preceding sentence, the
future benefits payable in the same          benefit payments made as a result of
form and commencing on the same              the series of amounts deferred may be
date that are actuarially equivalent to      treated as attributable to the amount
the portion of the amount deferred           deferred as of the earliest period in
that was taken into account as of the        which the employee obtained a legally
early inclusion date (where actuarial        binding right to a benefit under the
equivalence is determined using an in-       plan equal to the excess, if any, of the
terest rate, and, if applicable, mor-        amount of the gross benefit attrib-
tality and cost-of-living assumptions,       utable to that period (determined at
that were reasonable as of the early in-     the resolution date), over the amount
clusion date).                               of the reduction determined as of the
  (D) Allocation rules for amounts de-       end of that period. Thus, for example,
ferred over more than one period—(1)         if an employee obtains a legally bind-
General rule. The rules of this para-        ing right in each of several years to
graph (e)(4)(ii)(D) apply for purposes of    benefit payments from a nonqualified
determining whether an amount has            deferred compensation plan that pro-
been included under this paragraph           vides for a specified gross benefit for
(e)(4) before the earliest date permitted    the years to be offset by the benefits
under paragraph (e)(1) of this section.      payable under a qualified plan, the
  (2) Future compensation increases. In-     amount deferred in the first year may
creases in an employee’s compensation        be treated as equal to the gross benefit

                                         122
Internal Revenue Service, Treasury                                   § 31.3121(v)(2)-1

for the year, reduced by the offset ap-      account at more than one early inclu-
plicable at the end of the year (even if     sion date, this paragraph (e)(4)(ii)(E)
the offset increases after the end of the    applies on a first-in-first-out basis, be-
year).                                       ginning with the amount taken into
  (E) Treatment of benefits paid before      account at the earliest early inclusion
the resolution date. If a benefit payment    date (including income attributable
is attributable to an amount deferred        thereto).
that is not reasonably ascertainable at        (5) Rule of administrative convenience.
the time of payment (or is paid before       For purposes of this section, an em-
the date selected under paragraph (e)(5)     ployer may treat an amount deferred
of this section), and the employer has
                                             as required to be taken into account
previously taken an amount into ac-
                                             under this paragraph (e) on any date
count with respect to the amount de-
ferred under the early inclusion rule of     that is later than, but within the same
this paragraph (e)(4), then, in lieu of      calendar year as, the actual date on
the pro rata rule provided in paragraph      which the amount deferred is otherwise
(d)(1)(ii)(B) of this section, a first-in-   required to be taken into account
first-out rule applies in determining        under this paragraph (e). For example,
the portion of the benefit payment at-       if services creating the right to an
tributable to the amount taken into          amount deferred are considered per-
account. Under this first-in-first-out       formed under paragraph (e)(2) of this
rule, the benefit payment is compared        section periodically throughout a year,
to the sum of the amount taken into          the employer may nevertheless treat
account at the early inclusion date and      the services creating the right to that
the income attributable to that              amount deferred as performed on De-
amount. If the benefit payment equals        cember 31 of that year. If an employer
or exceeds the amount taken into ac-         uses the rule of administrative conven-
count at the early inclusion date and        ience described in this paragraph (e)(5),
the income attributable to that              any determination of whether the in-
amount as of the date of the benefit         come attributable to an amount de-
payment, the benefit payment is in-          ferred under an account balance plan is
cluded as wages under the general tim-       based on a reasonable rate of interest
ing rule of paragraph (a)(1) of this sec-    or whether the actuarial assumptions
tion to the extent of any excess, and        used to determine the present value of
the amount taken into account at the         an amount deferred in a nonaccount
early inclusion date (and income at-         balance plan are reasonable will be
tributable to that amount) is dis-
                                             made as of the date the employer se-
regarded thereafter with respect to the
                                             lects to take the amount into account.
amount deferred. If the amount taken
into account at the early inclusion            (6) Portions of an amount deferred re-
date and the income attributable to          quired to be taken into account on more
that amount as of the date of the ben-       than one date. If different portions of an
efit payment exceeds the benefit pay-        amount deferred are required to be
ment, the benefit payment is not in-         taken into account under paragraph
cluded as wages under the general tim-       (e)(1) of this section on more than one
ing rule of paragraph (a)(1) of this sec-    date (e.g., on account of a graded vest-
tion and, in determining the amount          ing schedule), then each such portion is
that must be taken into account there-       considered a separate amount deferred
after with respect to the amount de-         for purposes of this section.
ferred, the amount taken into account          (7) Examples. This paragraph (e) is il-
at the early inclusion date, plus attrib-    lustrated by the following examples:
utable income as of the date of the ben-
                                               Example 1. (i) Employer M establishes a
efit payment, is reduced by the amount
                                             nonqualified deferred compensation plan for
of the benefit payment, and only the         Employee A on November 1, 2005. Under the
excess plus future income attributable       plan, which is an account balance plan, Em-
to the excess (credited using assump-        ployee A obtains a legally binding right on
tions that were reasonable on the early      the last day of each calendar year (if Em-
inclusion date) is taken into consider-      ployee A is employed on that date) to be
ation. If amounts have been taken into       credited with a principal amount equal to 5

                                         123
§ 31.3121(v)(2)-1                                              26 CFR Ch. I (4–1–99 Edition)
percent of compensation for the year. In ad-       vested as of December 31, 2007; 40 percent is
dition, a reasonable rate of interest is cred-     vested as of December 31, 2008; 60 percent is
ited quarterly. Employee A’s account bal-          vested as of December 31, 2009; 80 percent is
ance is nonforfeitable and is payable upon         vested as of December 31, 2010; and 100 per-
Employee A’s termination of employment.            cent is vested as of December 31, 2011. Be-
For 2006, the principal amount credited to         cause these dates are later than the date on
Employee A under the plan (which, in this          which the services creating the right to the
case, is also the amount deferred within the       amount deferred are considered performed
meaning of paragraph (c) of this section) is       (December 31, 2006), the amount deferred is
$25,000.                                           required to be taken into account as of these
  (ii) Under paragraph (e)(2) of this section,     dates that fall in five different years.
the services creating the right to the $25,000        (ii) Paragraph (e)(6) of this section pro-
amount deferred are considered performed as        vides that, if different portions of an amount
of December 31, 2006, the date on which Em-        deferred are required to be taken into ac-
ployee A has performed all of the services         count under paragraph (e)(1) of this section
necessary to obtain a legally binding right to     on more than one date, then each such por-
the amount deferred. Thus, in accordance           tion is considered a separate amount de-
with paragraph (e)(1) of this section, the         ferred for purposes of this section. Thus,
$25,000 amount deferred must be taken into         $5,000 of the principal amount, plus interest
account as of December 31, 2006, which is the      credited through December 31, 2007, is taken
later of the date on which services creating       into account as an amount deferred on De-
the right to the amount deferred are per-          cember 31, 2007; $5,000 of the principal
formed or the date on which the right to the       amount, plus interest credited through De-
amount deferred is no longer subject to a          cember 31, 2008, is taken into account as a
substantial risk of forfeiture.                    separate amount deferred on December 31,
  Example 2. (i) The facts are the same as in      2008; etc.
Example 1, except that the principal amount           Example 4. (i) On November 21, 2001, Em-
credited under the plan on the last day of         ployer N establishes a nonqualified deferred
each year (and attributable interest) is for-      compensation plan under which all benefits
feited if the employee terminates employ-          are 100 percent vested. The plan provides for
ment within five years of that date.               Employee B (who is age 45) to receive a lump
  (ii) Under paragraph (e)(3) of this section,     sum benefit of $500,000 at age 65. This benefit
the determination of whether the right to an       will be forfeited if Employee B dies before
amount deferred is subject to a substantial        age 65.
risk of forfeiture is made in accordance with         (ii) Because the amount, form, and com-
the principles of section 83. Under § 1.83–3(c)    mencement date of the benefit are known,
of this chapter, a substantial risk of for-        and the only assumptions needed to deter-
feiture generally exists where rights in prop-     mine the amount deferred are interest and
erty that are transferred are conditioned, di-     mortality, the amount deferred is reasonably
rectly or indirectly, upon the future per-         ascertainable within the meaning of para-
formance of substantial services. Because          graph (e)(4)(i) of this section on November 21,
Employee A’s right to receive the $25,000          2001.
principal amount (and attributable interest)          Example 5. (i) The facts are the same as in
is conditioned on the performance of services      Example 4, except that plan provides that the
for five years, a substantial risk of forfeiture   lump sum will be paid at the later of age 65
exists with respect to that amount deferred        or termination of employment and provides
until December 31, 2011.                           that the $500,000 payable to Employee B is
  (iii) December 31, 2011, is the later of the     increased by 5 percent per year for each year
date on which services creating the right to       that payment is deferred beyond age 65.
the amount deferred are performed or the              (ii) Because the commencement date of the
date on which the right to the amount de-          benefit payment is contingent on when Em-
ferred is no longer subject to a substantial       ployee B terminates employment, the com-
risk of forfeiture. Thus, in accordance with       mencement date of the benefit payment is
paragraph (e)(1) of this section, the amount       not known. Thus, the amount deferred is not
deferred (which, pursuant to paragraph (c)(1)      reasonably ascertainable within the meaning
of this section, is equal to the $25,000 prin-     of paragraph (e)(4)(i) of this section, unless
cipal amount credited to Employee A’s ac-          the plan satisfies the requirements of para-
count on December 31, 2006, plus the interest      graph (c)(2)(iii)(B) of this section. Because
credited with respect to that principal            the fixed 5 percent factor may not be reason-
amount through December 31, 2011) must be          able at the time benefit payments commence
taken into account as of December 31, 2011.        (i.e., 5 percent might be higher or lower than
  Example 3. (i) The facts are the same as in      a reasonable interest rate when payments
Example 2, except that the principal amount        commence), the plan fails to satisfy para-
credited under the plan on the last day of         graph (c)(2)(iii)(B) of this section and accord-
each year (and attributable interest) be-          ingly the amount deferred is not reasonably
comes nonforfeitable according to a graded         ascertainable until termination of employ-
vesting schedule under which 20 percent is         ment.

                                               124
Internal Revenue Service, Treasury                                             § 31.3121(v)(2)-1
  Example 6. (i) The facts are the same as in      reasonably ascertainable, and Employer O is
Example 4, except that the $500,000 is payable     able to determine that during 2001 Employee
to Employee B at the later of age 55 or ter-       C earned a legally binding right to a life an-
mination of employment.                            nuity of $4,000 per year beginning in 2021
  (ii) Because the commencement date of the        when Employee C is age 65. Employer O de-
benefit payment is contingent on when Em-          termines the present value of Employee C’s
ployee B terminates employment, the com-           future benefit payments under the SERP as
mencement date of the benefit payment is           of this resolution date (December 31, 2018),
not known. Thus, the amount deferred is not        using a 7 percent interest rate and the UP–84
reasonably ascertainable until termination         mortality table, which, solely for purposes of
of employment.                                     this example, are assumed to be reasonable
  Example 7. (i) The facts are the same as in      actuarial assumptions for December 31, 2018.
Example 4, except that Employee B may elect        The special timing rule will be satisfied if
to take the benefit in the form of a life annu-    the resulting present value, $26,950, is taken
ity of $50,000 per year (commencing at age         into account on that date in accordance with
65).                                               paragraph (d)(1) of this section.
  (ii) Because the plan permits employees to         Example 9. (i) The facts are the same as in
elect to receive benefits in more than one         Example 8, except that the plan provides that
form and the alternative forms may not have        Employee C may choose to receive early re-
the same value when Employee B makes his           tirement benefits on an unreduced basis at
election, the plan fails to satisfy the require-   any time after age 60 if Employee C has com-
ments of paragraph (c)(2)(iii)(B) of this sec-     pleted 15 years of service by that date.
tion until a form of benefit is selected. Thus,      (ii) As of the date Employee C terminates
the amount deferred is not reasonably ascer-       employment, the amount of the benefit is
tainable until then.                               known and the only actuarial or other as-
  Example 8. (i) Employer O establishes a          sumptions needed to determine the amount
nonqualified deferred compensation plan.           deferred are an interest rate assumption and
The plan is a supplemental executive retire-       a mortality assumption. At that time, the
ment plan (SERP) that provides Employee C          amount deferred in each past year becomes
with a fully vested right to receive a pen-        reasonably ascertainable, and Employer O is
sion, in the form of a life annuity payable        able to determine that during 2001 Employee
monthly, beginning at age 65, equal to the         C earned a legally binding right to a life an-
excess of 3 percent of Employee C’s final 3-       nuity of $4,000 per year beginning on Decem-
year average pay for each year of participa-       ber 31, 2018 when Employee C is age 62. Em-
tion up to 15 years, over the amount payable       ployer O determines the present value of Em-
to Employee C from Employer O’s qualified          ployee C’s future benefit payments under the
pension plan. The amount payable under the         SERP as of this resolution date (December
qualified pension plan is a life annuity pay-      31, 2018), using a 7 percent interest rate and
able monthly, beginning at age 65, equal to        the UP–84 mortality table, which, solely for
1.5 percent of final 3-year average pay for        purposes of this example, are assumed to be
each year of employment, excluding pay in          reasonable actuarial assumptions for Decem-
excess of the section 401(a)(17) compensation      ber 31, 2018. The special timing rule will be
limit. No benefits are payable under the           satisfied if the resulting present value,
SERP if Employee C dies before age 65. Em-         $37,576, is taken into account on that date in
ployee C becomes a participant in the SERP         accordance with paragraph (d)(1) of this sec-
on January 1, 2001, at age 44. The amount de-      tion.
ferred under the SERP for any year is not            Example 10. (i) The facts are the same as in
reasonably ascertainable prior to termi-           Example 9, except that, as permitted under
nation of employment because the amount of         paragraph (e)(4)(ii) of this section, Employer
the benefit is not known and the determina-        O chooses to take an amount into account
tion of the amount deferred requires assump-       before the amount deferred for 2001 is reason-
tions other than interest and mortality (e.g.,     ably ascertainable. The amount that Em-
an assumption as to Employee C’s average           ployer O takes into account on December 31,
pay for the final three years of employment).      2001, is $13,043 (the present value of a life an-
As permitted by paragraph (e)(4)(i) of this        nuity of $4,000 per year, payable at age 62,
section, Employer O chooses not to take any        using a 6 percent interest rate and the UP–84
amount into account for any year before the        mortality table). Employer O does not take
resolution date. Employee C terminates em-         any other amount into account before the
ployment on December 31, 2018 when he is           resolution date.
age 62.                                              (ii)    In    accordance     with   paragraph
  (ii) As of the date Employee C terminates        (e)(4)(ii)(B) of this section, Employer O must
employment, the amount of the benefit is           determine any additional amount required to
known and the only actuarial or other as-          be taken into account in 2018. If the $4,000
sumptions needed to determine the amount           payable in the form of a life annuity begin-
deferred are an interest rate assumption and       ning at age 62 exceeds the life annuity which
a mortality assumption. At that time, the          is actuarially equivalent to the $13,043 pre-
amount deferred in each past year becomes          viously taken into account, the present

                                               125
§ 31.3121(v)(2)-1                                              26 CFR Ch. I (4–1–99 Edition)
value of the excess must be taken into ac-           (ii)    In    accordance     with    paragraph
count. In this Example 10, the $13,043 pre-        (e)(4)(ii)(B) of this section, Employer O must
viously taken into account is actuarially          determine any additional amount required to
equivalent to a $4,000 annuity commencing          be taken into account in 2018. If the $4,000
at age 62 using a 6 percent interest rate and      payable in the form of a life annuity begin-
the UP–84 mortality table ( which, solely for      ning at age 62 exceeds the life annuity which
purposes of this example, are assumed to be        is actuarially equivalent to the $15,834 pre-
reasonable actuarial assumptions for Decem-        viously taken into account, the present
ber 31, 2001). Accordingly, no additional          value of the excess must be taken into ac-
amount need be taken into account in 2018,         count. In this case, the $15,834 previously
regardless of any changes in market rates of       taken into account is actuarially equivalent
interest between 2001 and 2018.                    to a $4,856 annuity commencing at age 62
  Example 11. (i) The facts are the same as in     using a 6 percent interest rate and the UP–84
Example 9, except that, as permitted under         mortality table (which, solely for purposes of
paragraph (e)(4)(ii) of this section, Employer     this example, are assumed to be reasonable
O chooses to take an amount into account           actuarial assumptions for December 31, 2001).
before the amount deferred for 2001 is reason-     Because the life annuity of $4,856 per year
ably ascertainable. The amount that Em-            (which is equivalent to the amount taken
ployer O takes into account on December 31,        into account at the early inclusion date) ex-
2001, is $9,569 (the present value of a life an-   ceeds the $4,000 annuity attributable to the
nuity of $4,000 per year, payable at age 65,       amount deferred in 2001, no additional
using a 6 percent interest rate and the UP–84      amount is required to be taken into account
mortality table). Employer O does not take         for that amount deferred as of the resolution
any other amount into account before the           date. Employer O may claim a refund or
resolution date.                                   credit for the overpayment of FICA tax with
  (ii)    In    accordance     with  paragraph     respect to amounts taken into account prior
(e)(4)(ii)(B) of this section, Employer O must     to the resolution date to the extent per-
determine any additional amount required to        mitted by sections 6402, 6413, and 6511.
be taken into account in 2018. If the $4,000         Example 13. (i) The facts are the same as in
payable in the form of a life annuity begin-       Example 12, except that Employee C became
ning in 2018 at age 62 exceeds the life annuity    a participant in the SERP on January 1, 2000.
which is actuarially equivalent to the $9,569      In addition, Employer O determines in 2018
previously taken into account, the present
                                                   that during 2000 Employee C earned a legally
value of the excess must be taken into ac-
                                                   binding right to a life annuity of $1,500 per
count. In this case, the $9,569 previously
                                                   year beginning on December 31, 2018.
taken into account is actuarially equivalent
                                                     (ii) Employer O may allocate the $15,834
to a $2,935 annuity commencing at age 62
using a 6 percent interest rate and the UP–84      previously taken into account among any
mortality table (which, solely for purposes of     amounts deferred on or before the early in-
this example, are assumed to be reasonable         clusion date. At the resolution date, Em-
actuarial assumptions for December 31, 2001).      ployer O will have to take into account the
Accordingly, an additional amount needs to         present value of an annuity equal to the ex-
be taken into account in 2018 equal to the         cess of the life annuity attributable to the
present value of the excess of the $4,000 an-      amounts deferred for 2000 and 2001 over a life
nual stream of benefit payments to which           annuity of $4,856 per year.
Employee C obtained a legally binding right          Example 14. (i) In 2003, Employer P estab-
during 2001 over the $2,935 annual stream of       lishes a nonqualified deferred compensation
benefit payments which is actuarially equiv-       plan for Employee D. The plan provides that,
alent to the amount previously taken into          in consideration of Employee D’s services to
account. This present value (i.e., the present     be performed on Project X in 2004, Employee
value of a life annuity equal to $4,000 minus      D will have a nonforfeitable right to receive
$2,935, or $1,065 annually) is determined by       1 percent per year of Employer P’s net prof-
Employer O to be $10,005 as of the resolution      its associated with Project X for each of the
date using a 7 percent interest rate and the       immediately succeeding three years. No
UP–84 mortality table (which, solely for pur-      services beyond 2004 are required. The 1 per-
poses of this example, are assumed to be rea-      cent of net profits payable each year will be
sonable actuarial assumptions for December         paid on March 31 of the immediately suc-
31, 2018).                                         ceeding year. One percent of net profits asso-
  Example 12. (i) The facts are the same as in     ciated with Project X is $750,000 in 2005,
Example 9, except that the amount that Em-         $400,000 in 2006, and $90,000 in 2007. Employee
ployer O takes into account on December 31,        D receives $750,000 on March 31, 2006, $400,000
2001, is $15,834 (the present value of $4,000,     on March 31, 2007, and $90,000 on March 31,
payable at age 60, using a 6 percent interest      2008.
rate and the UP–84 mortality table). Em-             (ii) Because the services creating the right
ployer O does not take any other amount            to all of the amount deferred are performed
into account before the resolution date.           in 2004, the benefit payments based on the

                                               126
Internal Revenue Service, Treasury                                            § 31.3121(v)(2)-1
2005, 2006, and 2007 net profits are all attrib-   first-in-first-out rule applies in determining
utable to the amount deferred in 2004. How-        the benefit payments that are attributable
ever, because the present value of Employee        to amounts previously taken into account.
D’s future benefit is contingent on future         Using the 10 percent interest rate, Employer
profits, the determination of the amount de-       P determines that the $750,000 benefit pay-
ferred requires the use of assumptions other       ment on March 31, 2006, and the March 31,
than interest, mortality, and cost of living.      2007, benefit payment of $400,000 are less than
Thus, all of the amount deferred in 2004 will      the $1,000,000 taken into account at the early
not be reasonably ascertainable within the         inclusion date, plus attributable income,
meaning of paragraph (e)(4)(i) of this section     and, therefore, are not included in wages
until December 31, 2007 (which is the resolu-      when paid.
tion date). Employer P does not choose to             (iii) Under paragraph (e)(4)(ii)(E) of this
take any amount into account prior to the          section, if an employer chooses to take an
amount deferred becoming reasonably ascer-         amount into account before the resolution
tainable.                                          date, the amount taken into account (plus
  (iii) However, paragraph (d)(1)(ii)(A) of this   income attributable to that amount) is dis-
section provides that a benefit payment at-        regarded to the extent the amount is attrib-
tributable to an amount deferred under a           uted to benefit payments made before the
nonqualified deferred compensation plan            resolution date. Thus, Employer P must re-
must be included as wages when actually or         duce the $1,000,000 taken into account in 2004
constructively paid if the amount deferred         (plus income attributable to that amount)
has not been taken into account as wages           based upon the two benefit payments
under the special timing rule of paragraph         ($750,000 and $400,000) that were excluded
(a)(2) of this section. Thus, the benefit pay-     from wages. Using an interest rate of 10 per-
ments in 2006 and 2007 must be included as         cent, Employer P determines that the
wages when paid.                                   amount taken into account in 2004 plus in-
  (iv) As of December 31, 2007, all of the         terest to the resolution date and reduced
amount deferred under the plan becomes rea-        based upon the two benefit payments is
sonably ascertainable because the amount of        $15,228 and the additional amount that is re-
the benefit payable attributable to the            quired to be taken into account as of Decem-
amount deferred is treated as known under          ber 31, 2007, is $72,653 ($87,881–$15,228).
paragraph (e)(4)(i)(B) of this section, and the       Example 16. (i) Employee E obtains a fully
only assumption needed to determine the            vested, legally binding right during 2002,
present value of the future benefits is inter-     2003, and 2004 to payments from a non-
est. However, since Employer P was required        qualified deferred compensation plan of Em-
to treat the payments in 2006 and 2007 as          ployer Q under which the benefits are based
wages when paid under the general timing           on a formula that includes an actuarial off-
rule of paragraph (a)(1) of this section, only     set by the account balance under a qualified
the present value of the payment to be made        defined contribution plan of Employer Q as
in 2008 is required to be taken into account       of December 31, 2004. The payments from the
as of the resolution date (December 31, 2007)      nonqualified deferred compensation plan are
under the special timing rule of paragraph         to commence on December 31, 2005. At the
(a)(2) of this section. Using an interest rate     resolution date for the amounts earned dur-
of 10 percent per year (which, solely for pur-     ing 2002, 2003, and 2004, which is December 31,
poses of this Example 14, is assumed to be         2004, Employee E has a legally binding right
reasonable), Employer P determines that on         to a net annual benefit of $100,000 payable for
December 31, 2007, the present value of the        life to commence on December 31, 2005. On
future benefits is $87,881, and Employer P in-     the resolution date, Employer Q determines
cludes that additional amount in wages for         that on December 31, 2002, Employee E had a
2007. (Note that Employer P can choose to          legally binding right to receive $100,000 annu-
use the lag method of withholding described        ally for life beginning on December 31, 2005
in paragraph (f)(3) of this section, which al-     (as a result of the gross benefit under the
lows the resolution date amount to be taken        nonqualified plan being $120,000 annually for
into account no later than March 31, 2008,         life, and the offset being $20,000 annually for
provided that the amount deferred is in-           life, as of December 31, 2002). On December
creased by interest using the AFR for Janu-        31, 2003, Employee E had a legally binding
ary of 2008.)                                      right to receive $95,000 annually for life be-
  Example 15. (i) The facts are the same as in     ginning on December 31, 2005 (as a result of
Example 14, except that Employer P chooses         the gross benefit under the nonqualified plan
the early inclusion option permitted by para-      being $135,000 annually for life, and the offset
graph (e)(4)(ii) of this section to take           being $40,000 annually for life, as of Decem-
$1,000,000 into account on December 31, 2004,      ber 31, 2003). On December 31, 2004, Employee
before the amount deferred for 2004 is reason-     E had a legally binding right to receive
ably ascertainable.                                $100,000 annually for life beginning on De-
  (ii) Pursuant to paragraph (e)(4)(ii)(E) of      cember 31, 2005 (as a result of the gross ben-
this section, in applying the nonduplication       efit under the nonqualified plan being
rule of paragraph (a)(2)(iii) of this section, a   $145,000 annually for life, and the offset being

                                               127
§ 31.3121(v)(2)-1                                             26 CFR Ch. I (4–1–99 Edition)
$45,000 annually for life, as of December 31,      amount deferred on the date on which
2004).                                             the amount is taken into account in
  (ii) In this case, pursuant to paragraph         accordance with paragraph (e) of this
(e)(4)(ii)(D)(4) of this section, Employer Q
can attribute the entire $100,000 life annuity
                                                   section and take that estimated
to the amount deferred for 2002, even though       amount into account as wages paid by
Employee E’s benefit under the nonqualified        the employer and received by the em-
deferred compensation plan is reduced to           ployee on that date (the estimate
$95,000 in 2003.                                   date), for purposes of withholding and
  Example 17. (i) In 2010, Employee F per-         depositing FICA tax.
forms services for which she earns a right to        (ii) Underestimate of the amount de-
10 percent of the proceeds from the sale of a      ferred—(A) General rule. If the em-
motion picture. In 2011, Employee F per-
forms services for which she earns a right to
                                                   ployer underestimates the amount de-
10 percent of the proceeds from the sale of        ferred (as determined after calculating
another motion picture. These proceeds are         the actual amount deferred that should
calculated by subtracting the total adver-         have been taken into account as of the
tising expenses for both movies. Payment is        date on which the amount was taken
to be made in the year following the date on       into account in accordance with para-
which both pictures have been sold, but not        graph (e) of this section, using an in-
later than 2018. At the end of 2010, the adver-    terest rate and other actuarial assump-
tising expenses for both pictures totaled
$300,000. The first motion picture is sold for
                                                   tions that are reasonable as of that
$10,000,000 in 2014. The second motion picture     date), the employer may treat the
is sold for $17,000,000 in 2017. At the end of     shortfall as wages paid as of the esti-
2017, the advertising expenses totaled             mate date or as of any date that is no
$1,700,000. In 2018, Employee F is paid            later than three months after the esti-
$2,530,000 (10 percent of the sum of $10,000,000   mate date. In either case, the shortfall
and $17,000,000 minus $1,700,000).                 does not include the income credited to
  (ii) Pursuant to paragraph (e)(4)(ii)(D)(4) of
                                                   the amount deferred after the amount
this section, $970,000 (10 percent of the excess
of the gross proceeds from the sale of the         is taken into account in accordance
first motion picture at the resolution date in     with paragraph (e) of this section.
2017 over the advertising expenses incurred          (B) Shortfall is treated as wages paid on
at the end of 2010) of the payment made in         a date after the estimate date. If the em-
2018 can be attributed to the amount de-           ployer chooses to treat the shortfall as
ferred in 2010 (and with the remaining pay-        wages paid on a date that is no later
ment of $1,560,000 to be attributed to the         than three months after the estimate
amount deferred in 2011).
                                                   date, the employer must take that
   (f) Withholding—(1) In general. Unless          shortfall into account as wages paid by
an employer applies an alternative                 the employer and received by the em-
method described in paragraph (f)(2) or            ployee on that date, for purposes of
(3) of this section, an amount deferred            withholding and depositing FICA tax.
under a nonqualified deferred com-                   (C) Shortfall is treated as wages paid on
pensation plan for any employee is                 the estimate date. If the employer choos-
treated, for purposes of withholding               es to treat the shortfall as wages paid
and depositing FICA tax, as wages paid             as of the estimate date, the shortfall is
by the employer and received by the                treated as an error for purposes of
employee at the time it is taken into              withholding and depositing FICA tax.
account in accordance with paragraph               Appropriate adjustments may be made
(e) of this section. However, paragraphs           in accordance with section 6205(a) and
(f)(2) and (3) of this section provide al-         the regulations thereunder; however,
ternative methods which may be used                for purposes of § 31.6205–1(b), the error
with respect to an amount deferred for             need not be treated as ascertained be-
an employee. An employer is not re-                fore the date that is three months after
quired to be consistent in applying the            the estimate date.
alternatives described in this para-                 (D) Reporting. The employer must re-
graph (f) with respect to different em-            port the shortfall as wages on Form
ployees or amounts deferred.                       941, Employer’s Quarterly Federal Tax
   (2) Estimated method—(i) In general.            Return (and, if applicable, Form 941c,
Under the alternative method provided              Supporting Statement to Correct Infor-
in this paragraph (f)(2), the employer             mation) and Form W–2, Wage and Tax
may make a reasonable estimate of the              Statement (or, if applicable, Form W–

                                               128
Internal Revenue Service, Treasury                                        § 31.3121(v)(2)-1

2c, Corrected Wage and Tax Statement)          section, Employer M makes a reasonable es-
in accordance with its treatment of the        timate that the amount deferred that must
shortfall under paragraph (f)(2)(ii) (B)       be taken into account as of December 31,
                                               2003, for Employee A is $20,000, and withholds
or (C) of this section.                        and deposits FICA tax on that amount as if
   (iii) Overestimate of the amount de-        it were wages paid by Employer M and re-
ferred. If the employer overestimates          ceived by Employee A on that date. In Janu-
the amount deferred (as determined             ary of 2004, Employer M files and furnishes
after calculating the actual amount de-        Form W–2 for Employee A including the
ferred that should have been taken into        $20,000 in FICA wages. On March 3, 2004, Em-
account as of the date on which the            ployer M determines that the actual amount
amount was taken into account in ac-           deferred that should have been taken into
                                               account on December 31, 2003, was $22,000.
cordance with paragraph (e) of this sec-         (iii) In accordance with the alternative
tion, using an interest rate and actu-         method described in paragraph (f)(2)(ii) of
arial assumptions that are reasonable          this section, Employer M may treat the addi-
as of that date) and deposits more than        tional $2,000 as wages paid to and received by
the amount required, the employer              Employee A on December 31, 2003, the esti-
may claim a refund or credit in accord-        mate date. Employer M may treat the $2,000
ance with sections 6402, 6413, and 6511.       shortfall as an error ascertained on March 3,
                                               2004, and withhold and deposit FICA tax on
A Form 941c, or an equivalent state-
                                               that amount. Form W–2c for Employee A for
ment, must accompany each claim for            2003 must include the $2,000 shortfall in FICA
refund. In addition, Form W–2 or, if ap-       wages. Employer M must also correct the in-
plicable, Form W–2c must also reflect          formation on Form 941 for the last quarter of
the actual amount deferred that should         2003, reporting the adjustment on Form 941
have been taken into account.                  for the first quarter of 2004, accompanied by
   (3) Lag method. Under the alternative       Form 941c for the last quarter of 2003.
                                                 (iv) Instead, Employer M may treat the
method provided in this paragraph
                                               $2,000 shortfall as wages paid on March 31,
(f)(3), an amount deferred, plus inter-        2004, and withhold and deposit FICA tax on
est, may be treated as wages paid by           that amount as if it were wages paid by Em-
the employer and received by the em-           ployer M and received by Employee A on
ployee, for purposes of withholding and        that date. Form W–2 for Employee A for 2004
depositing FICA tax, on any date that          and Form 941 for the first quarter of 2004
is no later than three months after the        must include the $2,000 shortfall in FICA
date the amount is required to be              wages.
                                                 Example 2. (i) The facts are the same as in
taken into account in accordance with          Example 1, except that on March 3, 2004, Em-
paragraph (e) of this section. For pur-        ployer M determines that the actual amount
poses of this paragraph (f)(3), the            deferred that should have been taken into
amount deferred must be increased by           account on December 31, 2003, was $19,000.
interest through the date on which the           (ii) Under paragraph (f)(2)(iii) of this sec-
wages are treated as paid, at a rate           tion, Employer M may, in accordance with
that is not less than AFR. If the em-          sections 6402, 6413, and 6511, claim a refund or
                                               credit for the overpayment of tax resulting
ployer withholds and deposits FICA tax         from the overestimate. In addition, Em-
in accordance with this paragraph              ployer M must file and furnish a Form W–2c
(f)(3), the employer will be treated as        for Employee A and must correct the infor-
having taken into account the amount           mation on Form 941 for the last quarter of
deferred plus income to the date on            2003.
which the wages are treated as paid.             Example 3. (i) The facts are the same as in
   (4) Examples. This paragraph (f) is il-     Example 1, except that Employer M does not
lustrated by the following examples:           make a reasonable estimate of the amount
                                               deferred that must be taken into account as
  Example 1. (i) Employer M maintains a non-   of December 31, 2003. Instead, Employer M
qualified deferred compensation plan that is   withholds and deposits FICA tax on the
an account balance plan. The plan provides     amount deferred plus interest on that
for annual bonuses based on current year       amount using AFR (for January 2004) as if it
profits to be deferred until termination of    were wages paid by Employer M and received
employment. Employer M’s profits for 2003,     by Employee A on March 15, 2004.
and thus the amount deferred, is reasonably      (ii) Under the alternative method described
ascertainable, but Employer M calculates       in paragraph (f)(3) of this section, the
the amount deferred on March 3, 2004, when     amount taken into account on March 15, 2004
the relevant data is available.                (including the interest), will be treated as
  (ii) In accordance with the alternative      FICA wages paid to and received by Em-
method described in paragraph (f)(2) of this   ployee A on March 15, 2004.

                                           129
§ 31.3121(v)(2)-1                                            26 CFR Ch. I (4–1–99 Edition)
  Example 4. (i) The facts are the same as in     facts and circumstances, including con-
Example 1, except that an amount is also de-      sistency of treatment by the employer
ferred for Employee B which is required to be     and the extent to which the employer
taken into account on October 15, 2003, and
                                                  has resolved unclear issues in its favor.
Employer M chooses to use the lag method
in paragraph (f)(3) of this section in order to     (ii) Plan must be established or adopted.
provide time to calculate the amount de-          If an amount is deferred under a plan
ferred.                                           before January 1, 2000, and benefit pay-
  (ii) Employer M may use any date not later      ments attributable to that amount are
than January 15, 2004, to take the amount         actually or constructively paid on or
deferred into account (provided that the          after January 1, 2000, then in no event
amount deferred includes interest, at AFR         will an employer’s treatment of the
for January 1, 2003, through December 31,         amount deferred be considered to be in
2003, and at AFR for January 1, 2004, through
January 15, 2004).
                                                  accordance with a reasonable, good
                                                  faith interpretation of section 3121(v)(2)
  (g) Effective date and transition rules—        if the employer treats that amount as
(1) General effective date. Except for            taken into account as wages for FICA
paragraphs (g)(2) through (4) of this             tax purposes prior to the establishment
section, this section is applicable on            of the plan (within the meaning of
and after January 1, 2000. Thus, para-            paragraph (b)(2) of this section) pro-
graphs (a) through (f) of this section            viding for the deferred compensation
apply to amounts deferred on or after             (or, if later, the establishment of the
January 1, 2000; to amounts deferred              plan as amended to provide for the de-
before January 1, 2000, which cease to            ferred compensation, as provided in
be subject to a substantial risk of for-          paragraph (b)(2)(ii) of this section). If
feiture on or after January 1, 2000, or           an amount is deferred under a plan be-
for which a resolution date occurs on             fore January 1, 2000, and benefit pay-
or after January 1, 2000; and to benefits         ments attributable to that amount are
actually or constructively paid on or             actually or constructively paid before
after January 1, 2000.                            January 1, 2000, then in no event will
  (2) Reasonable, good faith interpreta-          the employer’s treatment of that
tion for amounts deferred and benefits            amount deferred be considered to be in
paid before January 1, 2000—(i) In gen-           accordance with a reasonable, good
eral. For periods before January 1, 2000          faith interpretation of section 3121(v)(2)
(including amounts deferred before                if the employer treats that amount as
January 1, 2000, and any benefits actu-           taken into account as wages for FICA
ally or constructively paid before Jan-           tax purposes prior to the adoption of
uary 1, 2000, that are attributable to            the plan providing for the deferred
those amounts deferred), an employer              compensation (or, if later, the adoption
may rely on a reasonable, good faith              of the plan amendment providing the
interpretation of section 3121(v)(2), tak-        deferred compensation). For example,
ing into account pre-existing guidance.           awards, bonuses, raises, incentive pay-
An employer will be deemed to have                ments, and other similar amounts
determined FICA tax liability and sat-            granted under a plan as compensation
isfied FICA withholding requirements              for past services may not be taken into
in accordance with a reasonable, good             account under section 3121(v)(2) prior
faith interpretation of section 3121(v)(2)        to the establishment (or, if applicable,
if the employer has complied with                 the adoption) of the plan.
paragraphs (a) through (f) of this sec-             (iii) Certain changes in position for
tion. For purposes of paragraphs (g)(2)           stock options, stock appreciation rights,
through (4) of this section, and subject          and other stock value rights not reason-
to paragraphs (g)(2)(ii) and (iii) of this        able, good faith interpretation. In the
section, whether an employer that has             case of a stock option, stock apprecia-
not complied with paragraphs (a)                  tion right, or other stock value right
through (f) of this section has deter-            (as defined in paragraph (b)(4)(ii) of
mined FICA tax liability and satisfied            this section) that is exercised before
FICA withholding requirements in ac-              January 1, 2000, an employer that
cordance with a reasonable, good faith            treats the exercise as not subject to
interpretation of section 3121(v)(2) will         FICA tax as a result of the nonduplica-
be determined based on the relevant               tion rule of section 3121(v)(2)(B) is not

                                              130
Internal Revenue Service, Treasury                                      § 31.3121(v)(2)-1

acting in accordance with a reasonable,        been due on the benefits actually or
good faith interpretation of section           constructively paid to the employee in
3121(v)(2) if the employer has not treat-      those periods under the plan if those
ed that grant and all earlier grants as        benefits were included in FICA wages
subject to section 3121(v)(2) by report-       when paid. If any benefit payments at-
ing the current value of such options          tributable to amounts deferred after
and rights as FICA wages on Form 941           December 31, 1993, were actually or
filed for the quarter during which each        constructively paid to an employee
grant was made (or, if later, for the          under a nonqualified deferred com-
quarter during which each grant ceased         pensation plan (within the meaning of
to be subject to a substantial risk of         paragraph (b)(1) of this section) in a
forfeiture).                                   pre-effective-date open period, but
   (3) Optional adjustments to conform         these payments were treated as subject
with this section for pre-effective-date       to FICA tax because the employer
open periods—(i) General rule. If an em-       treated the plan as not being a non-
ployer determined FICA tax liability           qualified deferred compensation plan,
with respect to section 3121(v)(2) in any      then the employer may claim a refund
period ending before January 1, 2000,          or credit for the FICA tax paid on
for which the applicable period of limi-       those benefit payments only to the ex-
tations has not expired on January 1,          tent that the FICA tax paid on those
2000 (pre-effective-date open periods),        benefit payments exceeds the FICA tax
in a manner that was not in accordance         that would have been due on the
with this section, the employer may            amounts deferred to which those ben-
adjust its FICA tax determination for          efit payments are attributable if those
that period to conform to this section.        amounts deferred had been taken into
Thus, if an amount deferred was taken          account when they would have been re-
into account in a pre-effective-date           quired to have been taken into account
open period when it was not required to        under this section (if this section had
be taken into account (e.g., an amount         been in effect then).
taken into account before it became               (iii) Reporting. Any employer that ad-
reasonably ascertainable), the em-             justs its FICA tax determination in ac-
ployer may claim a refund or credit for        cordance with paragraphs (g)(3)(i) and
any FICA tax paid on that amount to            (ii) of this section must make appro-
the extent permitted by sections 6402,         priate adjustments on Form 941 and
6413, and 6511.                                Form 941c for the affected periods, and,
   (ii) Consistency required. In the case of   in addition, must file and furnish Form
a plan that is not a nonqualified de-          W–2, or, if applicable, Form W–2c, for
ferred compensation plan (within the           any affected employee so that the So-
meaning of paragraph (b)(1) of this sec-       cial Security Administration may cor-
tion), if any payment was actually or          rectly post the amount deferred to the
constructively paid to an employee             employee’s earnings record. The ad-
under the plan in a pre-effective-date         justments may be made in accordance
open period and that payment was not           with section 6205(a) and the regulations
included in FICA wages by reason of            thereunder; however, for purposes of
the employer’s treatment of the plan           § 31.6205–1(b), the error is not required
as a nonqualified deferred compensa-           to be treated as ascertained before
tion plan, then the employer may               March 31, 2000.
claim a refund or credit for FICA tax             (4) Application of reasonable, good faith
paid on amounts treated as amounts             standard—(i) Plans that are not subject to
deferred under the plan (in accordance         section 3121(v)(2). If a plan is not a non-
with the employer’s treatment of the           qualified deferred compensation plan
plan as a nonqualified deferred com-           within the meaning of paragraph (b)(1)
pensation plan) for that employee for          of this section, but, for a period ending
pre-effective-date open periods only to        prior to January 1, 2000, and, pursuant
the extent that the FICA tax paid on           to a reasonable, good faith interpreta-
all amounts treated as amounts de-             tion of section 3121(v)(2), an amount
ferred for the employee in all pre-effec-      under the plan was taken into account
tive-date open periods under the plan          (within the meaning of paragraph (d)(1)
exceeds the FICA tax that would have           of this section) as an amount deferred

                                           131
§ 31.3121(v)(2)-1                                      26 CFR Ch. I (4–1–99 Edition)

under a nonqualified deferred com-            (C) General timing rule applicable. In
pensation plan, then, pursuant to para-     accordance with paragraph (d)(1)(ii) of
graph (g)(2) of this section, the fol-      this section, except as provided in
lowing rules shall apply—                   paragraphs (g)(4)(ii) (D) and (E), the
   (A) With respect to benefit payments     general timing rule described in para-
actually or constructively paid before      graph (a)(1) of this section applies to
January 1, 2000, that are attributable      benefits actually or constructively
to amounts previously taken into ac-        paid on or after January 1, 2000, attrib-
count under the plan, no additional         utable to an amount deferred in a pe-
FICA tax will be due;                       riod before January 1, 2000, to the ex-
   (B) On or after January 1, 2000, ben-    tent the amount taken into account
efit payments under the plan must be        was less than the amount that would
taken into account as wages when ac-        have been required to be taken into ac-
tually or constructively paid in accord-    count if paragraphs (a) through (f) of
ance with paragraph (a)(1) of this sec-     this section had been in effect before
tion; and                                   January 1, 2000.
   (C) To the extent permitted by para-       (D) Special rule for amounts deferred
graph (g)(3) of this section, the em-       before 1994. The difference between the
ployer may claim a refund or credit for     amount that was taken into account in
FICA tax actually paid on amounts           any period ending prior to January 1,
taken into account prior to January 1,      1994, and the amount that would have
2000.                                       been required or permitted to be taken
   (ii) Plans that are subject to section   into account in that period if para-
3121(v)(2) for which the amount deferred    graphs (a) through (f) of this section
has not been fully taken into account—      had been in effect is treated as if it had
(A) In general. The rules of paragraphs     been taken into account within the
(g)(4)(ii)(B) through (E) of this section   meaning of paragraph (d)(1) of this sec-
apply if a plan is a nonqualified de-       tion. For example, in the case of an
ferred compensation plan (within the        amount deferred before 1994 that was
meaning of paragraph (b)(1) of this sec-    not reasonably ascertainable (and
tion) and, with respect to an amount        which was not subject to a substantial
deferred under the plan for an em-          risk of forfeiture), the employer is
ployee prior to January 1, 2000, the em-    treated as if it had anticipated the ac-
ployer, in accordance with a reason-        tual amount, form, and commencement
able, good faith interpretation of sec-     date for the benefit payments attrib-
tion 3121(v)(2), either took into account   utable to the amount deferred and had
an amount that is less than the             taken the amount deferred into ac-
amount that would have been required        count at an early inclusion date before
to be taken into account if paragraphs      1994 using a method permitted under
(a) through (f) of this section had been    this section. Thus, with respect to such
in effect for that period or took no        an amount deferred, the employer is
amount into account. Thus, paragraphs       not required to take any additional
(g)(4)(ii)(B) through (E) of this section   amount into account when the amount
apply both to an employer that treated      deferred becomes reasonably ascertain-
the plan as if it were not a nonqualified   able, and no additional FICA tax will
deferred compensation plan within the       be due when the benefit payments at-
meaning of section 3121(v)(2) (by with-     tributable to the amount deferred are
holding and paying FICA tax due on          actually or constructively paid.
benefits actually or constructively           (E) Special rule for amounts required to
paid under the plan during that period,     be taken into account in 1994 or 1995. In
if any) and to an employer that treated     the case of an amount deferred that
the plan as a nonqualified deferred         would have been required to be taken
compensation plan within the meaning        into account in 1994 or 1995 if para-
of section 3121(v)(2).                      graphs (a) through (f) of this section
   (B) No additional tax required. Pursu-   had been in effect, an employer will be
ant to paragraph (g)(2) of this section,    treated as taking the amount deferred
no additional FICA tax will be due for      into account under paragraph (d)(1) of
any period ending prior to January 1,       this section to the extent the employer
2000.                                       takes the amount into account by

                                        132
Internal Revenue Service, Treasury                                            § 31.3121(v)(2)-1

treating it as wages paid by the em-                (g)(3) of this section to apply this section to
ployer and received by the employee as              1996 and 1997 before the January 1, 2000, gen-
of any date prior to April 1, 2000.                 eral effective date.
                                                      (ii) Under this section, the amounts de-
  (iii) Plans that are subject to section           ferred in 1996 and 1997 are not reasonably as-
3121(v)(2) for which more than the                  certainable (within the meaning of para-
amount deferred has been taken into ac-             graph (e)(4)(i) of this section) before January
count. If a plan is a nonqualified de-              1, 2000. Thus, as long as the applicable period
ferred compensation plan (within the                of limitations has not expired for the periods
meaning of paragraph (b)(1) of this sec-            in 1996 and 1997, Employer M may, to the ex-
tion) and an amount was taken into ac-              tent permitted under paragraph (g)(3) of this
                                                    section, apply for a refund or credit for the
count under the plan for an employee                HI tax paid on the amounts deferred for 1996
before January 1, 2000, in accordance               and 1997 and, in accordance with paragraph
with a reasonable, good faith interpre-             (e)(4) of this section, take into account the
tation of section 3121(v)(2), but that              amounts deferred when they become reason-
amount could not have been taken into               ably ascertainable.
account before January 1, 2000, if para-              Example 2. (i) Employer N adopts a plan on
graphs (a) through (f) of this section              January 1, 1994, that covers Employee B, who
                                                    has 10 years of service as of that date. The
had been in effect then, the following
                                                    plan provides that, in consideration of Em-
rules apply—                                        ployee B’s outstanding services over the past
  (A) The determination of the amount               10 years, Employee B will be paid a $500,000
deferred for any period beginning on or             lump sum distribution upon termination of
after January 1, 2000, must be made in              employment at any time. On January 15,
accordance with paragraph (c) of this               1996, Employee B terminates employment
section, and the time when amounts                  with Employer N. Employer N determines,
deferred under the plan are required to             based on a reasonable, good faith interpreta-
                                                    tion of section 3121(v)(2), that the plan is a
be taken into account must be deter-                nonqualified deferred compensation plan
mined in accordance with paragraph (e)              under that section. Employer N treats the
of this section, without regard to any              $500,000 as having been taken into account as
such amount that was taken into ac-                 an amount deferred in 1993 and earlier years.
count for any period ending before Jan-               (ii) Under paragraph (g)(2)(ii) of this sec-
uary 1, 2000; and                                   tion, if all amounts are deferred and all bene-
  (B) To the extent permitted by sec-               fits are paid under a plan before January 1,
                                                    2000, then in no event will an employer’s
tions 6402, 6413, and 6511, the employer            treatment of amounts deferred under the
may claim a refund or credit for an                 plan be considered to be in accordance with
overpayment of tax caused by the over-              a reasonable, good faith interpretation of
inclusion of wages that occurred before             section 3121(v)(2) if the employer treats these
January 1, 2000.                                    amounts as taken into account as wages for
  (5) Examples. This paragraph (g) is il-           FICA tax purposes prior to the adoption of
lustrated by the following examples:                the plan. Accordingly, Employer N’s treat-
                                                    ment is not in accordance with a reasonable,
  Example 1. (i) In 1996, Employer M estab-         good faith interpretation of section 3121(v)(2)
lishes a nonqualified deferred compensation         because Employer N treated amounts as
plan that is a nonaccount balance plan for          taken into account in years before the adop-
Employee A. All benefits under the plan are         tion of the plan. As a result, the payment
100 percent vested. In order to determine the       made to Employee B in 1996 was subject to
amount deferred on behalf of Employee A             both the OASDI and HI portions of FICA tax
under the plan for 1996 and 1997, Employer M        when paid.
must make assumptions as to the date on               Example 3. (i) Employer O adopts a bonus
which Employee A will retire and the form of        plan on December 1, 1993, that becomes effec-
benefit Employee A will elect, in addition to       tive and legally binding on January 1, 1994.
interest, mortality, and cost-of-living as-         Under the plan, which is not set forth in
sumptions. Based on assumptions made with           writing, a specified bonus amount (which is
respect to all of these contingencies, Em-          100 percent vested) is credited to Employee
ployer M determines that the amount de-             C’s account each December 31. A reasonable
ferred for 1996 is $50,000 and the amount de-       rate of interest on Employee C’s account bal-
ferred for 1997 is $55,000. In 1996 and 1997, Em-   ance is credited quarterly. Employee C’s ac-
ployee A’s total wages (without regard to the       count balance will begin to be paid in equal
amounts deferred) exceed the OASDI wage             annual installments over 10 years beginning
bases. Employer M withholds and deposits HI         on January 1, 2000. Employer O determines,
tax on the $50,000 and $55,000 amounts. Em-         based on a reasonable, good faith interpreta-
ployee A does not retire before January 1,          tion of section 3121(v)(2), that the bonus plan
2000. Employer M chooses under paragraph            is a nonqualified deferred compensation plan

                                                133
§ 31.3121(v)(2)-1                                             26 CFR Ch. I (4–1–99 Edition)
under that section and, therefore, treats the     does not treat the $50,000 payment in 1995 as
amounts credited from January 1, 1994,            wages for FICA tax purposes in that year.
through December 31, 1999, as amounts de-           (iii) Because amounts under a plan were
ferred and, in accordance with a reasonable,      taken into account (within the meaning of
good     faith   interpretation    of   section   paragraph (d)(1) of this section) as amounts
3121(v)(2), takes those amounts deferred into     deferred under a nonqualified deferred com-
account as wages for FICA tax purposes as of      pensation plan pursuant to a reasonable,
those dates. The bonus plan is set forth in       good      faith   interpretation    of    section
writing on May 1, 1999, and, thus, is treated     3121(v)(2)(A), but that plan is not a non-
as established as of January 1, 1994.             qualified deferred compensation plan within
  (ii) Under paragraph (g)(2)(ii) of this sec-    the meaning of paragraph (b)(1) of this sec-
tion, if an amount is deferred before January     tion, the transition rules provided in para-
1, 2000, and the attributable benefit is paid     graph (g)(4)(i) of this section apply. Thus, no
on or after January 1, 2000, then in no event     additional FICA tax will be due on the bene-
will an employer’s treatment of the amount        fits paid in 1995.
deferred under a plan be considered to be in
                                                    (iv) Because $290 of HI tax was paid on the
accordance with a reasonable, good faith in-
                                                  amount deferred in 1994, Employer P is enti-
terpretation of section 3121(v)(2) if the em-
ployer treats the amount deferred as taken        tled to a refund or credit for that amount to
into account as wages for FICA tax purposes       the extent permitted under sections 6402,
prior to the establishment of the plan (with-     6413, and 6511—but only to the extent that
in the meaning of paragraph (b)(2) of this        $290 exceeds the FICA tax that would have
section). Because the bonus plan is treated       been due on the $50,000 payment in 1995 if
as established on January 1, 1994 (pursuant       that payment had been subject to FICA tax
to the transition rule for unwritten plans in     when paid (i.e., if paragraphs (a) through (f)
paragraph (b)(2)(iii) of this section), and be-   of this section had been effective for those
cause Employer O, in accordance with a rea-       years). In 1995, Employee D had other wages
sonable, good faith interpretation of section     of $60,000. Thus, only $1,200 (the $61,200
3121(v)(2), took amounts deferred into ac-        OASDI wage base, less the $60,000 of other
count in 1994 through 1999, the amounts paid      wages) of the $50,000 payment would have
to Employee C attributable to those               been subject to OASDI; the full $50,000 would
amounts deferred will not be subject to FICA      have been subject to HI. This would have re-
tax when paid.                                    sulted in $148.80 of OASDI tax ($1,200 x 12.4
  Example 4. (i) In 1985, Employer P estab-       percent) and $1,450 of HI tax ($50,000 x 2.9 per-
lishes a compensation arrangement for Em-         cent). Employer P is not entitled to a refund
ployee D that provides for a lump sum pay-        or credit under the consistency rule of para-
ment to be made after termination of em-          graph (g)(3)(ii) because the $290 of HI tax paid
ployment but the arrangement is not a non-        in 1994 is less than the total $1,598.80 of FICA
qualified deferred compensation plan (within      tax liability that would have resulted if this
the meaning of paragraph (b)(1) of this sec-      section had applied for 1995.
tion). However, prior to January 1, 2000, and       (v) However, if the benefit payment is in-
in accordance with a reasonable, good faith       stead actually or constructively paid on or
interpretation of section 3121(v)(2), Employer
                                                  after January 1, 2000, the benefit payment
P treats the arrangement as a nonqualified
                                                  must be taken into account as wages when
deferred compensation plan under section
                                                  actually or constructively paid in accord-
3121(v)(2). Employer P determines that Em-
                                                  ance with the general timing rule of para-
ployee D’s total wages (without regard to the
amount deferred) for each year from 1985          graph (a)(1) of this section (and paragraph
through 1993 exceed the applicable OASDI          (g)(4)(i)(B) of this section).
and HI wage bases for each of those years           Example 5. (i) In 1985, Employer Q estab-
and, consequently, there is no FICA tax li-       lishes a compensation arrangement for Em-
ability with respect to the amounts deferred      ployee E that is a nonqualified deferred com-
for those years. In 1994, Employee D’s total      pensation plan within the meaning of para-
wages (without regard to the amount de-           graph (b)(1) of this section. However, prior to
ferred) exceed the OASDI wage base. How-          January 1, 2000, Employer Q determines,
ever, because there is no limit on the HI         based on a reasonable, good faith interpreta-
wage base, the amount deferred for 1994 re-       tion of section 3121(v)(2), that the arrange-
sults in additional HI tax liability of $290,     ment is not a nonqualified deferred com-
which is timely paid by Employer P.               pensation plan within the meaning of that
  (ii) Employee D terminates employment           section. Thus, when Employee E retires at
with Employer P in 1995 and receives a plan       the end of 1996 and benefit payments under
payment of $50,000. In that year, Employee D      the arrangement begin in 1997, Employer Q
also receives wages of $60,000 from Employer      withholds and deposits FICA tax on the
P. In accordance with its treatment of the        amounts paid to Employee E. Payments
plan as a nonqualified deferred compensation      under the arrangement continue on or after
plan under section 3121(v)(2), Employer P         January 1, 2000. Employer Q does not choose

                                              134
Internal Revenue Service, Treasury                                            § 31.3121(v)(2)-1
(under paragraph (g)(3) of this section) to ad-    tion 3121(v)(2). Thus, the transition rules pro-
just its FICA tax determination for a pre-ef-      vided in paragraphs (g)(3) and (4) of this sec-
fective-date open period by treating this sec-     tion do not apply. As a result, any amount
tion as in effect for all amounts deferred and     that would have been required to have been
benefits actually or constructively paid for       taken into account under this section before
any such period. The periods in 1994 and 1995      1994 is not treated as if it had been so taken
are not pre-effective-date open periods for        into account under paragraph (g)(4)(ii)(D) of
Employer Q.                                        this section, and benefit payments attrib-
  (ii) Under paragraph (g)(4)(ii) of this sec-     utable to amounts deferred before January 1,
tion, for purposes of determining whether          2000, are treated as FICA wages when actu-
benefits actually or constructively paid on        ally or constructively paid in accordance
or after January 1, 2000, were previously          with the general timing rule of paragraph
taken into account for purposes of applying        (a)(1) of this section.
the     nonduplication     rule    of   section      Example 8. (i) In 1993, Employer R estab-
3121(v)(2)(B), any amount that would have          lishes a nonqualified deferred compensation
been required to have been taken into ac-          plan for Employee F under which Employee
count before 1994 will be treated as if it had     F will have a fully vested right to receive a
been taken into account within the meaning         lump sum payment in 2000 equal to 50 per-
of paragraph (d)(1) of this section. Under the     cent of Employee F’s highest rate of salary.
nonduplication rule, benefit payments at-          On December 31, 1993, Employee F’s highest
tributable to an amount that has been so           salary is $1 million. In accordance with a
treated as taken into account is not treated       reasonable, good faith interpretation of sec-
as wages for FICA tax purposes at any later        tion 3121(v)(2), Employer R determines that,
time (such as upon payment).                       for 1993, there is an amount deferred that
  (iii) Because Employer Q does not adjust         must be taken into account as wages for
its FICA tax determination by treating this        FICA tax purposes. Based on Employer R’s
section as in effect for all amounts deferred      estimate that Employee F’s highest salary
for periods ending after December 31, 1993,        will be $3 million in 2000, Employer R deter-
any benefit payments attributable to               mines that the amount deferred is equal to
amounts deferred in periods ending after De-       the present value in 1993 of $1.5 million pay-
cember 31, 1993, will be included in wages         able in 2000. However, because Employee F
when actually or constructively paid in ac-        has other wages in 1993 that exceed the appli-
cordance with the general timing rule of           cable OASDI and HI wage bases for that
paragraph (a)(1) of this section.                  year, no additional FICA tax is paid as a re-
  Example 6. (i) The facts are the same as in      sult of that amount deferred being taken
Example 5, except that Employer Q chooses          into account for 1993. In addition, Employer
(in accordance with paragraph (g)(3) of this       R takes no amounts into account under the
section) to adjust its FICA tax determina-         plan after 1993 for Employee F. Under para-
tion for all pre-effective-date open periods by    graphs (e)(1) and (4)(ii)(D)(2) of this section,
treating this section as in effect for all         the largest amount that could have been
amounts deferred for those periods. In addi-       taken into account in 1993 is the present
tion, Employer Q chooses (in accordance            value of a lump sum payment of $500,000,
with paragraph (g)(4)(ii)(E) of this section) to   payable in 2000, because that is the max-
take the amounts deferred for 1994 and 1995        imum amount to which Employee F has a le-
into account by treating these amounts as          gally binding right as of December 31, 1993.
FICA wages paid and received by Employee E         Employee F’s highest salary is, in fact, $3
on January 15, 2000.                               million in 2000 and Employee F receives $1.5
  (ii) In accordance with the nonduplication       million under the plan on December 31, 2000.
rule of paragraph (a)(2)(iii) of this section,       (ii) In accordance with paragraphs (g)(1)
because all amounts deferred for Employee E        and (4)(iii)(A) of this section, the determina-
under the plan were taken into account (or         tion of the amount deferred under the plan
treated as taken into account), any benefit        for any period beginning on or after January
payments made to Employee E under the              1, 2000, and the time when that amount de-
plan will not be included as FICA wages            ferred is required to be taken into account
when actually or constructively paid.              must be determined in accordance with this
  Example 7. (i) The facts are the same as in      section. In addition, these determinations
Example 5, except that Employer Q does not         must be made without regard to any amount
withhold and deposit the FICA tax due on           deferred that was taken into account for any
benefits actually or constructively paid be-       period ending before January 1, 2000, that
fore January 1, 2000.                              could not be taken into account before Janu-
  (ii) Because Employer Q did not withhold         ary 1, 2000, if paragraphs (a) through (f) of
and deposit the FICA tax due on benefits ac-       this section had been in effect. Because no
tually or constructively paid before January       FICA tax was actually paid on that $1 mil-
1, 2000, Employer Q did not determine FICA         lion in 1993, no overpayment of tax was
tax liability and satisfy FICA tax with-           caused by the overinclusion of wages in 1993
holding requirements in accordance with a          and, thus, Employer R is not entitled to a re-
reasonable, good faith interpretation of sec-      fund or credit (even assuming that the period

                                               135
§ 31.3121(v)(2)–2                                             26 CFR Ch. I (4–1–99 Edition)
of limitations has been kept open for periods      ble to participate in a gap agreement
in 1993). In addition, because the difference      after December 31, 1983, is not an indi-
between the present value of the $1.5 million
                                                   vidual party to a gap agreement.
payment and the present value of a $500,000
payment was not taken into account for pe-            (5) Individual party to a March 24, 1983
riods beginning on or after January 1, 1994, $1    agreement. Individual party to a March
million must be included in FICA wages             24, 1983 agreement means an individual
under the general timing rule when paid.           who was eligible to participate in a
[64 FR 4547, Jan. 29, 1999; 64 FR 15687, Apr. 1,   March 24, 1983 agreement under the
1999]                                              terms of the agreement on March 24,
                                                   1983. An individual will be treated as an
§ 31.3121(v)(2)–2 Effective dates and              individual party to a March 24, 1983
     transition rules.
                                                   agreement even if the individual has
   (a) General statutory effective date. Ex-       not accrued any benefits under the
cept as otherwise provided in para-                plan by March 24, 1983, and regardless
graphs (b) through (e) of this section,            of whether the individual has taken
section 3121(v)(2) and the amendments              any specific action to become a party
made to section 3121(a)(2), (a)(3), and            to the agreement. However, an indi-
(a)(13) by the Social Security Amend-              vidual who becomes eligible to partici-
ments of 1983 (Pub. L. 98–21, 97 Stat.             pate in a March 24, 1983 agreement
65), as amended by section 2662(f)(2) of           after March 24, 1983, is not an indi-
the Deficit Reduction Act of 1984 (Pub.            vidual party to a March 24, 1983 agree-
L. 98–369, 98 Stat. 494), apply to                 ment.
amounts deferred and benefits paid                    (6) March 24, 1983 agreement. March 24,
after December 31, 1983.                           1983 agreement means an agreement in
   (b) Definitions. For purposes of
                                                   existence on March 24, 1983, between an
§ 31.3121(v)(2)–1 and this section, the fol-
                                                   individual and a nonqualified deferred
lowing definitions apply:
                                                   compensation plan within the meaning
   (1) FICA. FICA means the Federal In-
                                                   of § 31.3121(v)(2)–1(b). Such an agree-
surance Contributions Act (26 U.S.C.
                                                   ment does not fail to be a March 24,
3101 et seq.).
   (2) 457(a) plan. A 457(a) plan means an         1983 agreement merely because the
eligible deferred compensation plan of             terms of the plan are changed after
a State or local government or of a                March 24, 1983. In addition, for purposes
tax-exempt organization to which sec-              of this paragraph (b)(6) only, any plan
tion 457(a) applies.                               (or agreement) that provides for pay-
   (3) Gap agreement. Gap agreement                ments that qualify for one of the re-
means an agreement adopted after                   tirement payment exclusions is treated
March 24, 1983, and on or before Decem-            as a nonqualified deferred compensa-
ber 31, 1983, between an individual and            tion plan. For example, § 31.3121(v)(2)–
a nonqualified deferred compensation               1(b)(4)(v) provides that certain benefits
plan      within      the    meaning      of       established in connection with impend-
§ 31.3121(v)(2)–1(b). Such an agreement            ing termination do not result from the
does not fail to be a gap agreement                deferral of compensation and thus are
merely because the terms of the plan               not considered deferred under a non-
are changed after December 31,1983.                qualified deferred compensation plan.
   (4) Individual party to a gap agreement.        However, a plan that provides such
Individual party to a gap agreement                benefits and that was in existence on
means an individual who was eligible               March 24, 1983, is treated as a non-
to participate in a gap agreement on               qualified deferred compensation plan
December 31, 1983, under the terms of              for purposes of this paragraph (b) to
the agreement on that date. An indi-               the extent it provides benefits that
vidual will be treated as an individual            would have satisfied one of the retire-
party to a gap agreement even if the               ment payment exclusions.
individual has not accrued any benefits               (7) Retirement payment exclusions. Re-
under the plan by December 31, 1983,               tirement payment exclusions are the ex-
and regardless of whether the indi-                clusions from wages (for FICA tax pur-
vidual has taken any specific action to            poses) for retirement payments under
become a party to the agreement. How-              section      3121(a)(2)(A),   (a)(3),  and
ever, an individual who becomes eligi-             (a)(13)(A)(iii), as in effect on April 19,

                                               136
Internal Revenue Service, Treasury                                           § 31.3123–1

1983 (the day before enactment of the            (d) Determining transition benefit por-
Social Security Amendments of 1983).           tion. For purposes of determining the
   (8) Transition benefits. Transition bene-   portion of total benefits under a non-
fits are payments made after December          qualified deferred compensation plan
31, 1983, attributable to services ren-        that represents transition benefits, if,
dered before January 1, 1984. For this         under the terms of the plan, benefit
purpose, transition benefits are deter-        payments are not attributed to specific
mined without regard to any changes            years of service, the employer may use
made in the terms of the plan after            any reasonable method. For example, if
March 24, 1983, in the case of a March         a plan provides that the employee will
24, 1983 agreement or after December           receive benefits equal to 2 percent of
31, 1983, in the case of a gap agreement.      high 3-year average compensation mul-
   (c) Transition rules—(1) In general. Ex-    tiplied by years of service, and the em-
cept as provided in paragraph (c)(2) or        ployee retires after 25 years of service,
(3) of this section, the general statu-        9 of which are before 1984, the employer
tory effective date described in para-         may determine that 9/25 of the total
graph (a) of this section applies to ben-      benefit payments to be received begin-
efit payments after December 31, 1983.         ning in 2000 are transition benefits at-
Thus, except as provided in paragraph          tributable to services performed before
(c)(2) or (3) of this section, section         1984.
3121(v)(2) applies, and the retirement           (e) Order of payment. If an employer
payment exclusions do not apply, to            determines, in accordance with para-
benefit payments made after December           graph (d) of this section, that a portion
31, 1983, even if the benefit payments         of the total benefits under a non-
are made under a March 24, 1983 agree-         qualified deferred compensation plan
ment or a gap agreement.                       constitutes transition benefits, then,
   (2) Transition benefits under a March       for purposes of determining the portion
24, 1983 agreement. With respect to an         of each benefit payment that con-
individual party to a March 24, 1983           stitutes transition benefits, the em-
agreement, transition benefits paid            ployer must treat each benefit pay-
under that March 24, 1983 agreement            ment as consisting of transition bene-
(except for those paid under a 457(a)          fits in the same proportion as the tran-
plan) are not subject to the special           sition benefits that have not been paid
timing rule of section 3121(v)(2) and are      (as of January 1, 2000) bear to total
subject to section 3121(a) as in effect on     benefits that have not been paid (as of
April 19, 1983. Thus, transition benefits      January 1, 2000), unless such allocation
under a March 24, 1983 agreement (ex-          is inconsistent with the terms of the
cept for those under a 457(a) plan) to an      plan. However, for a benefit payment
individual party to a March 24, 1983           made before January 1, 2000, the em-
agreement are excluded from wages              ployer may use any reasonable alloca-
(for FICA tax purposes) only if they           tion method to determine the portion
qualify for any of the retirement pay-         of a payment that consists of transi-
ment exclusions (or any other exclu-           tion benefits, provided that the alloca-
sion provided under section 3121(a) as         tion method is consistent with the
in effect on April 19, 1983).                  terms of the plan.
   (3) Transition benefits under a gap         [64 FR 4567, Jan. 29, 1999]
agreement. With respect to an indi-
vidual party to a gap agreement, the           § 31.3123–1 Deductions by an employer
payor of transition benefits under the              from remuneration of an employee.
gap agreement must choose to either—              Any amount deducted by an em-
   (i) Take the transition benefits into       ployer from the remuneration of an
account as wages when paid; or                 employee is considered to be part of
   (ii) Take the amount deferred (within       the employee’s remuneration and is
the meaning of § 31.3121(v)(2)–1(c)) with      considered to be paid to the employee
respect to the transition benefits into        as remuneration at the time that the
account as wages under section                 deduction is made. It is immaterial
3121(v)(2) (as if section 3121(v)(2) had ap-   that any act of Congress or the law of
plied before its general statutory effec-      any State requires or permits such de-
tive date).                                    ductions and the payment of the

                                           137
§ 31.3201–1                                                     26 CFR Ch. I (4–1–99 Edition)

amount thereof to the United States, a             contribution base described in section
State, or any political subdivision                3231(e)(2)(B)(ii).
thereof.                                             (ii) Example. The rule in paragraph
                                                   (a)(2)(i) of this section is illustrated by
Subpart C—Railroad Retirement                      the following example.
   Tax Act (Chapter 22, Internal                     Example. A received compensation of
   Revenue Code of 1954)                           $60,000 in 1992. The section 3201(b) rate of 4.90
                                                   percent would be applied to A’s compensa-
                                                   tion up to $41,400, the applicable contribu-
             TAX ON EMPLOYEES                      tion base for 1992.
§ 31.3201–1 Measure of employee tax.                  (b)(1) Computation. The employee tax
                                                   is computed by multiplying the
  The employee tax is measured by the
                                                   amount of the employee’s compensa-
amount of compensation received for
                                                   tion with respect to which the em-
services rendered as an employee. For
                                                   ployee tax is imposed by the rate appli-
provisions relating to compensation,
                                                   cable to such compensation, as deter-
see § 31.3231(e)–1. For provisions relat-
                                                   mined under paragraph (a) of this sec-
ing to the circumstances under which
                                                   tion. The applicable rate is the rate in
certain compensation is to be dis-
                                                   effect when the compensation is re-
regarded for the purpose of deter-
                                                   ceived by the employee. For rules re-
mining the employee tax, see para-                 lating to the time of receipt, see
graphs (b)(1) and (2) of § 31.3231(e)–1.           § 31.3121(a)–2 (a) and (b).
[T.D. 8582, 59 FR 66189, Dec. 23, 1994]               (2) Example. The rule in paragraph
                                                   (b)(1) of this section is illustrated by
§ 31.3201–2 Rates and computation of               the following example.
     employee tax.
                                                     Example. In 1990, employee A received com-
  (a) Rates—(1)(i) Tier 1 tax. The Tier 1          pensation of $1,000 as remuneration for serv-
employee tax rate equals the sum of                ices performed for employer R in 1989. The
the tax rates in effect under section              employee tax is payable at the rate of 12.55
3101(a), relating to old-age, survivors,           percent (7.65 percent plus 4.90 percent) in ef-
                                                   fect for 1990 (the year the compensation was
and disability insurance, and section              received), and not the 12.41 percent rate (7.51
3101(b), relating to hospital insurance.           percent plus 4.90 percent) in effect for 1989
The Tier 1 employee tax rate is applied            (the year the services were performed).
to compensation up to the contribution
                                                   [T.D. 8582, 59 FR 66189, Dec. 23, 1994]
base        described       in      section
3231(e)(2)(B)(i). The contribution base is         § 31.3202–1 Collection of, and liability
determined under section 230 of the So-                 for, employee tax.
cial Security Act and is identical to                 (a) Collection; general rule. The em-
the old-age, survivors, and disability             ployer shall collect from each of his
insurance wage base and the hospital               employees the employee tax imposed
insurance wage base, respectively,                 with respect to the compensation of
under the Federal Insurance Contribu-              the employee by deducting or causing
tions Act.                                         to be deducted the amount of such tax
  (ii) Example. The rule in paragraph              from the compensation subject to the
(a)(1)(i) of this section is illustrated by        tax as and when such compensation is
the following example.                             paid. As to the measure of the em-
  Example. A received compensation of              ployee tax, see § 31.3201–1.
$60,000 in 1992. The section 3101(a) rate of 6.2      (b) Collection; payments by two or more
percent would be applied to A’s compensa-          employers in excess of annual compensa-
tion up to $55,500, the applicable contribu-       tion limitation. For rules relating to
tion base for 1992. The section 3101(b) rate of    payments by two or more employers in
1.45 percent would be applied to the entire        excess of the annual compensation lim-
$60,000 of A’s compensation because the ap-
                                                   itation see § 31.3121(a)(1)–1.
plicable contribution base for 1992 is $130,200.
                                                      (c) Undercollections or overcollections.
  (2)(i) Tier 2 tax. The Tier 2 employee           Any undercollection or overcollection
tax rate equals the percentage set forth           of employee tax resulting from the em-
in section 3201(b) of the Code. This rate          ployer’s inability to determine, at the
is applied to compensation up to the               time compensation is paid, the correct

                                               138
Internal Revenue Service, Treasury                                                § 31.3211–2

amount of compensation with respect              § 31.3211–2 Rates and computation of
to which the deduction should be made                 employee representative tax.
shall be corrected in accordance with              (a) Rates—(1)(i) Tier 1 tax. The Tier 1
the provisions of Subpart G of the reg-          employee representative tax rate
ulations in this part relating to adjust-        equals the sum of the tax rates in ef-
ments, credits, refunds, and abate-              fect under sections 3101(a) and 3111(a),
ments.                                           relating to the employee and the em-
   (d) When fractional part of cent may be       ployer tax for old-age, survivors, and
disregarded. In collecting the employee          disability insurance, and sections
tax, the employer shall disregard any            3101(b) and 3111(b), relating to the em-
fractional part of a cent of such tax un-        ployee and the employer tax for hos-
less it amounts to one-half cent or              pital insurance. The Tier 1 employee
more, in which case it shall be in-              representative tax rate is applied to
creased to one cent.                             compensation up to the contribution
   (e) Employer’s liability. The employer        base        described       in      section
is liable for the employee tax with re-          3231(e)(2)(B)(i). The contribution base is
spect to compensation paid by him,               determined under section 230 of the So-
whether or not collected from the em-            cial Security Act, and is identical to
ployee. If the employer deducts less             the old-age, survivors, and disability
than the correct amount of employee              insurance wage base and the hospital
tax or fails to deduct any part of the           insurance wage base, respectively,
tax, he is nevertheless liable for the           under the Federal Insurance Contribu-
correct amount of the tax. Until col-            tions Act.
lected from him, the employee is also              (ii) Example. The rule in paragraph
liable for the employee tax. Any em-             (a)(1)(i) of this section is illustrated by
ployee tax collected by or on behalf of          the following example.
an employer is a special fund in trust             Example. B, an employee representative, re-
for the United States. See section 7501.         ceived compensation of $60,000 in 1992. The
An employer is not liable to any person          sections 3101(a) and 3111(a) rates of 12.4 per-
for the amount of the employee tax de-           cent (6.2 percent plus 6.2 percent) would be
ducted by him and paid to the district           applied to B’s compensation up to $55,500, the
                                                 applicable contribution base for 1992. The
director.
                                                 sections 3101(b) and 3111(b) rates of 2.9 per-
   (f) Concurrent employment. If two or          cent (1.45 percent plus 1.45 percent) would be
more related corporations who are rail           applied to the entire $60,000 of B’s compensa-
employers concurrently employ the                tion because the applicable contribution
same individual and compensate that              base for 1992 is $130,200.
individual through a common pay-                   (2) (i) Tier 2 tax. The Tier 2 employee
master, which is one of the related cor-         representative tax rate equals the per-
porations employing the individual, see          centage set forth in section 3211(a)(2) of
§ 31.3121(s)–1.                                  the Code. This rate is applied up to the
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as       contribution base described in section
amended by T.D. 6541, 26 FR 553, Jan 20, 1961;   3231(e)(2)(B)(ii).
T.D. 6727, 29 FR 5866, May 5, 1964; T.D. 8582,     (ii) Example. The rule in paragraph
59 FR 66189, Dec. 23, 1994]                      (a)(2)(i) of this section is illustrated by
                                                 the following example.
  TAX ON EMPLOYEE REPRESENTATIVES
                                                   Example. B received compensation of $60,000
§ 31.3211–1 Measure of employee rep-             in 1992. The section 3211(a)(2) rate of 14.75
     resentative tax.                            percent would be applied to B’s compensa-
                                                 tion up to $41,400, the applicable contribu-
   The employee representative tax is            tion base for 1992.
measured by the amount of compensa-
tion received for services rendered as             (3) Supplemental Annuity Tax. The
an employee representative. For provi-           supplemental annuity tax for each
                                                 work-hour for which compensation is
sions relating to compensation, see
                                                 paid to an employee representative for
§ 31.3231(e)–1.
                                                 services rendered as an employee rep-
[T.D. 8582, 59 FR 66190, Dec. 23, 1994]          resentative is imposed at the same rate

                                             139
§ 31.3211–3                                                    26 CFR Ch. I (4–1–99 Edition)

as the excise tax imposed on every em-            rate is $15,500 ($55,500¥$40,000). The entire
ployer under section 3221(c). See also            $20,000 is subject to the sections 3101(b) and
§ 31.3211–3.                                      3111(b) rates since the combined compensa-
                                                  tion is less than $130,200, the applicable con-
   (b) (1) Computation. The employee
                                                  tribution base for 1992. The amount of the
representative tax is computed by mul-            employee representative compensation sub-
tiplying the amount of the employee               ject to the section 3211(a)(2) rate is $1,400
representative’s compensation with re-            ($41,400¥$40,000).
spect to which the employee represent-
                                                  [T.D. 8582, 59 FR 66190, Dec. 23, 1994]
ative tax is imposed by the rate appli-
cable to such compensation, as deter-             § 31.3211–3 Employee      representative
mined under paragraph (a) of this sec-                 supplemental tax.
tion. The applicable rate is the rate in
effect when the compensation is re-                  See paragraphs (a), (b), and (c) of
ceived by the employee representative.            § 31.3221–3 for rules applicable to the
For rules relating to the time of re-             supplemental tax for each work-hour
ceipt, see § 31.3121(a)–2 (a) and (b).            for which compensation is paid to an
   (2) Example. The rule in paragraph             employee representative for services
(b)(1) of this section is illustrated by          rendered as an employee representa-
the following example.                            tive.
  Example. In 1990, employee representative       [T.D. 8525, 59 FR 9666, Mar. 1, 1994]
B received $1,000 as remuneration for serv-
ices performed for employer R in 1989. The        § 31.3212–1 Determination       of   com-
employee representative tax is payable at              pensation.
the rate of 30.05 percent (15.30 percent plus        See § 31.3231(e)–1 for regulations ap-
14.75 percent) in effect for 1990 (the year the   plicable to compensation.
compensation was received), and not the
29.77 percent rate (15.02 percent plus 14.75                  TAX ON EMPLOYERS
percent) in effect for 1989 (the year the serv-
ices were performed).                             § 31.3221–1 Measure of employer tax.
   (c) (1) Rule where compensation is re-            (a) General Rule—The employer tax is
ceived both as an employee representative         measured by the amount of compensa-
and employee. The following rule ap-              tion paid by an employer to its employ-
plies to an individual who renders serv-          ees. For provisions relating to com-
ice both as an employee representative            pensation, see § 31.3231(e)-1. For provi-
and as an employee. The employee rep-             sions relating to the circumstances
resentative tax is imposed on com-                under which certain compensation is to
pensation received as an employee rep-            be disregarded for purposes of deter-
resentative under the rules described in          mining the employer tax, see para-
§ 31.3211–2. The employee tax is imposed          graphs (b) (1) and (2) of § 31.3231(e)–1.
on compensation received as an em-                   (b) Payments by two or more employers
ployee under the rules described in               in excess of annual compensation limita-
§ 31.3201–2. However, if the total com-           tion. For rules relating to payments by
pensation received is greater than the            two or more employers in excess of the
applicable contribution base, the em-             annual compensation limitation, see
ployee representative tax is imposed on           § 31.3121(a)(1)–1.
the amount equal to the contribution                 (c) Underpayments or overpayments.
base less the amount received for serv-           Any underpayment or overpayment of
ices rendered as an employee.                     employer tax resulting from the em-
   (2) Example. The rule in paragraph             ployer’s inability to determine, at the
(c)(1) of this section is illustrated by          time such tax is paid, the correct
the following example.                            amount of compensation with respect
  Example. C performed services both as an        to which the tax should be paid shall be
employee and an employee representative in        corrected in accordance with the provi-
1992. C received compensation of $40,000 as an    sions of Subpart G of the regulations in
employee and $20,000 as an employee rep-          this part relating to adjustments, cred-
resentative. C’s entire compensation of           its, refunds, and abatements.
$40,000 is subject to tax under the rules de-
scribed in § 31.3201–2. The amount of em-         [T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
ployee representative compensation subject        amended by T.D. 6541, 26 FR 555, Jan. 20, 1961;
to the section 3101(a) and the section 3111(a)    T.D. 8582, 59 FR 66190, Dec. 23, 1994]

                                              140
Internal Revenue Service, Treasury                                                   § 31.3221–3

§ 31.3221–2 Rates and computation of              posed by the rate applicable to such
     employer tax.                                compensation, as determined under
  (a) Rates—(1)(i) Tier 1 tax. The Tier 1         paragraph (a) of this section. The appli-
employer tax rate equals the sum of               cable rate is the rate in effect at the
the tax rates in effect under section             time the compensation is paid. For
3111(a), relating to old-age, survivors,          rules relating to the time of payment,
and disability insurance, and section             see § 31.3121(a)–2(a) and (b).
3111(b), relating to hospital insurance.            (2) Example. The rule in paragraph
The Tier 1 employer tax rate is applied           (b)(1) of this section is illustrated by
to compensation up to the contribution            the following example.
base        described       in      section         Example. In 1990, R’s employee A received
3231(e)(2)(B)(i). The contribution base is        $1,000 as remuneration for services performed
determined under section 230 of the So-           for R in 1989. The employer tax is payable at
cial Security Act and is identical to             the rate of 23.75 percent (7.65 percent plus
the old-age, survivors, and disability            16.10 percent) in effect for 1990 (the year the
insurance wage base and the hospital              compensation was received) and not the 23.61
insurance wage base, respectively,                percent rate (7.51 percent plus 16.10 percent)
under the Federal Insurance Contribu-             in effect for 1989 (the year the services were
                                                  performed).
tions Act.
  (ii) Example. The rule in paragraph             [T.D. 8582, 59 FR 66190, Dec. 23, 1994]
(a)(1)(i) of this section is illustrated by
the following example.                            § 31.3221–3    Supplemental tax.
  Example. R’s employee, A, received com-            (a) Introduction—(1) In general. Sec-
pensation of $60,000 in 1992. The section         tion 3221(c) imposes an excise tax on
3111(a) rate of 6.2 percent would be applied to   every employer, as defined in section
A’s compensation up to $55,500, the applica-      3231(a) and § 31.3231(a)–1, with respect to
ble contribution base for 1992. The section       individuals employed by the employer.
3111(b) rate of 1.45 percent would be applied     The tax is imposed for each work-hour
to the entire $60,000 of A’s compensation be-
cause the applicable contribution base for
                                                  for which the employer pays compensa-
1992 is $130,200.                                 tion, as defined in section 3231(e) and
                                                  § 31.3231(e)–1, for services rendered to
  (2)(i) Tier 2 tax. The Tier 2 employer          the employer during a calendar quar-
tax rate equals the percentage set forth          ter. This § 31.3221–3 provides rules for
in section 3221(b) of the Internal Rev-           determining the number of taxable
enue Code. This rate is applied up to             work-hours.
the contribution base described in sec-              (2) Overview. Paragraph (b) of this
tion 3231(e)(2)(B)(ii).                           section defines work-hours. Paragraph
  (ii) Example. The rule in paragraph             (c) of this section demonstrates the
(a)(2)(i) of this section is illustrated by       calculation of work-hours. Paragraph
the following example.                            (d) of this section offers a safe harbor
  Example. R’s employee, A, received com-         calculation of work-hours for use by
pensation of $60,000 in 1992. The section         any employer in lieu of calculating the
3221(b) rate of 16.10 percent would be applied    number of work-hours for each em-
to A’s compensation up to $41,400, the appli-     ployee.
cable contribution base for 1992.
                                                     (b) Definition of work-hours—(1) In
  (3) Supplemental Annuity Tax. The               general. For purposes of section 3221(c)
supplemental annuity tax for each                 and this section, work-hours are hours
work-hour for which compensation is               for which the employee is com-
paid by an employer for services ren-             pensated, whether or not the employee
dered during any calendar quarter by              performs services.
employees is imposed at the tax rate                 (i) Payments included in work-hours.
determined each calendar quarter by               Work-hours       include    regular   time
the Railroad Retirement Board. See                worked; overtime; time paid for vaca-
also § 31.3221–3.                                 tions and holidays; time allowed for
  (b)(1) Computation. The employer tax            meals; away-from-home terminal time;
is computed by multiplying the                    called and not used, runaround, and
amount of the compensation with re-               deadheading time; time for attending
spect to which the employer tax is im-            court, participating in investigations,

                                              141
§ 31.3221–3                                             26 CFR Ch. I (4–1–99 Edition)

and attending claim and safety meet-          (ii) The rule in paragraph (b)(3)(i) of
ings; and guaranteed time not worked.       this section is illustrated by the fol-
Work-hours also include conversion          lowing examples.
hours, that is, compensation converted        Example 1. A, an office worker, receives an
into work-hours. Conversion hours may       annual salary that is paid monthly. The sal-
be derived from payment by the mile or      ary is based on an 8-hour, Monday through
by the piece. Work-hours also include       Friday work schedule. A is not paid for over-
time for which the employee is paid for     time hours. A is not expected to work on
periods of absence not due to sickness      holidays, during A’s annual vacation, or dur-
                                            ing periods that A is ill. The number of
or accident disability, such as for rou-    work-hours for one month is 174 (2088 hours/
tine medical and dental examinations        year ÷12 months). This figure remains con-
or for time lost.                           stant, even though some months have more
  (ii) Payments excluded from work-         workdays than others.
hours. Certain kinds of payments are          Example 2. B is paid a stated amount for
not subject to conversion into work-        each day B works, regardless of the number
                                            of hours worked. However, if B works more
hours. These include those payments         than 8 hours during any day, B is paid over-
that are specifically excluded from         time for each additional hour worked that
compensation within the meaning of          day. B is not paid for holidays, vacations, or
section 3231(e), such as certain sick pay   sick time. During May, B worked 6 hours on
payments (section 3231(e)(1)(i)); tips      4 days, 7 hours on 6 days, 8 hours on 6 days,
(section 3231(e)(1)(ii)); and amounts       and 9 hours on 5 days. Because B is paid a
                                            daily rate for up to 8 hours, 8 hours are com-
paid specifically (either as an advance,    prehended in the daily rate. Therefore, the
as reimbursement, or allowance) for         number of work-hours for May is 173 (21
traveling          expenses      (section   days×8 hours/day+5 overtime hours), even
3231(e)(1)(iii)). Traveling expenses paid   though B actually worked 159 hours.
under a nonaccountable plan are ex-           (4) Conversion hours—(i) Compensa-
cluded from work-hours even though          tion not based on time (hour, day,
they are includible in compensation.        month, etc.), such as compensation
See § 31.3231(e)–1(a)(5). Also excluded     paid by the mile or by the piece, must
from work-hours are amounts rep-            be converted into the number of hours
resenting bonuses, amounts received         represented by the compensation paid.
pursuant to the exercise of an em-          Thus, if an employee is paid by the
ployee stock option, and all separation     mile, 1 work-hour equals the number of
payments or severance allowances.           miles constituting a workday, divided
  (2) Hourly compensation. Because the      by 8 hours. However, in the case of a
tax under section 3221(c) is calculated     collective bargaining agreement that
on the basis of work-hours, the number      specifies a number of hours as consti-
of hours for which an employee re-          tuting a workday, the number of hours
ceives compensation is the figure used      specified under the agreement may be
to determine work-hours. In the case of     used instead of 8.
an hourly-rated employee, each hour           (ii) The rule in paragraph (b)(4)(i) of
for which the employee receives com-        this section is illustrated by the fol-
pensation is one work-hour.                 lowing example.
  (3) Daily, weekly, monthly compensa-        Example. C’s normal workday consists of 2
tion. (i) If an employee is paid by the     150-mile round trips that together take 6
day, week, month, or other period of        hours. C is paid by the mile. The collective
time, the tax is imposed on the number      bargaining agreement does not specify the
                                            number of hours in a workday. Thus, the
of hours comprehended in the rate and,
                                            number of work-hours for each day C works
if any, the number of overtime hours        is 8, or 1 work-hour for each 37.5 miles (300
for which additional compensation is        miles/day ÷ 8 hours/day). If the applicable
paid. Thus, in the case of an office        collective bargaining agreement specifies
worker who receives an annual salary        that 6 hours constitute a workday, the num-
based on an 8-hour, 5-day-a-week work       ber of work-hours for each day C works
schedule that includes paid holidays,       would be 6.
vacations, and sick time, the number          (c) Calculation of work-hours—(1) An
of work-hours for one month is 174 (2088    employer may calculate the work-
hours/year ÷12 months).                     hours separately for each employee, as

                                        142
Internal Revenue Service, Treasury                                           § 31.3221–3

described in the examples in this para-           (d) Safe harbor—(1) In general. In lieu
graph. If the employer chooses to cal-          of calculating work-hours separately
culate work-hours separately for each           for each employee, an employer may
employee, the employer must calculate           use the safe harbor for all employees. If
the number of regular hours, overtime           the employer elects to use the safe har-
hours, and conversion hours for each            bor for a calendar year, the employer
employee for each month. In lieu of             must use the safe harbor for all em-
separate calculations, the employer             ployees for the entire calendar year. If
may calculate the work-hours for all            an employer uses the safe harbor for a
the employer’s employees using the              calendar year, the employer need not
safe harbor formula described in para-          elect the safe harbor for the following
graph (d) of this section.                      calendar year. An employer that elects
  (2) The rules in paragraph (c) of this        the safe harbor for a calendar year may
section are illustrated by the following        not subsequently elect to separately
examples.                                       calculate employee work-hours for that
                                                calendar year.
  Example 1. D worked 8 hours a day, Monday       (2) Method of calculation. The safe
through Friday, during the months of Feb-       harbor treats each employee of the em-
ruary and March 1992. D did not work on         ployer as receiving monthly compensa-
President’s Day, but was paid for the holi-     tion for a number of hours equal to the
day. D’s work-hours for February were 160 (19
                                                safe harbor number. To determine the
days × 8 hours a day + 8 holiday hours). D’s
work-hours for March were 176 (22 days × 8      number of work-hours for a month, the
hours a day).                                   employer multiplies the safe harbor
  Example 2. E worked 7-hour shifts every       number by the number that equals the
Tuesday through Saturday during the             total number of employees to whom
months of February and March 1992. E also       the employer paid compensation dur-
worked 7 overtime hours during February         ing the month.
and 21 overtime hours during March. Also, E       (i) Safe harbor number defined. The
was paid for 7 hours on President’s Day, even   safe harbor number is the number es-
though E did not work on that day. The          tablished in guidance of general appli-
number of work-hours for February was 161       cability promulgated by the Commis-
(21 days × 7 hours a day + 7 overtime hours
                                                sioner.
+ 7 holiday hours). The number of work-
hours for March was 168 (21 days × 7 hours a      (ii) Employee defined. Solely for pur-
day + 21 overtime hours). Because E receives    poses of this paragraph, an employee is
an hourly wage and was paid for the Presi-      any individual who is paid compensa-
dent’s Day holiday, the number of hours (7)     tion, within the meaning of § 31.3231(e)–
for which E was paid are added to the hours     1, regardless of the amount, during the
E actually worked. If E had worked on Presi-    month. Thus, for example, a part-time,
dent’s Day and had received extra pay for       temporary, or seasonal employee is
working on a holiday and holiday pay for 7      counted as an employee. A terminated
hours, the employer would include 14 hours      employee is counted in the month of
in E’s work-hours for that day, the 7 hours E
                                                termination (provided the terminated
actually worked and the 7 holiday hours for
which E was paid.
                                                employee received compensation in the
  Example 3. Employment beginning during        month of termination), but not in any
month. F began employment on March 16, a        subsequent month in which the em-
Monday, and worked 8 hours a day, Monday        ployee does not perform service for the
through Friday. The employer calculates         employer as an employee, even if the
that F’s hours for the month were 96, because   terminated employee is paid compensa-
F worked 12 8-hour days during the month. If    tion in a subsequent month. Thus, for
March 16 were on a Friday, the employer         example, an employee who terminates
would calculate 11 days, or 88 hours.           employment during the month, re-
  Example 4. Employment ending during           ceives compensation during the month
month. G’s last day of employment was Fri-      of termination, and receives a final
day, March 13. G worked 8 hours a day, Mon-
                                                paycheck the following month is
day through Friday, except for March 3,
when G was ill. G was paid for 8 hours for      counted as an employee of the em-
March 3. The employer calculates that G’s       ployer for the month of termination
work-hours for March were 80, because G         but not for the following month.
worked 9 8-hour days and was paid for an ad-      (3) Method of election. An employer
ditional 8 hours.                               makes the safe harbor election for a

                                            143
§ 31.3231(a)–1                                          26 CFR Ch. I (4–1–99 Edition)

calendar year on the employment tax          zation controlled and maintained whol-
return filed for the previous calendar       ly or principally by two or more em-
year.                                        ployers as defined in paragraph (a)(1),
  (4) Additional rules. The Commis-          (2) or (3) of this section and engaged in
sioner may, in revenue procedures, rev-      the performance of services in connec-
enue rulings, notices, or other guidance     tion with or incidental to railroad
of general applicability, revise the safe    transportation;
harbor number or provide additional            (5) Any railway labor organization,
safe harbors that satisfy section            national in scope, which has been or
3221(c).                                     may be organized in accordance with
  (e) Effective dates. This § 31.3221–3 is   the provisions of the Railway Labor
effective for calendar years beginning       Act; and
after December 31, 1992, except that           (6) Any subordinate unit of a na-
paragraph (d) is effective for calendar      tional railway-labor-organization em-
years beginning after December 31,           ployer, that is, any State or National
1993. Taxpayers may apply the rules in       legislative committee, general com-
paragraphs (a), (b), and (c) of this sec-    mittee, insurance department, or local
tion before January 1, 1993.                 lodge or division, of an employer as de-
[T.D. 8525, 59 FR 9666, Mar. 1, 1994]        fined in paragraph (a)(5) of this section,
                                             established pursuant to the constitu-
           GENERAL PROVISIONS                tion and bylaws of such employer.
                                               (b) As used in paragraph (a)(2) of this
§ 31.3231(a)–1 Who are employers.            section, the term ‘‘controlled’’ includes
   (a) Each of the following persons is      direct or indirect control, whether le-
an employer within the meaning of the        gally enforceable and however exer-
act:                                         cisable or exercised. The control may
   (1) Any carrier, that is, any express     be by means of stock ownership, or by
carrier, sleeping car carrier, or rail       agreements, licenses, or any other de-
carrier providing transportation sub-        vices which insure that the operation
ject to subchapter I of chapter 105 of       of the company is in the interest of one
title 49;                                    or more carriers. It is the reality of the
   (2) Any company—                          control, however, which is decisive, not
   (i) Which is directly or indirectly       its form nor the mode of its exercise.
owned or controlled by one or more             (c) As used in paragraph (a)(2) of this
employers as defined in paragraph            section, the term casual applies when
(a)(1) of this section, or under common      the service rendered or the operation of
control therewith, and                       equipment or facilities by a controlled
   (ii) Which operates any equipment or      company or person in connection with
facility or performs any service (except     the transportation of passengers or
trucking service, casual service, and        property by railroad is so irregular or
the casual operation of equipment or         infrequent as to afford no substantial
facilities) in connection with—              basis for an inference that such service
   (a) The transportation of passengers      or operation will be repeated, or when-
or property by railroad, or                  ever such service or operation is insub-
   (b) The receipt, delivery, elevation,     stantial.
transfer in transit, refrigeration or          (d) The term ‘‘employer’’ does not in-
icing, storage, or handling of property      clude any street, interurban, or subur-
transported by railroad;                     ban electric railway, unless such rail-
   (3) Any receiver, trustee, or other in-   way is operating as a part of a general
dividual or body, judicial or otherwise,     steam-railroad system of transpor-
when in the possession of the property       tation, but shall not exclude any part
or operating all or any part of the busi-    of the general steam-railroad system of
ness of any employer as defined in           transportation which is operated by
paragraph (a)(1) or (2) of this section;     any other motive power.
   (4) Any railroad association, traffic       (e) The term ‘‘employer’’ does not in-
association, tariff bureau, demurrage        clude any company by reason of its
bureau, weighing and inspection bu-          being engaged in the mining of coal,
reau, collection agency, and any other       the supplying of coal to an employer
association, bureau, agency, or organi-      where delivery is not beyond the mine

                                         144
Internal Revenue Service, Treasury                                         § 31.3231(b)–1

tipple and the operation of equipment           ner of rendition of the services. Other
or facilities for such mining or sup-           factors indicating that an individual is
plying of coal, or in any of such activi-       subject to the continuing authority of
ties.                                           the employer to supervise and direct
  (f) Any company that is described in          the manner of rendition of the services
paragraph (a)(2) of this section is an          are the furnishing of tools and the fur-
employer under section 3231. In certain         nishing of a place to work by the em-
cases, based on all the facts and cir-          ployer to the individual who renders
cumstances, it may be appropriate to            the services.
segregate those businesses engaged in
                                                   (3) In general, if an individual is sub-
rail services and therefore subject to
                                                ject to the control or direction of an
the Railroad Retirement Tax Act from
those businesses engaged exclusively in         employer merely as to the result to be
nonrail services and therefore not sub-         accomplished by the work and not as
ject to the Railroad Retirement Tax             to the means and methods for accom-
Act. The factors considered are set             plishing the result, he is an inde-
forth in guidance published by the In-          pendent contractor. On individual per-
ternal Revenue Service.                         forming services as an independent
                                                contractor is not, as to such services,
[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR
                                                in the service of an employer within
14021, Dec. 31, 1960; T.D. 8582, 59 FR 66191,
Dec. 23, 1994]                                  the meaning of paragraph (a)(1)(i) of
                                                this section. However, an individual
§ 31.3231(b)–1 Who are employees.               performing services as an independent
   (a) In general. (1) An individual who is     contractor may be, as to such services,
in the service of one or more employers         in the service of an employer within
for compensation is an employee with-           the meaning of paragraph (a)(1) (ii) or
in the meaning of the act. (For defini-         (iii) of this section.
tions of the terms ‘‘employer’’, ‘‘serv-           (4) Whether or not an individual is an
ice’’, and ‘‘compensation’’, see sub-           employee will be determined upon an
sections (a), (d), and (e), respectively,       examination of the particular facts of
of section 3231.) An individual is in the       the case.
service of an employer, with respect to            (5) If an individual is an employee, it
services rendered for compensation,             is of no consequence that he is des-
if—                                             ignated as a partner, coadventurer,
   (i) He is subject to the continuing au-      agent, independent contractor, or oth-
thority of the employer to supervise            erwise, or that he performs services on
and direct the manner in which he ren-          a part-time basis.
ders such services; or                             (6) No distinction is made between
   (ii) He is rendering professional or         classes or grades of employees. Thus,
technical services and is integrated            superintendents, managers, and other
into the staff of the employer; or
                                                supervisory personnel are employees
   (iii) He is rendering, on the property
                                                within the meaning of the act. An offi-
used in the employer’s operations,
                                                cer of an employer is an employee, but
other personal services the rendition of
                                                a director as such is not.
which is integrated into the employer’s
operations.                                        (7) In determining whether an indi-
   (2) In order that an individual may be       vidual is an employee with respect to
in the service of an employer within            services rendered within the United
the meaning of paragraph (a)(1)(i) of           States, the citizenship or residence of
this section, it is not necessary that          the individual, or the place where the
the employer actually direct or control         contract of service was entered into is
the manner in which the services are            immaterial.
rendered; it is sufficient if the em-              (8) If an individual performs services
ployer has the right to do so. The right        for an employer (other than a local
of an employer to discharge an indi-            lodge or division or a general com-
vidual is also an important factor indi-        mittee of a railway-labor-organization
cating that the individual is subject to        employer) which does not conduct the
the continuing authority of the em-             principal part of its business within the
ployer to supervise and direct the man-         United States, such individual shall be

                                            145
§ 31.3231(b)–1                                           26 CFR Ch. I (4–1–99 Edition)

deemed to be in the service of such em-       he was, on August 29, 1935, in the ‘‘em-
ployer only to the extent that he per-        ployment relation’’ to a carrier.
forms services for it in the United             (ii) An individual shall be deemed to
States. Thus, with respect to services        have been in the employment relation
rendered for such employer outside the        to a carrier on August 29, 1935, if (a) he
United States, such individual is not in      was on that date on leave of absence
the service of an employer.                   from his employment expressly granted
   (9) If an individual performs services     to him by the carrier by whom he was
for an employer (other than a local           employed, or by a duly authorized rep-
lodge or division or a general com-           resentative or such carrier, and the
mittee of a railway-labor-organization        grant of such leave of absence was es-
employer) which conducts the principal        tablished to the satisfaction of the
part of its business within the United        Railroad Retirement Board before July
States, he is in the service of such em-      1947; or (b) he was in the service of a
ployer whether his services are ren-          carrier after August 29, 1935, and before
dered within or without the United            January 1946 in each of six calendar
States. In the case of an individual, not     months whether or not consecutive; or
a citizen or resident of the United           (c) before August 29, 1935, he did not re-
States, rendering services in a place         tire and was not retired or discharged
outside the United States to an em-           from the service of the last carrier by
ployer which is required under the laws       whom he was employed or its corporate
applicable in such place to employ, in        or operating successor, but (1) solely by
whole or in part, citizens or residents       reason of his physical or mental dis-
thereof, such individual shall not be         ability he ceased before August 29, 1935,
deemed to be in the service of an em-         to be in the service of such carrier and
ployer with respect to services so ren-       thereafter remained continuously dis-
dered.                                        abled until he attained age sixty-five
                                              or until August 1945, or (2) solely for
   (10) The term ‘‘employee’’ does not
                                              such last stated reason a carrier by
include any individual while he is en-
                                              whom he was employed before August
gaged in the physical operations con-
                                              29, 1935, or a carrier who is its suc-
sisting of the mining of coal, the prepa-
                                              cessor did not on or after August 29,
ration of coal, the handling (other than
                                              1935, and before August 1945 call him to
movement by rail with standard rail-
                                              return to service, or (3) if he was so
road locomotives) of coal not beyond
                                              called he was solely for such reason un-
the mine tipple, or the loading of coal
                                              able to render service in six calendar
at the tipple.
                                              months as provided in (b) of this sub-
   (b) Employees of local lodges or divi-     division; or (d) he was on August 29,
sions of railway-labor-organization em-       1935, absent from the service of a car-
ployers. (1) An individual is in the serv-    rier by reason of a discharge which,
ice of a local lodge or division of a rail-   within one year after the effective date
way-labor-organization employer (see          thereof, was protested, to an appro-
paragraph (a)(6) of § 31.3231(a)–1) only      priate labor representative or to the
if—                                           carrier, as wrongful, and which was fol-
   (i) All, or substantially all, the indi-   lowed within 10 years of the effective
viduals constituting the membership of        date thereof by his reinstatement in
such local lodge or division are em-          good faith to his former service with
ployees of an employer conducting the         all his seniority rights. However, an in-
principal part of its business in the         dividual shall not be deemed to have
United States; or                             been in the employment relation to a
   (ii) The headquarters of such local        carrier on August 29, 1935, if before that
lodge or division is located in the           date he was granted a pension or gra-
United States.                                tuity on the basis of which a pension
   (2) (i) An individual in the service of    was awarded to him pursuant to sec-
a local lodge or division is not an em-       tion 6 of the Railroad Retirement Act
ployee within the meaning of the act          of 1937 (45 U.S.C. 228f), or if during the
unless he was, on or after August 29,         last payroll period before August 29,
1935, in the service of a carrier (see        1935, in which he rendered service to a
§ 31.3231(g) for definition of carrier) or    carrier he was not, with respect to any

                                          146
Internal Revenue Service, Treasury                                      § 31.3231(e)–1

service in such payroll period, in the        which is not included as an employer
service of an employer (see paragraph         under section 3231(a) who—
(a) of this section).                            (i) Was in the service of an employer
   (c) Employees of general committees of     either before or after June 29, 1937, and
railway-labor-organization employers. An         (ii) Is duly authorized and designated
individual is in the service of a general     to represent employees in accordance
committee of a railway-labor-organiza-        with the Railway Labor Act.
tion employer (see paragraph (a)(6) of        For railway labor organizations which
§ 31.3231(a)–1) only if—                      are employers under section 3231(a), see
   (1) He is representing a local lodge or    paragraph (a) (5) and (6) of § 31.3231(a)–
division described in paragraph (b)(1) of     1.
this section; or                                 (2) Any individual who is regularly
   (2) All, or substantially all, the indi-   assigned to or regularly employed by
viduals represented by such general           an employee representative, as defined
committee are employees of an em-             in paragraph (a)(1) of this section, in
ployer conducting the principal part of       connection with the duties of such em-
its business in the United States; or         ployee representative’s office.
   (3) He acts in the capacity of a gen-         (b) In determining whether an indi-
eral chairman or an assistant general         vidual is an employee representative,
chairman of a general committee               his citizenship or residence is material
which represents individuals rendering        only insofar as those factors may affect
service in the United States to an em-        the determination of whether he was
ployer. In such case, if his office or        ‘‘in the service of an employer’’ (see
headquarters is not located in the            paragraph (a) of § 31.3231(b)–1).
United States and the individuals rep-
resented by such general committee            § 31.3231(d)–1 Service.
are employees of an employer not con-            See § 31.3231(b)–1 for regulations re-
ducting the principal part of its busi-       lating to the term ‘‘in the service of an
ness in the United States, only a part        employer.’’
of his remuneration for such service
shall be regarded as compensation. The        § 31.3231(e)–1 Compensation.
part of his remuneration regarded as             (a) Definition—(1) The term compensa-
compensation shall be in the same pro-        tion has the same meaning as the term
portion to his total remuneration as          wages in section 3121(a), determined
the mileage in the United States under        without regard to section 3121(b)(9), ex-
the jurisdiction of such general com-         cept as specifically limited by the Rail-
mittee bears to the total mileage under       road Retirement Tax Act (chapter 22 of
its jurisdiction, unless such mileage         the Internal Revenue Code) or regula-
formula is inapplicable, in which case        tion. The Commissioner may provide
such other formula as the Railroad Re-        any additional guidance that may be
tirement Board may have prescribed            necessary or appropriate in applying
pursuant to section 1(c) of the Railroad      the definitions of sections 3121(a) and
Retirement Act of 1937 (45 U.S.C. 228a)       3231(e).
shall be applicable. However, no part of         (2) A payment made by an employer
his remuneration for such service shall       to an individual through the employ-
be regarded as compensation if the ap-        er’s payroll is presumed, in the absence
plication of such mileage formula, or         of evidence to the contrary, to be com-
such other formula as the Railroad Re-        pensation for services rendered as an
tirement Board may have prescribed,           employee of the employer. Likewise, a
would result in his compensation for          payment made by an employee organi-
the service being less than 10 percent of     zation to an employee representative
his remuneration for such service.            through the organization’s payroll is
                                              presumed, in the absence of evidence to
§ 31.3231(c)–1 Who are employee rep-          the contrary, to be compensation for
     resentatives.                            services rendered by the employee rep-
   (a) An employee representative with-       resentative as such. For rules regard-
in the meaning of the act is—                 ing the treatment of deductions by an
   (1) Any officer or official representa-    employer from remuneration of an em-
tive of a railway labor organization          ployee, see § 31.3123–1.

                                          147
§ 31.3231(e)–2                                                        26 CFR Ch. I (4–1–99 Edition)

   (3) The term compensation is not con-      an employee for services rendered in
fined to amounts paid for active serv-        excess of the applicable contribution
ice, but includes amounts paid for an         base. For rules applying this provision,
identifiable period during which the          see § 31.3121(a)(1)–1.
employee is absent from the active
service of the employer and, in the case      [T.D. 8582, 59 FR 66191, Dec. 23, 1994]
of     an      employee     representative,
amounts paid for an identifiable period       Subpart D—Federal Unemploy-
during which the employee representa-            ment Tax Act (Chapter 23, In-
tive is absent from the active service of        ternal Revenue Code of 1954)
the employee organization.
   (4) Compensation includes amounts          § 31.3301–1                  Persons liable for tax.
paid to an employee for loss of earnings
during an identifiable period as the re-         Every person who is an employer as
sult of the displacement of the em-           defined     in     section    3306(a)   (see
ployee to a less remunerative position        § 31.3306(a)–1) is liable for the tax. Even
or occupation as well as pay for time         if an employer is not subject to any
lost.                                         State unemployment compensation
   (5) For rules regarding the treatment      law, he is nevertheless liable for the
of reimbursement and other expense al-        tax. However, if he is subject to such a
lowance amounts, see § 31.3121(a)–3. For      State law, he may be entitled to cer-
rules regarding the inclusion of fringe       tain credits against the tax (see
benefits       in     compensation,     see   §§ 31.3302(a)1 to 31.3302(c)–1, inclusive).
§ 31.3121(a)–1T.                              For provisions relating to payment of
   (b) Special Rules. (1) If the amount of    the tax, see Subpart G of the regula-
compensation earned in any calendar           tions in this part.
month by an individual as an employee
in the service of a local lodge or divi-      § 31.3301–2                  Measure of tax.
sion of a railway-labor-organization
employer is less than $25, the amount           The tax for any calendar year is
is disregarded for purposes of deter-         measured by the amount of wages paid
mining the employee tax under section         by the employer during such year with
3201 and the employer tax under sec-          respect to employment after December
tion 3221.                                    31, 1938. (See § 31.3306(b)–1, relating to
   (2) Compensation for service as a del-     wages, and §§ 31.3306(c)–1 to 31.3306(c)–3,
egate to a national or international          inclusive, relating to employment.)
convention of a railway-labor-organiza-
tion employer is disregarded for pur-         [T.D. 6658, 28 FR 6632, June 27, 1963]
poses of determining the employee tax
                                              § 31.3301–3                  Rate and computation of
under section 3201 and the employer
                                                   tax.
tax under section 3221 if the individual
rendering the service has not pre-              (a) The rates of tax with respect to
viously rendered service, other than as       wages paid in calendar years after 1954
a delegate, which may be included in          are as follows:
the individual’s years of service for
                                                                                                                             Percent
purposes of the Railroad Retirement
Act.                                          In the calendar years 1955 to 1960, both inclu-
   (3) For special provisions relating to       sive .....................................................................          3
the compensation of certain general           In the calendar year 1961 .....................................                     3.1
                                              In the calendar year 1962 .....................................                     3.5
chairs or assistant general chairs of a
                                              In the calendar year 1963 .....................................                    3.35
general committee of a railway-labor-         In the calendar year 1964 and subsequent cal-
organization employer, see paragraph            endar years ........................................................              3.1
(c)(3) of § 31.3231(b)–1.
                                                (b) The tax is computed by applying
[T.D. 8582, 59 FR 66191, Dec. 23, 1994]       to the wages paid in a calendar year,
§ 31.3231(e)–2 Contribution base.             with respect to employment after De-
                                              cember 31, 1938, the rate in effect at the
   The term compensation does not in-         time the wages are paid.
clude any remuneration paid during
any calendar year by an employer to           [T.D. 6658, 28 FR 6632, June 27, 1963]

                                          148
Internal Revenue Service, Treasury                                             § 31.3302(a)–1

§ 31.3301–4 When wages are paid.                the State the total amount of contributions
                                                due with respect to all remuneration so re-
   Wages are paid when actually or con-         quired to be reported. Such contributions,
structively paid. Wages are construc-           including those with respect to the remu-
tively paid when they are credited to           neration paid on February 1, 1956, may be in-
the account of or set apart for an em-          cluded in computing the credit against the
ployee so that they may be drawn upon           tax for the calendar year 1955. This is true
by him at any time although not then            even though the remuneration paid on Feb-
                                                ruary 1, 1956 (if it constitutes ‘‘wages’’) is re-
actually reduced to possession. To con-         quired to be reported in the Federal return
stitute payment in such a case the              for 1956 and not in the Federal return for
wages must be credited to or set apart          1955.
for the employee without any substan-             Example 2. Under the unemployment com-
tial limitation or restriction as to the        pensation law of State Y, employer N is re-
time or manner of payment or condi-             quired to include in his contribution return
tion upon which payment is to be                for the quarter ending December 31, 1955, cer-
                                                tain remuneration paid on December 30, to
made, and must be made available to             1955, to an employee for services to be ren-
him so that they may be drawn upon at           dered after December 31. On January 20, 1956,
any time, and their payment brought             N pays to the State the total amount of con-
within his own control and disposition.         tributions due with respect to all remunera-
See § 31.6011(a)–3, relating to the return      tion required to be reported on the contribu-
on which wages are to be reported.              tion return. Such contributions, including
                                                those with respect to the remuneration paid
§ 31.3302(a)–1 Credit against tax for           on December 30, 1955, may be included in
     contributions paid.                        computing the credit against the tax for the
                                                calendar year 1955.
   (a) In general. Subject to the provi-
sion of paragraphs (b) and (c) of this            (c) Limitation on amount of credit al-
section and to the provisions of                lowable based on time when contributions
§ 31.3302(c)–1, the taxpayer may credit         are paid—(1) In general. The amount of
against the tax for any taxable year            credit allowable for contributions paid
the total amount of contributions paid          into a State unemployment fund de-
by him into an unemployment fund                pends in part on the time of payment
maintained during such year under a             of such contributions. Although con-
State law which has been found by the           tributions paid at any time may be
Secretary of Labor to contain the pro-          credited against the tax (subject to the
visions specified in section 3304(a); Pro-      limitations referred to in paragraphs
vided, however, That no credit may be           (c)(2) and (3) of this section), no refund
taken for contributions under a State           or credit of the tax based on credit for
law if such State has not been duly cer-        contributions paid will be allowed un-
tified for the calendar year to the Sec-        less the contributions are paid prior to
retary of the Treasury by the Sec-              the expiration of the period of limita-
retary of Labor. The contributions may          tions applicable to refund or credit of
be credited against the tax whether or          the tax. For general provisions relating
not they are paid with respect to em-           to the limitation period and to refunds,
ployment as defined in section 3306(c).         credits and abatements of the tax, see
For provisions relating to additional           respectively §§ 301.6511(a)–1, 301.6402–2
credit against the tax, see § 31.3302(b)–1.     and 301.6404–1 of this chapter (Regula-
   (b) Limitation on the taxable year with      tions on Procedure and Administra-
respect to which contributions are allow-       tion).
able. In order to be allowable as credit          (2) Amount of credit allowable when
against the tax for any taxable year,           contributions are paid on or before last
the contributions must have been paid           day for filing return. Contributions paid
with respect to such year.                      into a State unemployment fund on or
                                                before the last day upon which the Fed-
  Example 1. Under the unemployment com-        eral return for the taxable year is re-
pensation law of State X, employer M is re-     quired to be filed may be credited
quired to report in his contribution return
                                                against the tax in an amount equal to
for the quarter ending December 31, 1955, all
remuneration payable for services rendered      such contributions, but not, however,
in such quarter. A portion of such remunera-    to exceed the total credits, determined
tion is not paid to his employees until Feb-    pursuant to § 31.3302(c)–1. For provi-
ruary 1, 1956. On January 20, 1956, M pays to   sions relating to the time for filing the

                                            149
§ 31.3302(a)–1                                                 26 CFR Ch. I (4–1–99 Edition)

return, see § 31.6071(a)–1 in Subpart G of         The R Company pays $1,700 of the total State
this part.                                         contributions on or before such date, and the
   (3) Amount of credit allowable when             remaining $1,000 on February 1, 1962. If the
contributions are paid after last day for          $1,000 had been paid on or before January 31,
                                                   1962, that amount could have been credited
filing return. Contributions paid into a
                                                   against the tax (such amount plus the $1,700
State unemployment fund after the                  paid on or before January 31, 1962, not ex-
last day upon which the Federal return             ceeding the aggregate credit allowable).
for the taxable year is required to be             Since the $1,000 was paid after January 31,
filed may be credited against the tax in           1962, the R Company is entitled to a credit of
an amount not to exceed 90 percent of              90 percent of this amount or $900, plus the
the amount which would have been al-               credit of $1,700 allowable for the contribu-
lowable as credit on account of such               tions paid on or before January 31, 1962. The
contributions had they been paid into a            net liability for Federal tax is thus $500
State unemployment fund on or before               ($3,100 minus $2,600).
such last day. However, see paragraph                 (4) Amount of credit allowable when
(c)(4) of this section relating to the             contributions are paid to wrong State.
payment of contributions to the wrong              Contributions for the taxable year paid
State. For general provisions relating             into a State unemployment fund which
to refunds, credits, and abatements of             are required under the unemployment
the tax, see §§ 301.6402–2 and 301.6404–1          compensation law of that State, but
of this chapter (Regulations on Proce-             which are paid with respect to remu-
dure and Administration).                          neration on the basis of which the tax-
  Example 1. The Federal return of the M           payer had, prior to such payment, erro-
Company for the calendar year 1961 discloses       neously paid an amount as contribu-
total wages of $400,000. The Federal tax, im-      tions under another unemployment
posed at the rate of 3.1 percent, is $12,400.      compensation law, shall be deemed for
The company is liable for total State con-
                                                   purposes of the credit to have been paid
tributions of $8,000 for 1961. The due date of
the Federal return is January 31, 1962, no ex-     at the time of the erroneous payment.
tension of time for filing the return having       If, by reason of such other law, the tax-
been granted. The contributions are not paid       payer was entitled to cease paying con-
until February 1, 1962. If the contributions       tributions for such taxable year with
had been paid on or before January 31, 1962,       respect to services subject to such
the entire amount of $8,000 could have been        other law, the payment into the proper
credited against the tax. (Credits could not
                                                   fund shall be deemed for purposes of
exceed 2.7 percent of the wages, or $10,800.
See § 31.3302(c)–1.) Since the contributions       credit to have been made on the date
were paid after January 31, 1962, the M Com-       the Federal return for such year was
pany is entitled to a credit of 90 percent of      actually filed by the taxpayer under
the amount which would have been allowable         § 31.6011(a)–3.
as credit had the contributions been paid on
time (90 percent of $8,000, or $7,200), the net      Example. Employee N, whose Federal re-
liability for Federal tax being $5,200 ($12,400    turn for the calendar year 1961 discloses a
minus $7,200).                                     total tax of $3,100, employs individuals in
  Example 2. The facts are the same as in ex-      State X and State Y during the calendar
ample 1, except that the M Company is liable       year 1961. N assumes in good faith that the
for and pays total State contributions of          services of his employees are covered by the
$12,000, instead of $8,000. If the contributions   unemployment compensation law of State Y,
had been paid on or before January 31, 1962,       and pays as contributions to State Y the
the amount allowable as credit would have          amount of $2,700 based upon the remunera-
been $10,800 (2.7 percent of wages of $400,000).   tion of the employees. All of the services
Since the contributions were paid after Jan-       were in fact covered by the unemployment
uary 31, 1962, the M Company is entitled to a      compensation law of State X, and none by
credit of 90 percent of $10,800, or $9,720, the    the law of State Y. The payment to State Y
net liability for Federal tax being $2,680         was made on January 31, 1962. When the
($12,400 minus $9,720).                            error was discovered thereafter, N paid to
  Example 3. The Federal return of the R           State X contributions in the amount of $2,700
Company for the calendar year 1961 discloses       based upon such remuneration. Since the
a total tax of $3,100. The company is liable       contributions were paid to State Y on Janu-
for total State contributions of $2,700 for        ary 31, 1962, the contributions to State X are,
such year. The due date of the Federal re-         for purposes of the credit, deemed to have
turn is January 31, 1962, no extension of time     been paid on such date. N is entitled to a
for filing the return having been granted.         credit of $2,700 against the Federal tax of

                                               150
Internal Revenue Service, Treasury                                             § 31.3302(b)–1
$3,100, the net liability for Federal tax being     § 31.3302(b)–1 Additional credit against
$400 ($3,100 minus $2,700).                               tax.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as             (a) In general. In addition to the cred-
amended by T.D. 6658, 28 FR 6632, June 27,          it against the tax allowable for con-
1963]                                               tributions actually paid to State unem-
                                                    ployment funds (see § 31.3302(a)–1), the
§ 31.3302(a)–2 Refund          of   State    con-   taxpayer may be entitled to a credit
     tributions.
                                                    under section 3302(b). This additional
  If, subsequent to the filing of the re-           credit is allowable to the taxpayer with
turn, a refund is made by a State to the            respect to the amount of contributions
taxpayer of any part of his contribu-               which he is relieved from paying to an
tion credited against the tax, the tax-             unemployment fund under the provi-
payer is required to advise the district            sions of a State law which have been
director of the date and amount of such             certified for the taxable year as pro-
refund and the reason therefor, and to              vided in section 3303. Generally, an ad-
pay the tax, if any, due as a result of             ditional credit is available to an em-
such refund, together with interest                 ployer, if under the provisions of a
from the date when the tax was due.                 State law which have been so certified
                                                    he is permitted to pay contributions to
§ 31.3302(a)–3 Proof      of    credit      under   such State for the taxable year, or por-
     section 3302(a).                               tion thereof, at a rate which is both
   Credit against the tax for any cal-              lower than the highest rate applied
endar year for contributions paid into              under such law in such year and lower
State unemployment funds shall not be               than 2.7 percent. No additional credit is
                                                    allowable except with respect to a
allowed unless there is submitted to
                                                    State law certified by the Secretary of
the district director:
                                                    Labor for the taxable year as provided
   (a) A certificate of the proper officer          in section 3303 (or with respect to any
of each State (the laws of which re-                provisions thereof so certified).
quired the contributions to be paid)                   (b) Method of computing amount of ad-
showing, for the taxpayer:                          ditional credit allowable with respect to a
   (1) The total amount of contributions            State law—(1) Certification of a State law
required to be paid under the State law             as a whole. In ascertaining the addi-
with respect to such calendar year (ex-             tional credit for any taxable year with
clusive of penalties and interest) which            respect to a particular State law which
was actually paid on or before the date             the Secretary of Labor certifies as a
the Federal return is required to be                whole to the Secretary of the Treasury
filed; and                                          in accordance with the provisions of
   (2) The amounts and dates of such re-            section 3303, the taxpayer must first
quired payments (exclusive of penalties             compute the following amounts:
and interest) actually paid after the                  (i) The amount of contributions
date the Federal return is required to              (whether or not with respect to em-
be filed.                                           ployment as defined in section 3306(c))
   (b) A statement by the taxpayer that             which the taxpayer would have been re-
no part of any payment made by him                  quired to pay under the State law for
into a State unemployment fund for                  such year if throughout the year he
such calendar year, which is claimed as             had been subject to the highest rate ap-
a credit against the tax, was deducted              plied under such law in such year, or to
or is to be deducted from the remu-                 a rate of 2.7 percent, whichever rate is
neration of individuals in his employ.              lower.
Such statement shall contain or be                     (ii) The amount of contributions
verified by a written declaration that              (whether or not with respect to em-
it is made under the penalties of per-              ployment as defined in section 3306 (c))
jury.                                               he was required to pay under the State
   (c) Such other or additional proof as            law with respect to such year, whether
the Commissioner or the district direc-             or not paid.
tor may deem necessary to establish                 The amount computed under paragraph
the right to the credit provided for                (b)(1)(ii) of this section should then be
under section 3302(a).                              subtracted from the amount computed

                                                151
§ 31.3302(b)–2                                                                                      26 CFR Ch. I (4–1–99 Edition)

under paragraph (b)(1)(i) of this section                                                State laws. For limitation on total
and the result will be the additional                                                    credits, see § 31.3302(c)–1.
credit for the taxable year with respect                                                 [T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
to the law of that State.                                                                amended by T.D. 6658, 28 FR 6632, June 27,
  Example. A employs individuals only in                                                 1963]
State X during the calendar year 1955. The
                                                                                         § 31.3302(b)–2 Proof of additional cred-
unemployment compensation law of State X                                                      it under section 3302(b).
has been certified in its entirety to the Sec-
retary of the Treasury by the Secretary of                                                  Additional credit under section
Labor for such year. The highest rate applied                                            3302(b) shall not be allowed against the
in such year under such State law to any                                                 tax for any calendar year unless there
taxpayer is 3 percent. However, A has ob-                                                is submitted—
tained a rate of 1 percent under the law of                                                 (a) To the Commissioner a certificate
such State and is required to pay his entire                                             of the proper officer of each State (with
year’s contribution at that rate. The amount                                             respect to the law of which the addi-
of remuneration of A’s employees subject to                                              tional credit is claimed) showing the
contributions under such State law is $25,000.                                           highest rate of contributions applied
A’s additional credit under section 3302(b) is                                           under the State law in such calendar
$425, computed as follows:                                                               year to any person having individuals
Remuneration subject to contributions ....................                     $25,000   in his employ; and
Contributions at 2.7 percent rate .............................                   675
                                                                                            (b) To the district director a certifi-
Less:                                                                                    cate of the proper officer of each State
    Contributions required to be paid at 1 percent                                       (with respect to the law of which the
       rate ................................................................      250    additional credit is claimed) showing
                                                                                         for the taxpayer—
Additional credit to A ...............................................            425
                                                                                            (1) The total remuneration with re-
Since the 2.7 percent rate is less than the                                              spect to which contributions were re-
highest rate applied (3 percent), the 2.7 per-                                           quired to be paid by the taxpayer under
cent rate is used in computing the amount                                                the State law with respect to such cal-
($675) from which the amount of contribu-                                                endar year; and
tions required to be paid at the 1 percent                                                  (2) The rate of contributions applied
rate ($250) is deducted in order to ascertain                                            to the taxpayer under the State law
the additional credit ($425).                                                            with respect to such calendar year.
   (2) Certification with respect to par-                                                If under the law of such State different
ticular provisions of a State law. If the                                                rates of contributions were applied to
Secretary of Labor makes a certifi-                                                      the taxpayer during particular periods
cation to the Secretary of the Treasury                                                  of such calendar year, the certificate
with respect to particular provisions of                                                 shall set forth the information called
                                                                                         for in paragraphs (b)(1) and (2) of this
a State law for any taxable year pursu-
                                                                                         section with respect to each such pe-
ant to section 3303, the additional cred-
                                                                                         riod.
it of the taxpayer for such year with                                                       (c) Such other or additional proof as
respect to such law shall be computed                                                    the Commissioner or the district direc-
in such manner as the Commissioner                                                       tor may deem necessary to establish
shall determine.                                                                         the right to the additional credit pro-
   (c) Amount of additional credit allow-                                                vided for under section 3302(b).
able to taxpayer with respect to more than
one State law. If the taxpayer is enti-                                                  § 31.3302(c)–1 Limit on total credits.
tled to additional credit with respect                                                      (a) In general. Paragraph (b) of this
to more than one State law in any tax-                                                   section relates to the limitation on the
able year, the additional credit allow-                                                  aggregate of the credits allowable
able with respect to each State law                                                      under section 3302 (a) and (b). Para-
shall be computed separately (in ac-                                                     graph (c) of this section relates to re-
cordance with paragraph (b) of this sec-                                                 ductions, under certain circumstances,
tion) and the total additional credit al-                                                of the total credits allowable after ap-
lowable against the tax for such year                                                    plying section 3302 (a), (b), and (c)(1). In
shall be the aggregate of the additional                                                 paragraphs (c)(1), (2), and (3) of this
credits allowable with respect to such                                                   section, relate, respectively, to reduc-
                                                                                         tions of credits in respect of advances

                                                                                     152
Internal Revenue Service, Treasury                                      § 31.3302(c)–1

under title XII of the Social Security        paid on January 1, 1963, or on January
Act before September 13, 1960, advances       1 of any succeeding taxable year, the
under title XII of the Social Security        total credits otherwise allowable under
Act after September 12, 1960, and pay-        section 3302 to a taxpayer subject to
ments under the Temporary Unemploy-           the unemployment compensation law
ment Compensation Act of 1958. A re-          of the State shall be reduced for the
duction of credit under paragraph             taxable year unless—
(c)(1), (2), or (3) of this section applies     (a) No balance of such advance or ad-
separately from, and in addition to, a        vances exists as of the beginning of No-
reduction under any other such sub-           vember 10 of the taxable year, or
paragraph. See section 3302(d) and              (b) The State pays into the Federal
§ 31.3302(d)–1 for definitions and special    unemployment account, before Novem-
rules relating to section 3302(c), and for    ber 10 of the taxable year, the amount
a provision that, in applying section         certified by the Secretary of Labor pur-
3302(c), the Federal tax shall be com-        suant to section 3302(c)(2), and des-
puted at the rate of 3 percent.               ignates such payment as being made
   (b) Limitation on aggregate credit. The    for purposes of the last sentence of sec-
aggregate of the credit under section         tion 3302(c)(2).
3302(a) and the additional credit under       The credit reduction for a taxable year
section 3302(b) shall not exceed 90 per-      shall be a percentage of the wages paid
cent of the tax against which credit is       by the taxpayer during that taxable
taken, computed as if the tax were im-        year which are attributable to the
posed at the rate of 3 percent. Thus,         State. The percentage for the taxable
the aggregate of the credit which is al-      year 1963, or for any succeeding taxable
lowable to an employer for any taxable        year beginning before January 1, 1968,
year shall not exceed 2.7 percent of the      is 0.15 percent (that is, 5 percent of the
wages paid by the employer during the         Federal tax, computed as if imposed at
year.                                         the rate of 3 percent of the wages). The
   (c) Reductions of amount of credit oth-    percentage for any taxable year begin-
erwise allowable—(1) Advances before          ning on or after January 1, 1968, is the
September 13, 1960, under title XII of So-    percentage reduction for the imme-
cial Security Act—(i) Credit reductions for   diately preceding taxable year plus 0.15
1961 and 1962. Pursuant to section            percent. Thus, for 1968 the percentage
3302(c)(2), as applicable to credit allow-    is 0.3 percent, for 1969 the percentage is
able for any year ended before 1963, the      0.45 percent, and for 1970 the percent-
total credits otherwise allowable under       age is 0.6 percent.
section 3302 to a taxpayer subject to           (2) Advances after September 12, 1960,
the unemployment compensation law             under title XII of Social Security Act—(i)
of the State of—                              In general. If any balance of an advance
   (a) Alaska shall be reduced for the        or advances under title XII of the So-
taxable year 1961 by an amount equal          cial Security Act, made after Sep-
to 0.15 percent of the wages paid by the      tember 12, 1960, to the unemployment
taxpayer during 1961 which are attrib-        account of a State, remains unpaid on
utable to Alaska, and shall be reduced        January 1 of two consecutive taxable
for the taxable year 1962 by an amount        years, the total credits otherwise al-
equal to 0.3 percent of the wages paid        lowable under section 3302 to a tax-
by the taxpayer during 1962 which are         payer subject to the unemployment
attributable to Alaska; or                    compensation law of the State shall be
   (b) Michigan shall be reduced for the      reduced for the taxable year beginning
taxable year 1962 by an amount equal          with the second consecutive January 1,
to 0.15 percent of the wages paid by the      unless prior to November 10 of that
taxpayer during 1962 which are attrib-        taxable year the total amount of any
utable to Michigan.                           such advance or advances made to the
   (ii) Credit reductions for 1963 and sub-   account of the State has been fully re-
sequent years. If any balance of an ad-       paid. The reduction made pursuant to
vance or advances under title XII of          this subdivision in the total credits
the Social Security Act, made before          otherwise allowable for the taxable
September 13, 1960, to the unemploy-          year beginning with the second con-
ment account of a State, remains un-          secutive January 1 shall be 0.3 percent

                                          153
§ 31.3302(c)–1                                           26 CFR Ch. I (4–1–99 Edition)

of the wages paid by the taxpayer dur-         sion (i) of this subparagraph is made
ing the taxable year which are attrib-         for the fifth or any succeeding taxable
utable to the State (that is, 10 percent       year, the total credits otherwise allow-
of the Federal tax, computed as if im-         able under section 3302 to a taxpayer
posed at the rate of 3 percent of the          subject to the unemployment com-
wages). In the case of any succeeding          pensation law of the State shall be fur-
taxable year beginning with a consecu-         ther reduced for the taxable year un-
tive January 1 on which there exists           less the average employer contribution
such a balance of an unreturned ad-            rate (see section 3302(d)(4)) for the
vance or advances made after Sep-              State for the calendar year preceding
tember 12, 1960, the total credits other-      such taxable year equals or exceeds the
wise allowable shall be further reduced        5-year benefit cost rate (see section
unless prior to November 10 of that            3302(d)(5)) applicable to the State for
succeeding taxable year the total              the taxable year or 2.7 percent, which-
amount of any such advance or ad-              ever is higher. The percentage of reduc-
vances made to the account of the              tion, if any, under this subdivision for
State has been fully repaid. The reduc-        a taxable year shall be the percentage
tion for each such succeeding taxable          referred to in section 3302(c)(3)(C)
year beginning with a consecutive Jan-         which is certified by the Secretary of
uary 1 on which such a balance exists          Labor pursuant to section 3302(d)(7).
shall be a percentage of the wages paid          (3) Payments under the Temporary Un-
by the taxpayer during that succeeding         employment Compensation Act of 1958. If
taxable year which are attributable to
                                               any amount of temporary unemploy-
the State. The percentage reduction for
                                               ment compensation was paid in a State
any such succeeding taxable year shall
                                               under the Temporary Unemployment
be the aggregate of (a) the percentage
                                               Compensation Act of 1958, the total
reduction (without regard to paragraph
                                               credits otherwise allowable under sec-
(c)(2)(ii) or (iii) of this section) for the
                                               tion 3302 to a taxpayer with respect to
immediately preceding taxable year,
                                               wages attributable to the State for the
(b) 0.3 percent of the wages paid by the
                                               taxable year beginning January 1, 1963,
taxpayer during the taxable year which
                                               and for each taxable year thereafter,
are attributable to the State, and (c)
the percentage, if any, described in           shall be reduced unless prior to Novem-
paragraph (c)(2)(ii) or (iii) of this sec-     ber 10 of the taxable year—
tion.                                            (i) There have been restored to the
  (ii) Additional reduction if a balance of    Treasury the amounts of temporary
advances exists after third or fourth con-     unemployment compensation paid in
secutive January 1. If the credit reduc-       the State (except amounts paid to indi-
tion described in subdivision (i) of this      viduals who exhausted their unemploy-
subparagraph is made for the third or          ment compensation under title XV of
fourth consecutive taxable year, the           the Social Security Act and title IV of
total credits otherwise allowable under        the Veterans’ Readjustment Assistance
section 3302 to a taxpayer subject to          Act of 1952 prior to their making their
the unemployment compensation law              first claims under the Temporary Un-
of the State shall be further reduced          employment Compensation Act of
for the taxable year unless the average        1958), the amount of costs incurred in
employer contribution rate (see section        the administration of the Temporary
3302(d)(4)) for such State for the cal-        Unemployment Compensation Act of
endar year preceding such taxable year         1958); with respect to the State, and the
is at least 2.7 percent. The percentage        amount estimated by the Secretary of
of reduction, if any, under this subdivi-      Labor as the State’s proportionate
sion shall be the percentage referred to       share of other costs incurred in the ad-
in section 3302(c)(3)(B) which is cer-         ministration of such Act, or
tified by the Secretary of Labor pursu-          (ii) The State restores to the general
ant to section 3302(d)(7).                     fund of the Treasury the amount cer-
  (iii) Additional reduction if a balance of   tified by the Secretary of Labor pursu-
advances exists after fifth or any suc-        ant to section 104 of the Temporary
ceeding consecutive January 1. If the          Unemployment Compensation Act of
credit reduction described in subdivi-         1958, and designates such restoration as

                                           154
Internal Revenue Service, Treasury                                                                                 § 31.3302(e)–1

being made for purposes of the last sen-                         Less credit:
                                                                     Gross credit ............................      $2,700
tence of such section.                                               Credit reduction (1.45 percent
The credit reduction for a taxable year                                of wages) ............................        1,450
shall be a percentage of the wages paid                              Net credit ................................     1,250
by the taxpayer during that year which                           Amount of Federal tax due ............              1,850
are attributable to the State. The per-
centage for the taxable year 1963 is 0.15                        [T.D. 6658, 28 FR 6633, June 27, 1963, as
percent (that is, 5 percent of the Fed-                          amended by T.D. 6708, 29 FR 3198, Mar. 10,
eral tax, computed as if imposed at the                          1964]
rate of 3 percent). The percentage for
                                                                 § 31.3302(d)–1 Definitions and special
any succeeding year is 0.3 percent (that                              rules relating to limit on total cred-
is, 10 percent of the Federal tax, com-                               its.
puted as if imposed at the rate of 3 per-
cent).                                                              (a) Rate of tax deemed to be 3 percent.
  (4) Example. The cumulative effect of                          In applying the provisions of section
the credit reductions described in this                          3302(c) relating to the limitation on
paragraph may be illustrated by the                              total credits, and to reductions of cred-
following example:                                               its otherwise allowable, the tax im-
                                                                 posed by section 3301 shall be computed
  Example. Advances to the unemployment                          at the rate of 3 percent in lieu of any
account of State X were made in 1957 and in                      other rate prescribed in section 3301
1961 under title XII of the Social Security
Act. Payments under the Temporary Unem-
                                                                 (see § 31.3301–3).
ployment Compensation Act of 1958 were                              (b) Wages attributable to a particular
made in State X in 1958. No portion of the ad-                   State. For purposes of section 3302(c) (2)
vances or payments is returned before No-                        or (3), wages are attributable to a par-
vember 10, 1964. As a consequence:                               ticular State if they are subject to the
  (a) The credit reduction applicable under                      unemployment compensation law of
subparagraph (1) of this paragraph is made                       the State. If wages are not subject to
for 1964 at the rate of 0.15 percent;
                                                                 the unemployment compensation law
  (b) The credit reduction described in sub-
paragraph (2) of this paragraph has been                         of any State, the determination as to
made for 1963 (the second successive year                        whether such wages, or any portion
after 1961) at the rate of 0.3 percent. The rate                 thereof, are attributable to the par-
of credit reduction under subparagraph (2)                       ticular State with respect to which the
for 1964 is 1 percent (the aggregate of 0.6 per-                 reduction in total credits is imposed
cent under section 3302(c)(3)(A) and 0.4 per-                    shall be made in accordance with rules
cent (assumed for purposes of this example                       prescribed by the Commissioner.
to be the percentage referred to in section
                                                                    (c) Employment Security Act of 1960.
3302(c)(3)(B) which is certified by the Sec-
retary of Labor), and                                            The Employment Security Act of 1960,
  (c) The credit reduction described in sub-                     referred to in section 3302(c)(2), means
paragraph (3) of this paragraph has been                         title V of the Social Security Amend-
made for 1963 at the rate of 0.15 percent. The                   ments of 1960.
rate of credit reduction for 1964 is 0.3 per-
cent.                                                            [T.D. 6658, 28 FR 6635, June 27, 1963]
The cumulative rate of credit reduction ap-                      § 31.3302(e)–1 Successor employer.
plicable for 1964 to wages attributable to
State X is 1.45 percent, representing the ag-                       (a) In general. In addition to the cred-
gregate of the percentage reductions applica-                    its against the tax allowable under sec-
ble under subparagraphs (1), (2), and (3) of                     tion 3302(a) and (b) for any taxable year
this paragraph (0.15 percent, 1 percent, and                     after 1960, the taxpayer may be entitled
0.3 percent, respectively). In 1964 Employer A                   to an amount of credit under section
paid wages of $100,000, all of which are sub-
                                                                 3302(e). Credit under section 3302(e) is
ject to the unemployment compensation law
of State X. The credit which would be allow-                     provided in the case of a taxpayer who
able (under section 3302 (a), (b), and (c)(1)) if                (1) acquires substantially all of the
there were no credit reduction is $2,700. Em-                    property used in a trade or business, or
ployer A’s tax is computed as follows for                        in a separate unit of a trade or busi-
1964:                                                            ness, of another person (referred to in
Total taxable wages (attributable                                this section as a predecessor) who is
  to State X) ..................................    $100,000     not an employer (see § 31.3306(a)–1) for
Gross Federal tax (3.1 percent of                                the calendar year in which the acquisi-
  wages) ........................................      3,100     tion takes place, and (2) immediately

                                                               155
§ 31.3306(a)–1                                                26 CFR Ch. I (4–1–99 Edition)

after the acquisition employs in his              (or $200,000) was paid to individuals who were
trade or business one or more individ-            employed by the Y Corporation at the time
uals who immediately prior to the ac-             it acquired the property of the X Partner-
quisition were employed in the trade or           ship. Under section 3302(e), therefore, the Y
                                                  Corporation is entitled to credit of $6,000,
business of the predecessor.                      which is one-fifth of the credit ($30,000)
  (b) Method of computing credit under            which would have been available to the X
section 3302(e). (1) Except as provided in        Partnership.
paragraph (b)(2) of this section, the
amount of credit to which the taxpayer              (3) The aggregate amount of credit
may be entitled under section 3302(e) is          allowable to the taxpayer under sec-
the amount of credit to which the pred-           tion 3302 (a), (b), and (e) is subject to
ecessor would be entitled under section           the limits in section 3302(c).
3302 (a), (b), and (e), without regard to           (c) Proof of credit under section 3302(e).
the limits in section 3302(c), if the pred-       Credit under section 3302(e) shall not be
ecessor were an employer.                         allowed against the tax for any taxable
  (2) If, during the calendar year in             year unless there is submitted to the
which the acquisition takes place, the            district director (1) such information
predecessor pays remuneration, subject            or proof as may be called for in the re-
to contributions under the unemploy-              turn on which the credit is reported, or
ment compensation law of a State, to              in the instructions relating to the re-
any employee other than the individ-              turn, and (2) such other or additional
uals referred to in paragraph (a) of this         proof as the Commissioner or the dis-
section, the taxpayer will be entitled            trict director may deem necessary to
only to a portion of the amount of                establish the right to the credit pro-
credit described in paragraph (b)(1) of           vided for under section 3302(e).
this section. The portion is determined             (d) Cross-references. See paragraph (b)
by multiplying such amount by a frac-             of § 31.3306(b)(1)–1 for examples of the
tion. The numerator of the fraction is            acquisition of property used in a trade
the total amount of remuneration, sub-            or business, or in a separate unit there-
ject to such contributions, paid by the           of.
predecessor during such year to the in-
dividuals referred to in paragraph (a) of         [T.D. 6658, 28 FR 6635, June 27, 1963]
this section. The denominator of the
fraction is the total amount of remu-             § 31.3306(a)–1    Who are employers.
neration, subject to such contribu-                 (a) Definition—(1) For calendar years
tions, paid by the predecessor during             1956 through 1969, inclusive. Every per-
such year to all employees for services           son who employs 4 or more employees
performed by them in the trade or busi-           in employment (within the meaning of
ness, or unit thereof, acquired by the            section 3306 (c) and (d)) on a total of 20
taxpayer.                                         or more calendar days during any cal-
  Example. In April 1961 the X Partnership
                                                  endar year after 1955 and before 1970,
terminated after selling all of its property to   each such day being in a different cal-
the Y Corporation. During 1961, the X Part-       endar week, is with respect to such
nership paid its employees and former em-         year an employer subject to the tax.
ployees a total of $1,000,000 as remuneration       (1a) For 1970 and subsequent calendar
subject to contributions under the employ-        years. Every person who employs 4 or
ment compensation law of a State. (Note           more employees in employment (with-
that the X Partnership did not qualify as an
employer for 1961 for purposes of the Federal
                                                  in the meaning of section 3306 (c) and
unemployment tax, because it had employ-          (d)) on a total of 20 or more calendar
ees during less than 20 weeks in 1961.) When      days during a calendar year after 1969,
the Y Corporation acquired the property it        or during the calendar year imme-
concurrently employed all individuals who         diately preceding such a calendar year,
were then in the employ of the X Partner-         each such day being in a different cal-
ship. Assume that the X Partnership, if it        endar week, is with respect to such
had qualified as an employer for 1961, would      year an employer subject to the tax.
have been entitled to a total credit against
the Federal tax of $30,000 under section 3302       (2) For calendar year 1955. Every per-
(a) and (b), without regard to the limits in      son who employs 8 or more employees
section 3302(c). Of the $1,000,000 remuneration   in employment (within the meaning of
paid by the X Partnership in 1961, one-fifth      section 3306 (c) and (d)) on a total of 20

                                              156
Internal Revenue Service, Treasury                                      § 31.3306(b)–1

or more calendar days during the cal-        3306(c), the employee is counted with
endar year 1955, each such day being in      respect to all services during the pay
a different calendar week, is with re-       period. On the other hand, if the serv-
spect to such year an employer subject       ices of an employee during a pay period
to the tax.                                  are deemed not to be employment,
  (3) General agents of the Secretary of     even though a portion thereof con-
Commerce. For provisions relating to         stitutes employment, the employee is
the circumstances under which an em-         not counted with respect to any serv-
ployee who performs services as an of-       ices during the pay period.
ficer or member of the crew of an            [T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
American vessel (i) which is owned by        amended by T.D. 7037, 35 FR 6709, Apr. 28,
or bareboat chartered to the United          1970]
States and (ii) whose business is con-
ducted by a general agent of the Sec-        § 31.3306(b)–1 Wages.
retary of Commerce shall be deemed to           (a) Applicable law and regulations—(1)
be performing services for such general      Remuneration paid after 1954. Whether
agent rather than for the United             remuneration paid after 1954 for em-
States, see § 31.3306 (N)–1.                 ployment performed after 1938 con-
  (b) The several weeks in each of           stitutes wages is determined under sec-
which occurs a day on which the pre-         tion 3306(b). Accordingly, only remu-
scribed number of employees are em-          neration paid after 1954 for employ-
ployed need not be consecutive weeks.        ment performed after 1938 is covered by
It is not necessary that the employees       this section of the regulations and by
so employed be the same individuals;         the sections relating to the statutory
they may be different individuals on         exclusions from wages (§§ 31.3306(b)(1)–1
each day. Neither is it necessary that       to 31.3306(b)(10)–1).
the prescribed number of employees be           (2) Remuneration paid after 1939 and
employed at the same moment of time          before 1955. Whether remuneration paid
or for any particular length of time or      after 1939 and before 1955 for employ-
on any particular basis of compensa-         ment performed after 1938 constitutes
tion. It is sufficient if the total number   wages shall be determined in accord-
of employees employed during the 24          ance with the applicable provisions of
hours of a calendar day is 4 or more (8      law and of 26 CFR (1939) Part 403 (Regu-
or more for the calendar year 1955).         lations 107).
  (c) In determining whether a person           (3) Remuneration paid in 1939. Whether
employs a sufficient number of employ-       remuneration paid in 1939 for employ-
ees to be an employer subject to the         ment performed after 1938 constitutes
tax, each employee is counted with re-       wages shall be determined in accord-
spect to services which constitute em-       ance with the applicable provisions of
ployment as defined in section 3306(c)       law and of 26 CFR (1939) Part 400 (Regu-
(see § 31.3306(c)–2). No employee is         lations 90).
counted with respect to services which          (b) The term ‘‘wages’’ means all re-
do not constitute employment as so de-       muneration for employment unless spe-
fined. See, however, paragraph (d) of        cifically excepted under section 3306(b)
this section.                                (see §§ 31.3306(b)(1)–1 to 31.3306(b)(10)–1,
  (d) The provisions of paragraph (c) of     inclusive) or paragraph (j) of this sec-
this section are subject to the provi-       tion.
sions of section 3306(d), relating to           (c) The name by which the remunera-
services which do not constitute em-         tion for employment is designated is
ployment but which are deemed to be          immaterial. Thus, salaries, fees, bo-
employment, and relating to services         nuses, and commissions are wages if
which constitute employment but              paid as compensation for employment.
which are deemed not to be employ-              (d) The basis upon which the remu-
ment (see § 31.3306(d)–1). For example, if   neration is paid is immaterial in deter-
the services of an employee during a         mining whether the remuneration con-
pay period are deemed to be employ-          stitutes wages. Thus, it may be paid on
ment under section 3306(d), even             the basis of piecework or a percentage
though a portion thereof does not con-       of profits; and it may be paid hourly,
stitute employment under section             daily, weekly, monthly, or annually.

                                         157
§ 31.3306(b)–1T                                           26 CFR Ch. I (4–1–99 Edition)

   (e) Except in the case of remunera-        cifically excepted under section 3306(b),
tion paid for services not in the course      constitutes wages even though at the
of the employer’s trade or business (see      time paid the individual is no longer an
§ 31.3306(b)(7)–1), the medium in which       employee.
the remuneration is paid is also imma-
                                                Example. A is employed by B, an employer,
terial. It may be paid in cash or in
                                              during the month of June 1955 in employ-
something other than cash, as for ex-         ment and is entitled to receive remuneration
ample, goods, lodging, food, or cloth-        of $100 for the services performed for B dur-
ing. Remuneration paid in items other         ing the month. A leaves the employ of B at
than cash shall be computed on the            the close of business on June 30, 1955. On
basis of the fair value of such items at      July 15, 1955 (when A is no longer an em-
the time of payments.                         ployee of B), B pays A the remuneration of
   (f) Ordinarily, facilities or privileges   $100 which was earned for the services per-
(such as entertainment, medical serv-         formed in June. The $100 is wages, and the
                                              tax is payable with respect thereto.
ices, or so-called ‘‘courtesy’’ discounts
on purchases), furnished or offered by           (j) In addition to the exclusions spec-
an employer to his employees gen-             ified in §§ 31.3306(b)(1)–1 to 31.3306(b)(10)–
erally, are not considered as remunera-       1, inclusive, the following types of pay-
tion for employment if such facilities        ments are excluded from wages:
or privileges are of relatively small            (1) Remuneration for services which
value and are offered or furnished by         do not constitute employment under
the employer merely as a means of pro-        section 3306(c).
moting the health, good will, content-           (2) Remuneration for services which
ment, or efficiency of his employees.         are deemed not to be employment
The term ‘‘facilities or privileges’’,        under section 3306(d) (§ 31.3306(d)–1).
however, does not ordinarily include             (3) Tips or gratuities paid directly to
the value of meals or lodging furnished,
                                              an employee by a customer of an em-
for example, to restaurant or hotel em-
                                              ployer, and not accounted for by the
ployees, or to seamen or other employ-
                                              employee to the employer.
ees aboard vessels, since generally
these items constitute an appreciable            (k) For provisions relating to the
part of the total remuneration of such        treatment of deductions from remu-
employees.                                    neration as payments of remuneration,
   (g) Amounts of so-called ‘‘vacation        see § 31.3307–1.
allowances’’ paid to an employee con-         [T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
stitute wages. Thus, the salary of an         amended by T.D. 6658, 28 FR 6636, June 27,
employee on vacation, paid notwith-           1963; T.D. 7375, 40 FR 42350, Sept. 12, 1975;
standing his absence from work, con-          T.D. 8276, 54 FR 51028, Dec. 12, 1989; T.D. 8324,
stitutes wages.                               55 FR 51697, Dec. 17, 1990]
   (h) Amounts paid specifically—either
as advances or reimbursements—for             § 31.3306(b)–1T Question and answer
                                                   relating to the definition of wages
traveling or other bona fide ordinary              in section 3306(b) (Temporary).
and necessary expenses incurred or rea-
sonably expected to be incurred in the          The following question and answer
business of the employer are not wages.       relates to the definition of wages in
Traveling and other reimbursed ex-            section 3306(b) of the Internal Revenue
penses must be identified either by           Code of 1954, as amended by section
making a separate payment or by spe-          531(d)(3) of the Tax Reform Act of 1984
cifically     indicating    the   separate    (98 Stat. 885):
amounts where both wages and expense            Q–1: Are fringe benefits included in
allowances are combined in a single           the definition of wages under section
payment. For amounts that are re-             3306(b)?
ceived by an employee on or after July          A–1: Yes, unless specifically excluded
1, 1990, with respect to expenses paid or     from the definition of ‘‘wages’’ pursu-
incurred on or after July 1, 1990, see        ant to section 3306(b) (1) through (16).
§ 31.3306(b)–2.                               For example, a fringe benefit provided
   (i) Remuneration paid by an em-            to or on behalf of an employee is ex-
ployer to an individual for employ-           cluded from the definition of ‘‘wages’’
ment, unless such remuneration is spe-        if at the time such benefit is provided

                                          158
Internal Revenue Service, Treasury                                         § 31.3306(b)(1)–1

it is reasonable to believe that the em-       a per diem or mileage allowance paid
ployee will be able to exclude such ben-       as a reimbursement, the excess portion
efit from income under section 117 or          is subject to withholding and payment
132.                                           of employment taxes when paid. In the
[T.D. 8004, 50 FR 755, Jan. 7, 1985]
                                               case of a per diem or mileage allowance
                                               paid as an advance, the excess portion
§ 31.3306(b)–2 Reimbursement            and    is subject to withholding and payment
      other expense allowance amounts.         of employment taxes no later than the
   (a) When excluded from wages. If a re-      first payroll period following the pay-
imbursement or other expense allow-            roll period in which the expenses with
ance arrangement meets the require-            respect to which the advance was paid
ments of section 62(c) of the Code and         (i.e., the days or miles of travel) are
§ 1.62–2 and the expenses are substan-         substantiated. The Commissioner may,
tiated within a reasonable period of           in his discretion, prescribe special
time, payments made under the ar-              rules in pronouncements of general ap-
rangement that do not exceed the sub-          plicability regarding the timing of
stantiated expenses are treated as paid        withholding and payment of employ-
under an accountable plan and are not          ment taxes on per diem and mileage al-
wages. In addition, if both wages and          lowances.
the reimbursement or other expense al-            (2) Nonaccountable plans. If a reim-
lowance are combined in a single pay-          bursement or other expense allowance
ment, the reimbursement or other ex-           arrangement does not satisfy the re-
pense allowance must be identified ei-         quirements of section 62(c) and § 1.62–2
ther by making a separate payment or           (e.g., the arrangement does not require
by specifically identifying the amount         expenses to be substantiated or require
of the reimbursement or other expense          amounts in excess of the substantiated
allowance.                                     expenses to be returned), all amounts
   (b) When included in wages—(1) Ac-          paid under the arrangement are treated
countable plans—(i) General rule. Except       as paid under a nonaccountable plan,
as provided in paragraph (b)(1)(ii) of         are included in wages, and are subject
this section, if a reimbursement or            to withholding and payment of employ-
other expense allowance arrangement            ment taxes when paid.
satisfied the requirements of section             (c) Effective dates. This section gen-
62(c) and § 1.62–2, but the expenses are       erally applies to payments made under
not substantiated within a reasonable          reimbursement or other expense allow-
period of time or amounts in excess of         ance arrangements received by an em-
the substantiated expenses are not re-         ployee on or after July 1, 1990, with re-
                                               spect to expenses paid or incurred on or
turned within a reasonable period of
                                               after July 1, 1990. Paragraph (b)(1)(ii) of
time, the amount paid under the ar-
                                               this section applies to payments made
rangement in excess of the substan-
                                               under reimbursement or other expense
tiated expenses is treated as paid under
                                               allowance arrangements received by an
a nonaccountable plan, is included in
                                               employee on or after January 1, 1991,
wages, and is subject to withholding
                                               with respect to expenses paid or in-
and payment of employment taxes no
                                               curred on or after January 1, 1991.
later than the first payroll period fol-
lowing the end of the reasonable pe-           [T.D. 8324, 55 FR 51697, Dec. 17, 1990]
riod.
   (ii) Per diem or mileage allowances. If a   § 31.3306(b)(1)–1 $3,000 limitation.
reimbursement or other expense allow-             (a) In general. (1) the term ‘‘wages’’
ance arrangement providing a per diem          does not include that part of the remu-
or mileage allowance satisfies the re-         neration paid within any calendar year
quirements of section 62(c) and § 1.62–2,      by an employer to an employee which
but the allowance is paid at a rate for        exceeds the first $3,000 of remuneration
each day or mile of travel that exceeds        (exclusive of remuneration excepted
the amount of the employee’s expenses          from wages in accordance with para-
deemed substantiated for a day or mile         graph      (j)     of    § 31.3306(b)–1    or
of travel, the excess portion is treated       §§ 31.3306(b)(2)–1 to 31.3306(b)(8)–1, inclu-
as paid under a nonaccountable plan            sive), paid within such calendar year
and is included in wages. In the case of       by such employer to such employee for

                                           159
§ 31.3306(b)(1)–1                                              26 CFR Ch. I (4–1–99 Edition)

employment performed for him at any                seven months of 1955, or total remuneration
time after 1938.                                   of $4,200. At the end of the fifth month C has
  (2) The $3,000 limitation applies only           been paid $3,000 by employer D, and only that
if the remuneration paid during any                part of his total remuneration from D con-
                                                   stitutes wages subject to the tax. The $600
one calendar year by an employer to                paid to employee C by employer D in the
the same employee for employment                   sixth month, and the like amount paid in the
performed after 1938 exceeds $3,000. The           seventh month, are not included as wages
limitation in such case relates to the             and are not subject to the tax. At the end of
amount of remuneration paid during                 the seventh month C leaves the employ of D
any one calendar year for employment               and enters the employ of E. Employer E pays
after 1938 and not to the amount of re-            to C remuneration of $600 a month in each of
muneration for employment performed                the remaining five months of 1955, or total
in any one calendar year.                          remuneration of $3,000. The entire $3,000 paid
                                                   by E to employee C constitutes wages and is
  Example. Employer B, in 1955, pays em-           subject to the tax. Thus, the first $3,000 paid
ployee A $2,500 on account of $3,000 due him       by employer D and the entire $3,000 paid by
for employment performed in 1955. In 1956          employer E constitute wages.
employer B pays employee A the balance of            Example 2. During the calendar year 1955 F
$500 due him for employment performed in           is simultaneously an officer (an employee) of
the prior year (1955), and thereafter in 1956      the X Corporation, the Y Corporation, and
also pays A $3,000 for employment performed        the Z Corporation, each such corporation
in 1956. The $2,500 paid in 1955 is subject to     being an employer for such year. During
tax in 1955. The balance of $500 paid in 1956      such year F is paid a salary of $3,000 by each
for employment during 1955 is subject to tax       Corporation. Each $3,000 paid to F by each of
in 1956, as is also the first $2,500 paid of the   the corporations, X, Y, and Z (whether or not
$3,000 for employment during 1956 (this $500       such corporations are related), constitutes
for 1955 employment added to the first $2,500      wages and is subject to the tax.
paid for 1956 employment constitutes the
maximum wages subject to the tax which                (b) Wages paid by predecessor attrib-
could be paid in 1956 by B to A). The final        uted to successor. (1) If an employer
$500 paid by B to A in 1956 is not included as     (hereinafter referred to as a successor)
wages and is not subject to the tax.
                                                   during any calendar year acquires sub-
  (3) If during a calendar year an em-             stantially all the property used in a
ployee is paid remuneration by more                trade or business of another employer
than one employer, the limitation of               (hereinafter referred to as a prede-
wages to the first $3,000 of remunera-             cessor), or used in a separate unit of a
tion paid applies, not to the aggregate            trade or business of a predecessor, and
remuneration paid by all employers                 if immediately after the acquisition
with respect to employment performed               the successor employs in his trade or
after 1938, but instead to the remunera-           business an individual who imme-
tion paid during such calendar year by             diately prior to the acquisition was
each employer with respect to employ-              employed in the trade or business of
ment performed after 1938. In such case            such predecessor, then, for purposes of
the first $3,000 paid during the calendar          the application of the $3,000 limitation
year by each employer constitutes                  set forth in paragraph (a) of this sec-
wages and is subject to the tax. In con-           tion, any remuneration (exclusive of
nection with the application of the                remuneration excepted from wages in
$3,000 limitation, see also paragraph (b)          accordance with paragraph (j) of
of this section relating to the cir-               § 31.3306(b)–1 or §§ 31.3306(b)(2)–1 to
cumstances under which wages paid by               31.3306(b)(8)–1, inclusive), with respect
a predecessor employer are deemed to               to employment paid (or considered
be paid by his successor. In connection            under this provision as having been
with the annual wage limitation in the             paid to such individual by such prede-
case of remuneration after December                cessor during such calendar year and
31, 1978 from two or more related cor-             prior to such acquisition shall be con-
porations that compensate an em-                   sidered as having been paid by such
ployee through a common paymaster,                 successor. Wages paid by a predecessor
see § 31.3306(p)–1.                                shall not be considered as having been
  Example 1. During 1955 employer D pays to        paid by the successor unless both the
employee C a salary of $600 a month for em-        predecessor and the successor are em-
ployment performed for D during the first          ployers as defined in section 3306(a) for

                                               160
Internal Revenue Service, Treasury                                       § 31.3306(b)(1)–1

the calendar year in which the acquisi-         stores transfers one of such stores to the S
tion occurs (see § 31.3306(a)–1, relating       Company. The S Company is considered to
to who are employers).                          have acquired a separate unit of the trade or
  (2) The wages paid, or considered as          business of the R Corporation.
having been paid, by a predecessor to             (5) A successor may receive credit for
an employee shall, for purposes of the          wages paid to an employee by a prede-
$3,000 limitation, be treated as having         cessor only if immediately prior to the
been paid to such employee by a suc-            acquisition the employee was employed
cessor, if:
                                                by the predecessor in his trade or busi-
  (i) The successor during a calendar
year acquired substantially all the             ness which was acquired by the suc-
property used in a trade or business, or        cessor and if immediately after the ac-
used in a separate unit of a trade or           quisition such employee is employed
business, of the predecessor;                   by the successor in his trade or busi-
  (ii) Such employee was employed in            ness (whether or not in the same trade
the trade or business of the predecessor        or business in which the acquired prop-
immediately prior to the acquisition            erty is used). If the acquisition in-
and is employed by the successor in his         volves only a separate unit of a trade
trade or business immediately after the         or business of the predecessor, the em-
acquisition; and                                ployee need not have been employed by
  (iii) Such wages were paid during the         the predecessor in that unit provided
calendar year in which the acquisition          he was employed in the trade or busi-
occurred and prior to such acquisition.         ness of which the acquired unit was a
  (3) The method of acquisition by an           part.
employer of the property of another
employer is immaterial. The acquisi-              Example. The Y Corporation in 1955 ac-
tion may occur as a consequence of the          quires all the property of the X Manufac-
incorporation of a business by a sole           turing Company and immediately after the
                                                acquisition employs in its trade or business
proprietor of a partnership, the con-
                                                employee A, who, immediately prior to the
tinuance without interruption of the
                                                acquisition, was employed by the X Com-
business of a previously existing part-         pany. Both the Y Corporation and the X
nership by a new partnership or by a            Company are employers, as defined in the
sole proprietor, or a purchase or any           Act, for the calendar year 1955. The X Com-
other transaction whereby substan-              pany has in 1955 (the calendar year in which
tially all the property used in a trade         the acquisition occurs) and prior to the ac-
or business, or used in a separate unit         quisition paid $2,000 of wages to A. The Y
of a trade or business, of one employer         Corporation in 1955 pays to A remuneration
is acquired by another employer.                with respect to employment of $2,000. Only
  (4) Substantially all the property            $1,000 of such remuneration is considered to
used in a separate unit of a trade or           be wages. For purposes of the $3,000 limita-
business may consist of substantially           tion, the Y Corporation is credited with the
all the property used in the perform-           $2,000 paid to A by the X Company. If, in the
ance of an essential operation of the           same calendar year, the property is acquired
                                                from the Y Corporation by the Z Company,
trade or business, or it may consist of
                                                an employer for such year, and A imme-
substantially all the property used in a        diately after the acquisition is employed by
relatively self-sustaining entity which         the Z Company in its trade or business, no
forms a part of the trade or business.          part of the remuneration paid to A by the Z
  Example 1. The M Corporation which is en-     Company in the year of the acquisition will
gaged in the manufacture of automobiles, in-    be considered to be wages. The Z Company
cluding the manufacture of automobile en-       will be credited with the remuneration paid
gines, discontinues the manufacture of the      to A by the Y Corporation and also with the
engines and transfers all the property used     wages paid to A by the X Company (consid-
in such manufacturing operations to the N       ered for purposes of the application of the
Company. The N Company is considered to         $3,000 limitation as having also been paid by
have acquired a separate unit of the trade or   the Y Corporation).
business of the M Corporation, namely, its
engine manufacturing unit.                      [T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
  Example 2. The R Corporation which is en-     amended by T.D. 6658, 28 FR 6636, June 27,
gaged in the operation of a chain of grocery    1963; T.D. 7660, 44 FR 75142, Dec. 19, 1979]



                                            161
§ 31.3306(b)(2)–1                                      26 CFR Ch. I (4–1–99 Edition)

§ 31.3306(b)(2)–1 Payments under em-        employee’s retirement. Thus payments
     ployers’ plans on account of retire-   made to an employee on account of his
     ment, sickness or accident dis-        retirement are excluded from wages
     ability, medical or hospitalization    under this exception even though not
     expenses, or death.                    made under a plan or system.
   (a) The term ‘‘wages’’ does not in-
clude the amount of any payment (in-        § 31.3306(b)(4)–1 Payments on account
cluding any amount paid by an em-                of sickness or accident disability, or
ployer for insurance or annuities, or            medical or hospitalization ex-
into a fund, to provide for any such             penses.
payment) made to, or on behalf of, an         The term ‘‘wages’’ does not include
employee or any of his dependents           any payment made by an employer to,
under a plan or system established by       or on behalf of, an employee on ac-
an employer which makes provision for       count of the employee’s sickness or ac-
his employees generally (or for his em-     cident disability or the medical or hos-
ployees generally and their dependents)     pitalization expenses in connection
or for a class or classes of his employ-    with the employee’s sickness or acci-
ees (or for a class or classes of his em-   dent disability, if such payment is
ployees and their dependents), on ac-       made after the expiration of 6 calendar
count of:                                   months following the last calendar
   (1) An employee’s retirement,            month in which such employee worked
   (2) Sickness or accident disability of   for such employer. Such payments are
an employee or any of his dependents,       excluded from wages under this excep-
   (3) Medical or hospitalization ex-       tion even though not made under a
penses in connection with sickness or       plan or system. If the employee does
accident disability of an employee or       not actually perform services for the
any of his dependents, or                   employer during the requisite period,
   (4) Death of an employee or any of       the existence of the employer-em-
his dependents.                             ployee relationship during that period
   (b) The plan or system established by    is immaterial.
an employer need not provide for pay-
ments on account of all of the specified    § 31.3306(b)(5)–1 Payments from or to
items, but such plan or system may               certain tax-exempt trusts, or under
provide for any one or more of such              or to certain annuity plans or bond
items. Payments for any one or more              purchase plans.
of such items under a plan or system          (a) Payments from or to certain tax-ex-
established by an employer solely for       empt trusts. The term ‘‘wages’’ does not
the dependents of his employees are         include any payment made—
not within this exclusion from wages.         (1) By an employer, on behalf of an
   (c) Dependents of an employee in-        employee or his beneficiary, into a
clude the employee’s husband or wife,
                                            trust, or
children, and any other members of the
                                              (2) To, or on behalf of an employee or
employee’s immediate family.
   (d) It is immaterial for purposes of     his beneficiary from a trust,
this exclusion whether the amount or        if at the time of such payment the
possibility of such benefit payments is     trust is exempt from tax under section
taken into consideration in fixing the      501(a) as an organization described in
amount of an employee’s remuneration        section 401(a). A payment made to an
or whether such payments are re-            employee of such a trust for services
quired, expressly or impliedly, by the      rendered as an employee of the trust
contract of service.                        and not as a beneficiary thereof is not
                                            within this exclusion from wages.
§ 31.3306(b)(3)–1 Retirement payments.        (b) Payments under or to certain annu-
   The term ‘‘wages’’ does not include      ity plans. (1) The term ‘‘wages’’ does
any payment made by an employer to          not include any payment made after
an employee (including any amount           December 31, 1962—
paid by an employer for insurance or          (i) By an employer, on behalf of an
annuities, or into a fund, to provide for   employee or his beneficiary, into an
any such payment) on account of the         annuity plan, or

                                        162
Internal Revenue Service, Treasury                                  § 31.3306(b)(9)–1

   (ii) To, or on behalf of, an employee     ities, for service not in the course of
or his beneficiary under an annuity          the employer’s trade or business does
plan, if at the time of such payment         not constitute wages. Remuneration
the annuity plan is a plan described in      paid in any medium other than cash for
section 403(a).                              other types of services does not come
   (2) The term ‘‘wages’’ does not in-       within this exclusion from wages. For
clude any payment made before Janu-          provisions    relating     to the   cir-
ary 1, 1963—                                 cumstances under which service not in
   (i) By an employer, on behalf of an       the course of the employer’s trade or
employee or his beneficiary, into an         business does not constitute employ-
annuity plan, or                             ment, see § 31.3306(c)(3)–1.
   (ii) To, or on behalf of, an employee
or his beneficiary under an annuity          § 31.3306(b)(8)–1 Payments to employ-
plan, if at the time of such payment              ees for non-work periods.
the annuity plan meets the require-             The term ‘‘wages’’ does not include
ments of section 401(a) (3), (4), (5), and   any payment (other than vacation or
(6).                                         sick pay) made by an employer to an
   (c) Payments under or to certain bond     employee after the calendar month in
purchase plans. The term ‘‘wages’’ does      which the employee attains age 65, if—
not include any payment made after              (a) Such employee does no work
December 31, 1962—                           (other than being subject to call for the
   (1) By an employer, on behalf of an       performance of work) for such em-
employee or his beneficiary, into a          ployer in the period for which such
bond purchase plan, or                       payment is made; and
   (2) To, or on behalf of, an employee         (b) The employer-employee relation-
or his beneficiary under a bond pur-         ship exists between the employer and
chase plan,                                  employee throughout the period for
if at the time of such payment the plan      which such payment is made.
is a qualified bond purchase plan de-        Vacation or sick pay is not within this
scribed in section 405(a).                   exclusion from wages. If the employee
                                             does any work for the employer in the
[T.D. 6658, 28 FR 6636, June 27, 1963]
                                             period for which the payment is made,
§ 31.3306(b)(6)–1 Payment by an em-          no remuneration paid by such em-
     ployer of employee tax under sec-       ployer to such employee with respect
     tion 3101 or employee contributions     to such period is within this exclusion
     under a State law.                      from wages. For example, if employee
   The term ‘‘wages’’ does not include       A, who attained the age of 65 in Janu-
any payment by an employer (without          ary 1955, is employed by the X Com-
deduction from the remuneration of, or       pany on a stand-by basis and is paid
other reimbursement from, the em-            $200 by the X Company for being sub-
ployee) of either (a) the employee tax       ject to call during the month of Feb-
imposed by section 3101 or the cor-          ruary 1955 and an additional $25 for
responding section of prior law, or (b)      work performed for the X Company on
any payment required from an em-             one day in February 1955, then none of
ployee under a State unemployment            the $225 is excluded from wages under
compensation law.                            this exception.
                                             [T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
§ 31.3306(b)(7)–1 Payments other than        amended by T.D. 6708, 29 FR 3199, Mar. 10,
     in cash for service not in the course   1964]
     of employer’s trade or business.
   The term ‘‘wages’’ does not include       § 31.3306(b)(9)–1 Moving expenses.
remuneration paid in any medium                 (a) The term ‘‘wages’’ does not in-
other than cash for service not in the       clude remuneration paid on or after
course of the employer’s trade or busi-      November 1, 1964, to or on behalf of an
ness. Cash remuneration includes             employee, either as an advance or a re-
checks and other monetary media of           imbursement, specifically for moving
exchange. Remuneration paid in any           expenses incurred or expected to be in-
medium other than cash, such as lodg-        curred, if (and to the extent that) at
ing, food, or other goods or commod-         the time of payment it is reasonable to

                                         163
§ 31.3306(b)(10)–1                                      26 CFR Ch. I (4–1–99 Edition)

believe that a corresponding deduction       an incentive compensation plan which
is or will be allowable to the employee      also provides for the making of other
under section 217. The reasonable belief     types of payments. However, any pay-
contemplated by the statute may be           ment or series of payments which
based upon any evidence reasonably           would have been paid if the employee’s
sufficient to induce such belief, even       relationship had not been terminated is
though such evidence may be insuffi-         not excluded from ‘‘wages’’ under this
cient upon closer examination by the         section and section 3306(b)(10). For ex-
district director or the courts finally      ample, lump-sum payments for unused
to establish that a deduction is allow-      vacation time or a final paycheck re-
able under section 217. The reasonable       ceived after retirement are payments
belief shall be based upon the applica-      which the employee would have re-
tion of section 217 and the regulations      ceived whether or not he retired and
thereunder in Part 1 of this chapter         therefore are not excluded from
(Income Tax Regulations). When used
                                             ‘‘wages.’’ Further, if any payment is
in this section, the term ‘‘moving ex-
                                             made upon or after termination of em-
penses’’ has the same meaning as when
                                             ployment for any reason other than
used in section 217 and the regulations
                                             those set out in paragraphs (a)(1), (2),
thereunder.
  (b) Except as otherwise provided in        and (3) of this section such payment is
paragraph (a) of this section, or in a       not excludable from ‘‘wages’’ by this
numbered paragraph of section 3306(b),       section. For example, if a pension plan
amounts paid to or on behalf of an em-       provides for retirement upon disability,
ployee for moving expenses are wages         completion of 30 years of service, or at-
for purposes of section 3306(b).             tainment of age 65, and if an employee
                                             who is not disabled retires at age 61
[T.D. 7375, 40 FR 42351, Sept. 12, 1975]     after 30 years of service, none of the re-
                                             tirement payments made to the em-
§ 31.3306(b)(10)–1 Payments under cer-
     tain employers’ plans after retire-     ployee under the pension plan (includ-
     ment, disability, or death.             ing any made after he is 65) is exclud-
                                             able from ‘‘wages’’ under this section.
   (a) In general. The term ‘‘wages’’ does
                                             However, if the pension plan had condi-
not include the amount of any pay-
                                             tioned retirement after 30 years of
ment or series of payments made after
January 2, 1968, by an employer to, or       service upon attainment of age 60, all
on behalf of, an employee or any of his      of the retirement payments would have
dependents under a plan established by       been excludable.
the employer which makes provisions            (b) Plan. The plan or system estab-
for his employees generally (or for his      lished by an employer need not provide
employees generally and their depend-        for payments because of termination of
ents) or for a class or classes of his em-   employment for all the reasons set out
ployees (or for a class or classes of his    in paragraphs (a)(1), (2), and (3) of this
employees and their dependents),             section, but such plan or system may
which is paid or commences to be paid        provide for payments because of termi-
upon or within a reasonable time after       nation for any one or more of such rea-
the termination of an employee’s em-         sons. Payments because of termination
ployment relationship because of the         of employment for any one or more of
employee’s—                                  such reasons under a plan or system es-
   (1) Death,                                tablished by an employer solely for the
   (2) Retirement for disability, or         dependents of his employees are not
   (3) Retirement after attaining an age     within this exclusion from wages.
specified in the plan established by the       (c) Dependents. Dependents of an em-
employer or in a pension plan of the         ployee include the employee’s husband
employer as the age at which a person        or wife, children, and any other mem-
in the employee’s circumstances is eli-      bers of the employee’s immediate fam-
gible for retirement.                        ily.
A payment or series of payments made           (d) Benefit payments. It is immaterial
under the circumstances described in         for purposes of this exclusion whether
the preceding sentence is excluded           the amount or possibility of such ben-
from ‘‘wages’’ even if made pursuant to      efit payments is paid on account of

                                           164
Internal Revenue Service, Treasury                                             § 31.3306(c)–2

services rendered or taken into consid-              §§ 31.3306(b)–1 to 31.3306(b)(8)–1, inclu-
eration in fixing the amount of an em-               sive, relating to wages.
ployee’s remuneration or whether such                   (c) Determination of whether serv-
payments are required expressly or                   ices performed after 1938 and before
impliedly, by the contract of service.               1955 constitute employment shall be
  (e) Example. The application of this               made in accordance with the provisions
section may be illustrated by the fol-               of law applicable to the period in which
lowing example:                                      they were performed and of the regula-
  Example. A, an employee, receives a salary         tions thereunder. The regulations ap-
of $1,500 a month, payable on the 5th day of         plicable in determining whether serv-
the month following the month for which the          ices performed after 1938 and before
salary is earned. A’s employer has estab-            1955 constitute employment are as fol-
lished an incentive compensation plan for a          lows:
class of his employees, including A, pro-               (1) Services performed in 1939—26
viding for the payment of deferred com-
pensation on termination of employment, in-
                                                     CFR (1939) Part 400 (Regulations 90).
cluding termination upon an employee’s                  (2) Services performed after 1939 and
death, retirement at age 65 (the retirement          before 1955—26 CFR (1939) Part 403
age specified in the plan), or retirement for        (Regulations 107).
disability. On March 1, 1973, A attains the
age of 65 and retires. On March 5, 1973, A re-       § 31.3306(c)–2 Employment;       services
ceives $5,500 from his employer of which                  performed after 1954.
$1,500 represents A’s salary for services he
performed in February 1973, and $4,000 rep-             (a) In general. Whether services per-
resents incentive compensation paid under            formed after 1954 constitute employ-
the employer’s plan. The amount of $4,000 is         ment is determined under subsections
excluded from ‘‘wages’’ under this section.          (c) and (n) of section 3306.
The amount of $1,500 is not excluded from               (b) Services performed within the
‘‘wages’’ under this section.
                                                     United States. Services performed after
[T.D. 7374, 40 FR 30951, July 24, 1975]              1954 within the United States (see
                                                     § 31.3306(j)–1) by an employee for the
§ 31.3306(b)(13)–1 Payments or benefits              person employing him, unless specifi-
     under a qualified educational as-
     sistance program.                               cally excepted under section 3306(c),
                                                     constitute employment. With respect
  The term ‘‘wages’’ does not include                to services performed within the
any payment made, or benefit fur-                    United States, the place where the con-
nished, to or for the benefit of an em-              tract of service is entered into is im-
ployee in a taxable year beginning                   material. The citizenship or residence
after December 31, 1978, if at the time              of the employee or of the person em-
of such payment or furnishing it is rea-             ploying him also is immaterial except
sonable to believe that the employee                 to the extent provided in any specific
will be able to exclude such payment or              exception from employment. Thus, the
benefit from income under section 127.               employee and the person employing
[T.D. 7898, 48 FR 31019, July 6, 1983]               him may be citizens and residents of a
                                                     foreign country and the contract of
§ 31.3306(c)–1 Employment;                services   service may be entered into in a for-
     performed before 1955.                          eign country, and yet, if the employee
  (a) Services performed after 1938 and              under such contract performs services
before 1955 constitute employment                    within the United States, there may be
under section 3306(c) if such services               to that extent employment.
were employment under the law appli-                    (c) Services performed outside the
cable to the period in which they were               United States—(1) In general. Except as
performed.                                           provided in subparagraph (2) of this
  (b) The tax applies with respect to re-            paragraph, services performed outside
muneration paid by an employer after                 the United States (see § 31.3306(j)–1) do
1954 for services performed after 1938               not constitute employment.
and before 1955, as well as for services                (2) On or in connection with an Amer-
performed after 1954, to the extent that             ican vessel or American aircraft. (i) This
the remuneration and services con-                   subparagraph relates to services per-
stitute wages and employment. See                    formed after 1954 ‘‘on or in connection

                                                 165
§ 31.3306(c)–3                                              26 CFR Ch. I (4–1–99 Edition)

with’’ an American vessel, and to serv-         met, then the services of that employee
ices performed after 1961 ‘‘on or in con-       performed on or in connection with the
nection with’’ an American aircraft to          vessel or aircraft constitute employ-
the extent that the remuneration for            ment. The expression ‘‘on or in connec-
the latter services is paid after 1961.         tion with’’ refers not only to services
Such services performed outside the             performed on the vessel or aircraft but
United States by an employee for the            also to services connected with the ves-
person employing him constitute em-             sel or aircraft which are not actually
ployment if:                                    performed on it (for example, shore
   (a) The employee is also employed            services performed as officers or mem-
‘‘on and in connection with’’ such ves-         bers of the crew, or as employees of
sel or aircraft when outside the United         concessionaires, of the vessel).
States; and                                        (iv) Services performed by a member
   (b) The services are performed under         of the crew or other employee whose
a contract of service, between the em-          contract of service is not entered into
ployee and the person employing him,            within the United States, and during
which is entered into within the United         the performance of which and while the
States, or during the performance of            employee is employed on the vessel or
the contract under which the services           aircraft it does not touch at a port
are performed and while the employee            within the United States, do not con-
is employed on the vessel or aircraft it        stitute employment, notwithstanding
touches at a port within the United             that service performed by other mem-
States; and                                     bers of the crew or other employees on
   (c) The services are not excepted            or in connection with the vessel or air-
under section 3306(c). (See particularly        craft may constitute employment.
§ 31.3306(c)(17)–1, relating to fishing.)          (v) A vessel includes every descrip-
   (ii) An employee performs services on        tion of watercraft, or other contriv-
and in connection with the vessel or            ance, used as a means of transportation
aircraft if he performs services on the         on water. An aircraft includes every
vessel or aircraft which are also in con-       description of craft, or other contriv-
nection with the vessel or aircraft.            ance, used as a means of transportation
Services performed on the vessel by             through the air. In the case of an air-
employees as officers or members of             craft, the term ‘‘port’’ means an air-
the crew, or as employees of conces-            port. An airport means an area on land
sionaires, of the vessel, for example,          or water used regularly by aircraft for
are      performed     under     such    cir-   receiving or discharging passengers or
cumstances, since the services are also         cargo. For definitions of ‘‘American
connected with the vessel. Similarly,           vessel’’ and ‘‘American aircraft’’, see
services performed on the aircraft by           § 31.3306(m)–1.
employees as officers or members of                (vi) With respect to services per-
the crew of the aircraft are performed          formed outside the United States on or
on and in connection with such air-             in connection with an American vessel
craft. Services may be performed on             or American aircraft, the citizenship or
the vessel or aircraft, however, which          residence of the employee is immate-
have no connection with it, as in the           rial, and the citizenship or residence of
case of services performed by an em-            the employer is material only in case it
ployee while on the vessel or aircraft          has a bearing in determining whether a
merely as a passenger in the general            vessel is an American vessel.
sense. For example, the services of a           [T.D. 6658, 28 FR 6636, June 27, 1963]
buyer in the employ of a department
store while he is a passenger on a ves-         § 31.3306(c)–3 Employment;      excepted
sel are not in connection with the ves-              services in general.
sel.                                               (a) Services performed by an em-
   (iii) If services are performed by an        ployee for the person employing him do
employee ‘‘on and in connection with’’          not constitute employment for pur-
an American vessel or American air-             poses of the tax if they are specifically
craft when outside the United States            excepted from employment under any
and the conditions in (b) and (c) of            of the numbered paragraphs of section
paragraph (c)(2)(i) of this section are         3306(c). Services so excepted do not

                                            166
Internal Revenue Service, Treasury                                        § 31.3306(c)(2)–1

constitute employment for purposes of             hotel, or other similar establishment
the tax even though they are per-                 may constitute a private home. If a
formed within the United States, or are           dwelling house is used primarily as a
performed outside the United States on            boarding or lodging house for the pur-
or in connection with an American ves-            pose of supplying board or lodging to
sel or American aircraft. If not other-           the public as a business enterprise, it is
wise provided in the regulations relat-           not a private home and the services
ing to the numbered paragraphs of sec-            performed therein are not excepted.
tion 3306(c), such regulations apply                (2) In general, services of a household
with respect to services performed                nature in or about a private home in-
after 1954.                                       clude services performed by cooks,
  (b) The exception attaches to the               waiters, butlers, housekeepers, govern-
services performed by the employee                esses, maids, valets, baby sitters, jani-
and not to the employee as an indi-               tors, laundresses, furnacemen, care-
vidual; that is, the exception applies            takers, handymen, gardeners, footmen,
only to the services rendered by the              grooms, and chauffeurs of automobile
employee in an excepted class.                    for family use.
   Example. A is an individual who is em-           (b) In a local college club or local chap-
ployed part time by B to perform services         ter of a college fraternity or sorority. (1)
which constitutes ‘‘agricultural labor’’ (see     Services of a household nature per-
§ 31.3306 (k)–1). A is also employed by C part
                                                  formed by an employee in or about the
time to perform services as a grocery clerk
in a store owned by him. While A’s services       club rooms or house of a local college
which constitute ‘‘agricultural labor’’ are ex-   club or of a local chapter of a college
pected, the exception does not embrace the        fraternity or sorority by which he is
services performed by A as a grocery clerk in     employed are excepted from employ-
the employ of C and the latter services are       ment. A local college club or local
not excepted from employment.                     chapter of a college fraternity or soror-
   (c) For provisions relating to the cir-        ity does not include an alumni club or
cumstances under which services which             chapter. If the club rooms or house of
are excepted are nevertheless deemed              a local college club or local chapter of
to be employment, and relating to the             a college fraternity or sorority is used
circumstances under which services                primarily for the purpose of supplying
which are not excepted are neverthe-              board or lodging to students or the
less deemed not to be employment, see             public as a business enterprise, the
§ 31.3306(d)–1.                                   services performed therein are not
                                                  within the exception.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
amended by T.D. 6658, 28 FR 6637, June 27,          (2) In general, services of a household
1963]                                             nature in or about the club rooms or
                                                  house of a local college club or local
§ 31.3306(c)(1)–1 Agricultural labor.             chapter of a college fraternity or soror-
   Services performed by an employee              ity include services rendered by cooks,
for the person employing him which                waiters, butlers, maids, janitors, laun-
constitute ‘‘agricultural labor’’ as de-          dresses, furnacemen, handymen, gar-
fined in section 3306(k) are excepted             deners,    housekeepers,      and    house-
from employment. For provisions re-               mothers.
lating to the definition of the term                (c) Services not excepted. Services not
‘‘agricultural labor’’, see § 31.3306(k)–1.       of a household nature, such as services
                                                  performed as a private secretary, tutor,
§ 31.3306(c)(2)–1 Domestic service.               or librarian, even though performed in
   (a) In a private home. (1) Services of a       the employer’s private home or in a
household nature performed by an em-              local college club or local chapter of a
ployee in or about a private home of              college fraternity or sorority, are not
the person by whom he is employed are             within the exception. Services of a
excepted from employment. A private               household nature are not within the
home is a fixed place of abode of an in-          exception if performed in or about
dividual or family. A separate and dis-           rooming or lodging houses, boarding
tinct dwelling unit maintained by an              houses, clubs (except local college
individual in an apartment house,                 clubs), hotels, hospitals, eleemosynary

                                              167
§ 31.3306(c)(3)–1                                     26 CFR Ch. I (4–1–99 Edition)

institutions, or commercial offices or      days (whether or not consecutive) dur-
establishments.                             ing such calendar quarter; or
                                               (2) Such individual was regularly em-
§ 31.3306(c)(3)–1 Services not in the       ployed (as determined under paragraph
     course of employer’s trade or busi-
     ness.                                  (d)(1) of this section) by such employer
                                            in the performance of services not in
   (a) Services not in the course of the    the course of the employer’s trade or
employer’s trade or business performed      business during the preceding calender
by an employe for an employer in a cal-     quarter (including the last calendar
endar quarter are excepted from em-         quarter of 1954).
ployment unless—                               (e) In determining whether an em-
   (1) The cash remuneration paid for       ployee has performed services not in
such services performed by the em-          the course of the employer’s trade or
ployee for the employer in the calendar
                                            business on at least 24 days during a
quarter is $50 or more; and
                                            calendar quarter, there shall be count-
   (2) Such employee is regularly em-
                                            ed as one day—
ployed in the calendar quarter by such
employer to perform such services.             (1) Any day or portion thereof on
                                            which the employee actually performs
Unless the tests set forth in both para-    such services; and
graphs (a)(1) and (2) of this section are
                                               (2) Any day or portion thereof on
met, the services are excepted from
                                            which the employee does not perform
employment.
                                            services of the prescribed character but
   (b) The term ‘‘services not in the
                                            with respect to which cash remunera-
course of the employer’s trade or busi-
                                            tion is paid or payable to the employee
ness’’ includes services that do not pro-
                                            for such services, such as a day on
mote or advance the trade or business
                                            which the employee is sick or on vaca-
of the employer. Services performed for
                                            tion.
a corporation do not come within the
exception.                                  An employee who on a particular day
   (c) The test relating to cash remu-      reports for work and, at the direction
neration of $50 or more is based on the     of his employer, holds himself in readi-
remuneration earned during a calendar       ness to perform services not in the
quarter rather than on the remunera-        course of the employer’s trade or busi-
tion paid in a calendar quarter. How-       ness shall be considered to be engaged
ever, for purposes of determining           in the actual performance of such serv-
whether the test is met, it is also re-     ices on that day. For purposes of this
quired that the remuneration be paid,       exception, a day is a period of 24 hours
although it is immaterial when the re-      commencing at midnight and ending at
muneration is paid. Furthermore, in         midnight.
determining whether $50 or more has            (f) For provisions relating to the ex-
been paid for services not in the course    clusion from wages of remuneration
of the employer’s trade or business,        paid in any medium other than cash for
only cash remuneration for such serv-       services not in the course of the em-
ices shall be taken into account. The       ployer’s     trade   or   business,   see
term ‘‘cash remuneration’’ includes         § 31.3306(b) (7)–1.
checks and other monetary media of
exchange. Remuneration paid in any          § 31.3306(c)(4)–1 Services on or in con-
other medium, such as lodging, food, or          nection with a non-American vessel
other goods or commodities, is dis-              or aircraft.
regarded in determining whether the           (a) Services performed within the
cash-remuneration test is met.              United States by an employee for an
   (d) For purposes of this exception, an   employer ‘‘on or in connection with’’ a
individual is deemed to be regularly        vessel not an American vessel, or ‘‘on
employed by an employer during a cal-       or in connection with’’ an aircraft not
endar quarter only if—                      an American aircraft, are excepted
   (1) Such individual performs services    from employment if the employee is
not in the course of the employer’s         employed by the employer ‘‘on and in
trade or business for such employer for     connection with’’ the vessel or aircraft
some portion of the day on at least 24      when outside the United States.

                                        168
Internal Revenue Service, Treasury                                        § 31.3306(c)(6)–1

  (b) An employee performs services on         formed outside the United States on or
and in connection with the vessel or           in connection with a vessel not an
aircraft if he performs services on the        American vessel, or an aircraft not an
vessel or aircraft when outside the            American aircraft, do not constitute
United States which are also in connec-        employment in any event.
tion with the vessel or aircraft. Serv-          (f) The provisions of section 3306(c)
ices performed on the vessel outside           (4) and of this section, insofar as they
the United States by employees as offi-        relate to services performed on or in
cers or members of the crew, or by em-         connection with an aircraft not an
ployees of concessionaires, of the ves-        American aircraft, apply only to serv-
sel, for example, are performed under          ices performed after 1961 for which re-
such circumstances, since such services        muneration is paid after 1961.
are also connected with the vessel.            [T.D. 6658, 28 FR 6637, June 27, 1963]
Similarly, services performed on the
aircraft outside the United States by          § 31.3306(c)(5)–1 Family employment.
employees as officers or members of               (a) Certain services are excepted
the crew of the aircraft are performed         from employment because of the exist-
on and in connection with such air-            ence of a family relationship between
craft. Services may be performed on            the employee and the individual em-
the vessel or aircraft, however, which         ploying him. The exceptions are as fol-
have no connection with it, as in the          lows:
case of services performed by an em-              (1) Services performed by an indi-
ployee while on the vessel or aircraft         vidual in the employ of his or her
merely as a passenger in the general           spouse;
sense. For example, the services of a             (2) Services performed by a father or
buyer in the employ of a department            mother in the employ of his or her son
store while he is a passenger on a ves-        or daughter; and
sel are not in connection with the ves-           (3) Services performed by a son or
sel.                                           daughter under the age of 21 in the em-
  (c) The expression ‘‘on or in connec-        ploy of his or her father or mother.
tion with’’ refers not only to services           (b) Under paragraph (a) (1) and (2) of
performed on the vessel or aircraft but        this section, the exception is condi-
also to services connected with the ves-       tioned solely upon the family relation-
sel or aircraft which are not actually         ship between the employee and the in-
performed on it (for example, shore            dividual employing him. Under para-
services performed as officers or mem-         graph (a)(3) of this section, in addition
bers of the crew, or as employees of           to the family relationship, there is a
concessionaires, of the vessel).               further requirement that the son or
  (d) The citizenship or residence of the      daughter shall be under the age of 21,
employee and the place where the con-          and the exception continues only dur-
tract of service is entered into are im-       ing the time that such son or daughter
material for purposes of this exception,       is under the age of 21.
and the citizenship or residence of the           (c) Services performed in the employ
person employing him is material only          of a corporation are not within the ex-
in case it has a bearing in determining        ception. Services performed in the em-
whether the vessel is an American ves-         ploy of a partnership are not within
sel. For definitions of the terms ‘‘ves-       the exception unless the requisite fam-
sel’’ and ‘‘aircraft’’, see paragraph          ily relationship exists between the em-
(c)(2)(v) of § 31.3306(c)–2. For definitions   ployee and each of the partners com-
of the terms ‘‘American vessel’’ and           prising the partnership.
‘‘American aircraft’’, see § 31.3306(m)–1.
  (e) Since the only services performed        § 31.3306(c)(6)–1 Services in employ of
outside the United States which con-                United States or instrumentality
stitute employment are those de-                    thereof.
scribed in section 3306(c) and paragraph          (a) Services in employ of United States
(c) of § 31.3306(c)–2 (relating to services    or wholly-owned instrumentality thereof.
performed outside the United States on         Services performed in the employ of
or in connection with an American ves-         the United States Government, except
sel or American aircraft), services per-       as provided in section 3306(n) (see

                                           169
§ 31.3306(c)(7)–1                                         26 CFR Ch. I (4–1–99 Edition)

§ 31.3306(n)–1), are excepted from em-         wholly owned by one or more of the
ployment. Services performed in the            foregoing are excepted only to the ex-
employ of an instrumentality of the            tent that the instrumentality is with
United States which is wholly owned            respect to such services immune under
by the United States also are excepted         the Constitution of the United States
from employment.                               from the tax imposed by section 3301.
   (b) Services in employ of instrumen-          (b) For provisions relating to the
tality not wholly owned by United              term ‘‘State’’ see § 31.3306(j)–1.
States—(1) Services performed after 1961.
                                               [T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
Services performed after 1961 in the
                                               amended by T.D. 6658, 28 FR 6638, June 27,
employ of an instrumentality of the            1963]
United States which is partially owned
by the United States are excepted from         § 31.3306(c)(8)–1 Services in employ of
employment, if the remuneration for                  religious, charitable, educational,
such service is paid after 1961. Services            or certain other organizations ex-
performed after 1961 in the employ of                empt from income tax.
an instrumentality of the United                  (a) Services performed after 1961. Serv-
States which is neither wholly owned           ices performed by an employee after
nor partially owned by the United              1961 in the employ of a religious, chari-
States are excepted from employment            table, educational, or other organiza-
if (i) the instrumentality is exempt           tion described in section 501(c)(3) which
from the tax imposed by section 3301 by        is exempt from income tax under sec-
virtue of any provision of law which           tion 501(a) are excepted from employ-
specifically refers to section 3301 or the     ment, if the remuneration for such
corresponding section of prior law in          service is paid after 1961. For provi-
granting exemption from such tax, and          sions relating to exemption from in-
(ii) the remuneration for such service         come tax of an organization described
is paid after 1961. For provisions which       in section 501(c) (3), see Part 1 of this
make general exemptions from Federal           chapter (Income Tax Regulations).
taxation ineffectual as to the tax im-            (b) Services performed before 1962. (1)
posed by section 3301, see § 31.3308–1.        Services performed by an employee in
   (2) Services performed before 1962. Serv-   the employ of an organization de-
ices performed in the employ of an in-         scribed in section 3306(c)(8) as in effect
strumentality of the United States             before 1962, that is, a corporation, com-
which is not wholly owned by the               munity chest, fund, or foundation, or-
United States are excepted from em-            ganized and operated exclusively for
ployment if the instrumentality is ex-         religious, charitable, scientific, testing
empt from the tax imposed by section           for public safety, literary, or edu-
3301 by virtue of any other provision of       cational purposes, or for the prevention
law, and (i) the services are performed        of cruelty to children or animals, no
before 1962 or (ii) remuneration for the       part of the net earnings of which inures
services is paid before 1962.                  to the benefit of any private share-
[T.D. 6658, 28 FR 6638, June 27, 1963]         holder or individual, and no substantial
                                               part of the activities of which is car-
§ 31.3306(c)(7)–1 Services in employ of        rying on propaganda, or otherwise at-
     States or their political subdivi-        tempting, to influence legislation, are
     sions or instrumentalities.               excepted from employment if (i) the
   (a) Services performed in the employ        services are performed before 1962, or
of any State, or of any political sub-         (ii) remuneration for the services is
division thereof, are excepted from em-        paid before 1962.
ployment. Services performed in the               (2) Any organization which is an or-
employ of an instrumentality of one or         ganization of a type described in sec-
more States or political subdivisions          tion 501(c)(3) and which—
thereof are excepted if the instrumen-            (i) Is exempt from income tax under
tality is wholly owned by one or more          section 501(a), or
of the foregoing. Services performed in           (ii) Has been denied exemption from
the employ of an instrumentality of            income tax under section 501(a) by rea-
one or more of the several States or po-       son of the provisions of section 503 or
litical subdivisions thereof which is not      504, relating to prohibited transactions

                                           170
Internal Revenue Service, Treasury                                          § 31.3306(c)(9)–1

and to accumulations out of income,               power. The Interstate Commerce Commis-
respectively,                                     sion is hereby authorized and directed upon
                                                  request of the Board, or upon complaint of
is an organization of a type described            any party interested, to determine after
in section 3306(c)(8) as in effect before         hearing whether any line operated by elec-
1962. An organization which would be              tric power falls within the terms of this pro-
an organization of a type described in            viso. The term ‘‘employer’’ shall also include
section 501(c)(3) except for those provi-         railroad associations, traffic associations,
sions of section 501(c)(3) which are not          tariff bureaus, demurrage bureaus, weighing
contained in section 3306(c)(8) as in ef-         and inspection bureaus, collection agencies,
                                                  and other associations, bureaus, agencies, or
fect before 1962 (provisions relating to          organizations controlled and maintained
participation or intervention in a polit-         wholly or principally by two or more em-
ical campaign on behalf of a candidate            ployers as hereinbefore defined and engaged
for public office) is also an organiza-           in the performance of services in connection
tion of a type described in section               with or incidental to railroad transportation
3306(c)(8) as in effect before 1962.              and railway labor organizations, national in
                                                  scope, which have been or may be organized
[T.D. 6658, 28 FR 6638, June 27, 1963]            in accordance with the provisions of the
                                                  Railway Labor Act, and their State and Na-
§ 31.3306(c)(9)–1 Railroad      industry;         tional legislative committees and their gen-
     services performed by an employee            eral committees and their insurance depart-
     or an employee representative                ments and their local lodges and divisions,
     under the Railroad Unemployment              established pursuant to the constitution and
     Insurance Act.                               bylaws of such organizations. The term ‘‘em-
   (a) Services performed by an indi-             ployer’’ shall not include any company by
vidual as an ‘‘employee’’ or as an ‘‘em-          reason of its being engaged in the mining of
ployee representative’’, as those terms           coal, the supplying of coal to an employer
                                                  where delivery is not beyond the mine tipple,
are defined in section 1 of the Railroad          and the operation of equipment or facilities
Unemployment Insurance Act, as                    therefor, or in any of such activities.
amended, are excepted from employ-                  (b) The term ‘‘carrier’’ means an express
ment.                                             company, sleeping-car company, or carrier
   (b) Section 1 of the Railroad Unem-            by railroad, subject to part I of the Inter-
ployment Insurance Act (45 U.S.C. 351),           state Commerce Act.
as amended, provides, in part, as fol-              (c) The term ‘‘company’’ includes corpora-
lows:                                             tions, associations, and joint-stock compa-
                                                  nies.
  For the purposes of this Act, except when         (d) The term ‘‘employee’’ (except when
used in amending the provisions of other          used in phrases establishing a different
Acts—                                             meaning) means any individual who is or has
  (a) The term ‘‘employer’’ means any car-        been (i) in the service of one or more employ-
rier (as defined in subsection (b) of this sec-   ers for compensation, or (ii) an employee
tion), and any company which is directly or       representative. The term ‘‘employee’’ shall
indirectly owned or controlled by one or          include an employee of a local lodge or divi-
more such carriers or under common control        sion defined as an employer in section 1 (a)
therewith, and which operates any equip-          only if he was in the service of a carrier on
ment or facility or performs any service (ex-     or after August 29, 1935. The term ‘‘em-
cept trucking service, casual service, and the    ployee’’ includes an officer of an employer.
casual operation of equipment or facilities)        The term ‘‘employee’’ shall not include
in connection with the transportation of pas-     any individual while such individual is en-
sengers or property by railroad, or the re-       gaged in the physical operations consisting
ceipt, delivery elevation, transfer in transit,   of the mining of coal, the preparation of
refrigeration or icing, storage, or handling of   coal, the handling (other than movement by
property transported by railroad, and any re-     rail with standard railroad locomotives) of
ceiver, trustee, or other individual or body,     coal not beyond the mine tipple, or the load-
judicial or otherwise, when in the possession     ing of coal at the tipple.
of the property or operating all or any part        (e) An individual is in the service of an em-
of the business of any such employer: Pro-        ployer whether his service is rendered within
vided, however, That the term ‘‘employer’’        or without the United States if (i) he is sub-
shall not include any street, interurban, or      ject to the continuing authority of the em-
suburban electric railway, unless such rail-      ployer to supervise and direct the manner of
way is operating as a part of a general           rendition of his service, or he is rendering
steam-railroad system of transportation, but      professional or technical services and is inte-
shall not exclude any part of the general         grated into the staff of the employer, or he
steam-railroad system of transportation now       is rendering, on the property used in the em-
or hereafter operated by any other motive         ployer’s operations, other personal services

                                              171
§ 31.3306(c)(9)–1                                             26 CFR Ch. I (4–1–99 Edition)
the rendition of which is integrated into the     an employer as defined in section 1(a) and
employer’s operations, and (ii) he renders        who is duly authorized and designated to
such service for compensation: Provided,          represent employees in accordance with the
however, That an individual shall be deemed       Railway Labor Act, and any individual who
to be in the service of an employer, other        is regularly assigned to or regularly em-
than a local lodge or division or a general       ployed by such officer or official representa-
committee of a railway-labor-organization         tive in connection with the duties of his of-
employer, not conducting the principal part       fice.
of its business in the United States only
when he is rendering service to it in the
United States; and an individual shall be
                                                       *        *       *       *        *
deemed to be in the service of such a local
                                                    (i) The term ‘‘compensation’’ means any
lodge or division only if (1) all, or substan-
                                                  form of money remuneration, including pay
tially all, the individuals constituting its
                                                  for time lost but excluding tips, paid for
membership are employees of an employer
                                                  services rendered as an employee to one or
conducting the principal part of its business
                                                  more employers, or as an employee rep-
in the United States; or (2) the headquarters
                                                  resentative: Provided, however, That in com-
of such local lodge or division is located in
                                                  puting the compensation paid to any em-
the United States; and an individual shall be
                                                  ployee, no part of any month’s compensation
deemed to be in the service of such a general
                                                  in excess of $300 for any month before July 1,
committee only if (1) he is representing a
                                                  1954, or in excess of $350 for any month after
local lodge or division described in clauses
                                                  June 30, 1954, and before the calendar month
(1) or (2) immediately above; or (2) all, or
                                                  next following the month [May] in which
substantially all, the individuals represented
                                                  this Act was amended in 1959, or in excess of
by it are employees of an employer con-
                                                  $400 for any month after the month [May] in
ducting the principal part of its business in
                                                  which this Act was so amended, shall be rec-
the United States; or (3) he acts in the capac-
                                                  ognized. A payment made by an employer to
ity of a general chairman or an assistant
                                                  an individual through the employer’s pay
general chairman of a general committee
                                                  roll shall be presumed, in the absence of evi-
which represents individuals rendering serv-
                                                  dence to the contrary, to be compensation
ice in the United States to an employer, but
                                                  for service rendered by such individual as an
in such case if his office or headquarters is
                                                  employee of the employer in the period with
not located in the United States and the in-
                                                  respect to which the payment is made. An
dividuals represented by such general com-
                                                  employee shall be deemed to be paid, ‘‘for
mittee are employees of an employer not
                                                  time lost’’ the amount he is paid by an em-
conducting the principal part of its business
                                                  ployer with respect to an identifiable period
in the United States, only such proportion of
                                                  of absence from the active service of the em-
the remuneration for such service shall be
                                                  ployer, including absence on account of per-
regarded as compensation as the proportion
                                                  sonal injury, and the amount he is paid by
which the mileage in the United States
                                                  the employer for loss of earnings resulting
under the jurisdiction of such general com-
                                                  from his displacement to a less remunerative
mittee bears to the total mileage under its
                                                  position or occupation. If a payment is made
jurisdiction, unless such mileage formula is
                                                  by an employer with respect to a personal in-
inapplicable, in which case the Board may
                                                  jury and includes pay for time lost, the total
prescribe such other formula as it finds to be
                                                  payment shall be deemed to be paid for time
equitable, and if the application of such
                                                  lost unless, at the time of payment, a part of
mileage formula, or such other formula as
                                                  such payment is specifically apportioned to
the Board may prescribe, would result in the
                                                  factors other than time lost, in which event
compensation of the individual being less
                                                  only such part of the payment as is not so
than 10 per centum of his remuneration for
                                                  apportioned shall be deemed to be paid for
such service no part of such remuneration
                                                  time lost. Compensation earned in any cal-
shall be regarded as compensation: Provided
                                                  endar month before 1947 shall be deemed paid
further, That an individual not a citizen or
                                                  in such month regardless of whether or when
resident of the United States shall not be
                                                  payment will have been in fact made, and
deemed to be in the service of an employer
                                                  compensation earned in any calendar year
when rendering service outside the United
                                                  after 1946 but paid after the end of such cal-
States to an employer who is required under
                                                  endar year shall be deemed to be compensa-
the laws applicable in the place where the
                                                  tion paid in the calendar year in which it
service is rendered to employ therein, in
                                                  will have been earned if it is so reported by
whole or in part, citizens or residents there-
                                                  the employer before February 1 of the next
of.
                                                  succeeding calendar year or, if the employee
  (f) The term ‘‘employee representative’’
                                                  establishes, subject to the provisions of sec-
means any officer or official representative
                                                  tion 8, the period during which such com-
of a railway labor organization other than a
                                                  pensation will have been earned.
labor organization included in the term em-
ployer as defined in section 1(a) who before
or after August 29, 1935, was in the service of        *        *       *       *        *

                                              172
Internal Revenue Service, Treasury                                            § 31.3306(c)(10)–1
  (r) The term ‘‘Board’’ means the Railroad          The test relating to remuneration of
Retirement Board.                                    $50 is based on the remuneration
  (s) The term ‘‘United States’’, when used in       earned during a calendar quarter rath-
a geographical sense, means the States,              er than on the remuneration paid in a
Alaska, Hawaii, and the District of Colum-
bia.
                                                     calendar quarter. The exception applies
                                                     separately with respect to each organi-
                                                     zation for which the employee renders
      *        *        *        *        *          services in a calendar quarter. The
                                                     type of services performed by the em-
[Sec. 1, Railroad Unemployment Insurance
Act, as amended by secs. 1 and 2, Act of June
                                                     ployee and the place where the services
20, 1939, 53 Stat. 845; secs. 1 and 3, Act of Aug.   are performed are immaterial; the stat-
13, 1940, 54 Stat. 785, 786; sec. 15, Act of Apr.    utory tests are the character of the or-
8, 1942, 56 Stat. 210; secs. 1 and 2, Act of July    ganization in the employ of which the
31, 1946, 60 Stat. 722; sec. 302, Act of Aug. 31,    services are performed and the amount
1954, 68 Stat. 1040; sec. 301, Act of May 19,        of the remuneration for services per-
1959, Pub. L. 86–28, 73 Stat. 30]                    formed by the employee in the cal-
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as
                                                     endar quarter.
amended by T.D. 6658, 28 FR 6638, June 27,             Example 1. X is a local lodge of a fraternal
1963]                                                organization and is exempt from income tax
                                                     under section 501(a) as an organization of the
§ 31.3306(c)(10)–1 Services in the em-               character described in section 501 (c)(8). X
     ploy of certain organizations ex-               has a number of paid employees, among
     empt from income tax.                           them being A who serves exclusively as re-
                                                     cording secretary for the lodge, and B who
  (a) In general. (1) This section deals             performs services for the lodge as janitor of
with the exception from employment                   its clubhouse. For services performed during
of certain services performed in the                 the first calendar quarter of 1955 (that is,
employ of any organization exempt                    January 1, 1955, through March 31, 1955, both
from income tax under section 501(a)                 dates inclusive) A earns a total of $30. For
(other than an organization described                services performed during the same calendar
in section 401(a)) or under section 521.             quarter B earns $180. Since the remuneration
(See the provisions of §§ 1.401–1,                   for the services performed by A during such
                                                     quarter is less than $50, all of such services
1.501(a)–1, and 1.521–1 of this chapter              are excepted. Thus, A is not counted as an
(Income Tax Regulations).) If the serv-              employee in employment on any of the days
ices meet the tests set forth in para-               during such quarter for purposes of deter-
graphs (b), (c), (d), or (e) of this section,        mining whether the X organization is an em-
the services are excepted.                           ployer (see § 31.3306(a)–1). Even though it is
  (2) See also § 31.3306(c)(8)–1 for provi-          subsequently determined that X is an em-
sions relating to the exception of serv-             ployer, A’s remuneration of $30 for services
                                                     performed during the first calendar quarter
ices performed in the employ of reli-
                                                     of such year is not subject to tax. B’s serv-
gious, charitable, educational, or cer-              ices, however, are not excepted during such
tain other organizations exempt from                 quarter since the remuneration therefor is
income tax; § 31.3306(c)(10)–2 for provi-            not less than $50. Thus, B is counted as an
sions relating to the exception of serv-             employee in employment during all of such
ices performed by certain students in                quarter for purposes of determining whether
the employ of a school, college, or uni-             the X organization is an employer. If it is de-
versity; and § 31.3306(c)(10)–3 for provi-           termined that the X organization is an em-
                                                     ployer, B’s remuneration of $180 for services
sions relating to the exception of serv-
                                                     performed during the first calendar quarter
ices performed before 1962 in the em-                is included in computing the tax.
ploy of certain employees’ beneficiary                 Example 2. The facts are the same as in ex-
associations.                                        ample 1, above, except that on April 1, 1955,
  (b) Remuneration less than $50 for cal-            A’s salary is increased and, for services per-
endar quarter. Services performed by an              formed during the calendar quarter begin-
employee in a calendar quarter in the                ning on that date (that is, April 1, 1955,
employ of an organization exempt from                through June 30, 1955, both dates inclusive),
                                                     A earns $60. Although all of the services per-
income tax under section 501(a) (other
                                                     formed by A during the first quarter were ex-
than an organization described in sec-               cepted, none of A’s services performed during
tion 401(a)) or under section 521 are ex-            the second quarter are excepted since the re-
cepted from employment, if the remu-                 muneration for such services is not less than
neration for the service is less than $50.           $50. A, therefore, is counted as an employee

                                                 173
§ 31.3306(c)(10)–1                                           26 CFR Ch. I (4–1–99 Edition)
in employment during all of the second quar-         (d) Students employed before 1962. (1)
ter for the purpose of determining whether        Services performed in the employ of an
the X organization is an employer. If it is de-   organization exempt from income tax
termined that the X organization is an em-
ployer, A’s remuneration of $60 for services
                                                  under section 501(a) (other than an or-
performed during the second calendar quar-        ganization described in section 401(a))
ter is included in computing the tax.             or under section 521 by a student who is
  Example 3. The facts are the same as in ex-     enrolled and is regularly attending
ample 1, above, except that A earns $120 for      classes at a school, college, or univer-
services performed during the year 1955, and      sity, are excepted from employment if
such amount is paid to him in a lump sum at       the services are performed before 1962
the end of the year. The services performed       or if remuneration for the services is
by A in any calendar quarter during the year
are excepted if the portion of the $120 attrib-
                                                  paid before 1962. For purposes of this
utable to services performed in that quarter      paragraph, the amount of remunera-
is less than $50. In such case, A is not count-   tion for services performed by the em-
ed as an employee in employment on any of         ployee in the calendar quarter, the
the days during such quarter for purposes of      type of services, and the place where
determining whether the X organization is         the services are performed are immate-
an employer. If, however, the portion of the      rial; the tests are the character of the
$120 attributable to services performed in
                                                  organization in whose employ the serv-
any calendar quarter during the year is not
less than $50, the services during that quar-     ices are performed and the status of
ter are not excepted. In the latter case, A is    the employee as a student enrolled and
counted as an employee in employment dur-         regularly attending classes at a school,
ing all of such quarter and, if it is deter-      college, or university.
mined that the X organization is an em-              (2) The term ‘‘school, college, or uni-
ployer, that portion of the $120 attributable     versity’’ as used in this paragraph is to
to services performed in such quarter is in-
cluded in computing the tax.
                                                  be taken in its commonly or generally
                                                  accepted sense. For provisions relating
   (c) Collection of dues or premiums for         to services performed before 1962 by a
fraternal beneficiary societies, and ritual-      student enrolled and regularly attend-
istic services in connection with such soci-      ing classes at a school, college, or uni-
eties, before 1962. The following services        versity not exempt from income tax in
performed by an employee in the em-               the employ of such school, college, or
ploy of a fraternal beneficiary society,          university, see paragraph (b) of
order, or association exempt from in-             § 31.3306(c)(10)–2. For provisions relating
come tax under section 501(a) are ex-             to services performed after 1961 by a
cepted from employment if the services            student enrolled and regularly attend-
are performed before 1962 or if remu-             ing classes at a school, college, or uni-
neration for the services is paid before          versity in the employ of such school,
1962:                                             college, or university, see paragraph (a)
   (1) Services performed away from the           or § 31.3306(c)(10)–2.
home office of such a society, order, or             (e) Services performed before 1962 in em-
association in connection with the col-           ploy of agricultural or horticultural orga-
lection of dues or premiums for such              nization exempt from income tax. (1)
society, order, or association; and               Services performed by an employee in
   (2) Ritualistic services (wherever per-        the employ of an agricultural or horti-
formed) in connection with such a soci-           cultural organization which is de-
ety, order, or association.                       scribed in section 501(c)(5) and the reg-
For purposes of the paragraph the                 ulations thereunder and which is ex-
amount of the remuneration for serv-              empt from income tax under section
ices performed by the employee in the             501(a) are excepted from employment if
calendar quarter is immaterial; the               the services are performed before 1962
tests are the character of the organiza-          or if remuneration for the services is
tion in whose employ the services are             paid before 1962.
performed, the type of services, and, in             (2) For purposes of this paragraph,
the case of collection of dues or pre-            the type of services performed by the
miums, the place where the services               employee, the amount of remuneration
are performed.                                    for the services, and the place where


                                              174
Internal Revenue Service, Treasury                                       § 31.3306(c)(10)–3

the services are performed are immate-         taken in its commonly or generally ac-
rial; the test is the character of the or-     cepted sense.
ganization in whose employ the serv-              (4) For provisions relating to services
ices are performed.                            performed before 1962 by a student in
                                               the employ of an organization exempt
[T.D. 6658, 28 FR 6639, June 27, 1963]
                                               from income tax, see paragraph (d) of
§ 31.3306(c)(10)–2 Services of student         § 31.3306(c)(10)–1.
     in employ of school, college, or uni-     [T.D. 6658, 28 FR 6640, June 27, 1963]
     versity.
   (a) Services performed after 1961. Serv-    § 31.3306(c)(10)–3 Services before 1962
ices performed after 1961 in the employ             in employ of certain employees’
of a school, college, or university, by a           beneficiary associations.
student who is enrolled and is regu-              (a) Voluntary employees’ beneficiary as-
larly attending classes at the school,         sociations. Services performed by an
college, or university, are excepted           employee in the employ of a voluntary
from employment (whether or not the            employees’ beneficiary association pro-
school, college, or university is exempt       viding for the payment of life, sick, ac-
from income tax), if remuneration for          cident, or other benefits to the mem-
the services is paid after 1961.               bers of such association or their de-
   (b) Services performed before 1962. Serv-   pendents are excepted from employ-
ices performed in the employ of a              ment if—
school, college, or university not ex-            (1) No part of its net earnings inures
empt from income tax under section             (other than through such payments) to
501(a), by a student who is enrolled and       the benefit of any private shareholder
is regularly attending classes at the          or individual,
school, college, or university, are ex-           (2) 85 percent or more of the income
cepted from employment if the services         consists of amounts collected from
are performed before 1962 or if remu-          members for the sole purpose of mak-
neration for the services is paid before       ing such payments and meeting ex-
1962.                                          penses, and
   (c) Application of section. (1) For pur-       (3) The services are performed before
poses of this section, the type of serv-       1962, or remuneration for the services
ices performed by the employee, the            is paid before 1962.
place where the services are performed,           (b) Federal employees’ beneficiary asso-
and the amount of remuneration for             ciations. Services performed by an em-
services performed by the employee are         ployee in the employ of a voluntary
immaterial; the tests are the character        employees’ beneficiary association pro-
of the organization in the employ of           viding for the payment of life, sick, ac-
which the services are performed and           cident, or other benefits to the mem-
the status of the employee as a student        bers of such association or their de-
enrolled and regularly attending class-        pendents or their designated bene-
es at the school, college, or university,      ficiaries are excepted from employ-
in the employ of which he performs the         ment if—
services.                                         (1) Admission to membership in the
   (2) The status of the employee as a         association is limited to individuals
student performing the services shall          who are officers or employees of the
be determined on the basis of the rela-        United States Government,
tionship of such employee with the or-            (2) No part of the net earnings of the
ganization for which the services are          association inures (other than through
performed. An employee who performs            such payments) to the benefit of any
services in the employ of a school, col-       private shareholder or individual, and
lege, or university as an incident to             (3) The services are performed before
and for the purpose of pursuing a              1962, or remuneration for the services
course of study at such school, college,       is paid before 1962.
or university has the status of a stu-            (c) Application of tests. For purposes
dent in the performance of such serv-          of this section, the type of services per-
ices.                                          formed by the employee, the amount of
   (3) The term ‘‘school, college, or uni-     remuneration for the services, and the
versity’’ as used in this section is to be     place where the services are performed

                                           175
§ 31.3306(c)(11)–1                                     26 CFR Ch. I (4–1–99 Edition)

are immaterial; the test is the char-       § 31.3306(c)(13)–1 Services of student
acter of the organization in whose em-           nurse or hospital intern.
ploy the services are performed.               (a) Services performed as a student
[T.D. 6658, 28 FR 6640, June 27, 1963]      nurse in the employ of a hospital or a
                                            nurses’ training school are excepted
§ 31.3306(c)(11)–1 Services in employ of    from employment, if the student nurse
     foreign government.                    is enrolled and regularly attending
                                            classes in a nurses’ training school and
  (a) Services performed by an em-
                                            such nurses’ training school is char-
ployee in the employ of a foreign gov-
                                            tered or approved pursuant to State
ernment are excepted from employ-           law.
ment. The exception includes not only          (b) Services performed as an intern
services performed by ambassadors,          (as distinguished from a resident doc-
ministers, and other diplomatic offi-       tor) in the employ of a hospital are ex-
cers and employees but also services        cepted from employment, if the intern
performed as a consular or other officer    has completed a 4 years’ course in a
or employee of a foreign government,        medical school chartered or approved
or as a nondiplomatic representative        pursuant to State law.
thereof.
  (b) For purposes of this exception,       § 31.3306(c)(14)–1 Services of insurance
the citizenship or residence of the em-          agent or solicitor.
ployee is immaterial. It is also imma-         (a) Services performed for a person
terial whether the foreign government       by an employee as an insurance agent
grants an equivalent exemption with         or insurance solicitor are excepted
respect to similar services performed       from employment, if all such services
in the foreign country by citizens of       performed for such person by such indi-
the United States.                          vidual are performed for remuneration
                                            solely by way of commission.
§ 31.3306(c)(12)–1 Services in employ of       (b) If all or any part of the remunera-
     wholly owned instrumentality of        tion of an employee for services per-
     foreign government.                    formed as an insurance agent or insur-
  (a) Services performed by an em-          ance solicitor for a person is a salary,
ployee in the employ of certain instru-     none of his services performed as an in-
mentalities of a foreign government         surance agent or insurance solicitor for
are excepted from employment. The ex-       such person are excepted from employ-
ception includes all services performed     ment, and his total remuneration (for
in the employ of an instrumentality of      example, salary, or salary and commis-
the government of a foreign country,        sions) for such services is included for
if—                                         purposes of computing the tax.
  (1) The instrumentality is wholly         § 31.3306(c)(15)–1 Services in delivery
owned by the foreign government;                 or distribution of newspapers, shop-
  (2) The services are of a character            ping news, or magazines.
similar to those performed in foreign          (a) Services of individuals under age 18.
countries by employees of the United        Services performed by an employee
States Government or of an instrumen-       under the age of 18 in the delivery or
tality thereof; and                         distribution of newspapers or shopping
  (3) The Secretary of State certifies to   news, not including delivery or dis-
the Secretary of the Treasury that the      tribution (as, for example, by a re-
foreign government, with respect to         gional distributor) to any point for
whose instrumentality exemption is          subsequent delivery or distribution, are
claimed, grants an equivalent exemp-        excepted from employment. Thus, the
tion with respect to services performed     services performed by an employee
in the foreign country by employees of      under the age of 18 in making house-to-
the United States Government and of         house delivery or sale of newspapers or
instrumentalities thereof.                  shopping news, including handbills and
  (b) For purposes of this exception,       other similar types of advertising ma-
the citizenship or residence of the em-     terial, are excepted. The services are
ployee is immaterial.                       excepted irrespective of the form or

                                         176
Internal Revenue Service, Treasury                                          § 31.3306(c)(17)–1

method of compensation. Incidental                   (18) International organization. The term
services by the employee who makes                ‘‘international organization’’ means a public
the house-to-house delivery, such as              international organization entitled to enjoy
services in assembling newspapers, are            privileges, exemptions, and immunities as an
considered to be within the exception.            international organization under the Inter-
                                                  national Organizations Immunities Act (22
The exception continues only during
                                                  U.S.C. 288–288f).
the time that the employee is under
the age of 18.                                      (2) Section 1 of the International Or-
  (b) Services of individuals of any age.         ganizations Immunities Act provides as
Services performed by an employee in,             follows:
and at the time of, the sale of news-
papers or magazines to ultimate con-                 SEC. 1. [International Organizations Immuni-
sumers under an arrangement under                 ties Act.] For the purposes of this title [Inter-
which the newspapers or magazines are             national Organizations Immunities Act], the
                                                  term ‘‘international organization’’ means a
to be sold by him at a fixed price, his
                                                  public international organization in which
compensation being based on the reten-            the United States participates pursuant to
tion of the excess of such price over the         any treaty or under the authority of any Act
amount at which the newspapers or                 of Congress authorizing such participation or
magazines are charged to him, are ex-             making an appropriation for such participa-
cepted from employment. The services              tion, and which shall have been designated
are excepted whether or not the em-               by the President through appropriate Execu-
ployee is guaranteed a minimum                    tive order as being entitled to enjoy the
amount of compensation for such serv-             privileges, exemptions, and immunities here-
ices, or is entitled to be credited with          in provided. The President shall be author-
the unsold newspapers or magazines                ized, in the light of the functions performed
turned back. Moreover, the services are           by any such international organization, by
                                                  appropriate Executive order to withhold or
excepted without regard to the age of
                                                  withdraw from any such organization or its
the employee. Services performed                  officers or employees any of the privileges,
other than at the time of sale to the ul-         exemptions, and immunities provided for in
timate consumer are not within the ex-            this title (including the amendments made
ception. Thus, the services of a re-              by this title) or to condition or limit the en-
gional distributor which are ante-                joyment by any such organization or its offi-
cedent to but not immediately part of             cers or employees of any such privilege, ex-
the sale to the ultimate consumer are             emption, or immunity. The President shall
not within the exception. However, in-            be authorized, if in his judgment such action
cidental services by the employee who             should be justified by reason of the abuse by
makes the sale to the ultimate con-               an international organization or its officers
sumer, such as services in assembling             and employees of the privileges, exemptions,
                                                  and immunities herein provided or for any
newspapers or in taking newspapers or
                                                  other reason, at any time to revoke the des-
magazines to the place of sale, are con-          ignation of any international organization
sidered to be within the exception.               under this section, whereupon the inter-
                                                  national organization in question shall cease
§ 31.3306(c)(16)–1 Services in employ of          to be classed as an international organiza-
     international organization.
                                                  tion for the purposes of this title.
   (a) Subject to the provisions of sec-
tion 1 of the International Organiza-
                                                  § 31.3306(c)(17)–1    Fishing services.
tions Immunities Act (22 U.S.C. 228),
services performed in the employ of an              (a) In general. Subject to the limita-
international organization as defined             tions prescribed in paragraphs (b) and
in section 7701(a)(18) are excepted from          (c) of this section, services described in
employment.                                       this paragraph are excepted from em-
   (b) (1) Section 701(a)(18) provides as         ployment. Services performed by an in-
follows:                                          dividual in the catching, taking, har-
  SEC. 7701. Definitions. (a) When used in this   vesting, cultivating, or farming of any
title, where not otherwise distinctly ex-         kind of fish, shell-fish (for example,
pressed or manifestly incompatible with the       oysters, clams, and mussels), crustacea
intent thereof—                                   (for example, lobsters, crabs, and
                                                  shrimps), sponges, seaweeds, or other
     *        *       *        *       *          aquatic forms of animal and vegetable

                                              177
§ 31.3306(c)(18)–1                                       26 CFR Ch. I (4–1–99 Edition)

life are excepted. The exception ex-         admitted. For purposes of this section
tends to services performed as an offi-      an alien individual who is temporarily
cer or member of the crew of a vessel        present in the United States as a non-
while the vessel is engaged in any such      immigrant under such subparagraph
activity whether or not the officer or       (F) or (J) is deemed to be a nonresident
member of the crew is himself so en-         alien individual. The preceding sen-
gaged. In the case of an individual who      tence does not apply to the extent it is
is engaged in any such activity in the       inconsistent with section 7701(b) and
employ of any person, the services per-      the regulations under that section. A
formed, by such individual in the em-        nonresident alien individual who is
ploy of such person, as an ordinary in-      temporarily present in the United
cident to any such activity are also ex-     States as a nonimmigrant under such
cepted. Similarly, for example, the          subparagraph (J) includes an alien indi-
shore services of an officer or member       vidual admitted to the United States
of the crew of a vessel engaged in any       as an ‘‘exchange visitor’’ under section
such activity are excepted if such serv-     201 of the United States Information
ices are an ordinary incident to any         and Educational Exchange Act of 1948
such activity. Services performed as an      (22 U.S.C. 1446).
ordinary incident to any such activity         (2) If services are performed by a non-
may include, for example, services per-      resident alien individual’s alien spouse
formed in such cleaning, icing, and          or minor child, who is temporarily
packing of fish as are necessary for the     present in the United States as a non-
immediate preservation of the catch.         immigrant under subparagraph (F) or
   (b) Salmon and halibut fishing. Serv-     (J) of section 101(a)(15) of the Immigra-
ices performed in connection with the        tion and Nationality Act, as amended,
catching or taking of salmon or hal-         the services are not deemed for pur-
ibut, for commercial purposes, are not       poses of this section to be performed to
within the exception. Thus, neither the      carry out a purpose for which such in-
services of an officer or member of the      dividual was admitted. The services of
crew of a vessel (irrespective of its ton-   such spouse or child are excepted from
nage) which is engaged in the catching       employment under this section only if
or taking of salmon or halibut, for          the spouse or child was admitted for a
commercial purposes, nor the services        purpose specified in such subparagraph
of any other individual in connection        (F) or (J) and if the services are per-
with such activity, are within the ex-       formed to carry out such purpose.
ception.                                       (b) Section 101 of the Immigration
   (c) Vessels of more than 10 net tons.     and Nationality Act (8 U.S.C. 1101), as
Services described in paragraph (a) of       amended, provides, in part, as follows:
this section performed on or in connec-
tion with a vessel of more than 10 net         SEC. 101. Definitions. [Immigration and Na-
                                             tionality Act (66 Stat. 166)]
tons are not within the exception. For
                                               (a) As used in this chapter—* * *
purposes of the exception, the tonnage
                                               (15) The term immigrant means every alien
of the vessel shall be determined in the     except an alien who is within one of the fol-
manner provided for determining the          lowing classes of nonimmigrant aliens—
register tonnage of merchant vessels
under the laws of the United States.
                                                  *        *       *        *       *
§ 31.3306(c)(18)–1 Services of certain
     nonresident aliens.                       (F) (i) An alien having a residence in a for-
                                             eign country which he has no intention of
   (a) (1) Services performed after 1961     abandoning, who is a bona fide student quali-
by a nonresident alien individual who        fied to pursue a full course of study and who
is temporarily present in the United         seeks to enter the United States temporarily
States as a nonimmigrant under sub-          and solely for the purpose of pursuing such a
paragraph (F) or (J) of section 101(a)       course of study at an established institution
                                             of learning or other recognized place of study
(15) of the Immigration and Nation-
                                             in the United States, particularly designated
ality Act (8 U.S.C. 1101), as amended,       by him and approved by the Attorney Gen-
are excepted from employment if the          eral after consultation with the Office of
services are performed to carry out a        Education of the United States, which insti-
purpose for which the individual was         tution or place of study shall have agreed to

                                         178
Internal Revenue Service, Treasury                                               § 31.3306(d)–1
report to the Attorney General the termi-           ployment, then all the services of that
nation of attendance of each nonimmigrant           employee for that person in that pay
student, and if any such institution of learn-      period shall be deemed to be employ-
ing or place of study fails to make reports
promptly the approval shall be withdrawn,
                                                    ment.
and (ii) the alien spouse and minor children          (c) If less than one-half of the em-
of any such alien if accompanying him or fol-       ployee’s time in the employ of a par-
lowing to join him;                                 ticular person in a pay period is spent
                                                    in performing services which con-
      *        *       *        *        *          stitute employment, then none of the
                                                    services of that employee for that per-
  (J) An alien having a residence in a foreign      son in that pay period shall be deemed
country which he has no intention of aban-          to be employment.
doning who is a bona fide student, scholar,           (d) The application of the provisions
trainee, teacher, professor, research assist-
                                                    of paragraphs (a), (b), and (c) of this
ant, specialist, or leader in a field of special-
ized knowledge or skill, or other person of         section may be illustrated by the fol-
similar description, who is coming tempo-           lowing examples:
rarily to the United States as a participant          Example 1. Employer B, who operates a
in a program designated by the Secretary of         farm and a store, employs A to perform serv-
State, for the purpose of teaching, instruct-
                                                    ices in connection with both operations. A’s
ing or lecturing, studying, observing, con-
                                                    services on the farm are such that they are
ducting research, consulting, demonstrating
                                                    excepted as agricultural labor and do not
special skills, or receiving training, and the
                                                    constitute employment, and his services in
alien spouse and minor children of any such
                                                    the store constitute employment. He is paid
alien if accompanying him or following to
                                                    at the end of each month. During a par-
join him.
                                                    ticular month A works 120 hours on the farm
                                                    and 80 hours in the store. None of A’s serv-
      *        *       *        *        *          ices during the month are deemed to be em-
                                                    ployment, since less than one-half of his
[Sec. 101, Immigration and Nationality Act,         services during the month constitutes em-
as amended by sec. 101, Act of June 27, 1952,       ployment. During another month A works 75
66 Stat. 166; sec. 109, Act of Sept. 21, 1961, 75   hours on the farm and 120 hours in the store.
Stat. 534]                                          All of A’s services during the month are
                                                    deemed to be employment, since one-half or
[T.D. 6658, 28 FR 6640, June 27, 1963, as           more of his services during the month con-
amended by T.D. 8411, 57 FR 15241, Apr. 27,         stitutes employment.
1992]                                                 Example 2. Employee C is employed as a