PDF document

- 1 -

Federal-State            

Reference Guide 
 
   A Federal-State Cooperative Publication 
 
  Social Security Administration 
  Internal Revenue Service 
  National Conference of State Social Security Administrators 
 
                                  Providing guidelines for social 
                                  security and Medicare coverage 
                                  and tax withholding requirements 
                                  for state, local and Indian tribal 
                                  government employees and 
                                  public employers. 
                                   
Publication 963 (Rev. 11-2014) Catalog Number 21843B Department of the Treasury Internal Revenue Service www.irs.gov

- 2 -

Introduction

The Federal-State Reference Guide provides state and local government employers a
comprehensive reference source on social security and Medicare coverage and federal tax
withholding issues. The Guide was first published by the Internal Revenue Service (IRS) in
July 1995 with special assistance from the State of Colorado, and is a cooperative effort of
the Social Security Administration, the IRS, and the National Conference of State Social
Security Administrators (NCSSSA). Topics addressed in this publication include
determination of worker status, public retirement systems (FICA replacement plans), social
security and Medicare coverage and benefits, Section 218 Agreements, employment tax laws,
and other tax issues. The tax information is generally applicable to federal agencies, with
some exceptions; for example, Section 218 Agreement information and section 530 relief are
not applicable to federal agencies.

Since 2002, the IRS office of Federal, State and Local Governments (FSLG) has produced
the Federal-State Reference Guide annually, primarily as a web-based document. FSLG was
created as part of the reorganization of the IRS, to be an office devoted exclusively to the
federal tax needs of governmental entities. The most recent version of Publication 963 can be
downloaded at any time from the FSLG website. This website also contains information
about other related tax topics, upcoming events, the FSLG Newsletter, and the IRS. All IRS
forms and publications referred to in this publication can be ordered without charge from the
IRS at (800) 829-3676, or can be downloaded from the IRS website. Governmental taxpayers
may get assistance with general or account-related questions by calling Customer Account
Services at (877) 829-5500, Monday through Friday.

This publication also includes information to assist Indian tribal governments. Federal tax
law establishes the role of Indian tribal governments as employers. Tribal governments are
required to follow substantially the same procedures as other employers; however, tribes are
not eligible for Section 218 Agreements, and other special statutory provisions apply to these
entities. If you have questions about Indian Tribal governments, please visit the office of
Indian Tribal Governments (ITG) website or telephone your local IRS ITG office. This
website also contains Publication 4268, Employment Tax Desk Guide, containing further
information that specifically addresses employment tax issues for tribal governments.

Frequently asked questions appear at the end of each chapter. After each answer, the primary
contact for the topic is indicated - “IRS,” “SSA,” or “STATE”.

The Federal-State Reference Guide is for informational and reference purposes only. Under
no circumstances should the content be used or cited as authority for assuming, or attempting
to sustain, a technical position with respect to employment tax, social security benefits, or
other legal issues. The Internal Revenue Code (IRC), Social Security Act (Act) and related
regulations, rulings and case law are the only valid citations of authority for technical
matters.

- 3 -

Contents 
 
   1  Social Security and Government Employers 
       
   2  Government Entities and Federal Taxes 
 
   3  Wage Reporting and Employment Taxes  
 
   4  Determining Worker Status 
 
   5  Social Security and Medicare Coverage 
 
   6  Social Security and Public Retirement Systems 
 
   7 Social Security Administration 
 
   8 Internal Revenue Service 
 
   9 Social Security Administrators 
 
Glossary 
 
Appendix:  Section 218 of Social Security Act 
          Amended Section 530 of Revenue Act of 1978 
          Revenue Procedure 85-18 
          Revenue Ruling 86-88 
          Revenue Ruling 88-36 
          Revenue Procedure 91-40 
             Statutory Citations for State Enabling Laws 
             Citations Used in This Publication 
 
Index 

                                    iii

- 4 -

 Chapter 1  

 Social Security and Government Employers 
 
 Federal tax requirements generally apply to public employers in the same way that they 
 do to private employers. However, there are some differences arising from the unique 
 history of laws governing social security and Medicare coverage for state and local 
 government employees. Special provisions apply to the application of these taxes as well 
 as certain withholding requirements. 
 
 Historical Overview  
  
 Social security taxes were first collected in 1937. The funding mechanism for the social 
 security program was officially established in the Internal Revenue Code (IRC) as the 
 Federal Insurance Contributions Act (FICA). Under the original Social Security Act of 
 1935, state and local government employees were excluded from social security 
 coverage because of unresolved legal questions regarding the federal government’s 
 authority to impose taxes on state and local governments and their employees.  
  
 Beginning in 1951, states were allowed to enter into voluntary agreements with the 
 federal government to provide social security coverage to public employees. These 
 arrangements are called “Section 218 Agreements” because they are authorized by 
 Section 218 of the Social Security Act. Originally, government entities filed with the 
 SSA, but since 1987, the IRS has been responsible for collecting these taxes from 
 governmental employers. All 50 states, Puerto Rico, the Virgin Islands, and 
 approximately 60 interstate instrumentalities have Section 218 Agreements with SSA, 
 providing varying degrees of coverage for employees in the state.  
  
 Social security coverage of government employees varies greatly from state to state. In 
 26 states, at least 90% of state and local government employees work in positions 
 covered by social security. By contrast, in California, Colorado, Louisiana, Nevada, and 
 Texas, less than half of state and local government employees are covered. As of 2008, 
 27.5%, of the state and local government workforce, or 6.6 million, state and local 
 government employees, were not covered by social security. 
  
 The largest proportion of uncovered government employees work at the local level. The 
 majority of uncovered local government public employees are police officers, 
 firefighters and teachers. Approximately one-fourth of the nation’s public employees are 
 not covered for social security. 
  
 The following chart includes the major historical developments since state and local 
 employees first became eligible for social security coverage in 1951.

                                      1-1

- 5 -

             Key Dates 
      
January 1, 1951  Beginning this date, states could voluntarily elect social security coverage for public 
                 employees not covered under a public retirement system (FICA replacement plan) by 
                 entering into a Section 218 Agreement with SSA. Prior to this date, there was no mandatory 
                 social security coverage. 
                  
January 1, 1955  Beginning this date, states could extend social security coverage to employees (other than 
                 police officers and firefighters) covered under a public retirement system. 
                  
July 1, 1966     Beginning this date, employees covered for social security under a Section 218 Agreement 
                 are automatically covered for Medicare. 
                  
April 20, 1983   Beginning this date, coverage under a Section 218 Agreement cannot be terminated unless 
                 the governmental entity is legally dissolved. 
                  
April 1, 1986    State and local government employees hired on or after this date, not already covered, are 
                 mandatorily covered for Medicare, unless the position is specifically excluded by law. For 
                 state and local government employees hired before April 1, 1986, Medicare coverage may 
                 be elected under a Section 218 Agreement. 
                  
January 1, 1987  Beginning this date, State Social Security Administrators were no longer responsible for 
                 collecting social security contributions from public employers or for verifying and 
                 depositing the taxes owed by public employers. After 1986, public employers pay Federal 
                 Insurance Contributions Act (FICA) taxes directly to the Internal Revenue Service (IRS) in 
                 the same manner as do private employers. 
                  
July 2, 1991     Beginning this date, state and local government employees became subject to mandatory 
                 social security and Medicare coverage, unless they are (1) members of a qualifying public 
                 retirement system, or (2) covered under a Section 218 Agreement. 
                  
August 15, 1994  The Social Security Independence and Program Improvements Act of 1994 established the 
                 SSA as an independent agency, effective March 31, 1995. This Act also increased the FICA 
                 exclusion amount for election workers from $100 to any amount less than the threshold 
                 amount mandated by law in a calendar year. (To verify the current year amount, see the 
                 SSA website.) States were authorized to amend their Section 218 Agreements to increase 
                 the FICA exclusion amount for election workers to the statutorily mandated threshold. The 
                 Act also amended Section 218 of the Act to allow all states the option to extend social 
                 security and Medicare coverage to police officers and firefighters who participate in a 
                 public retirement system. (Under previous law, only 23 states were authorized to do so.) 
                  
October 21, 1998 Public Law 105-277 provided a 3-month period for states to modify their Section 218 
                 Agreements to exclude from coverage services performed by students. This provision was 
                 effective July 1, 2000, for states that exercised the option to take this exclusion. 
                  
March 2, 2004    Public Law 108-203 enacted, requiring public employers to furnish Form SSA-1945 to 
                 public employees hired after December 31, 2004, informing them that they are earning 
                 retirement benefits not covered by social security; also closed the Government Pension 
                 Offset (GPO) loophole, effective April 1, 2004. 

                                                1-2

- 6 -

Key Public Employer Responsibilities 
 
The following are the major responsibilities that apply to all public employers, regardless of 
their social security coverage and public retirement system: 
 
   Properly classify workers as independent contractors or employees 
   Solicit and collect valid taxpayer identification numbers from all employees and payees 
   Determine which employees are exempt from social security and/or Medicare taxes 
   Withhold, report and pay appropriate social security and Medicare taxes, or Medicare-
    only taxes, for each employee. 
   Obtain clarifications of laws, regulations, and other appropriate information from State 
    Social Security Administrators, IRS, and SSA. 
 
Considerations for Social Security Coverage (Section 218 and Mandatory) 
 
Social security coverage can vary widely within a state or even a local area. Do not make an 
assumption about Section 218 coverage for an entity and whether it is in compliance with all 
applicable laws merely because of the status of a similar entity, either in the same or a different 
state. For Section 218 coverage questions, contact your State Social Security Administrator (see 
www.ncsssa.org). For mandatory (non-section 218) coverage questions, contact an IRS FSLG 
Specialist (see www.irs.gov/govts for a directory). Related information can also be found at the 
SSA State and Local Government Employers website at http://www.ssa.gov/slge/sitemap.htm. 
 
In general, to determine the correct coverage for a group of employees, a government employer 
must address the following questions: 
 
 If employees are covered by a Section 218 Agreement: 
  
 1. When did the state enter into a Section 218 Agreement to elect social security coverage 
    for a particular political subdivision? 
 2. What optional exclusions and what coverage groups were listed in that Agreement or 
    later modification? 
 3. Does the political subdivision have more than one modification? 
 4. Did the state or political subdivision terminate voluntary social security coverage, in its 
    entirety or with respect to any coverage group(s), before April 20, 1983? 
 5. Has the state elected to provide Medicare-only for a particular entity? 
 
 If employees are not covered by a Section 218 Agreement:  
  
 1. Does the state or political subdivision have any employees who were hired prior to April 
    1, 1986, and who are exempt from mandatory Medicare? 
 2. Does the state or political subdivision have a public retirement system?*  If so, 
    employees who are qualified participants in the public retirement system are not subject 
    to mandatory social security coverage that began July 2, 1991. 
 
                                            1-3

- 7 -

 *  Throughout this publication, the term “public retirement system”(or”FICA replacement 
 plan”) refers to a retirement system administered by a state, political subdivision, or 
 instrumentality thereof that meets the requirements of section 3121(b)(7)(F) of the Internal 
 Revenue Code. See Revenue Procedure 91-40 in the Appendix. For section 218 purposes, it is 
 irrelevant whether the retirement system meets the minimum benefit standards for a qualified 
 plan under the Employee Retirement Income Security Act (ERISA). See Chapter 6. 
  
 Note: In some situations, legal challenges occur that are resolved in the federal courts. It is 
 even possible that, while cases are pending, the application of the laws can vary and be 
 applied by the IRS and SSA solely in one state (if a case has been heard and decided in a 
 federal district court) or in states only in one federal circuit (if a case has been heard and 
 decided at the federal circuit court level). It is important, therefore, in such situations to be 
 aware of which federal district or circuit court has jurisdiction over federal laws that apply 
 to each state. To locate a map and contact information for federal courts, go to: 
 http://www.uscourts.gov/court_locator.aspx 
  
                    1-4

- 8 -

Steps To Determine Social Security and Medicare Coverage of State and 
Local Government Employees 
 
State and local government employees may be covered for social security and Medicare under 
either a Section 218 Agreement, which applies to anyone holding the affected position; or under 
mandatory coverage, which is based on the situation of the individual employee. 
 
If the position is covered under a Section 218 Agreement, any employee occupying that position 
is covered. This is the first coverage consideration for a governmental employer. If, however, 
the position is not covered under an Agreement, then the employer must determine whether 
mandatory FICA coverage applies. To do this, the employer must first determine whether the 
employee is deemed to be a member of a public retirement system (or “FICA replacement 
plan”). This is a critical consideration in determining whether and how Section 218 or 
mandatory FICA coverage applies to an employee.  
 
The following steps outline how a public employer should determine whether social security 
and Medicare coverage or Medicare-only coverage applies to an employee.  
 
Step 1:  Determine whether the employee’s position is covered by a Section 218 Agreement 
(Chapter 5, Social Security and Medicare Coverage.)*  If the answer is “yes,” the employee is 
covered for social security and Medicare under the Agreement, unless an exclusion applies for 
that position. If the answer is “no,” proceed to the next step. 
 
Step 2:  If the employee’s position is not covered under a Section 218 Agreement, determine 
whether the employee is a member of a public retirement system (Chapter 6, Social Security 
and Public Retirement Systems    .) If “no,” the employee is subject to mandatory social security 
and Medicare, unless an exclusion applies. If “yes” (the employee is a member of a public 
retirement system), the employee is exempt from mandatory social security. Medicare is 
mandatory for public employees hired or rehired after March 31, 1986, regardless of 
membership in a public retirement system. Proceed to the next step to determine Medicare 
coverage for any employee hired prior to April 1, 1986. 
 
Step 3:  Determine whether a Section 218 Agreement provides Medicare-only coverage for 
employees hired prior to April 1, 1986. If “yes,” the employee is covered for Medicare only. If 
“no,” proceed to the next step. 
 
Step 4:  Determine whether the Medicare continuing employment exception applies to the 
employee (Chapter 5). If “yes,” the employee is exempt from mandatory Medicare. If “no,” the 
employee is subject to mandatory Medicare, unless an exclusion applies. 
 
* State enabling legislation can have an effect on positions and entities covered by the particular 
state’s Section 218 Agreement. Consult the appropriate state’s enabling legislation to determine 
which positions are eligible for coverage under that state’s Section 218 Agreement. For a list of 
state enabling statutes, see the Appendix of this Guide. 
 
The flowchart on the next page illustrates the above steps. 
 
                                             1-5

- 9 -

                      SOCIAL SECURITY AND MEDICARE COVERAGE OF  
                      STATE AND LOCAL GOVERNMENT EMPLOYEES 
                                                       
   Is the position or 
   service covered 
    for Social                          Withhold Social 
    Security and                         Security and 
   Medicare under a    Yes              Medicare, unless 
    Section 218                    exclusion applies 1/ 
    Agreement?                          

    No 

                                  Is employee covered by                 Withhold  
   Is employee a                         a Section 218                   Medicare for 
    qualified                     Agreement that provides                those 
    member of a       Yes         Medicare-only coverage             Yes employees, 
   public retirement               for employees hired                   unless 
    system?                        prior to April 1, 1986?               exclusion 
                                                                         applies  1/ 

    No                                    No 

                                                                         No Social 
                                         Does Medicare 
    Withhold                      Continuing Employment              Yes Security 
    Mandatory                      Exception Apply?   3/                 or Medicare 
   Social Security                                                       Withheld 
   and Medicare, 
   unless exclusion 
    applies  2/                           No 

                                   Withhold Medicare 
                                   only, unless exclusion 
                                          applies  2/ 
                                         
   1/  Section 218 Mandatory and Optional Exclusions (see Chapter 5) 
   2/  Mandatory Exclusions from FICA (see Chapter 5) 
   3/  Medicare Continuing Employment Exception (see Chapter 5) 

   NOTE:  This chart is meant as a guide only and is not a substitute for discussing complex Section 
   218 coverage situations with your State Social Security Administrator or FICA taxation issues 
   with your IRS FSLG Specialist. 

                                   1-6

- 10 -

IRS, SSA, State Social Security Administrators and Public
Employer Social Security and Medicare Tax Responsibilities

The Social Security Administration is responsible for administering the Social Security Act,
including the interpretation of individual Section 218 Agreements. SSA also administers
benefits and maintains individual earnings records. See Chapter 7, Social Security
Administration.

The Internal Revenue Service is responsible for administering the Internal Revenue Code
(IRC), advising employers of their responsibilities, collecting taxes, and working with SSA and
State Social Security Administrators on social security coverage and related tax issues. See
Chapter 8, Internal Revenue Service.

The State Social Security Administrator is the designated official legally appointed to
act for the state in negotiations with the Social Security Administration. This official
acts for the state with respect to the initial Section 218 Agreement and modifications, the
performance of the state’s responsibilities under the Agreement, and in all state dealings
concerning the administration of the Agreement. Each state’s Section 218 Agreement
(“Agreement”), and Social Security Regulation 404.1204, provide a legal obligation for
each state to designate such an official. In many states the actual day-to-day
responsibilities are delegated to the staff of the designated state official. See Chapter 9,
State Social Security Administrators.

Public employers are responsible for the following:

 Properly classify workers as independent contractors or employees
 Determine which employees are exempt from social security and/or Medicare taxes
 Withhold, report and pay appropriate social security and Medicare taxes, or Medicare-
only taxes for each employee
 Obtain clarifications of laws, regulations and other appropriate information from State
Social Security Administrators, IRS and SSA.

Where to Direct Questions

The IRS, SSA, and State Social Security Administrator have different responsibilities and areas
of authority in dealing with issues related to social security coverage, taxation, and reporting.
The following indicates the primary point of contact for many common questions.

Topics for the Internal Revenue Service:

 Federal income tax
 Worker classification (employee or independent contractor) for employees not covered
by a Section 218 Agreement
 Collection of social security or Medicare tax
 Completion and filing of Form W-2 and W-3
 Employment tax returns (941, 943, 944)
 Definition of public retirement system (FICA replacement plan)
 Is an employee covered under mandatory social security?
 Are certain payments subject to social security or Medicare tax?
1-7

- 11 -

    Do I need a new employer identification number? 
 
Topics for the Social Security Administration: 
 
    Social security benefits 
    Section 218 coverage determinations 
    Individual earnings records and quarters of coverage 
    Verification of Section 218 terms 
    Form W-2 records 
    Problems with social security number 
 
Topics for the State Social Security Administrator: 
 
    Existence or terms of a Section 218 Agreement 
    Modifications to the Section 218 Agreement 
    Treatment of a specific position under a Section 218 Agreement 
    Other issues involving interpretation of state law 
 
Frequently Asked Questions 

  1) What is a Section 218 Agreement?   A Section 218 Agreement is a written voluntary 
     agreement between one of the 50 states (or Puerto Rico, the Virgin Islands, or an 
     interstate instrumentality) and the SSA pursuant to the provisions of Section 218 of the 
     Social Security Act. This Agreement provides social security and Medicare, or 
     Medicare-only, coverage for designated groups of state and local government 
     employees. The term refers to the original agreement and all subsequent modifications. 
     These agreements can cover services of employees who are covered by a public 
     retirement system as well as those who are not. To determine whether your entity is 
     covered under a Section 218 Agreement, or can execute one, contact your State Social 
     Security Administrator. See list of State Administrators on-line at the NCSSSA website. 
     [SSA/STATE] 
   
  2) How may a Section 218 Agreement affect employees covered by a public retirement 
     system? An Agreement may provide social security and Medicare coverage for 
     employees already covered by a public retirement system (or FICA replacement plan). 
     This may include: 
 
     a.   Employees covered by a retirement system who elect coverage under a 
          referendum. The social security and Medicare coverage applies in addition to 
          retirement system coverage. 
. 
     b. Employees performing services that are excluded from mandatory social security 
          coverage provisions, but are only optionally excluded under Section 218 
          Agreements, such as student services, and services of election workers who earn 
          less than the threshold amount. 
      
     c. Election workers, by establishing a dollar threshold for social security coverage 
          lower than that set by the statutory requirement. 
 
                                          1-8

- 12 -

d. Employees hired before April 1, 1986, who meet the continuing employment
Medicare exception. [STATE]

3) Why might a Section 218 Agreement be modified? Modifications to Section 218
Agreements are necessary to include additional coverage groups, to cover additional
services in a group already covered (services previously optionally excluded), to cover
ineligibles, to cover employees changing to the “Yes” group in a divided retirement
system, to cover previously terminated groups, or to identify political subdivisions
joining a covered retirement system. See Chapter 5. [STATE]

4) I was told by the State Social Security Administrator that my town is covered for
social security under the state’s Section 218 Agreement and cannot be terminated.
Is this true? Yes. By law, after April 20, 1983, coverage obtained under a Section 218
Agreement, cannot be terminated. Beginning July 2, 1991, any state and local
government employees not covered for social security under a Section 218 Agreement
who are not qualified participants in a public retirement system (FICA replacement
plan), are covered under mandatory social security. [STATE/SSA]

5) Are Indian tribal government employers eligible to enter into Section 218
Agreements? No, Indian tribal governments are not considered states or subdivisions
of states for this purpose. See Internal Revenue Code section 7871. [IRS]

6) I have a question regarding social security and Medicare coverage requirements
for employees of my city. Whom do I contact? The State Social Security
Administrator should always be an entity’s first contact on any questions regarding
coverage under social security or Medicare. If additional assistance on coverage is
needed, the SSA should be consulted. Questions about whether specific services are
subject to mandatory social security and Medicare taxes should be directed to the IRS.
[STATE]

7) What is the responsibility of State Social Security Administrators with respect to
non-Section 218 entities? Under Section 218 of the Act, the primary legal
responsibility State Social Security Administrators have is for Section 218 entities.
However, the responsibilities the Administrator has with respect to non-Section 218
entities vary from state to state. Some State Administrators may not interact with non-
Section 218 entities, while in other states the State Administrator may perform
monitoring, quasi-regulatory and enforcement functions for them. If a non-Section 218
entity needs information regarding coverage under an agreement, the State Social
Security Administrator should be contacted. [STATE]

8) If an entity has a Section 218 Agreement in effect, and joins the state’s public
employee retirement system, does Section 218 coverage continue? After April 20,
1983, a Section 218 Agreement cannot be terminated for any reason as long as that
entity exists. The addition of a retirement system does not affect employee coverage
under the Section 218 Agreement. [SSA]

1-9

- 13 -

Chapter 2

Government Entities and Federal Taxes

The Bureau of the Census estimated that there were 89,004 units of local government in the
United States in 2012. These units of government employ more than 20% of the American
workforce.
This chapter discusses the legal basis for different types of government entities and the specific
tax questions that arise in connection with them. Many tax laws apply differently to government
entities than to other organizations and individuals.
The income of certain government entities, including states, political subdivisions of states, or
integral parts of states or political subdivisions, is generally exempt from tax. The income of
other government entities, such as instrumentalities, might be excludable from gross income
under IRC §115 if that income is derived from the exercise of an essential governmental function
and accrues to a state or political subdivision of a state.
Certain government entities, such as colleges or universities, that are agencies or
instrumentalities of a state or political subdivision of a state, are subject to the tax on unrelated
business income under IRC §511. For more information, see Publication 598, Tax on Unrelated
Business Income of Exempt Organizations.

State Government
States are recognized as entities by the U.S. Constitution. However, different definitions of a
“state” apply for different legal purposes. Federal employment taxes generally apply to all 50
states, the District of Columbia, and all U.S. Territories. For purposes of a Section 218
Agreement, a “state” may refer to any of the 50 states, Puerto Rico, the Virgin Islands, and
interstate instrumentalities. For this purpose, the definition of a “state” does not include the
District of Columbia, Guam, American Samoa, the Commonwealth of the Northern Mariana
Islands or Indian tribal governments.
Authority

The states have primary responsibility for many aspects of government. The 10th Amendment to
the U.S. Constitution reserves to the states or to the people all powers not delegated to the federal
government nor prohibited by the Constitution. Some services for which the state has primary
responsibility include:

 Protection of lives and property by maintenance of a police force
 Regulation and improvement of transportation and roads within the state
 Regulation of business within the state
 Education and maintenance of schools
 Condemnation of property through eminent domain

In many cases, the federal and state governments share responsibility, with the federal
government providing most of the funding and the state distributing the services. Some common
services involving shared responsibility include:

2-1

- 14 -

  Health care 
  Public assistance for persons in need 
  Protection of natural resources 
  Improvement in living and working conditions 

Local Government and Political Subdivisions 

Local governments are generally political subdivisions of states. They differ from state and 
federal governments in that their authority is not based directly on a constitution. Each state 
constitution governs the procedure for the establishment of local governments. In most cases, the 
state legislature must approve the creation or incorporation of a local government. The local 
government then receives a charter defining its organization, authority and responsibilities, 
including the means for electing governing officials. 
Local government units bear a variety of names, such as city, county, township, village, parish, 
borough, or district. The legal significance of these terms may vary from state to state. 
 
Authority 

The authority of local governments varies greatly among the states and individual jurisdictions. 
Generally, a local government has the authority to: 

  Impose taxes 
  Try people accused of breaking local laws or ordinances 
  Administer local programs within its boundaries 
 
In addition to funding provided by local taxes, fees, and other sources, local governments receive 
financial aid from state and federal governments in providing these services according to need. 
Some of the services that local governments take primary responsibility for providing include: 
 
  Conducting and coordinating elections 
  Public safety 
  Building and repairing local roads and streets 
  Providing police and fire protection 
  Collecting garbage and recycling 
  Ensuring the safety of drinking water 
  Maintaining courts, courthouses and jails 
  Collecting state and local government taxes 
  Keeping official records, such as for marriage, birth and death 
 
Instrumentalities 
 
An instrumentality is an organization separate from, but affiliated with, a state or local 
government. It may or may not be created by or pursuant to state statute, but it is operated for 
public purposes. Generally, an instrumentality performs governmental functions, but does not 
have the full powers of a government, such as police authority, taxation, and eminent domain 
(sovereign powers). Questions concerning the legal status of an instrumentality, for federal tax or 

                                         2-2

- 15 -

social security and Medicare purposes, should be directed to the IRS. Questions concerning a 
specific Section 218 Agreement should be addressed to the State Administrator or the SSA (see 
Chapter 7). 
 
A wholly-owned instrumentality of one or more states or political subdivisions is treated as a 
state or local government employer for purposes of the mandatory social security and Medicare 
provisions of IRC section 3121(b)(7)(F).  
 
Interstate Instrumentalities  
 
An interstate instrumentality is an independent legal entity organized by two or more states to 
carry on governmental functions. Examples include a regional planning authority, transportation 
system or water district. For purposes of Section 218, an interstate instrumentality is treated as a 
state. 
 
For an interstate instrumentality to cover its employees with a retirement system, a referendum 
must be held prior to the execution of a Section 218 Agreement. All interstate instrumentalities 
are authorized to provide a retirement system either on a divided system basis or a majority vote 
referendum (see Chapter 5 for referendum procedures). Employees of an interstate 
instrumentality who are not covered for social security under a Section 218 Agreement, but who 
are qualified participants in a public retirement system, are not covered for social security even 
if the employer incorrectly continues to withhold and report such taxes. 
 
Characteristics of Instrumentalities 
 
In Revenue Ruling 57-128, the IRS addressed the question of whether an organization is wholly-
owned by one or more states or political subdivisions. This revenue ruling established the 
following factors as relevant to a determination of whether the entity is a government: 

      Whether it is used for a governmental purpose and performs a governmental function 

      Whether performance of its function is on behalf of one or more states or political 
       subdivisions 

      Whether there are any private interests involved, or whether the states or political 
       subdivisions involved have the powers and interests of an owner 

      Whether control and supervision of the organizations   vested in public authority or is
       authorities 

      Whether express or implied statutory or other authority is necessary for its creation 
       and/or use of the instrumentality, and whether such authority exists 

      The degree of financial autonomy and the source of operating expenses 
Schools, hospitals and libraries, as well as associations formed for public purposes, such as soil 
and water conservation districts, may be instrumentalities of government, depending on the facts 
and circumstances. State sponsorship of an organization, state regulation of its activities, the 
participation of its employees in a public retirement system, and operation with public funds are 

                                          2-3

- 16 -

among the factors to be considered in determining whether an organization is an instrumentality. 
If an organization is essentially under private ownership and control, it is not an instrumentality 
of government. See Revenue Ruling 69-453. 
Associations formed for conservation, protection and promotion, although carrying out a public 
purpose, may not rise to the level of state instrumentalities. The following associations may or 
may not be state instrumentalities: 

  Soil and water conservation districts 
  Fire associations that protect forestland 
  Associations that promote a state or municipality 

To determine the status of an entity, it is essential to review the documents that establish 
statutory authority. The following cases elaborate on the principles established in IRS Revenue 
Ruling 57-128. 
 
Soil and Water Conservation Districts - Entities whose revenues are principally generated 
from fees collected from land owners within the district may or may not be instrumentalities of 
government, depending upon application of the factors listed above, including whether the 
district is under public or private control. 
 
   Example: A soil conservation district in Minnesota was established to carry out 
   a state conservation program. The Soil Conservation Service of the U.S. 
   Department of Agriculture furnished the district with technical and clerical 
   personnel. The disbursements made by the district were made from fees 
   collected from members (occupiers of the land within the district) for services 
   rendered, from funds allocated by the U.S. Department of Agriculture, and from 
   state appropriations. The soil conservation district was created by statute as a 
   political subdivision of the state and was under the control of a board of 
   supervisors elected or appointed in accordance with state law. The soil 
   conservation district is a political subdivision of the state. [Revenue Ruling 57-
   120, 1957-1 C.B. 310]  
   Example: A Connecticut soil and water conservation district was formed as a 
   private nonstock corporation by private individuals. The state had authority to 
   assist private individuals in forming conservation districts, but did not have the 
   power to operate them. The private individuals had complete control over the 
   corporate operations, revenue and expenditures. Therefore, the soil and water 
   conservation district is not a wholly-owned instrumentality of the state. 
   [Revenue Ruling 69-453, 1969-2 C.B. 182] 
 
Fire associations - Fire associations may or may not be instrumentalities of government, 
depending on whether they are under public or private control.  

   Example: A fire association was organized pursuant to an Oregon state law 
   that required all forest land in the state to be adequately protected from the 
   dangers of fire. While the fire association was organized as a result of an 

                                             2-4

- 17 -

Oregon law, it was organized and operated for the mutual benefit of its
members, and was not an instrumentality of the state. Furthermore, except for
the work it performed on a cost basis for the state and federal government, the
association derived most of its support from assessments imposed on its
members. [Revenue Ruling 70-483, 1970-2 C.B. 201]

Example: Under the laws of the state of Pennsylvania, townships have the
authority to purchase fire engines and fire apparatus out of general township
funds for use of the township and to appropriate money to fire companies
located in the township in order to secure fire protection. These volunteer fire
companies are instrumentalities under Pennsylvania state law, and the members
of volunteer fire departments are employees of the political subdivision.
[Revenue Ruling 70-484, 1970-2, C.B. 202]

Associations that Promote a State or Municipality - State sponsorship of promotional
activities is not sufficient to raise an association to instrumentality status.

Example: A municipal league comprised of qualified officials of member cities
or villages, but with no control and supervision vested in a public authority, is
not a state instrumentality. The League’s activities consisted of publishing a
monthly magazine featuring articles on governmental matters, conducting
conferences, and sponsoring and participating in municipal law institutes and
seminars. The state had no statute for the incorporation of a league of this
nature as an instrumentality. [Revenue Ruling 65-26, 1965-1, C.B. 444]

Note: Some state statutes specifically create certain associations as instrumentalities. A review
of the establishing legislation is required to make a status determination.

Indian Tribal Governments

The legal relationship between the United States and Indian tribal governments is set forth in the
Constitution, treaties, statutes, and court decisions. Congress may limit the authority of Indian
tribal governments; but, within those limits, the tribal governments retain attributes of
sovereignty over both their members and their territory. Generally, Indian tribal governments
provide government services, such as transportation, education, and medical care to reservation
Indians.

Authority

Tribal governmental power includes the authority to:

 Choose the form of tribal government
 Determine tribal membership
 Regulate tribal and individual property
 Levy taxes
 Establish courts

2-5

- 18 -

 Maintain law and order

Employment Taxes

Generally, Indian tribal governments should follow general rules that apply to nongovernmental
entities for employment tax. Publication 15, Employer’s Tax Guide, and Publication 15-A,
Employer’s Supplemental Tax Guide, provide the basic rules for employers. There are, however,
some special employment tax rules that apply to Indian tribal governments:

 An exception applies to the definition of “employment” for FUTA purposes for
services performed in the employ of an Indian tribe. See IRC section 3306(c)(7). An
Indian tribe may elect to make contributions to the state unemployment fund as if
services by its employees were employment under FUTA, or it may make payments
in lieu of the contributions in amounts equal to the unemployment benefits
attributable under the state law to the service. An Indian tribe may make separate
elections for any subdivision, subsidiary, or business enterprise wholly owned by it. If
an Indian tribe fails to make either form of payment within 90 days of receiving a
notice of delinquency, or if it fails to post a required payment bond, then service for
the tribe is not excepted from ”employment” until the failure has been corrected. See
IRC section 3309(d). For this purpose, the term “Indian tribe” has the meaning given
in 25 USC Section 450b(e) (Section 4(e) of the Indian Self-Determination and
Education Assistance Act), and includes any subdivision, subsidiary, or business
enterprise wholly-owned by an Indian tribe. See IRC section 3306(u).

 Amounts paid to members of Indian tribal councils for services performed as council
members are not wages for purposes of FICA and income tax withholding (although
such amounts are includible in gross income). Revenue Ruling 59-354, 1959-2 C.B.
24.

 Certain income derived by Indians from the exercise of their recognized tribal fishing
rights is exempt from federal income and employment taxes (IRC section 7873).
Wages paid to a member of a tribe employed by another member of the same tribe, or
by a qualified Indian entity for services performed in a fishing rights-related activity
of the employee’s tribe, are exempt not only from federal income tax, but also from
both the employer’s and the employee’s share of the social security and Medicare tax
(Notice 89-34, 1989-1 C.B. 674).

Extensive information specifically addressing Indian tribal governments and employment tax
issues can be found in Publication 4268, Employment Tax Desk Guide, on the IRS Indian Tribal
Governments (ITG) website.

Frequently Asked Questions

1) How is the tax treatment of governments different from that of other entities?
Under IRC §115, the income of certain government entities, including states, political

2-6

- 19 -

   subdivisions of states, or integral parts of states or political subdivisions, is generally not 
   taxable. The income of other government entities, such as instrumentalities, might be 
   excludable from gross income if that income is derived from the exercise of an essential 
   governmental function and accrues to a state or political subdivision of a state. Colleges 
   and universities that are agencies or instrumentalities of any government, or any political 
   subdivision of government, or that are owned or operated by a government or political 
   subdivision of a government, are subject to tax on unrelated business income.[IRS] 

2) Can the IRS issue a letter indicating that our entity is a tax-exempt government?       In 
   order for a government entity to receive an official determination of its status as a 
   political subdivision, instrumentality of government, or whether its income is excludable 
   from gross income, exempt under Internal Revenue Code (IRC) section 115, it must 
   obtain a letter ruling by following the procedures specified in Revenue Procedure 2014-1 
   or its successor. There is a fee associated with obtaining a letter ruling. [IRS] 

   As a service to government entities, IRS can issue a “governmental information letter” 
   free of charge. This letter describes government entity exemption from federal income tax 
   and cites applicable Internal Revenue Code sections pertaining to deductible contributions 
   and income exclusion. Most organizations and individuals will accept the 
   governmental information letter as the substantiation required for these purposes. Contact 
   an FSLG Specialist or go to the  FSLG Customer Services page for more information. 
   [IRS] 

                                         2-7

- 20 -

Chapter 3

Wage Reporting and Employment Taxes

A government entity that has employees needs to be familiar with the basic responsibilities
and requirements applicable to all employers, as well as some provisions that are unique to
governments. This chapter briefly covers the main types of compensation that are included
in employee wages and the requirements for tax withholding and payments. Tax
requirements for employers are discussed in detail in Publication 15, Employer’s Tax
Guide (Circular E). This chapter highlights some key requirements for employers
generally, and matters of special interest to governmental employers.

All governmental entities that employ workers are subject to federal employment taxes on
wages, except where the law provides specific exceptions. The Internal Revenue Code
(IRC) defines wages subject to income tax withholding under section 3401, and defines
wages for social security and Medicare purposes taxes under section 3121. As discussed in
chapter 2, a broad exception exempts government employment from federal
unemployment tax (FUTA).

Social security and Medicare taxes, also referred to as Federal Insurance Contributions Act
(FICA) taxes, consist of Old-Age, Survivors and Disability Insurance (OASDI, or social
security) and Medicare Hospital Insurance (Medicare) taxes. Internal Revenue Code (IRC)
section 3101 imposes tax on the employee, and section 3111 imposes tax on the employer.
State or local entities covered by social security and/or Medicare must withhold and pay
over the employee share of the taxes and must pay the employer share. Under section
3402, employers are also generally required to withhold income tax from wages.

In general, all compensation provided to an employee is included in taxable wages unless
an exception is provided by law. An exception may apply for FICA taxes, or federal
income tax withholding, or both. The following discussion addresses the treatment of
certain forms of compensation, focusing on some that are of particular interest to
government employers.

Note: Workers are subject to social security, Medicare, or income tax withholding only
when performing services as employees of the organization. The process for determining
whether workers are employees is the subject of Chapter 4.

Social Security and Medicare Wages

IRC section 3121(a) provides that wages include all remuneration for employment,
whether paid in cash or in some other form, unless specifically excluded by statute.
Examples of wages for social security and Medicare purposes include salaries, fees,
bonuses, prizes, awards and commissions. It is immaterial whether the payments are based
on the hour, week, month, year, piecework, percentage of revenue, or other system.

3-1

- 21 -

 An important exception is provided by IRC 3121(b)(7)(F), which excludes state and local 
 government employees from the OASDI tax, except where these employees are not 
 covered by a public retirement system (FICA replacement plan), or where a Section 218 
 Agreement exists. Chapter 5 discusses the application of the tax to governmental 
 employees in detail.  

 The Social Security Administration establishes the maximum amount of wages subject to 
 the social security tax per year. For 2015, this amount is $118,500. The amount is adjusted 
 each year. (Since 1994, there has been no wage base limit for Medicare tax.) 

 Social Security, Medicare and Additional Medicare Tax Rates and Limits 

 Social Security and Medicare Tax 
  
                                        2012      2013  2014                  2015 
 Social Security (OASDI) Information 
                                                                               
 Employee Rate                          4.20%     6.20% 6.20%                 6.20% 
                                                                               
 Employer Rate                          6.20%     6.20% 6.20%                 6.20% 
                                                                               
 Maximum Wages Subject to Tax*          $110,100  $110,100  $117,000  $118,500 
  
 Medicare Tax Information 
                                                                               
 Employee Rate                          1.45%     1.45% 1.45%*                1.45%* 
                                                                               
 Employer Rate                          1.45%     1.45% 1.45%                 1.45% 
                                         
 Maximum Wages Subject to Tax           All Wages 
 Additional Medicare Tax Information 

 Employee Rate                          ----      0.9%  0.9%                   0.9% 

 Employer Rate                          ----      N/A   N/A                    N/A 

 Withholding Threshold                  Wages that exceed $200,000 in a calendar year 

 Additional Medicare Tax 
 Beginning in 2013, a 0.9% Additional Medicare Tax applies to Medicare wages, Railroad 
 Retirement Tax Act compensation, and self-employment income over a threshold amount 
 based on the taxpayer’s filing status. 

                                         3-2

- 22 -

An employer must withhold Additional Medicare Tax from wages and RRTA 
compensation it pays to an employee in excess of $200,000 in a calendar year, without 
regard to the employee’s filing status or wages paid by another employer. Any withheld 
Additional Medicare Tax will be credited against the total tax liability shown on the 
individual’s income tax return (Form 1040). 
 
Unlike OASDI and Medicare taxes, the Additional Medicare Tax is only paid by the 
employee. There is no employer match for Additional Medicare Tax. 
 
An employer is required to begin withholding Additional Medicare Tax in the pay period 
in which it pays wages in excess of $200,000 to an employee and continue withholding it 
until the end of the calendar year. 
 
All wages that are currently subject to Medicare tax are subject to Additional Medicare 
Tax if they are paid in excess of the applicable threshold for a taxpayer’s filing status. 
For more information on Additional Medicare Tax, see Questions and Answers for the 
Additional Medicare Tax on IRS.gov. 

Statutory Exceptions to Social Security and Medicare Coverage 
State and local government employment not covered by a public retirement system (see 
Chapter 6) is generally subject to social security and Medicare coverage under IRC 
3121(b)(7)(F). However, the Internal Revenue Code provides some statutory exceptions 
that exclude certain services from the definition of employment for purposes of mandatory 
social security coverage. These exceptions include services performed by: 
 3121(b)(7)(F)(i) – individual employed to be relieved from unemployment 
 3121(b)(7)(F)(ii) – inmate or hospital patient 
 3121(b)(7)(F)(iii) – individual serving on a temporary basis because of emergency 
 3121(b)(7)(F)(iv) – election official or worker, for amounts below an annually 
 designated threshold 
 3121(b)(7)(F)(v) – public official compensated solely on a fee basis 
In cases where social security coverage is provided by a Section 218 Agreement, the 
exclusions for some of these groups may apply differently. These are discussed in greater 
detail in Chapter 5. 

Other Forms of Cash Compensation 

In addition to stated salary or wages, employees may receive cash designated in various 
other ways. Below are some other common forms of cash compensation. 
 
Sick Pay 
 
Sick pay is an amount paid to an employee because of inability to work because of 
sickness or injury. Sick pay is generally subject to social security and Medicare taxes and 

                                    3-3

- 23 -

income tax withholding if paid by the employer. The employer withholds from sick pay
based on the employee’s Form W-4. Sick pay is sometimes paid by a third party, such as
an insurance company or employee trust. The rules on third-party withholding, paying and
reporting social security and Medicare taxes differ, depending upon whether the third
party is acting as an agent of the employer or an independent insurer, and the terms of an
agreement between the employer and agent or insurer.

If the third-party payer does not withhold income tax, the employee may request income
tax withholding by completing and giving to the third party Form W-4S, Request for
Federal Income Tax Withholding from Sick Pay.

See Publication 15-A, Employer’s Supplemental Tax Guide, for more details on third-party
sick pay.

The following types of sick pay or injury pay are not subject to social security and
Medicare taxes:

1. Payments received under a workers’ compensation act, or under a statute in the
nature of a workers’ compensation act.
2. Payments, or portions of payments, attributable to the employees’ contributions to
a sick pay plan.
3. Payments on account of sickness or injury made by, or on behalf of, an employer,
more than six months after the last calendar month in which the employee worked
for the employer.

Vacation Pay

Vacation pay is wages and is subject to social security and Medicare tax and income tax
withholding. When vacation pay is made in addition to regular wages for the vacation
period, withhold as if the vacation pay were a supplemental wage payment, discussed
later.

Military Differential Pay

Military differential pay is any payment made by an employer to an individual during the
period that the individual is called to active duty in the uniformed services for a period of
more than 30 days, and represents part or all of the wages the individual would have
received from the employer if the individual were performing service for the employer
during that time.

The Heroes Earnings and Relief Tax Act of 2008 defines military differential pay as
wages for income tax purposes, reportable on Form W-2, box 1.

After December 31, 2008, the following rules apply:

3-4

- 24 -

1. Differential wage payments made to an individual on active duty for more than 30
days are subject to income tax withholding, but not to social security and Medicare
(FICA) or unemployment tax (FUTA).
2. Differential wage payments are supplemental wages. Employers may use either the
aggregate or the separate method to calculate income tax withholding in these
situations. For a discussion of these methods, see section 7, “Supplemental
Wages”, in Publication 15, Employer’s Tax Guide.
3. The amount of differential wages must be reported on Form W-2.

Deceased Employee’s Wages

If an employee dies during the year, the employer must report the accrued wages, vacation
pay, and other compensation paid after the date of death. Also, report wages that were
available to the employee while he or she was alive, regardless of whether the wages
actually were in the possession of the employee, as well as any other regular wage
payment, even if is necessary to reissue the payment in the name of the estate or
beneficiary. How the payment is reported depends on the year in which payment is made.

Payment made in the year of death - If you made the payment after the employee’s death
but in the same year the employee died, you must withhold social security and Medicare
taxes on the payment and report the payment on the employee’s Form W-2 only as social
security wages (box 3) and Medicare wages and tips (box 5) to ensure proper social
security and Medicare taxes withheld in boxes 4 and 6. Do not show the payment in box 1.

Payment made after the year of death - If the payment was made after the year of death, it
should not be reported on Form W-2 and social security and Medicare taxes should not be
withheld.

Whether the payment is made in the year of death or after the year of death, report it in
box 3 of Form 1099-MISC, Miscellaneous Income , as a payment to the estate or
beneficiary. Use the name and taxpayer identification number (TIN) of the estate or
beneficiary on Form 1099-MISC. See Revenue Ruling 86-109, 1986-2 C.B.196.

See the Instructions for Forms W-2 and W-3 and Publication 559, Survivors, Executors,
and Administrators, for more information on the treatment of payments on behalf of a
decedent.

Back Pay

Back pay is pay received in a tax year for actual or deemed employment in an earlier year.
For social security coverage and benefit purposes, all back pay is wages, except amounts
specifically and legitimately designated otherwise, such as interest, penalties, and legal
fees. For tax purposes, back pay is treated as wages in the year received and is reported on
Form W-2 for that year. Income, social security and Medicare tax withholding apply in the
year of payment at the rates in effect for that period.

3-5

- 25 -

If the back pay is awardedunder a statute (for example ,under the Americans with
Disabilities Act or Fair Labor Standards Act), the period for which back pay is credited as
wages for social security purposes is different from the tax year it is reported. However,
payments of back pay under a statute will remain posted to the employee’s social security
earnings record in the year reported on Form W-2 unless the employer or employee
notifies the SSA in a special, separate report. If this is done, SSA can allocate the statutory
back pay to the appropriate periods for purposes of retirement benefit calculations. See
IRS Publication 957, Reporting Back Pay and Special Wage Payments to the Social
Security Administration, for more information.

Workers’ Compensation

Amounts received by police officers, firefighters, and other employees or their survivors
for personal injuries or sickness incurred in the course of employment are excludable from
income and social security and Medicare taxes if they are paid under a workers’
compensation act or a statute in the nature of a workers’ compensation act that provides
compensation to employees for personal injuries or sickness incurred in the course of
employment.
This exclusion does not apply to retirement plan benefits based on age, length of service,
or prior contributions to the plan, even if the individual retired because of an occupational
sickness or injury.
Workers’ compensation benefits are fully excluded from gross income and are not subject
to employment taxes, income tax withholding or reporting.

Noncash Payments

Generally, noncash payments are wages subject to social security and Medicare. The
dollar value of wages paid in a medium other than cash should be computed based on the
fair market value of the property at the time of the payment. The fair market value may be
based on the prevailing value of the item in the locality or upon a reasonable value
established for other purposes. Special rules may apply to noncash fringe benefits,
discussed below.

3-6

- 26 -

Fringe Benefits

Fringe benefits, which generally include any compensation other than cash wages or
salary, must be included in an employee’s wages unless an exception is provided by law.
Examples of employer-provided fringe benefits include:

 Vehicles for personal use
 Meals
 Health or life insurance
 Tickets to entertainment or sporting events
 Holiday gifts
 Personal use of employer facilities
 Transportation passes

The tax treatment of some of these benefits is determined by specific statutes; others fall
under general rules for broader categories of fringe benefits. IRS Publication 15-B,
Employer’s Tax Guide to Fringe Benefits , updated annually, addresses fringe benefits
applicable to all employers. In addition, the office of Federal, State and Local
Governments (FSLG) produces Publication 5137, Fringe Benefit Guide, especially for
government employers. For a more comprehensive discussion of fringe benefits, you can
view or download this publication on the FSLG website. Some common tax-exempt
benefits are discussed below.

Business Expense Reimbursements – Accountable Plan

Payments to employees for travel and other ordinary and necessary expenses of the
employer’s business generally are wages subject to social security and Medicare and
income tax withholding unless they are made under an accountable plan. There are three
requirements for a reimbursement procedure to be treated as an accountable plan:

1. The expenses must qualify as deductible business expenses incurred while
performing services for the employer;
2. The employee must adequately account for the expenses to the employer within
a reasonable period of time; and
3. The employee must return any amounts received that exceed expenses within a
reasonable period of time.

See IRC section 62(c), section 1.62-2 of the Income Tax Regulations, and Publication 15
for more information on accountable plans.

The use of per diem rates at or below the federal rate for travel expenses can reduce and
simplify the recordkeeping requirements for accounting for these expenses. See
Publication 463, Travel, Entertainment, Gift, and Car Expenses, or the FSLG’s
Publication 5137, Fringe Benefit Guide, for more information on per diem reimbursement
systems.

3-7

- 27 -

Reimbursements Not Made Under Accountable Plan

If an employer provides reimbursements that do not comply with the accountable plan
rules, these amounts are treated as wages and subject to all employment taxes. The
employee may be able to deduct the expenses incurred on his or her individual income tax
return.

Hourly or Tool Rate Reimbursement

The payment of an hourly rate to cover the cost of tools, equipment, etc., is not an
accountable plan if the amount would be paid regardless of the amount of expenses
incurred or whether expenses actually are incurred. Only if actual business expenses that
are accounted for under the rules above are incurred can the amount be excluded from
wages.

Working Condition Fringe Benefit

An employer may exclude from the wages of an employee the value of any property or
services provided by the employer to the extent that, if the employee paid for the property
or services, the payment would be allowable as a business expense deduction. This is
called a working condition fringe benefit. See IRC section 132(a)(3). Working condition
fringe benefits include property provided that is necessary for employees to accomplish
work. Common examples include vehicles or special clothing provided by the employer.

Employer-Provided Vehicles

If an employer provides an employee with unrestricted use of a vehicle, the employee
receives a noncash fringe benefit and the value of the use is required to be included in
income. The entire value of the vehicle for the tax year is included in income unless the
employee substantiates its business use. The portion of the value that is attributable to the
employee’s substantiated business use of the employer’s vehicle is excludable from the
employee’s income as a working condition fringe. See IRC section 274(d) and Regulation
section 1.274-5T.

There are three methods for determining the value of the personal use of a vehicle:

 Cents-per-mile rule
 Commuting rule
 Lease value rule

The requirements for each of these rules are discussed in IRS Publication 15-B, and in the
FSLG’s Publication 5137, Fringe Benefit Guide.

The value of a “qualified nonpersonal use vehicle” can be excluded from income as a
working condition fringe benefit. A qualified nonpersonal use vehicle is one that, due to
its nature, is not likely to be used more than a minimal amount for personal purposes. This
includes, for example, a clearly marked police, fire, or public safety officer vehicle, a

3-8

- 28 -

flatbed truck, a school bus, or ambulance. An employee is not required to substantiate the
business use of a qualified nonpersonal use vehicle in order to exclude its value from
income. See IRC section 274(d)(i) and Publication 15-B.

Clothing Provided by Employer

The value of work clothing provided by the employer is not taxable to the employee if:

1) the employee must wear the clothing as a condition of employment, and
2) the clothing is not suitable for everyday wear.

It is not enough that the employee wear distinctive clothing; the employer must
specifically require the clothing for work. The second test is not met solely because the
employee does not, in fact, wear the work clothes away from work; the clothing must not
be suitable for taking the place of regular clothing. The value and upkeep of work clothes
provided to firefighters, health care workers, law enforcement officers or letter carriers is
nontaxable to the employee. The value of provided items such as safety shoes or boots,
safety glasses, hard hats and work gloves provided and maintained by the employer is not
taxable if the employer requires the items for work and the items are not suitable for
everyday use.

Health Benefits

Under IRC sections 105 and 106, contributions to or benefits provided from an employer-
provided health care plan, including reimbursements and paid insurance premiums, are
generally excluded from the wages of the employees and are not subject to social security,
Medicare taxes or income tax withholding. A health reimbursement arrangement (HRA)
may provide for the carryover of benefits from year to year, and may specify the types of
medical benefits that are covered. An HRA can only be financed by employer
contributions, and cannot involve an employee election to participate. For more
information, see Publication 969, Health Savings Accounts and Other Tax-Favored Health
Plans.

Note: The Affordable Care Act made changes affecting the tax treatment of HRAs. See
www.irs.gov for more information.

Cafeteria (Section 125) Plans

Cafeteria plans, including flexible spending arrangements, are benefit plans under which
employees can choose from among cash and certain qualified benefits. If the employee
elects qualified benefits, employer contributions are generally excluded from the wages of
the employees and are not subject to social security, Medicare taxes or income tax
withholding. A cafeteria plan is a separate written plan maintained by an employer for
employees that meets the specific requirements of section 125 of the Internal Revenue
Code and associated regulations. It provides participants an opportunity to receive certain
benefits on a pre-tax basis. Participants in a cafeteria plan must be permitted to choose

3-9

- 29 -

among at least one taxable benefit (such as cash) and one qualified benefit. If an employee
elects to receive cash instead of any qualified cafeteria plan benefit, that amount is treated
as wages subject to all employment taxes.

A qualified benefit is a benefit that does not defer compensation and is excludable from an
employee’s gross income under a specific provision of the Code, without being subject to
the principles of constructive receipt. Qualified benefits include:

 Accident and health benefits (but not Archer medical savings accounts or long-
term care insurance)
 Adoption assistance
 Dependent care assistance
 Group-term life insurance coverage (including costs that cannot be excluded from
wages)
 Health savings accounts, including distributions to pay long-term care services

Generally, qualified benefits under a cafeteria plan (including health and accident
insurance) are excluded from the wages of the employees. The cost of group-term life
insurance of up to $50,000 provided by an employer is excludable from income and social
security, and Medicare wages. However, the cost of group-term life insurance that exceeds
$50,000 of coverage is included in wages (but is not subject to income tax withholding)
and is subject to social security and Medicare taxes, even when provided as a qualified
benefit in a cafeteria plan. The cost of group-term life insurance that is includible in
income only because the insurance exceeds $50,000 of coverage is considered a qualified
benefit. Adoption plans are also subject to social security and Medicare taxes. See IRS
Publication 15-B for details.

Health benefits provided under a cafeteria plan may include insurance or a flexible
spending arrangement (FSA) for qualifying medical expenses. An employer may have
both a Health Reimbursement Arrangement (HRA) and a cafeteria plan, but the salary
reductions cannot be used to directly or indirectly fund an HRA (see Revenue Ruling
2005-24).

Any amounts paid for health benefits pursuant to a salary reduction election are considered
paid by the employer; therefore, the employee is not entitled to exclude from income any
amounts paid as “reimbursements” to the employees for benefits under the plan. See
Revenue Ruling 2005-24 for more information on the interaction between an HRA and
various reimbursement arrangements.

Annual Limitation

For plan years beginning after December 31, 2012, a cafeteria plan may not allow an
employee to request salary reduction contributions for a health FSA in excess of $2,500.
This amount will be indexed for future years.

3-10

- 30 -

A cafeteria plan offering a health FSA must be amended to specify the $2,500 limit (or 
any lower limit set by the employer). While cafeteria plans generally must be amended on 
a prospective basis, an amendment that is adopted on or before December 31, 2014, may 
be made effective retroactively, provided that in operation the cafeteria plan meets the 
limit for plan years beginning after December 31, 2012. A plan that does not limit health 
FSA contributions to $2,500 is not a cafeteria plan and all benefits offered under the plan 
are includible in the employees' gross income. See Notice 2012-40.  
 
In general, all amounts credited to an employee in the plan must be used up by the end of 
the calendar year or are forfeited. However, under a “grace period rule” an IRC 125 
cafeteria plan may permit an employee to use amounts remaining from the previous year 
to pay expenses incurred for certain qualified benefits during the period of up to two 
months and 15 days immediately following the end of the plan year. See Notice 2005-42 . 
 
A plan may be amended to provide that up to $500 of unused amounts remaining at the 
end of a plan year in a health FSA to be paid or reimbursed to plan participants for 
qualified medical expenses incurred during the following plan year. However, if this 
provision is adopted, the grace period discussed above does not apply. See Notice 2013-
71.   
 
Meals and Lodging Furnished by Employer 
 
The value of meals is excludable ifthe meals are furnished on the business premises of the 
employer andare provided for the convenience of the employer. 
The value of lodging is excludable if the lodging is furnished on the business premises, is 
furnished for the convenience of the employer, and if the employee is required to accept 
the lodging as a condition of employment. See Publication 15-B for more information.  
 
Retirement Plans 
 
Regardless of social security coverage, most public employees are covered by some form 
of retirement plan. The terms of these plans may vary greatly, but in general provide for 
tax-deferred income placed in trust for the benefit of employees. These plans may involve 
employee or employer contributions, or both. Under certain provisions of the IRC, 
contributions may be deferred from tax until they are withdrawn. The term “qualified” is 
widely used to describe private-sector plans under IRC 401 that meet specific provisions 
of the Employee Retirement Income Security Act (ERISA) that enable them to offer 
certain tax advantages to the participants. Many public employees, however, are covered 
by nonqualified plans, generally under IRC sections 403(b) or 457, discussed below.  
 
Income Tax Withholding on Qualified Retirement Plans 
 
For income tax withholding purposes, employer and employee contributions made under 
qualified plans (up to the maximum allowable for the year) are deferred from income tax. 
The employee will be subject to tax on distributions of these amounts when they are 

                                       3-11

- 31 -

withdrawn from the plan. In most cases, withdrawals that are not rolled over into another 
plan are subject to mandatory income tax withholding upon distribution. 
 
Employer “Pick-Up” Contributions 
 
IRC Section 414(h)(2) allows state and local government entities with governmental plans 
within the meaning of IRC 414(d) to treat contributions that have been designated as 
employee contributions, but which are “picked up” (paid) by the employer, to be treated as 
employer contributions, and therefore as excludable from income. These “picked up” 
contributions are also exempt from social security and Medicare tax as long as they are not 
made pursuant to a salary reduction agreement. For more information on the conditions 
required for employer pick-up. See IRC 414(h)(2). For more information, visit 
www.irs.gov and search for “Employer pick-up contributions.” 
 
Section 403(b) Plans 
 
Plans under IRC section 403(b), also called tax sheltered annuities, are available to certain 
employees of public schools, employees of tax-exempt organizations, and certain 
ministers. These plans resemble qualified plans in many respects. Many public school 
employees are covered by 403(b) plans in addition to receiving social security coverage 
under a Section 218 Agreement. 
 
Employer contributions to tax-sheltered annuities under section 403(b) for public school 
employees are exempt from social security and Medicare taxes, unless the contributions 
are made by reason of a salary reduction agreement. Eligible participants may defer 
amounts from income tax up to an annual limit ($18,000 in 2015). This amount may be 
increased for certain employees with more than 15 years of service. In addition, additional 
tax-deferred “catch-up” contributions may be made for employees age 50 or older. 

Employee contributions, including those made by salary reduction arrangements, are 
subject to social security and Medicare tax. See IRC §3121(a)(5)(D).  

For more information, see Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans), 
and the section 403(b) page on IRS.gov.                                                                                                    
 
Section 457 (Nonqualified) Plans 

Many public employees participate in nonqualified section 457, deferred compensation 
plans. These plans can be established by state and local governments or tax-exempt 
organizations. If they meet the requirements of IRC section 457(b), they are considered 
“eligible” plans; if not they are considered “ineligible” plans, and are governed by IRC 
section 457(f). 
 
Section 457(b) – Eligible Plans 
Governmental 457(b) plans must be funded, with assets held in trust for the benefit of 
employees. Plans eligible under 457(b) may defer amounts from income tax up to an 
annual limit ($18,000 in 2015). Governmental 457(b) plans may make “catch-up” 

                                         3-12

- 32 -

contributions to employees age 50 or older, in addition to the basic section 457(b) catch-
up. Social security and Medicare taxes generally apply to all employer and employee
contributions. For further information regarding social security and Medicare tax
withholding and reporting on amounts deferred into eligible deferred compensation plans,
see the section 457(b) page on IRS.gov.
Amounts deferred from wages into eligible section 457(b) plans are not subject to income
tax withholding until they are distributed from the plan or made available to the participant
or beneficiary. For further information regarding income tax reporting and withholding
upon amounts deferred into and distributed from eligible governmental deferred
compensation plans, see the section 457(b) page on IRS.gov, and Section VI of Notice
2003-20.

Section 457(f) – Ineligible Plans
Nonqualified state or local government plans that do not meet the requirements of section
457(b) are ineligible, or section 457(f), plans. There is no limit on the annual deferrals on
these plans, but to defer taxation, all deferrals must be subject to substantial risk of
forfeiture. Amounts deferred under a section 457(f) plan are generally subject to social
security and Medicare taxes at the later of the time 1) when the services giving rise to the
related compensation are performed, or 2) when there is no substantial risk of forfeiture of
the rights to the amounts.

Employer Reporting Responsibilities

Basic federal tax requirements that generally apply to all employers are discussed below.
For a more detailed explanation, see Publication 15.

Employer Identification Number

IRS identifies individual taxpayers by using taxpayer identification numbers (TINs For ).
individuals, the TIN is the social security number. State and local entities use employer
identification numbers (EINs) assigned by IRS to identify their accounts and tax returns.
The EIN should be used on all employment tax returns (e.g., Form 941), information
returns (e.g., Form W-2) and correspondence with the IRS. Generally, each county, city,
school district or other governmental unit will have a unique EIN. However, this is not
always the case within state governments. Many state agencies use an EIN assigned to
another agency; some larger state agencies may use a unique EIN.

When two entities are combined (for example, when one municipality annexes another, or
when school districts are consolidated) the EIN of the annexed area or abolished district
should no longer be used, as it is no longer a separate entity. A continuing entity that
absorbs or annexes another can retain its EIN. However, if a new entity is created from the
dissolution of two or more preexisting entities, a new EIN should be obtained. When an
unincorporated area is incorporated, it becomes a separate entity and must obtain its own
EIN.

3-13

- 33 -

To obtain a new EIN, complete Form SS-4, Application for Employer Identification
Number. Once you have received an EIN, ensure that it is accurate and complete on each
tax document submitted. When an incorrect EIN is used, credit for tax payments can be
delayed or applied incorrectly.

Note: For tax years prior to 1987, SSA assigned EINs beginning with the digits “69” for
government employers to report earnings, but these are no longer used. Prior to 1987,
these numbers were assigned for new modifications to Section 218 Agreements, and then
used to process wage reports. Many states have a filing system based upon the 69 number
and, therefore, continue to sequentially assign 69 numbers for internal recordkeeping
purposes.

Form SSA-1945

State and local government employers are required to notify employees hired on or after
January 1 2005, in jobs not covered by social security, of the effects of the Windfall
Elimination Provision and the Government Pension Offset. The law requires newly hired
public employees to sign Form SSA-1945, indicating that they are aware of a possible
reduction in their future social security benefit entitlement. For more detailed information
about this law, see Chapter 7 or http://www.socialsecurity.gov/form1945.

Form W-2

An employer is responsible for furnishing Form W-2, Wage and Tax Statement, to each
employee from whom income, social security or Medicare tax was withheld, or would
have been withheld if the employee had claimed no more than one withholding allowance
or had not claimed exemption from withholding on Form W-4. Statements to employees
must be furnished by January 31 of the following year. The aggregate amounts are
reported on Form W-3, Transmittal of Wage and Tax Statements. For more information,
see the Instructions for Forms W-2 and W-3.

Employers who file 250 or more Forms W-2 must file them electronically. Statements
may be furnished to employees electronically only if an affirmative consent has been
received from the employee to do so. See Publication 1141 for more information.

An employer uses Form 941, Employer’s QUARTERLY Federal Tax Return (or for certain
employers, the annual Form 943 or 944) to report wages paid and taxes withheld. After the
calendar year ends, employers prepare individual employee reports on Forms W-2, Wage
and Tax Statement, with Form W-3, Transmittal of Wage and Tax Statements, showing the
total wages paid and taxes withheld for each employee during the year. An employer
reports wage information to SSA for crediting to the employees’ earnings records. This is
done either by sending SSA Copy A of the paper Form W-2 with a covering Form W-3, or
by sending the Form W-2 information in the form of electronic reports.

If you need to talk directly to SSA about an electronic file or other wage reporting
problem, you may contact an Employer Services Liaison Officer (ESLO) through the

3-14

- 34 -

ESLO page on the SSA website, or call 1-800-772-6270 for assistance from an earnings
report technician. Specifications for electronic reporting of Form W-2 information can be
found at the SSA employer page or by calling the ESLO for your state.

Form 941

Form 941, Employer’s Quarterly Federal Tax Return, is used to report total wages, wages
subject to social security and Medicare tax, and federal income tax. Agricultural
employers file Form 943 , Employer’s Annual Tax Return for Agricultural Employers.
Form 944, discussed below, is an annual version of the form, for employers with the
smallest payrolls. Generally, annual Form 941 or Form 943 totals must match the
aggregate wages shown on all Forms W-2 issued to employees for the same period.

To prepare Form 941, the total wages and compensation for the quarter must be
determined. Wage payments are included in the quarter in which they are paid. For
example, an employee works for the county in a pay period ending on March 20, but is not
paid until April 5. In this situation, the employee’s wage payment is included in the second
quarter when the payment is made, not the first quarter when the work was done. Total
wages and compensation entered on line 2 of Form 941 includes all payments to
employees. Examples of these payments include:

1) Wages, salaries, commissions, fees, and bonuses
2) Vacation allowances
3) Dismissal pay and severance pay
4) Tip income
5) Noncash payments, including goods, lodging, food, clothing or services

Wages from which social security and Medicare tax must be withheld may differ from
total wages. This may be because certain amounts are not included in wages for income
tax purposes, but are subject to social security and Medicare tax (for example, deferred
compensation in a nonqualified deferred compensation plan). Another common reason for
a difference in the totals is that earnings exceeding the annual wage base are not subject to
the OASDI portion of social security tax. The total income tax withheld (line 3 )includes
all federal income tax withheld from all employees for the calendar quarter covered by the
return.

Form 941 must be filed with the IRS by the last day of the month following the calendar
quarter. For example, the first quarter return covering January through March is due by
April 30. If all taxes are deposited when due, the employer has 10 additional days after the
due date to file the return. If the return is not filed by this date, the employer may be
subject to penalties and interest in addition to the tax due on the return.

Form 944

Certain taxpayers with small payrolls may report their employment taxes on an annual
rather than a quarterly basis. The IRS will notify these taxpayers that they are eligible to
use Form 944. Instead of the quarterly Form 941, they file annual Form 944, Employer’s

3-15

- 35 -

Annual Employment Tax Return. An employer may contact the IRS to request to file a 
Form 941 instead of a Form 944. See Revenue Procedure 2009-51. The deposit 
requirements, discussed below, are the same as for quarterly filers. For more information 
on eligibility, see Publication 15 or the Instructions for Form 944. 
 
Except for the return due date, references to the requirements for quarterly Form 941 
discussed in this chapter are also applicable to filers of annual Form 944. 
 
Form 941-X 
 
Employers correct errors to Form 941 or 944 by filing Form 941-X, Adjusted Employer’s 
Quarterly Federal Tax Return or Claim for Refund, or Form 944-X, Adjusted Employer’s 
ANNUAL Federal Tax Return or Claim for Refund. Form 941-X is a stand-alone return 
that should be filed as soon as the error is discovered. The return for the period when the 
error is discovered is not affected. Additional requirements are discussed in the 
Instructions for Form 941 and in the Instructions for Form 941-X.  
 
Special Reporting Situations for Government Employers 
 
These are some circumstances commonly facing government employers that involve 
special reporting rules. 
 
Multiple Employers and the Wage Base 
 
Because each employer must withhold social security tax on wages up to the annual 
maximum, an employee who works for more than one employer in one calendar year may 
have excess social security taxes withheld. In order to get a refund of the excess social 
security tax withheld by the employers, the employee shows the overpayment on Form 
1040. Employers are not responsible for making any adjustments based on wages paid by 
other employers and cannot claim a refund in this situation, because each employer is 
responsible for withholding and paying social security tax on wages paid to each employee 
up to the wage base. 
For the purpose of determining responsibility for reporting wages, a state is considered to 
be one employer and each political subdivision is considered a separate employer. An 
employee who transfers from one state agency to another during a calendar year does not 
change employers. In this case, the state should withhold and pay social security tax only 
up to the wage base for that employee. However, an employee who transfers from a state 
agency to a political subdivision of the state, a city or county, has changed employers. 
Each employer must withhold and pay social security tax up to the wage base for that 
employee, regardless of other employment. 
 
Medicare Qualified Government Employment (MQGE) 
 
As explained in Chapter 2, all employees hired after March 31, 1986, are subject to 
Medicare tax. State and local employers that provide coverage under a public retirement 

                                          3-16

- 36 -

system may have employees who are not subject to social security but are subject to
Medicare tax. This is referred to as Medicare Qualified Government Employment
(MQGE). MQGE Forms W-2 are filed separately from those for employees covered by
social security and Medicare, or from Forms W-2 having no social security or Medicare
wages. Paper MQGE Forms W-2 must be transmitted with a covering Form W-3 with
“Medicare Govt. Emp.” checked in box b. See the Instructions for Forms W-2 and W-3 or
contact your ESLO for more information. Note: Electronically transmitted records should
be grouped to follow a “Code RE” record with an Employment Code of "Q". All other W-
2 records should be grouped to follow a Code RE record with an Employment Code of
"R". Do not group MQGE W-2 records and non-MQGE W-2 records together after a
single Code RE record. See SSA Publication 42-007 , Specifications for Filing Forms W-2
Electronically (EFW2).

Employees Covered for MQGE and FICA

If they are employed in more than one capacity, some state and local employees may be
subject to both Medicare-only withholding and full social security and Medicare in the
same reporting year. When an employee is in a continuous employment relationship with
the same employer for the year, and the employer has both types of employees, the
employer has two reporting options:

1. Prepare a single Form W-2 with the total annual wages in box 1, the total Medicare
wages and taxes from BOTH positions in box 5 and box 6. Social security and
Medicare wages and taxes are entered in box 3 and box 4 (SSA prefers that this
method be used in order to reduce errors), or

2. Use a separate Form W-2 for wage data from the Medicare-only position and a second
Form W-2 for FICA wage data from the positions with both social security and
Medicare coverage.

Information Reporting for Election Workers

If the compensation of an election workers is less than a statutorily established amount
($1,600 for calendar year 2015), it is generally not subject to mandatory social security
and Medicare tax. See IRC sections 3121(b)(7)(F)(iv) and 3121(u)(2)(B)(ii)(V). However,
under a state’s Section 218 Agreement an election workers’ compensation may be subject
to social security and Medicare taxes at a level below the statutory amount. In any case,
compensation of election workers is not subject to income tax withholding.

If an election worker’s wages are subject to withholding of social security and Medicare
tax, Form W-2 reporting is required for all compensation, regardless of the amount. If an
election worker’s compensation is not subject to withholding of social security and
Medicare tax, Form W-2 reporting is required for payments that aggregate $600 or more in
a calendar year. See Revenue Ruling 2000-6 for a discussion of information reporting with
respect to election workers.

3-17

- 37 -

Information Returns

Any entity, including a governmental organization, conducting a trade or business, is
required to file with the IRS, and furnish to recipients, information returns for certain
types of payments. In most cases, these payments are reported on Form 1099-MISC,
Miscellaneous Income.

IRC 6041(a) states that all persons engaged in a trade or business and making payment in
the course of the trade or business to another person of rent, salaries, wages, premiums,
annuities, compensation, remuneration, emoluments, or other fixed and determinable
gains, profits, and income (with certain exceptions) of $600 or more in any year must
furnish an information return indicating the amount of such income and the name and
address of the recipient of such payment. The return with respect to certain payments of
compensation to an employee is made on Forms W-2 and W-3; never use Form 1099-
MISC to report payments for services by an employee. The recipient of the payment is
required to furnish to you the entity’s name, address and identification number. You
should obtain this information before payments are made. This identification number must
be included on the information return. Payments for nonemployee compensation are
discussed in the Instructions for Form 1099-MISC.

Governments must file Form 1099-G, Certain Government Payments, for certain
payments, including tax refunds, unemployment compensation, and taxable grants. See the
Instructions for Form 1099-G for more information. A variety of information returns are
required to report various other types of payments.

Payers responsible for filing 250 or more information returns of one type (for example,
Form 1099-MISC) are required to file these electronically. Regardless of whether the
returns are filed electronically, a paper statement must be furnished to each recipient
unless correct procedures are followed for establishing an electronic system for furnishing
statements, including affirmative consent from each individual to receive the information
electronically. For more information, see the General Instructions for Certain Information
Returns and Publication 1179.

Depositing Taxes

In general, employers are required to deposit federal employment taxes if the total tax
liability for Form 941 for the current or previous quarter is $2,500 or more. These taxes
are required to be deposited using the Electronic Federal Tax Payment System (EFTPS).
You can no longer make deposits using paper coupons. A balance due on the Form 941 or
944 of less than $2,500 is not required to be deposited; it may be paid with the return.

Note: As of November 30, 2009, federal agencies can no longer use FEDTAX II for
deposits and must use EFTPS. Publication 966 explains the EFTPS system.

See Notice 2003-20 for guidance on depositing and reporting of income tax withheld upon
distributions from eligible deferred compensation plans described in section 457(b).

3-18

- 38 -

When to Deposit 
 
An employer will use either the monthly or the semiweekly schedule for deposit of federal 
employment taxes. These schedules indicate when a deposit is due after a tax liability 
arises (a pay date). Before the beginning of each calendar year, employers must determine 
which of the two deposit schedules they are required to use. The deposit schedule used is 
based on the total tax liability reported on Form 941 or Form 943 during a four-quarter 
lookback period as discussed below. The deposit schedule is not determined by how often 
employees are paid. 
 
Lookback Period 
 
The deposit schedule an employer must use for a calendar year is determined from the 
total taxes reported on Forms 941 (line 8) in a four-quarter “lookback” period that applies 
to that year. The lookback period begins July 1 of the second preceding year, and ends 
June 30 of the preceding year. If the employer reported $50,000 or less of taxes for the 
lookback period, the employer is a monthly schedule depositor; if it reported more than 
$50,000, the employer is a semiweekly schedule depositor.  
 
The rules for making deposits are summarized in the table on the next page. 
                     
                                    3-19

- 39 -

Summary of Federal Tax Deposit (FTD) Rules

If the employer is a… And the payroll date is… Then a deposit must be
made:
th
Monthly schedule depositor Any time during the month On or before the 15 of the
($50,000 or less during the month
lookback period)

Semiweekly schedule Saturday, Sunday, Monday, On or before the following
depositor (More than Tuesday Friday
$50,000 during the
Wednesday, Thursday, On or before the following
lookback period)
Friday Wednesday

Special Rules:
$2,500 Rule: Accumulated taxes less than $2,500 in a quarter do not have to be deposited
if paid with a timely filed return.
$100,000 Next Day Rule: $100,000 or more within a deposit period must be deposited
on the next banking day. Monthly depositors become semiweekly depositors on the next
day and remain so for the remainder of the year and all of the following year.
Accuracy of Deposits Rule: An employer who inadvertently underdeposits will not be
penalized if the shortfall does not exceed $100 or 2% of the amount of employment taxes
required to be deposited. Balance due must be deposited by a shortfall make-up date. See
IRS Publication 15 for details.
Deposits on Banking Days Only: If a deposit is required to be made on a day that is not
a banking day, the deposit is considered timely made if it is made by the close of the next
banking day. Legal holidays (days that are legal holidays in the District of Columbia) are
considered non-banking days, as are Saturday and Sunday.
Special Rules for Non-Banking Days: Semiweekly depositors have at least three
banking days following the close of the semiweekly period to deposit taxes accumulated
during the semiweekly period. For more information, see IRS Publication 15.

Deposit Requirements for Nonpayroll (Form 945) Tax Liabilities

The deposit rules and dollar thresholds to figure when deposits for nonpayroll tax
withholding are the same as they are for employment taxes; however, they are aggregated
separately, and the deposit thresholds above apply separately. Do not combine Form 945
with deposits for employment tax liabilities (Form 941 or Form 944). See the instructions
for Form 945 for details on reporting nonpayroll withholding.

For more information on the deposit rules, see IRS Publication 15. For more information
on using the Electronic Federal Tax Payment System (EFTPS), see IRS Publication 966.

3-20

- 40 -

Calculating Federal Income Tax Withholding 
 
Employers are generally required to withhold federal income tax from the wages paid to 
employees. The withheld amount is credited to the employees’ individual income taxes. 

Each employee should submit a signed   Form W-4, Employee’s Withholding Allowance 
Certificate, when employment begins. The amount of federal income tax withheld on an 
employee depends on five factors: 

 1. Payroll period, 
 2. Employee marital status, as shown on Form W-4, 
 3. Amount of wages, 
 4. Number of withholding allowances claimed by the employee on Form W-4, and 
 5. Additional amounts the employee requests to have withheld. 
 
Publication 15, furnished by the IRS to each employer at the beginning of each calendar 
year, contains the tax withholding tables and percentage tables to use to determine actual 
withholding based on the above criteria. Refer to Publication 15 for specific instructions 
on calculating withholding from your employees. 
     
Federal Unemployment Tax Act 
 
The Federal Unemployment Tax Act (FUTA) provides a federal-state insurance system for 
workers who lose their jobs. Most private employers pay both a federal and state 
unemployment tax. States and their political subdivisions are exempt from paying tax 
under FUTA. However, state and local government employees, with certain exceptions, 
must be covered by state unemployment insurance. Contact your state employment or 
labor agency for more information. 
 
Interest and Penalties 
 
Tax that is not paid when due or in the manner required may be subject to civil penalties 
as well as interest on the amount due. 
 
Employment Tax Penalties 
 
The following are the most commonly assessed penalties related to employment tax. There 
are penalties for filing a return late and paying or depositing taxes late, unless there is 
reasonable cause. 

                                       3-21

- 41 -

                                                                                                                         _______ 
 IRC                  Penalty Assessed For:                                                               Penalty Rates: 
 Section 
 6651(a)(1)  Failure to file a tax return (failure to 5% of the tax due per month up to 25% 
              timely file) 
 6651(a)(2)  Failure to pay tax shown on the return  0.5% (one half of one percent) of the tax 
              (failure to timely pay) (imposed if the due per month up to 25% 
              amount of tax shown on the return is 
              not paid on or before the prescribed 
              date) 
 6651(c)      Both failure to timely file and failure When both penalties apply for any 
              to timely pay                           month, the failure to file penalty is 
                                                      assessed at 4.5% 
 6652(b)      Failure to report tips                  Imposes a penalty for tip income 
                                                      unreported to the employer; the penalty is 
                                                      50% of the employee social security and 
                                                      Medicare tax on the unreported tip 
                                                      income 
 6656         Deposit penalties: 
              1-5 days late                           2% 
              6-15 days late                          5% 
              More than 15 days late, but paid by     10% 
                    th
              the 10  day after notice and demand 
              (Notice and demand date is the 
              assessment date) 
                                     th
              Taxes still unpaid after the 10  day    15% 
              following notice and demand 
              Failure to deposit electronically       10% 
 6662         Underpayment of employment taxes        20% of the underpayment attributable to 
              due to disregard of the rules and       negligence or disregard of rules and 
              regulations (accuracy-related)          regulations 
 6672         Failure to withhold or pay over trust   100% of unpaid tax (see below) 
              fund taxes 
 
Trust Fund Recovery Penalty 
 
Under section 6672, if withheld taxes that must be withheld are not withheld or are not 
deposited or paid, the trust fund recovery penalty may apply. The penalty is the full 
amount of the unpaid trust fund tax. This penalty may be imposed on all persons who are 
determined by the IRS to be responsible for collecting, accounting for, and paying over 
these taxes, and who acted willfully in not doing so. 
 
A responsible person can be an officer, employee, or volunteer. A responsible person also 
may include one who signs checks for the business or otherwise has authority to cause the 
spending of funds. “Willfully” means voluntarily, consciously, and intentionally. A 
responsible person acts willfully if the person knows that the required actions are not 
taking place. 

                                             3-22

- 42 -

Information Reporting Penalties  
 
The following are the most commonly assessed penalties as they relate to information reporting: 
 
 IRC Section                Penalty                      Rate for Returns Required To Be 
                                                         Filed January 1, 2011, or Later* 
 6721        Failure to file correct information returns  The penalty for failure to file 
             on or before the required filing date or    information returns without all 
             failure to include all information          required and correct information 
             required to be shown on the return (or      (including missing, incorrect and/or 
             where there is incorrect information        unissued TINs) is $100 for each 
             shown)                                      failure to a maximum of $1,500,000 
                                                         per calendar year 
 6722        Failure to furnish correct payee            The penalty is $100 for each failure, 
             statements on or before the date            not to exceed $1,500,000 per 
             prescribed to the person to whom such       calendar year, when there is failure 
             statement is required to be furnished, or   to furnish a timely and correct 
             a failure to include all of the information payee statement 
             required to be shown on the payee            
             statement or where the information is 
             incorrect 
 6723        Failure to comply with other specific       The penalty is $50 for each failure, 
             information reporting requirements on or  not to exceed $100,000 per calendar 
             before the prescribed time (usually         year, when there is failure to 
             related to failure to furnish a TIN)        comply with any information 
                                                         reporting requirement  
 
 * - Reduced penalties may apply for returns filed within 30 days, by August 1, or for 
entities with gross receipts no more than $5,000,000. See the Instructions for Certain 
Information Returns for more information. 
 
Interest 
 
Interest is assessed on any taxes due and unpaid, in addition to any penalties that may be 
imposed. However, the law allows an employer who has made an undercollection or 
underpayment of social security and Medicare taxes or income tax withholding to make an 
interest free-adjustment (IRC section 6205(a)(1)). The following two requirements must 
be met: 
 
 1) Correction of the error must be made in the period in which the error was 
      ascertained, and  
 
 2) Payment of the tax must be made no later than the due date of the return for the 
      return period in which the error was ascertained. Additional tax due as a result of 
      an IRS examination or ruling may qualify for an interest-free adjustment. 
 
                                     3-23

- 43 -

Frequently Asked Questions 
 
 1) If board members are paid nominal amounts, for example, under $1,000 per 
    year, must social security and Medicare taxes be withheld?  Generally, yes. 
    Elected and most appointed officials are employees of the public entity they serve, 
    and are generally subject to the withholding rules that apply to other  workers. 
    Withhold social security and Medicare taxes for any official who is either 1) 
    covered under a Section 218 Agreement, or 2) not a qualified participant in a 
    public retirement system (also called a “FICA replacement plan”), and therefore 
    subject to mandatory coverage. Any official elected or appointed after March 31, 
    1986, is subject to Medicare. See Chapter 4 for more information on who is an 
    employee. [IRS] 
  
 2) What is the statute of limitations date for an adjustment or claim for refund 
    of payroll taxes? The general rule is that an adjustment or claim for refund of any 
    overpayment of federal payroll taxes must be filed within three years from the date 
    the return was due or three years from the date it was filed, if that date is later. For 
    this purpose, a Form 941 return for any calendar quarter is considered filed on 
    April 15 of the following calendar year, if it is in fact filed by that date. [IRS] 
 
 3) What is the social security tax treatment of prison inmate labor?      Generally, 
    services performed by inmates, for the state or local political subdivision that 
    operates the prison are excluded from social security coverage, whether or not 
    performed outside the confines of the prison. Inmates usually are not in an 
    employment relationship with the state or political subdivision. In general, services 
    performed by inmates, as part of the rehabilitative and therapeutic program of the 
    institution, are not usually performed as employees. Services performed by inmates 
    for an entity other than the state or local governmental unit, e.g., a work-release 
    program, may be covered if an employment relationship exists. The relevant factor 
    for determining social security coverage is whether an employer/employee 
    relationship exists between the inmate and the non-governmental employer, not the 
    place where the inmate is incarcerated. Services performed by inmates outside the 
    institution for the same unit of government that operates it are considered 
    performed in the institution. For more information, visit irs.gov and enter “prison 
    industry program” in the search box. [IRS] 
  
 4) Are the services of police officers and firefighters emergency services excluded 
    from social security and Medicare coverage?      Police officers and firefighters are 
    not considered emergency workers under the mandatory exclusion from social 
    security and Medicare coverage. This exclusion applies only to services of an 
    employee who was hired because of an unforeseen emergency to work in 
    connection with that emergency on a temporary basis (for example, an individual 
    hired to battle a major forest fire or to provide emergency assistance in other 
    similar disasters such as volcano eruption, severe ice storm, earthquake or flood). 
    Regular, long-term police and fire employees are not emergency workers for this 

                                       3-24

- 44 -

     purpose and subject to the same rules as other public employees to determine 
     whether they are covered by social security. [IRS] 
 
  5) How are tax deposits made? As of January 1, 2011, employment taxes may no 
     longer be made with paper coupons at federal tax depositaries. They must be made 
     electronically, or, in some cases, may be paid with the tax return. See Publication 
     15, (Circular E) Employer’s Tax Guide. [IRS] 
   
                               3-25

- 45 -

Chapter 4

Determining Worker Status

It is critical for any entity paying compensation to know whether its workers are properly
classified as employees or independent contractors. In some cases, workers may be
designated as employees by a Section 218 Agreement. In other cases, workers may be
defined as “statutory employees” or “statutory nonemployees” because specific laws
address the occupation (see Publication 15-A for more information on these workers). In
general, however, the determination of worker status is made by applying an established
common-law standard that addresses the facts and circumstances concerning how the work
is performed. Whether workers are employees has significant consequences for tax
liability and reporting.

Generally, when workers are employees, the government entity that employs them must
withhold and pay employment taxes and file employment tax returns. Employment taxes
consist of federal income tax withholding, Old-Age, Survivors and Disability Insurance
(OASDI), or social security tax and the Hospital Insurance tax (Medicare tax). The social
security tax and Medicare tax make up the Federal Insurance Contributions Act (FICA)
contributions, which are paid through employer and employee shares. State and local
governments generally pay the social security tax on employees covered under Section
218 Agreements and on employees not covered by a public retirement system (mandatory
coverage), and generally pay the Medicare portion on all other employees hired after
March 31, 1986. Wages paid by state and local governments are not subject to taxes under
the Federal Unemployment Tax Act (FUTA) but state unemployment taxes may apply.

When workers are independent contractors, the governmental entity may have
information-reporting and backup withholding responsibilities, but it is not required to
withhold and pay employment taxes on behalf of those workers.

This chapter deals with the general rules for determining whether workers are employees,
and the laws that apply to different categories of public employment.

Workers Covered Under Section 218 Agreements

As discussed in Chapter 1, states can enter into agreements with SSA to provide social
security and Medicare coverage for their employees pursuant to section 218 of the Social
Security Act (Section 218 Agreements). If a position is covered by a Section 218
Agreement, then anyone holding that position is an employee. Therefore, the first question
for a government to ask about a worker’s status is whether the worker is in a position
covered under a Section 218 Agreement. If Section 218 coverage applies, this fact takes
precedence over other considerations, including the common-law tests discussed below
and the mandatory coverage rules.

4-1

- 46 -

If you are not sure whether the Section 218 Agreement covers a specific position, contact
your State Social Security Administrator, or the SSA Regional Office for assistance. If a
group of workers is covered under a Section 218 Agreement, the Agreement cannot be
terminated or modified to exclude that coverage group.

Employees who are not covered under a Section 218 Agreement are generally subject to
social security and Medicare unless they participate in a public retirement system that
serves as a FICA replacement plan, discussed in Chapter 6. However, Medicare taxes
generally apply to wages of all state and local government employees hired after March
31, 1986. See Chapter 5, Social Security and Medicare Coverage, for further
information.

Indian tribal governments are not treated as states for purposes of Section 218. See IRC
section 7871 for information on the treatment of Indian tribes as governments. For more
information about social security coverage, Medicare, and tribal governments, see the IRS
Indian Tribal Governments website.

Common-Law Standard – Employee Status for FICA Purposes

Internal Revenue Code (IRC) section 3121(d)(2) states that, for purposes of social security
and Medicare, an employee is “any individual who, under the usual common-law rules
applicable in determining the employer-employee relationship, has the status of an
employee.” The IRS has interpreted the common-law test for determining whether a
worker is an employee as whether the service recipient (i.e., the government entity) has the
right to direct and control the worker as to the manner and means of the worker’s job
performance. In other words, does the entity have the right to tell the worker not only what
shall be done, but how it shall be done?

All the facts and circumstances must be considered in deciding whether a worker is an
independent contractor or an employee. The facts fall into three main categories:

1) Whether the entity has the right to control the behavior of the worker;
2) Whether the entity has financial control over the worker; and
3) The relationship of the parties, including how they see their relationship.

These facts are discussed below, with emphasis given to governmental situations.

Behavioral Control

Facts that fall under this category show whether the entity has a right to direct and control
how the worker performs the specific task for which he or she is engaged. Many times,
when workers perform their tasks satisfactorily, the entity does not appear to exercise
much control. The critical question, however, is whether there is a right to control. If the
entity has the right to do so, it is not necessary that it actually direct and control the
manner in which the services are performed.

4-2

- 47 -

The following table addresses the elements of behavioral control with respect to
government employees:

Instructions, An employee is generally subject to the government entity's instructions about
Training and when, where, and how to work. The employer has established policies, which the
Required workers are required to learn and follow. Daily or ongoing instructions regarding
Procedures the expected tasks are especially indicative of employee status. Training is a
classic means of explaining detailed methods and procedures to be used in
performing a task. Periodic or ongoing training about procedures to be followed
and methods to be used indicates that the employer wants the services performed
in a particular manner. This type of training is strong evidence of an employer-
employee relationship. For instance, police officers and firefighters must be
trained to comply with departmental rules and regulations. They do not have the
independence characteristic of independent contractors. Other examples of
training that indicates employment include a state statute requiring that animal
control officers receive state-sponsored training, and a statute requiring that
inspectors of sanitary facilities be trained and state-certified. These facts are
indicative of a right to control. Election workers are trained to follow uniform
procedures established for the polling place. They are directed by a supervisor.
These facts suggest they would typically be employees. Government employees
often work subject to regulations and manuals, which specify how their jobs are
to be done. Teachers are required to receive periodic training in departmental
policies. They are required to attend meetings, to follow an established
curriculum, to use certain textbooks, to submit lesson plans, and to abide by
departmental policies concerning professional conduct. However, some types of
training or minimal instructions may be provided to either an employee or an
independent contractor, including orientation or information sessions about a
government entity’s policies and voluntary programs for which there is no
compensation.

Government Government workers may be required to identify themselves by wearing a
Identification uniform, driving a marked vehicle, etc. When an individual represents himself or
herself as an agent of a government, that gives the individual an appearance of
authority. Wearing a uniform, displaying government identification, or using
forms and stationery that indicate one is representing a government are highly
indicative of employee status.

Nature of The nature of the worker’s occupation affects the degree of direction and control
Occupation necessary to determine worker status. Highly-trained professionals such as
doctors, accountants, lawyers, engineers, or computer specialists may require
very little, if any, instruction on how to perform their specific services.

Attorneys, doctors and other professionals can, however, be employees. In such
cases, the entity may not train the individuals or tell them how to practice their
professions, but may retain other kinds of control, such as requiring work to be
done at government offices, controlling scheduling, holidays, vacations, and other
conditions of employment. Again, the government entity should consult state
statutes to determine whether a professional position is statutorily created. On the
other hand, professionals can be engaged in an independent trade, business, or
profession in which they offer their services to the public, including work for

4-3

- 48 -

government entities. In this case, they may be independent contractors and not
employees. In analyzing the status of professional workers, evidence of control or
autonomy with respect to the financial details is especially important, as is
evidence concerning the relationship of the parties as discussed below.

Evaluation Evaluation systems are used by virtually all government entities to monitor the
Systems quality of work performed. This is not necessarily an indication of employee
status. In analyzing whether a government entity's evaluation system provides
evidence of the right to control work performance, consider how the evaluation
system may influence the workers’ behavior in performing the details of the job.
If there is a periodic, formal evaluation system that measures compliance with
performance standards concerning the details, the system and its enforcement are
evidence of control over the workers’ behavior.

Financial Control

This second category includes evidence of whether the entity controls the business and
financial aspects of the workers’ activities. Employees do not generally have the risk of
incurring a loss in the course of their work, but generally receive a salary for as long as
they work. An independent contractor has a genuine possibility of profit or loss. Facts
showing possibility of profit or loss include: significant investment in equipment, tools or
facilities; unreimbursed expenses, including the requirement to provide materials or hiring
helpers; working by the day or by the job rather than on a continuous basis; having fixed
costs that must be paid regardless of whether the individual works; and payment based on
contract price, regardless of what it costs to accomplish the job.

The following table addresses the elements of financial control.

Method of The method of payment must be considered. An individual who is paid a contract
Payment price, regardless of what it costs to accomplish the job, has a genuine possibility of
profit or loss and therefore would not generally be considered an employee. An
individual who is paid by the hour, week, or month is typically an employee.
However, this is not always the case; for example, independent contractor
attorneys usually bill by the hour. An individual who is paid by the unit of work,
such as a court reporter, may or may not be an independent contractor, depending
on the facts.

Offering Another factor favoring independent contractor status exists when the individual
Services makes his or her services available to the public or a relevant segment of the
to the market. Relevant questions that address this issue include:
Public
 Does the individual advertise?
 Does the individual use a private business logo?
 Does the individual maintain a visible workplace?
 Does the individual work for more than one entity?

Corporate If the individual is incorporated and observes corporate formalities associated with
Form of this status, this makes it unlikely that he or she is an employee of the government
Business entity. (A corporate officer will be an employee of the corporation.) The mere fact

4-4

- 49 -

of incorporation or use of a corporate name, however, does not transform an
employee into an independent contractor. The corporation must serve an intended
business function or purpose, or be engaged in business.

Part-Time The fact that workers work on a part-time or temporary basis, or work for more
Status than one entity, does not make them independent contractors. A part-time,
temporary or seasonal worker may be an employee or an independent contractor
under the common-law rules.

Relationship of the Parties

The third category used to determine worker status is evidence of the relationship between
the parties, including how they view their relationship. The relationship of the parties is
generally evidenced by examining the parties’ agreements and actions with respect to each
other, paying close attention to those facts that show not only how they perceive their
relationship, but also how they represent their relationship to others.

For example, a fact illustrating how the parties perceive their relationship is the intent of
the parties as expressed in a written contract. A written agreement describing the worker
as an independent contractor is evidence of the parties’ intent, and in situations where it is
unclear whether a worker is an independent contractor or employee, the intent of the
parties, as reflected in the contract, may resolve the issue.

However, a contractual designation, in and of itself, is not sufficient evidence for
determining worker status. The facts and circumstances under which a worker performs
services are determinative. The substance of the relationship, not the label, governs the
worker’s status. See Employment Tax Regulation §31.3121(d)-1(a)(3). The following
items may reflect the intent of the parties:

 Filing a Form W-2 or withholding payroll taxes for an individual indicates the
entity's belief that the worker is an employee.
 A worker doing business in corporate form, with observance of corporate
formalities, indicates the worker is not an employee of the government entity.
 Providing employee benefits, such as paid vacation, sick days and health
insurance, is evidence that the entity regards the individual as an employee. The
evidence is strongest if the worker is provided with benefits under a tax-qualified
retirement plan, section 403(b) annuity or cafeteria plan because, by statute, these
benefits can be provided only to employees.

The following are key considerations in evaluating the elements involving the relationship
of the parties.

4-5

- 50 -

Discharge or The circumstances under which a business and a worker can terminate their
Termination relationship have traditionally been considered useful evidence concerning the
status of the worker. However, business practices and legal standards governing
worker termination have changed since these general principles developed. Under a
traditional analysis, a government entity's ability to terminate the work relationship
at will, without penalty, provided a highly effective method to control the worker.
The ability to fire at will is indicative of employee status. In the traditional
independent contractor relationship, the government entity could terminate the
relationship only if the worker failed to provide the intended product or service,
thus indicating that the business did not have the right to control how the work was
performed. In the current environment, however, a government entity rarely has
complete flexibility in discharging employees. The reasons a government entity can
terminate an employee may be limited by law, by contract, or by its own practices.
Consequently, inability to freely discharge a worker, by itself, no longer constitutes
persuasive evidence that the worker is an independent contractor.

Termination Historically, a worker’s ability to terminate work at will was considered to
of Contracts illustrate that the worker merely provided labor and tended to indicate an employer-
employee relationship. In contrast, if the worker terminated work, and payment
could be refused, or the worker could be sued for nonperformance, this traditionally
tended to indicate an independent contractor relationship. Today, however, it is
more common that independent contractors may enter short-term contracts for
which nonperformance remedies are inappropriate, or may negotiate limits on their
liability for nonperformance. For example, professionals, such as doctors and
attorneys, are typically able to terminate their contractual relationship without
penalty. Accordingly, the worker’s protection from liability for terminating the
relationship does not necessarily indicate employee status.

Non- Employers may successfully sue employees for substantial damages resulting from
performance their failure to perform the services for which they were engaged. As a result, the
of Employees presence or absence of limits on a worker’s ability to terminate the relationship, by
itself, is less relevant in determining worker status. On the other hand, a
government entity's ability to refuse payment for unsatisfactory work continues to
be characteristic of an independent contractor relationship. Because the meaning of
the right to discharge or terminate is so often unclear, and depends primarily on
contract and labor law, these facts should be viewed with great caution.

Permanency The permanency of the relationship between the worker and service recipient is
somewhat relevant to determining whether there is an employer-employee
relationship. If a worker is engaged with the expectation that the relationship will
continue indefinitely, rather than for a specific project or period, this is generally
considered evidence of intent to create an employment relationship. However, a
long-term relationship may also exist between a government entity and an
independent contractor. There may be a long-term contract, or contracts may be
renewed regularly due to superior service, competitive costs, or lack of alternative
service providers. Part-time, seasonal or temporary workers may also be employees
under the common law. The fact that workers do not have full-time, permanent
status is irrelevant to their classification.

4-6

- 51 -

Common-Law Standard - Summary

In many worker classification cases, some facts will support independent contractor status
and others will support employee status. Independent contractors are rarely totally
unconstrained in the performance of their contracts, and employees almost always have
some degree of autonomy. The determination of a worker’s status, therefore rests on the
weight given to the facts as a whole, keeping in mind that no one factor is determinative.

Form SS-8, Determination of Worker Status for Purposes of Federal Employment
Taxes and Income Tax Withholding

In difficult cases, the IRS can provide a determination as to whether a worker is an
employee or an independent contractor. To obtain a determination from the IRS, file Form
SS-8. Either a governmental entity or a worker may submit Form SS-8. The IRS will
acknowledge receipt of the Form SS-8 and will also request information from the other
party. If a contract has been executed between the worker and the entity, a copy of the
contract should be submitted with Form SS-8. In some cases, the IRS will contact the State
Social Security Administrator to determine whether the entity and position are covered by a
Section 218 Agreement. The IRS will generally issue a formal determination to the entity
and will send a copy to the worker.

Note: The SS-8 determination is not an examination. It does not reopen a closed
examination or change the findings for years previously examined.

Employee Status for Income Tax Withholding

“Employment” for income tax purposes is generally governed by regulations under Code
section 3401. As explained above, for purposes of social security and Medicare (FICA)
FICA, employee status is determined under the common-law control test, unless a Section
218 Agreement is in place and specifically covers the position. In general, the common-law
factors apply to the determination of whether a worker is an employee for income tax
purposes as it does for FICA taxes. The regulations under IRC 3401(c) contain nearly
identical language to the regulations under IRC 3121(d)(2), reciting the same “right to
control” text that appears in 31.3121(d)-1(c). See Regulations 31.3401(c)-1.

However, IRC §3401(c) contains a specific provision for government employees for
income tax withholding purposes; it states that “the term employee includes an officer,
employee, or elected official of the United States, a State, or any political subdivision
thereof.” Therefore, an officer, employee, or elected official of a state or local government
is an employee for income tax withholding purposes.

Classification Issues Involving Government Employee

The following discussion addresses some special worker classification situations involving
governmental employees.

4-7

- 52 -

Public Officials 
  
The term “public official” refers to someone who has authority to exercise the power of the 
government and does so as an agent and employee of the government. The Internal 
Revenue Code does not define the term “public official,” but Regulation §1.1402(c)-2(b), 
addressing of self-employment tax, indicates that holders of “public office” are not in a 
trade or business and are therefore not subject to self-employment tax. This Regulation 
states that the performance of the functions of a public office does not constitute a trade or 
business. If self-employment tax is not applicable to the services, the individuals who 
perform them are presumed to be employees. 
 
An exception to this rule applies for certain public officials paid solely on a fee basis (see 
Chapter 5). The regulations give the following specific examples of positions that constitute 
“public office”: 
 
   Governor 
   Mayor 
   Member of a legislature or elected representative (i.e., elective office) 
   County commissioner 
   State or local judge, or justice of the peace 
   County or city attorney 
   Marshal, sheriff, constable 
   Registrar of deeds   
   Tax collector or tax assessor 
   Road commissioners 
   Members of boards and commissions, such as school boards, utility districts, zoning 
    boards, and boards of health 
  
However, it may not always be clear whether a worker holds public office. In Metcalf & 
Eddy v. Mitchell, 269 U.S. 514 (1926), the U.S. Supreme Court addressed the definition of 
an officer, and whether consulting engineers hired by states or subdivisions of states were 
independent contractors or “officers and employees” of a state. The Court ruled that an 
office is a public station conferred by the appointment of a government. The term “officer” 
includes the idea of tenure, duration, emolument and duties fixed by law, and where an 
office is created, the law usually determines its term, its duties, and its compensation. The 
Court concluded that the consulting engineers were not officers of the state or a subdivision 
of it, and were independent contractors. Public officials will generally have the 
characteristics of common-law employees.  
 
Therefore, depending on the facts presented, a worker who is compensated for services 
performed for a government may be an independent contractor and not a public official or 
employee. 
 
If there is some question as to whether a worker is a public official and employee, a critical 
factor to consider is whether there is a provision of the state constitution or a statute 
establishing the position. State statutes should be reviewed to determine whether they 

                                          4-8

- 53 -

establish enough control for the individual to be classified as an employee under the 
common-law test. A statute may state that a specific position is that of a public official, in 
which case there is likely to be a right to control sufficient to make the individual an 
employee. Statutes may also specify the duties of a public office and generally establish the 
officer's superiors and subordinates, if any. Statutes establish an official’s term of office 
and sometimes the compensation. They may require that a public official take an oath of 
office. Statutes often establish general and specific penalties for dereliction of duty. For 
instance, members of boards who are paid for each meeting they attend may face 
termination if they fail to attend a certain number of meetings. 
  
  Example. State A establishes the position of city attorney by statute, and 
  indicates that the position holder is an officer and an employee. This statute 
  defines the duties of the position. The city attorney is required to direct all 
  litigation in which the city is a party, including prosecution of criminal 
  cases; to represent the city in all legal matters in which the city or a city 
  officer is a party; to attend meetings of the commissioners, advise 
  commissioners, mayors, etc., on all legal questions, and approve all 
  contracts and legal documents. A city manager appoints, supervises and 
  controls the work of the city attorney. The city attorney must take an oath of 
  office. These facts show the importance of state statutes in establishing a 
  right of direction and control over a public official and thus classifying the 
  individual as a common-law employee.  
 
Elected Officials 
  
For social security and Medicare purposes, elected officials (also referred to as “individuals 
in elective positions”), are subject to a degree of control that typically makes them 
employees under the common law, and therefore subject to these taxes. Elected officials are 
responsible to the public, which has the power to vote them out of office. Elected officials 
may also be subject to recall by the public or a superior official. Very few elected officials 
have sufficient independence to be considered independent contractors. Under IRC 3401, 
wages, for income tax withholding purposes, include all remuneration, other than fees paid 
to a public official. Because elected officials receive wages, not fees, they are employees 
for income tax withholding purposes, regardless of any determination for social security 
and Medicare purposes.  
  
Home Care Service Recipients 
 
A home care service recipient (HCSR) is an individual who receives home care services 
while enrolled in a program administered by a federal, state, or local government agency 
that provides funding for that individual's home care services. Home care services include 
health care and personal attendant care services rendered to the HCSR. Generally, the 
HCSR is considered the employer of the service provider under the common-law rules. The 
provision of home care services generally constitutes household employment.  
  
                             4-9

- 54 -

The HCSR may request that the IRS authorize, under section 3504, an agent to act on his or
her behalf to withhold, report, and pay the federal employment taxes with respect to the
workers who provide home care services. See Revenue Procedure 70-6 and Form 2678,
Employer/Payer Appointment of Agent. Special rules apply when a state or local
government agency acts as the section 3504 agent. See Revenue Procedure 80-4 and Notice
2003-70. A state or local government agency acting as a section 3504 agent on behalf of a
HCSR files an aggregate Form 941 and aggregate Form 940, attaching Schedule R (Form
941), Allocation Schedule for Aggregate Form 941 Filers, and Schedule R (Form 940),
Allocation Schedule for Aggregate Form 940 Filers. Agencies must have an employer
identification number separate from the one used to report taxes of its own employees for
this purpose. The state agent may engage a reporting agent or subagent to perform the
reporting and payment of employment taxes that the state agent would otherwise perform
on behalf of the service recipient. See Notice 2003-70 for the correct reporting procedures.

Volunteer Firefighters

Compensation paid in an employer-employee relationship is taxable wages (unless an
exclusion applies), regardless of whether the workers are termed “volunteers.” In some
cases, rather than receive salaries, firefighters may receive amounts intended to reimburse
them for expenses. They may also receive other cash or in-kind benefits that may be wages.
Unless these reimbursements are paid under an accountable plan, discussed in Chapter 3,
these reimbursements are taxable as wages.

Amounts that are termed “reimbursements” but that are not paid under an accountable plan
are treated as wages and subject to income and social security and Medicare taxes.
Therefore, a per diem or fixed amount paid to a firefighter (or other worker), that does not
reimburse actual, documented expenses, is includible in income and subject to income tax
withholding, social security and Medicare.

The services of volunteers are generally not eligible for the exclusion from FICA for
emergency workers, discussed in Chapter 5 . IRC §3121(b)(7)(F)(iii) provides that services
performed by employees on a temporary basis in the case of fires, storm, snow, earthquake,
floor or other similar emergency are exempt from employment. Firefighters who are on call
and work part-time or intermittently do not qualify for the emergency worker exclusion.
This exception applies only for temporary workers who are hired because of an unforeseen
emergency.

Medical Residents

Medical residents are generally common-law employees of the hospitals for which they
work, and therefore are subject to social security and Medicare taxes (unless they are
excepted by a Section 218 Agreement). IRC 3121(b)(10) provides an exception for students
employed by a school, college, or university (SCU) who are enrolled and regularly
attending classes at the SCU. However, this exception is not available to full-time
employees. Under regulation section 31.3121(b)(10)-2(d)(3)(iii), an employee whose
normal work schedule is 40 hours or more per week is always considered a full-time

4-10

- 55 -

employee. Therefore, medical residents generally do not qualify to exclude payments for
their services from social security and Medicare taxes.

Identity of the Employer for Tax Purposes

In certain cases it is clear that the work in question is performed by employees, but it may
not be clear which of two or more entities, organizations, or individuals is the employer.
This situation may arise when workers are supplied or paid by one entity but work under
the direction of another (for example, leased workers).

The term “employer” is defined in IRC §3401(c), for income tax withholding and reporting
purposes, as the person for whom an individual performs any service, of whatever nature,
as an employee. However, an exception is provided if the person for whom the individual
performs the services does not have control of the payment of the wages. In this situation,
the term “employer” means the person having legal control of the payment of the wages.
See IRC §3401(d)(1) and Regulation 31.3401(d)-1(f).

When a question is raised about the identity of the employer, all facts relating to the
employment must be considered. If there is any provision in a statute or ordinance that
authorizes the employment by a government entity of the individual, and the individual is
hired under this authority, the individual is generally an employee of that governmental
entity. Any statutory provisions relating to the relationship should be reviewed. If there is
no applicable statutory authority, the identity of the employer must be determined under the
common-law control test.

Employee Status for Other Purposes

A state or federal agency may make determinations of employee status for Workers’
Compensation, minimum wage, or other purposes. The state or federal agency may apply
different standards from those used to determine worker classification for federal
employment tax purposes. Characterizations of individuals as employees based on state or
non-tax laws should be weighed with caution, and in some cases disregarded, because the
laws or regulations involved may use different definitions of an employee for their
purposes.

Independent Contractor Reporting Responsibilities

Independent contractors are subject to social security and Medicare taxes under the Self-
Employment Contributions Act (SECA). Generally, payments to independent contractors of
$600 or more during a calendar year must be reported on Form 1099-MISC, Miscellaneous
Income. Independent contractors are required to provide a taxpayer identification number
(TIN) to the entity that pays them. Form W-9, Request for Taxpayer Identification Number,
contains the required certification and can be used for this purpose.

For more information about requirements for information reporting to independent
contractors, see the Instructions for Form 1099-MISC.

4-11

- 56 -

Workers who have been treated as independent contractors but are later determined to be
employees will need to file amended returns if they reported income on Form 1040,
Schedule C, and calculated self-employment tax (SECA) on Schedule SE. A worker in this
situation should use Form 8919, Uncollected Social Security and Medicare Tax on Wages,
to figure and report the employee share of the FICA tax. Entities that misclassify
employees as independent contractors may be held liable for back taxes, penalties and
interest.

Worker Providing Services as an Employee and as an Independent Contractor

Individuals who are employees with respect to some services may not be employees with
respect to other services they provide. For example, a teacher may be retained to remove
snow from school property. This individual may be an employee as a teacher but an
independent contractor for the snow-removal activity. Apply the common-law rules
separately to each activity to establish whether it is an independent trade or business.
Revenue Ruling 58-505 explains that for an individual to work in two capacities (employee
and contractor), the services must not be interrelated. Stated differently, an individual does
not work in two capacities when the same type of work, such as legal services, is divided
into two components, one in an employee capacity, and one in an independent contractor
capacity. The services and remuneration for the two activities must be separate.

Section 530 Relief

State and local government entities under examination by the IRS may be entitled to relief
from employment tax for certain workers under Section 530 of the Revenue Act of 1978
(“Section 530”). If applicable, Section 530 terminates an entity’s federal employment taxes,
including social security and Medicare, income tax withholding, and any penalties
attributable to the liability. See Revenue Procedure 85-18. This relief is not available for
services covered by a Section 218 Agreement.

If the requirements for relief are met, the entity may obtain relief from liability for income
tax withholding for prior years. However, Section 530 relief from income tax withholding
will not apply with respect to wages paid after the date on which the entity is advised that
the workers are covered under a Section 218 Agreement. This is because the entity would
have begun withholding FICA taxes, which constitutes treatment of the workers as
employees. See Revenue Procedure 85-18, section 3.03(C) and 3.04.

Section 530 provides relief for an entity that treated workers as nonemployees if the entity
had a reasonable basis for the classification and acted consistently on that basis. To qualify
for Section 530 relief, the entity must have a reasonable basis for treating the worker as an
independent contractor. Section 530 provides three safe harbors for satisfying the
reasonable basis requirement:

4-12

- 57 -

1) Published ruling or judicial precedent;
2) Prior IRS examination of the taxpayer (if after 1996, the examination must have
included a review of worker classification); or
3) Longstanding recognized practice of a significant segment of the industry.
Alternatively, an entity may establish some other reasonable basis. For more
information, see Revenue Procedure 85-18.

In addition, the entity must:

1) Have filed all federal tax returns (including information returns) on a basis
consistent with treatment of the worker as a nonemployee; and
2) Not have treated the worker, or any other worker in a substantially similar position,
as an employee.

Tax Consequences for Workers

In some cases, a government entity may be entitled to relief under Section 530, but
workers find, through a determination letter or some other means, that they have been
misclassified and are employees. Section 530 does not extend relief to workers. It does not
convert them from employees to independent contractors. Misclassified employees are
liable for the employee share of social security and Medicare taxes rather than for SECA
(self-employment) tax. (See Form 8919, Uncollected Social Security and Medicare Tax on
Wages.) If they have been filing income tax returns as independent contractors, they
should file amended returns for years for which the statute of limitations is open. As
employees, they are not entitled to deduct employee business expenses on Schedule C.
Because their employers are entitled to continue treating them as independent contractors,
the workers will not be subject to income tax, social security or Medicare withholding, and
will generally have to make estimated tax payments to cover their tax liabilities.

For more information about the requirements for Section 530 relief, see Publication 1976,
Do You Qualify for Relief Under Section 530?

Note: Section 530 is not part of the Internal Revenue Code. It was originally intended as
an interim relief measure, but was extended indefinitely in 1982.

Frequently Asked Questions

1) What are the consequences of misclassifying a worker? Generally, when an
employer erroneously classifies an employee as an independent contractor and
does not withhold federal payroll taxes, the employer is liable for the employer and
employee shares of all applicable federal payroll taxes, as well as various penalties
and interest. [IRS]

2) What do you do if you cannot determine whether a worker is an employee?
The state or local entity and/or the worker can request a formal determination by

4-13

- 58 -

     submitting to the IRS Form SS-8, Determination of Worker Status for Purposes of 
     Federal Employment Taxes and Income Tax Withholding. When Form SS-8 is 
     submitted to the IRS, all the facts are analyzed and the determination of the 
     worker’s status is presented to the worker and the service recipient. [IRS] 
 
  3) Are volunteers considered employees? The common-law tests apply to 
     determining the status of individuals regardless of whether they are deemed 
     “volunteers.” If an individual considered a volunteer meets the common-law tests, 
     any form of compensation or benefit he or she receives is considered wages, unless 
     a specific exception applies. [IRS] 
 
  4) What effect does the presence of a Section 218 Agreement have on worker 
     status? If an existing Section 218 Agreement classifies a position as that of an 
     employee, covered by the Agreement, then an individual in that position is an 
     employee, subject to FICA and income tax withholding; the common-law tests are 
     not considered. Positions not covered by a Section 218 Agreement should be 
     evaluated under the common-law tests. [SSA/IRS] 
 
                                         4-14

- 59 -

Chapter 5  

Social Security and Medicare Coverage 

As discussed in Chapter 3, cash or noncash compensation for services is subject to 
income, social security, and Medicare taxes unless certain exceptions apply. In addition 
to the exceptions for certain payments, state and local employees may be exempted from 
social security (and in some cases, Medicare) taxes based on coverage under a public 
retirement system. A public employee may be covered for social security and Medicare, 
Medicare only, or may be exempt from both. The flowchart inChapter 1, “Social 
Security and Medicare Coverage of State and Local Employees,” illustrates the process 
for determining the social security and Medicare coverage that applies to an employee. 
This chapter addresses various categories of employees and rules by which coverage is 
established, including the process for obtaining coverage under a Section 218 Agreement 
(“Agreement”). As a supplement to the social security coverage information provided in 
this publication, refer to the State and Local Government Employers page on the SSA 
website. Additional information is also available on the IRS FSLG home page. 
 
All state and local government employees fall into one of three categories with respect to 
social security coverage: 
 
 1) Employees under Section 218 coverage (also called “voluntary coverage”). 
 These employees are covered for social security by a voluntary Section 218 Agreement 
 between the State Administrator and the SSA. They may or may not participate in a 
 public retirement system. This chapter discusses coverage under Section 218 
 Agreements. (Public retirement systems are discussed in Chapter 6.) 
  
 2) Employees under mandatory social security coverage. These employees are 
 required to be covered for amounts that are deemed to be wages, because they are not 
 members of a qualifying public retirement system and are not covered by a Section 218 
 Agreement. Government employees not covered by a public retirement system or 
 social security are subject to mandatory coverage after July 1, 1991. 
  
 3) Employees with no social security coverage. These employees are covered by a 
 qualifying public retirement system, and are therefore exempt from mandatory social 
 security. They are not covered by a Section 218 Agreement.  
  
Each of the three categories of employees is discussed below. 
 
1) Employees Under Section 218 Coverage 
 
State and local government employees can be covered for social security and Medicare 
through a Section 218 Agreement between the state and the SSA. This agreement may 
provide any of the following: 
 
                                     5-1

- 60 -

      Coverage for groups of employees in positions covered by a retirement system 
      Coverage for groups of employees in positions not covered by a retirement system 
      Coverage for employees in positions that are excluded from mandatory coverage 
       provisions, but are optional exclusions under Section 218 Agreements (for 
       example, student services). 
      Medicare Hospital Insurance (HI)-only coverage for employees hired prior to 
       April 1, 1986, who are members of a public retirement system. 
 
Each state’s original Agreement incorporates the basic provisions, definitions, and 
conditions for coverage. Only the State Social Security Administrator can initiate a 
request for Section 218 coverage on behalf of an entity in the state. Additional coverage 
can be provided by modifications .Each modification, like the original Agreement, is 
binding upon all parties.  
 
In order to establish an Agreement, authority must exist under state law (state enabling 
legislation) to enter into an Agreement and to extend coverage under an Agreement. The 
types and extent of coverage provided under an Agreement must be consistent with 
federal and state laws. 
 
State and local government employees who are covered under an Agreement have the 
same benefits, rights, and responsibilities as employees who have mandatory social 
security coverage. The cost to the employer of providing social security protection for 
state and local government employees is the same as that for employees in mandatory 
coverage.  
 
Coverage under an Agreement must be provided for groups of employees. An Agreement 
may be modified to increase, but not to decrease, the extent of coverage. (An exception 
applies to election worker services and solely fee-based positions; see Optional Section 
218 Exclusions below.) 
 
Termination of Agreements 
 
Before legislation was enacted in 1983, states could terminate coverage for any group of 
employees covered under the state’s Section 218 Agreement. A state did this by 
providing a two-year advance notice to the federal government. Once it was terminated, 
the coverage for this group of employees could not be reinstated. The 1983 Social 
Security Amendments rescinded this provision and prohibited states from terminating 
coverage on or after April 20, 1983, but permitted states to cover again any group 
terminated before this date. 
 
Coverage Groups 
 
Coverage under Section 218 Agreements can be extended only to groups of employees, 
referred to as coverage groups. Once an employee position is covered under a Section 
218 Agreement, any employee filling that position is a member of the coverage group for 
social security and Medicare. There are two types of coverage groups:1)  anabsolute, or 

                                        5-2

- 61 -

non-retirement, coverage group (employees not in a retirement system); and 2) a 
retirement system coverage group. Each state decides, within federal and state law, 
which groups to include under its Agreement, and when their coverage begins. The state 
can choose to cover non-retirement system groups, retirement system groups, or both. 
 
Absolute Coverage Groups (Non-Retirement System Groups) 
 
An absolute coverage group includes the services of employees in positions not covered 
by a retirement system, except those whose services are mandatorily or optionally 
excluded from social security and Medicare coverage. They may also be referred to as 
non-retirement system groups or Section 218(b)(5) groups. A state may extend 
Section 218 coverage to an absolute retirement system group without considering the 
desires of the employees. An absolute coverage group may consist of any of the 
following: 
 
     All employees of a state engaged in performing services in connection with  
      governmental (nonproprietary) functions 
     All employees of a state engaged in performing services in connection with a 
      single proprietary function 
     All employees of a political subdivision of a state engaged in performing services 
      in connection with governmental (nonproprietary) functions 
     All employees of a political subdivision of a state engaged in performing services 
      in connection with a single proprietary function 
     Certain  civilian employees working with the National Guard of a state 
     Individuals employed under an agreement between a state and the United States to 
      perform services as inspectors of agricultural products 
 
Retirement System Coverage Group 
 
A retirement system coverage group consists of employees working in positions covered 
by a public retirement system (FICA replacement plan), as provided in section 218(d)(4) 
of the Social Security Act (Act). Such a group may be provided social security and 
Medicare coverage under an Agreement only if approved by a referendum. The Act gives 
the state the option, for referendum purposes, of breaking down a retirement system into 
its components. If a retirement system covers positions of employees of one or more 
political subdivisions of the state, the state has the following choices. It may hold a 
referendum for: 
 
   1) All employees in positions under the retirement system 
   2) State employees in positions under the system 
   3) Employees of one or more political subdivisions in positions under the system 
   4) Any combination of the groups in (2) and (3) 
   5) Employees of a hospital that is an integral part of a political subdivision 
   6) Employees of two or more hospitals (each hospital must be an integral part of the 
      same political subdivision); or 
   7) Employees of each institution of higher learning 

                                         5-3

- 62 -

The referendum for retirement system employees is conducted either on a majority vote 
basis (allowed in all states), or on a divided system basis (allowed in certain states). 
 
Majority Vote Referendum 
 
Under this type of referendum, social security and Medicare coverage may be extended to 
employees in positions covered by a retirement system only if a majority of the eligible 
employees vote in favor of such coverage. A majority of all of the eligible employees 
under the system (not a majority of the eligible employees casting votes), must vote in 
favor of coverage. All states are authorized by federal law to use the majority vote 
referendum procedures. Although the referendum itself is a state matter, federal law 
requires that the following conditions be met to establish coverage: 
 
 1) Eligible employees are given not less than 90 days notice of the referendum 
 2) An opportunity to vote is given, and limited to eligible employees who were in an 
    employment relationship with the employer both on the date the notice was given 
    and on the date the referendum is held 
 3) The referendum is held by secret ballot 
 4) The referendum is supervised by the governor (or his/her designee) 
 5) A majority of the retirement system’s eligible employees vote for coverage 
  
Divided System Retirement Referendum 
 
In addition to the majority vote referendum procedure, certain states and all interstate 
instrumentalities are authorized to divide a retirement system based on whether the 
employees in positions under the retirement system want coverage. Under the divided 
vote referendum, only those employees who vote "yes" and all future employees who 
become members of the retirement system will be covered. Members who vote "no" are 
not covered as long as they maintain continuous employment in a position within the 
same public retirement system coverage group. 
 
The states having this authority under Section 218(d)(6)(c) of the Act are: 
 
  Alaska              Illinois            New Jersey                 Tennessee 
  California          Kentucky            New Mexico                 Texas 
  Connecticut         Louisiana           New York                   Vermont 
  Florida             Massachusetts       North Dakota               Washington 
  Georgia             Minnesota           Pennsylvania               Wisconsin 
  Hawaii              Nevada              Rhode Island 
 
These “divided vote” states may choose between a divided system vote and a majority 
vote referendum. 
 
States authorized to use the divided vote retirement system referendum to extend 
coverage may use either of two voting procedures: 
 
                                         5-4

- 63 -

  1) Simplified One-Step Method: Poll all eligible members and divide the system 
     into two parts, with each member placed in either the “Yes” or “No” group based 
     on his or her choice (simplified one-step referendum), or 
 
  2) Original Two-Step Method: Subdivide the retirement system into two parts or 
     systems – “Yes” and “No” groups - based on individual members’ choices and 
     then, after the individuals are separated based on this preference, conduct a 
     majority vote referendum among the “Yes” group. These individuals can then 
     change their original poll vote. 
 
The conditions for a divided vote referendum are the same as those given for the majority 
vote referendum with two exceptions: (1) the ballots are not secret, because the 
individuals choosing coverage must be identified, and (2) the individual must be in an 
employment relationship and a member of the retirement system when the vote is held 
(but not necessarily when the referendum notice was given).  
 
At the discretion of the state, employees who become members of the retirement system 
after the referendum (division) date and before the execution of the modification 
extending coverage to the retirement system coverage group may be given a choice to 
receive coverage. 
 
The referendum procedures must be conducted under the direction of the State Social 
Security Administrator. 
 
Continuation of Coverage Rules 
 
Once coverage is provided for state and local government employees, it generally 
continues unless an event occurs that results in termination of the coverage, such as a 
change in employer. The continuation rules are applied for each type of coverage group 
as follows: 
  
Absolute Coverage Group: Social security and Medicare coverage for non-retirement 
system groups continues as long as the continuing governmental entity exists. This is true 
even if the positions are later placed under a retirement system. (This provision includes 
police and firefighter positions that were first covered as an absolute coverage group.)  
 
Majority Vote Retirement System Group: Following a favorable majority vote 
referendum, services under the retirement system, including positions brought under the 
retirement system in the future, are compulsorily covered for social security under the 
State’s Section 218 Agreement. Social security and Medicare coverage will continue as 
long as the continuing governmental entity exists, even though the positions are later 
removed from under the retirement system, the system is abolished, or the positions are 
placed under an additional retirement system. 
 
                                      5-5

- 64 -

Divided Vote Retirement System Group: If the use of procedure (2) above – the
original two-step referendum – results in a favorable majority, then the entire “Yes”
group and all future members of the retirement system are covered.

As a result of procedure (1) – the simplified one-step referendum – all those retirement
system members who voted “Yes” and all future retirement system members are covered
for social security. If all current retirement system members vote against social security
coverage (the “No” group), then only future retirement system members will be covered
for social security and make up the “Yes” group.

Under a divided retirement system, employees carry the “no” or “yes ”vote with them if
they transfer to another position within the same retirement system coverage group.
Social security coverage is not terminated because the positions are later covered under
an additional retirement system.

If the divided vote retirement system is later abolished or positions are removed from
coverage under it, the “Yes” group (those employees who voted “Yes” in the referendum
and those subsequently hired retirement system members) continue to be covered for
social security. New employees hired into positions after the removal from, or
abolishment of, the former retirement system, are not covered for social security because
they would not be considered new members of that former retirement system.

Section 218 Coverage Exclusions

When a state or local government entity voluntarily enters into the state’s Section 218
Agreement with the Social Security Administration, it is important to determine which
employee services will be excluded from social security coverage. If services are
excluded, any employees performing these services are not covered by the Agreement.

Certain services – known as mandatory exclusions – are excluded from voluntary social
security coverage by Section 218(c)(6) of the Social Security Act.

Other services, however, are optional exclusions under Section 218(c)(3), (5) and (8)
and, therefore, may be covered under a voluntary Section 218 Agreement. Coverage
under a Section 218 Agreement supersedes all other considerations. If optional exclusion
services are covered under a Section 218 Agreement, these amounts are subject to social
security and Medicare tax.

Mandatory Section 218 Exclusions

Federal law requires the exclusion of the following services from section 218 coverage
under Section 218(c)(6) of the Social Security Act:

 Services performed by individuals hired to be relieved from unemployment.
The intent of the program establishes whether the program is designed to relieve
individuals from unemployment. This is usually determined from the statutes or

5-6

- 65 -

    other authorities that established the program. The exclusion does not include 
    services performed by individuals under programs, such as work-study, where the 
    primary purpose is to provide work experience and training to increase the 
    employability of the person, because the primary intent of such programs is not to 
    relieve them from unemployment. 
 
   Services performed in a hospital, home or other institution by a patient or 
    inmate thereof as an employee of a state or local government . Generally, these 
    services are performed by individuals who are not normally in an employment 
    relationship with the state or political subdivision. In the case of work performed 
    by inmates in a state prison or local jail, they are excluded from coverage, 
    whether or not the services are performed outside the confines of the prison or 
    jail, because in either case the inmates are normally not in such an employment 
    relationship with the state or political subdivision. However, services performed 
    by inmates outside the prison or jail for an entity other than the state or local 
    government operating the prison or jail, such as on a work-release program, may 
    be covered if an employment relationship exists. The employer for tax purposes is 
    determined under the common-law rules, discussed in Chapter 4. Note: Services 
    performed by patients or inmates as part of the rehabilitative or therapeutic 
    program of the institution are not usually considered to be services performed by 
    employees. 
  
   Covered transportation service. This includes services performed by 
    transportation system employees who are covered for Social Security under 
    Section 210(k) of the Social Security Act. 
 
   Other services that would be excluded if performed for a private employer 
    because the work is not defined as employment under Section 210(a) of the 
    Social Security Act. This includes services performed by a nonresident alien 
    temporarily residing in the U.S. holding an F-1, J-1, M-1 or Q-1 visa, when the 
    services are performed to carry out the purpose for which the alien was admitted 
    to the U.S. (A state may optionally include certain agricultural services under a 
    Section 218 Agreement.) See the section Foreign Students, Teachers and 
    Apprentices later.  
 
   Services performed by an employee hired on a temporary basis in case of 
    fire, storm, snow, earthquake, flood or similar emergency. This exclusion 
    applies only to those who are hired on a temporary basis in response to a specific 
    emergency. It does not include workers considered temporary for other reasons, 
    or individuals in a continuous employment relationship who perform services 
    related to emergencies on a regular or continuing basis.  

   Service described in section 210(a)(7)(F) of the Social Security Act that is 
    included as “employment” under section 210(a). Services by individuals not 
    covered by a public retirement system and subject to mandatory coverage are 
    excluded from coverage under a Section 218 Agreement. 
     
                                       5-7

- 66 -

Caution: Mandatory exclusions apply to voluntary social security coverage
situations (through a Section 218 Agreement) and should not be confused with the
different set of exclusions that applies to mandatory social security coverage
situations.

Optional Section 218 Exclusions

Under a Section 218 Agreement, a state has the option to exclude from social security
coverage the services listed below when they are performed by members of any coverage
group, including retirement system coverage groups. If the Agreement does not
specifically exclude these services, they are covered.

The following are positions and services that may be excluded at the option of the state:

 All services in any class or classes of elective positions. These are
positions filled by an election; they also may be referred to as “elected
officials.” The election may be by a legislative body, a board or
committee, or by the qualified electorate of a jurisdiction. The method of
selection must constitute an election under state law. The election may be
conducted through open voting by the electorate at large, or by a chosen
body from a list of candidates. Generally, elective positions fall into three
classes: executive, legislative, and judicial.

 All services in any class or classes of part-time positions. A part-time
position is one for which the number of work hours normally required by
the position in a week or a pay period is less than the normal time
requirements for the majority of the positions in the employing entity. The
part-time position exclusion is based on the normal time requirements of
the position and not the time spent by an employee in the position. If a
position is established as a full-time position, but the employee works
part-time in this position, the exclusion does not apply. Conversely, if a
position is established as a part-time position and the employee works full
time in this position, the services of the employee are excluded. Whether
seasonal or temporary positions that require full-time services for a period
of short duration are part-time positions depends on the definition of part-
time established for the coverage group. Where the part-time position
exclusion is taken, the state should include a definition of “part-time” in
the modification if one has not been previously established.

Note: The definition of “part-time” under a Section 218 Agreement
provisions may be different from the definition of “part-time” used to
determine whether an individual is a qualified participant in a public
retirement system (discussed in Chapter 6).

5-8

- 67 -

Example: A city provides social security coverage to some of its
employees under a Section 218 Agreement, but excludes services
performed in part-time positions. The Section 218 Agreement
defines part-time positions as positions normally requiring less than
50 hours of service per month. The city must apply the definition in
the Section 218 Agreement to determine which employees are
excluded from social security coverage under the Agreement. Any
employees excluded from coverage under the Agreement may then
be subject to mandatory coverage.

 All services in any class or classes of positions compensated solely by
fees received directly from the public, by an individual who is treated
by the municipality as self-employed. See the section Fee-Based Public
Officials, later.

 Agricultural labor, but only those services that would be excluded if
performed for a private sector employer. A state that initially excludes
agricultural labor may later modify its agreement to cover it. However, if
agricultural labor is not excluded initially, it cannot be excluded later. If a
state has not taken the agricultural exclusion, then all remuneration for
agricultural labor is covered for social security.

 Services performed by students enrolled and regularly attending
classes at the school, college or university for which they are working.
The student exclusion applies only during periods of regular school
attendance, whether during the regular academic year or in summer
session. The exclusion does not apply to work done during summer
vacation if the student is not attending a summer session. Services
performed by students during holidays, weekends, seasonal breaks, and
between semesters falling within the academic year when classes are not
scheduled, are excluded.

 Services performed by election officials or election workers paid less
than the calendar year threshold amount mandated by law. (If the
state's Section 218 Agreement does not have an election-worker exclusion
or the entity has an Agreement that does not exclude election workers,
social security and Medicare taxes apply from the first dollar paid.) See
the section Election Officials and Election Workers, later.

Note: Effective July 2, 1991, elective and part-time positions, although optionally
excluded under a Section 218 Agreement, must be covered under a qualifying public
retirement system or else they will be covered for social security under the mandatory
social security provisions.

Optional exclusions can be taken by the state in any combination and applied to both
absolute and retirement system coverage groups. Any services a state excludes can be

5-9

- 68 -

included later if permitted by federal and state law and the state’s Agreement. Generally, 
if one of the types of work listed above has been included in a coverage group, it cannot 
later be removed from coverage, except for services performed by (1) election 
officials/workers, and (2) solely fee-based positions. 
 
Optional exclusions apply only to voluntary social security coverage under a Section 218 
Agreement; there are no optional exclusions from mandatory coverage. 
  
Note: The 1972 Amendments to the Social Security Act allowed states a limited period to 
exclude services in part-time positions and services performed by students, in cases 
where this exclusion was not initially chosen. An additional window to make this election 
was provided by Public Law 105-277, enacted October 21, 1998, which allowed states a 
limited period to exclude the services of students employed by the public school, college 
or university where they are regularly attending classes. In those states exercising this 
option, the student exclusion was effective July 1, 2000. Where a state used either or both 
of these special one-time provisions for excluding services that had been covered 
previously, it cannot again cover these services under a Section 218 Agreement. 
   
2) Employees Under Mandatory Social Security Coverage 
 
Public Law 101-508 mandated full social security coverage beginning July 2, 1991, for 
state and local government employees who are not members of a qualifying public 
retirement system (also called a “FICA replacement plan”) and who are not covered 
under a Section 218 Agreement, unless a specific exclusion applies under the law. 
 
If an employee is mandatorily covered for social security, then becomes a member of a 
qualifying public retirement system, mandatory coverage ends; social security coverage 
would apply only if the position becomes covered by a Section 218 Agreement. 
 
If an employee becomes a member of a public retirement system and is covered for social 
security under a Section 218 Agreement, the employee continues to be covered for social 
security and Medicare. 
 
The determination of whether an employee is covered by mandatory social security is 
made on an individual basis. For example, a Section 218 Agreement may exclude part-
time positions, and a public retirement system may exclude part-time employees for the 
same entity. If an employee is excluded from section 218 coverage because of work 
performed in a part-time position, (as defined under the Agreement), and is also excluded 
from membership in a public retirement system because of part-time status, that 
employee is subject to mandatory social security. 
 
     Example: A city has a Section 218 Agreement that excludes part-time 
     positions requiring less than 18 hours of work a week. City cafeteria 
     positions require employees to work only 3 hours per day, or 15 hours 
     per week. The city’s public retirement system does not allow 

                       5-10

- 69 -

   membership for employees unless they work 25 hours or more per 
   week. The cafeteria workers are subject to mandatory social security. 
 
Exclusions from Mandatory Social Security Coverage  
 
Under Section 210(a) of the Social Security Act, the following categories of employees 
are not subject to mandatory social security coverage, even if they are not covered by a 
public retirement system: 
 
  Services performed by individuals hired to be relieved from unemployment.  
   The intent of the program establishes whether the program is designed to relieve 
   individuals from unemployment. This is usually determined from the statutes or 
   other authorities that established the program. The exclusion does not include 
   services performed by individuals under programs, such as work-study, where the 
   primary purpose is to provide work experience and training to increase the 
   employability of the person, because the primary intent of such programs is not to 
   relieve them from unemployment. 
  
  Services performed in a hospital, home or other institution by a patient or 
   inmate thereof as an employee of a state or local government . Generally, 
   services performed by inmates in a state prison or local jail are excluded from 
   coverage. This is true whether or not the services are performed outside the 
   confines of the prison or jail, because the inmates are not normally in an 
   employment relationship with the state or political subdivision. However, services 
   performed by inmates outside the prison or jail for an entity other than the state or 
   local government operating the prison or jail, such as on a work-release program, 
   may be covered if an employment relationship exists. The employer for tax 
   purposes is determined under the common-law rules, discussed in Chapter 4. 
   Note:  Services performed by patients or inmates as part of the rehabilitative or 
   therapeutic program of the institution are generally not employment.  
  
  Services performed by an employee hired on a temporary basis in case of 
   fire, storm, snow, earthquake, flood or similar emergency. This exclusion 
   applies only to those workers who are hired on a temporary basis in response to a 
   specific emergency. It does not include workers considered temporary for other 
   reasons, or individuals in a continuous employment relationship who perform 
   services related to emergencies on a regular or continuing basis. 
    
  Services performed by election officials or election workers paid less than the 
   calendar year threshold amount mandated by law, unless a Section 218 
   Agreement covers election workers. See the section Election Officials and 
   Election Workers,      below .
    
  Services in positions compensated solely by fees that are subject to self-
   employment tax (SECA), unless a Section 218 Agreement covers these 
   services. See the section Fee-Based Public Officials, below. 

                                    5-11

- 70 -

 Services performed by a nonresident alien temporarily residing in the U.S.
holding an F-1, J-1, M-1 or Q-1 visa, when the services are performed to
carry out the purpose for which the individual was admitted to the U.S. See
the section Foreign Students, Teachers and Apprentices below.

 Services performed by students enrolled and regularly attending classes at
the school, college or university where they are working, unless a Section 218
Agreement covers student services.

 Services that would be excluded if performed for a private employer because
the work is defined as employment under Section 210(a) of the Social
Security Act, unless a Section 218 Agreement covers certain agricultural
services.

Note: Coverage under a Section 218 Agreement always takes precedence over other
employment circumstances. When considering whether the mandatory social security
coverage and exclusion rules apply to a worker’s services, first determine whether the
services are covered by a Section 218 Agreement.

Election Officials and Election Workers

Prior to the 1967 Social Security Amendments, there was no specific provision for the
exclusion of election officials or election workers. The Social Security Act was amended
for years beginning with 1968 to allow states to modify their Agreements to exclude the
services of election officials and election workers whose pay was below an annually
determined threshold amount.
The Federal Insurance Contributions Act (FICA) tax exclusion for election officials and
election workers is $1,600 for the calendar year beginning January 1, 2015, unless those
wages are subject to social security and Medicare at a lower threshold under the state’s
Section 218 Agreement.

If the entity is covered by a Section 218 Agreement, the Agreement determines the
treatment of election workers for FICA purposes. The Agreement may specify a lower
threshold amount for election officials and election workers (for example, $50 a calendar
quarter or $100 a calendar year). In these states, the social security and Medicare tax
applies when the amount specified in the state’s Agreement is met. States may modify the
Agreement to exclude the services of election officials and election workers paid less
than the threshold amount mandated by law. Such modifications are effective in the
calendar year the modification is mailed or delivered to the Social Security
Administration.

If the Section 218 Agreement does not exclude election workers from coverage, or does
not provide a threshold for coverage, social security and Medicare taxes apply from the
first dollar paid. If the entity is not covered under a Section 218 Agreement, the rules for

5-12

- 71 -

mandatory social security and Medicare under Section 210(a)(7)(F) of the Social Security
Act apply.

The election official/worker thresholds under mandatory social security for calendar
years prior to 2016 are as follows:

2013-2015 $1,600
2009-2012 $1,500
2008 $1,400
2006-2007 $1,300
2002-2005 $1,200
2000-2001 $1,100
1995-1999 $1,000
1978-1994 $ 100

For calendar years 1968 through 1977, the threshold was $50 per calendar quarter.

Generally, Form W-2 is required for these workers; however, if the worker received only
wages for election work and the total is less than $600 total for the year, Form W-2 is not
required and no withholding of social security or Medicare tax is required. The amount
paid is includible in the gross income of the worker. Revenue Ruling 2000-6 provides
reporting procedures for payments to election officials and election workers in several
different situations.

Contact your State Social Security Administrator concerning the status of election
officials and election workers under the state’s Section 218 Agreement. Additional
information and threshold amounts can be found on the SSA website.

Fee-Based Public Officials

A fee-based public official receives and retains remuneration directly from the public. An
individual who receives payment for services from government funds in the form of
wages or salary is not a fee-based public official, even if the compensation is called a fee.

Beginning in 1968, services performed in positions compensated solely by fees are
excluded from coverage under Section 218 Agreements unless the state specifically
covers these services. If a state covered these positions before 1968, it may modify its
Agreement to exclude these positions prospectively. The exclusion is effective the first
day of the year following the year in which the modification is mailed or delivered by
other means to SSA. If a state covered and later excluded these positions, the state cannot
again cover these positions.

5-13

- 72 -

Fee-Basis Exclusion   PositionsCompensated Solely by Fees 
 
Services in positions compensated solely by fees are excluded from coverage under 
Section 218 Agreements (except where the state specifically included these services) and 
are covered as self-employment and subject to self-employment tax (SECA).  
 
Fee-Basis Exclusion   PositionCompensated by Salary and Fees 
 
Generally, a position compensated by a salary and fees is considered a fee-basis position 
if the fees are the principal source of compensation, unless a state law provides that a 
position for which any salary is paid is not a fee-basis position. 
 
If the state law does include this provision, none of the compensation, including the 
salary, is covered wages under the state’s Section 218 Agreement. In this case, the salary 
payment, while excluded under the Agreement, is subject to mandatory social security if 
the official is not a qualified participant in a public retirement system. 
 
Police Officers and Firefighters 
 
Beginning August 16, 1994, all states were allowed to extend Section 218 social security 
and Medicare or Medicare-only coverage to police officer and firefighter positions 
covered under a retirement system through a referendum procedure conducted by the 
state. (Prior to August 16, 1994, only 23 states, and all interstate instrumentalities, were 
specifically authorized by Congress to do so.)  Those states were:  
   
   Alabama             Kansas     North Carolina                    Tennessee 
   California         Maine       North Dakota                      Texas 
   Florida            Maryland    Oregon                            Vermont 
   Georgia            Mississippi Puerto Rico                       Virginia 
   Hawaii             Montana     South Carolina                    Washington 
   Idaho              New York    South Dakota                       
 
As noted earlier, all states may use the majority vote referendum procedure. Some states 
are also authorized under the Act to use the divided retirement system referendum, 
discussed earlier. (Interstate instrumentalities may use the majority or divided retirement 
system referendum procedures.) As with other retirement system employees, before 
referendums can be held and coverage extended to police officer and firefighter positions 
already covered by a retirement system, there must first be authority to provide such 
coverage under state law (state statutes and/or the enabling act) and the federal-state 
agreement (via a modification to the state’s Section 218 Agreement). 
 
                                  5-14

- 73 -

Generally, state statutes and court decisions establish the definition of police officer and
firefighter positions. For social security purposes, the terms do not include services in
positions that, although connected with police and firefighting functions, do not meet the
definitions of police officer and firefighter positions.

Note: Police officers and firefighters are not considered emergency workers for purposes
of the mandatory exclusion from social security and Medicare coverage for such
workers. This exclusion applies only to services of an employee who was hired because of
an unforeseen emergency to do work in connection with that emergency on a temporary
basis to provide emergency assistance in fires or other disasters such as severe ice storm,
earthquake, volcano eruption or flood.

Police and Firefighter Positions Not Covered Under a Retirement System

If police officer and firefighter positions are not covered under a retirement system, these
positions are mandatorily covered for social security and Medicare unless the positions
were already covered under a Section 218 Agreement as part of a non-retirement system
coverage group.

Foreign Students, Teachers and Apprentices

Individuals admitted to the United States under an F-1, J-1, M-1 or Q-1 visa are generally
exempt from both social security and Medicare taxes. Wages earned within the United
States are subject to income tax, whether or not the workers are U.S. citizens.
Nonresident students who are not U.S. citizens, permanent residents or resident aliens for
tax purposes may be able to take advantage of treaty exemptions to exclude a portion of
their U.S. source income from withholding. For more information on specific treaty
provisions, contact the IRS or SSA. The following IRS publications have additional
information on social security and Medicare coverage for foreign workers:

 Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities
 Publication 519, U.S. Tax Guide for Aliens
 Publication 901, U.S. Tax Treaties

3) Employees With No Social Security Coverage

The final category of workers includes those who are not subject to any voluntary or
mandatory social security coverage at all. This can only occur where the workers are
covered by a qualifying public retirement system (“FICA replacement plan”) and are not
covered by a Section 218 Agreement. Employers of these workers will not withhold
social security taxes or show any “social security wages” on Form W-2; they are
generally covered for Medicare. Public retirement systems are the subject of Chapter 6.

5-15

- 74 -

Identifying Covered Employment

In addition to determining whether specific employees are members of a social security
coverage group, questions may arise as to whether certain positions constitute
employment. These determinations may be based on decisions regarding specific issues
to which either federal or state law is applicable. It is important to know whether federal
or state law is applied in making a determination on a specific issue. Generally, questions
involving interpretation or application of state law are resolved by the authorized legal
officers of the state in accordance with applicable state and local laws, regulations and
the state court decisions. Jurisdiction for some of the major questions is indicated in the
table below:

Federal Law:
Does an employer-employee relationship exist?
Who is the employer?
Are the earnings wages?
What are emergency services?
What are student services?

State Law:
Who is an officer of a state or political subdivision?
Is an entity a political subdivision?
Is a function governmental or proprietary?
Is a position under a retirement system?
Which employees are eligible for membership in a retirement system?
Who is an employee for purposes of retirement system participation?

Although federal law determines whether earnings are wages subject to social security
and Medicare, state laws have a bearing on the issue of employment, such as whether a
position is that of a public official of a state. Where this is the case, an opinion of the
state legal officer may be requested. The state’s opinion will be given weight in making
the decision, but it will not be determinative of the issue. Before contacting IRS or SSA,
contact the State Social Security Administrator for guidance.

The federal courts provide the ultimate determination of how social security and tax laws
will apply in a given situation.

Note: Federal Circuit Court decisions are binding only in the circuit in which they are
issued. For a map of federal Circuit Court jurisdictions, see the interactive map at
www.uscourts.gov/court_locator.aspx.

Identity of the Employer for Social Security Coverage Purposes

Because entities have different social security and retirement plan situations, it is
important to determine which of two or more entities, organizations, or individuals is the
employer. In some cases, certain individuals, referred to as “leased workers,” are supplied

5-16

- 75 -

or paid by one entity but work under the direction of another. Generally, if there is a
provision in a statute or ordinance that creates a position and the individual is hired or
elected under this authority, the individual is an employee of the state or political
subdivision to which the provision applies. If there is no such authority, the employer is
the entity that has the right to control the worker in the performance of the work, i.e., the
common-law employer.

The employing entity is responsible for withholding and paying social security and
Medicare taxes on its employees’ wages, as well as reporting to SSA the amount of
wages paid. These withholding, paying and reporting requirements apply to wages of
individuals subject to mandatory social security and Medicare, as well as to wages of
individuals covered under a Section 218 Agreement. See Publication 15.
Indian Tribal Governments and Section 218

Indian Tribal Governments, while treated as states for other purposes, are not treated as
states for social security and Medicare tax purposes under Internal Revenue Code (IRC)
section 7871. Thus, Indian tribal governments do not enter into Section 218 Agreements
with SSA and may not participate in a public retirement system as an alternative to
paying social security and Medicare tax under the provisions of IRC section
3121(b)(7)(F).

Mandatory Medicare Coverage

Prior to April 1, 1986, state and local government employees could only be covered for
Medicare through a voluntary Section 218 Agreements between the state and the federal
government. This changed with the enactment of the Consolidated Omnibus Budget
Reconciliation Act (COBRA) of 1985, which mandated that all state and local employees
hired or rehired after March 31, 1986, must be covered for Medicare, and pay Medicare
taxes regardless of their membership in a retirement system. Employees covered by
social security under a Section 218 Agreement are automatically covered for Medicare.
Public employees already covered under a Section 218 Agreement are covered under
Medicare and subject to the tax. Employees who are not covered by social security, but
are subject to the Medicare-only portion of FICA, are referred to as Medicare Qualified
Government Employees (MQGE). Reporting procedures for MQGE employees are
covered in Chapter 3.

Employees who have been in continuous employment with the employer since March 3l,
1986, who are not covered under a Section 218 Agreement nor subject to the mandatory
social security and Medicare provisions, remain exempt from both social security and
Medicare taxes, provided they are members of a public retirement system. (See
Continuing Employment Exception, below.)

The flowchart “Social Security and Medicare Coverage for State and Local Government
Employees” in Chapter 1 shows how to determine whether Medicare coverage applies.

5-17

- 76 -

Continuing Employment Exception 
 
Services performed after March 31, 1986, by an employee who was hired by a state or 
political subdivision employer before April 1, 1986, are exempt from mandatory 
Medicare tax if the employee is a member of a qualifying public retirement system and 
all of the following requirements are met: 
 
    The employee was performing regular and substantial services for remuneration 
     for the state or political subdivision employer before April 1, 1986, and 
    The employee was a bona fide employee of that employer on March 31, 1986, and 
    The employment relationship with that employer was not entered into for 
     purposes of avoiding the Medicare tax, and  
    The employment relationship with that employer has been continuous since 
     March 31, 1986.  
    
   In general, the following employment changes are considered continuous 
   employment and qualify the employee for the exception: 
    
     1) From a state agency to another state agency in the same state. 
     2) From an employer of one political subdivision to an employer in the same 
        political subdivision. 
      
     The following are not considered continuous employment for this purpose: 
 
     1) From a state agency to a political subdivision of that state. 
     2) From a political subdivision to a state agency. 
     3) From one political subdivision to another. 
     4) From a state agency to an agency of another state. 
    
See Revenue Ruling 86-88 Revenue, Ruling 88-36  , (in the Appendix) and Revenue 
Ruling 2003-46 for more information about the continuing employment exception. 
 
The Centers for Medicare & Medicaid Services (CMS) is the federal agency that 
administers the Medicare program. For more information, see the CMS website. 
 
Services Not Subject to Mandatory Medicare Coverage 
 
The following are not subject to mandatory Medicare tax even though the services are 
performed by an employee hired after March 31, 1986. (Note: These are the same 
services that are excluded from mandatory social security coverage, discussed earlier.) 
 
    Services performed by individuals hired to be relieved from unemployment. (This 
     does not include many programs financed from federal funds where the primary 
     purpose is to give the employee work experience or training.) 
    Services performed in a hospital, home or other institution by a patient or inmate 
     thereof as an employee of a state or local government employer. 

                                           5-18

- 77 -

   Services performed by an employee on a temporary basis in case of fire, storm, 
    snow, earthquake, flood or other similar emergency. 
   Services performed by non-resident aliens with F-1, J-1, M-1 and Q-1 visas. 
   Services in positions compensated solely by fees that are subject to SECA, the 
    Self-Employment Contributions Act (unless a Section 218 Agreement covers 
    these services).  
   Services performed by a student enrolled and regularly attending classes at the 
    school, college or university where he or she is working (unless a Section 218 
    Agreement covers student services). 
   Services performed by an election worker or official whose pay in a calendar year 
    is less than the amount mandated by law (unless a Section 218 Agreement covers 
    election workers).  
   Services that would be excluded if performed for a private employer because it is 
    not work defined as employment under Section 210(a) of the Social Security Act 
    (unless a Section 218 Agreement covers certain agricultural services). 
 
See the sections on Mandatory Exclusions and Optional Exclusions in this chapter for 
more details on these exclusions. 
 
Voluntary Medicare Coverage  
 
A Section 218 Agreement can be executed to provide Medicare-only coverage for 
employees who are qualified participants in a public retirement system and not covered 
under a Section 218 Agreement and not subject to the mandatory Medicare provisions. 
Contact your State Social Security Administrator for further information. (A list of State 
Administrators is available at www.ncsssa.org.)  
 
Frequently Asked Questions 
 
 1) Are any services excluded from mandatory social security and Medicare 
    coverage? Yes. The same exclusions apply to mandatory social security and 
    mandatory Medicare; this list appears in this chapter under the discussion of 
    mandatory social security and again under the discussion of mandatory Medicare. 
    see the lists in this chapter. However, some services excluded from mandatory 
    coverage under provisions of the Internal Revenue Code may be covered by a 
    Section 218 Agreement. [IRS, SSA] 
 
 2) If a local government has a public retirement system that qualifies as a FICA 
    replacement plan and does not have a Section 218 Agreement, can employees 
    elect to participate in social security on a voluntary basis? No. An employee 
    can only participate in social security if the position is covered either by the 
    mandatory provisions or by a Section 218 Agreement. Only the State Social 
    Security Administrator can initiate a request for Section 218 coverage. [SSA] 
 
 3) Does a college student employed by a university during the summer months 
    qualify for the student social security and Medicare exception from 

                                  5-19

- 78 -

    mandatory social security if he/she is not regularly enrolled and attending 
    classes at the university during that time?  If an individual is not enrolled in 
    classes during school breaks of more than five weeks, including summer breaks, 
    the student social security and Medicare exception does not apply (other than 
    during payroll periods of a month or less that fall wholly or partially within the 
    academic term). See Revenue Procedure 2005-11, sections 7.04 and 7.05. [IRS] 
 
 4) Are elected and appointed officials considered employees? For income tax 
    purposes, elected (or elective) and most appointed officials are defined by section 
    3401(c) of the Internal Revenue Code as employees of the public entity they serve 
    (e.g., mayors, members of the legislature, county commissioners, city council 
    members and board or commission members). In general, elected as well as 
    appointed officials will meet the common-law tests to be considered employees. 
    Regardless of the common-law tests, some positions may be defined as 
    employment by state statute. Some fee-basis officials are by law treated as self-
    employed. An elected or appointed official who is an employee is subject to rules 
    for mandatory social security and Medicare unless covered under a Section 218 
    Agreement or a qualified participant in a retirement system. All officials elected 
    or appointed to their positions after March 31, 1986, are subject to Medicare 
    withholding. See Chapter 4. [IRS] 
 
 5) How is “termination of employment” defined for purposes of determining 
    whether the continuing employment exception for Medicare tax is 
    applicable? Whether an employment relationship has terminated is a question of 
    fact that must be determined on the basis of all the relevant facts and 
    circumstances. Great weight, however, will be given to the personnel rules of the 
    state employer or political subdivision employer to determine whether an 
    employment relationship has been terminated. (Revenue Ruling 86-88.) [IRS] 
 
 6) An employee who was hired before April 1, 1986, by the state transferred 
    after March 31, 1986, to another state agency. The transfer was made 
    without terminating the employee’s employment with the state. Does the 
    employee qualify for the continuing employment exception? Yes. An 
    employee hired before April 1, 1986, by a state employer who transfers after 
    March 31, 1986, to another state employer of the same state may qualify for the 
    continuing employment exception, provided the transfer was made without a 
    termination of the employee’s overall employment relationship with that state. 
    The same rule applies to an employee hired before April 1, 1986, by a political 
    subdivision employer, who transfers after March 31, 1986, to another employer of 
    that same political subdivision. However, an employee hired before April 1, 1986, 
    does not qualify for the continuing employment exception if after March 31, 
    1986, the employee transfers from a state employer to a political subdivision 
    employer or from a political subdivision employer to a state employer. Likewise, 
    an employee does not qualify for the exception if the employee transfers from a 
    political subdivision employer in one political subdivision to a political 

                                      5-20

- 79 -

    subdivision employer in a different political subdivision, or from a state employer 
    in one state to a state employer in a different state. [IRS] 
  
 7) Can employees who were hired prior to April 1, 1986, and who are not 
    currently paying into Medicare, enroll in Medicare in the future?  Individual 
    employees can never elect voluntarily to participate in social security or 
    Medicare. State or local public employers can voluntarily choose to cover one or 
    more groups of employees under Medicare-only, even if they are otherwise 
    exempt because of the continuing employment exception. To elect such coverage, 
    the state or local government (through the state) must enter into a modification of 
    the state’s Section 218 Agreement. Contact your State Social Security 
    Administrator for further information about a Medicare-only modification. If an 
    individual’s state or local government employment is not covered under social 
    security or Medicare, the individual may not be insured (i.e., have enough work 
    credits) for Medicare based on his/her own wages. That individual may be entitled 
    to coverage based on sufficient other work that is covered for social security, or 
    Medicare on his/her own earnings record or that of an insured spouse. [SSA] 
 
    5-21

- 80 -

Chapter 6  

Social Security and Public Retirement 

Systems 
 
Effective July 2, 1991, Congress made social security coverage mandatory for state and 
local government employees who are neither covered by a Section 218 Agreement nor 
qualified participants in a public retirement system (also referred to as a “FICA 
replacement plan”). States can provide employees with membership in a public 
retirement system as an alternative to mandatory social security coverage. 
 
As a supplement to the social security and public retirement systems information 
provided in this publication, refer to the FSLG web site.  
 
This chapter provides information about the requirements a retirement system must meet 
to qualify as an alternative to social security coverage. 
 
Public Retirement Systems (FICA Replacement Plans) 
 
A public retirement system, as defined in Internal Revenue Code (IRC) section 
3121(b)(7)(F) and Regulation 31.3121(b)(7)-2, is a pension, annuity, retirement or similar 
fund or system maintained by a state or local government that provides a retirement 
benefit to the employee that is comparable to the benefit provided under the Old-Age 
portion of the Old-Age, Survivors and Disability Insurance (social security) part of FICA. 
To be a retirement system for this purpose, the plan must provide a minimum retirement 
benefit. In this context, the term “employer” is used to refer to a state, political 
subdivision, or instrumentality. The term “employee” is used here only to refer to an 
employee of a state, political subdivision, or instrumentality. 
 
Note: A “public retirement system” for this purpose is not required to be a qualified plan 
within the meaning of the Employee Retirement Income Security Act of 1974 (ERISA). 
The ERISA provisions relate to the tax treatment of contributions and benefits of 
employee plans, and are irrelevant to the coverage issues addressed here. To avoid 
confusion, this publication does not use the term “qualified” to refer to public retirement 
systems. For mandatory coverage purposes, the employee may be a member of any type 
of retirement system, including a system that is nonqualified under ERISA (for example, a 
section 457 plan), as long as the plan provides the minimum level of benefits required for 
a public retirement system. These requirements are discussed below and in Regulation 
31.3121(b)(7)-2(e) and in Revenue Procedure 91-40.  
 
For purposes of determining whether mandatory coverage applies for an employee 
holding more than one position, social security is NOT a public retirement system. 
 
      Example:  An  individual  holds  two  positions  with  the  same  political 
      subdivision.  The  wages  earned  in  one  position  are  subject  to  social 

                                           6-1

- 81 -

security and Medicare tax pursuant to a Section 218 Agreement; the
other position is not covered. The social security system is not a
retirement system for this purpose. Thus, mandatory social security
coverage applies to service in the other (non-218) position unless the
employee is a member of a public retirement system with respect to
that position. See Regulation 31.3121(b)(7)-2(e)(1).

In general, there are two types of public retirement systems that may meet the minimum
benefit requirement — the defined contribution plan and the defined benefit plan.

Defined Contribution Plan

A defined contribution plan provides an individual account for each participant and
provides benefits based solely on the amount contributed to the participant’s account, and
any income, expenses, gains or losses that may be allocated to that participant’s account.
See IRC section 414(i).

A defined contribution plan that satisfies the definition of a retirement system under
Regulation 31.3121(b)(7)-2(e)(2)(iii) must provide for an allocation to the employee’s
account of at least 7.5 percent of the employee’s compensation during any period under
consideration. A variety of plan types could meet the requirement; for example, plans
established under IRC sections 401(a), 403(b), or 457. Contributions from both the
employer and the employee may be used to make up the 7.5 percent. Matching
contributions by the employer may be taken into account for this purpose. A plan with
only employee contributions would also satisfy the minimum benefit requirement,
provided the contributions constitute at least 7.5 percent of compensation. However, the
7.5 percent cannot include any earnings on the account.

Definition of Compensation

For a defined contribution plan, the definition of “compensation” used to determine
whether the benefit is sufficient must include at least the employee’s base pay, provided
that the definition of “base pay” is reasonable. Thus, for example, a defined contribution
retirement system may disregard any of the following: overtime pay, bonuses, or single-
sum amounts received on account of death or separation from service, amounts received
under a bona fide vacation, compensatory time or sick pay plan, or amounts received
under severance pay plans. Any compensation in excess of the social security
contribution wage base for that year ($118,500 in 2015) may also be disregarded for this
purpose.

Example: A political subdivision maintains an elective defined
contribution plan that is a retirement system within the meaning of IRS
regulations. The plan is on a calendar year. In 2014, an employee
contributes to the plan at a rate of 7.5 percent of base pay. Assume that the
employee compensation will reach the social security maximum
contribution base in October. The employee is a qualified participant in the

6-2

- 82 -

 plan for the entire plan year, even if the employee ceases to contribute to 
 the  plan  after  reaching  the  maximum  contribution  base.  See  Regulation 
 31.3121(b)(7)-2(e)(2)(iii)(B). 
 
Generally, for an employee who holds more than one position with the same employer, 
all compensation with that employer is considered in applying the 7.5 percent test. 
However, at the employer’s option, compensation from only one position may be 
considered, if that position is not part-time, temporary, or seasonal. See Regulation 
31.3121(b)(7)-2(c)(2)(iv). 
 
Reasonable Interest Rate Requirement 
 
Generally, a defined contribution retirement system must credit the employee’s account 
with earnings at a reasonable rate, under all the facts and circumstances. Alternatively, 
employees’ accounts may be held in a separate trust subject to general fiduciary standards 
and credited with actual earnings of the trust fund. Whether the interest rate is reasonable 
is determined after reducing the rate to adjust for the payment of any administrative 
expenses. See Regulation 31.3121(b)(7)-2(e)(2)(iii)(C). 
 
Defined Benefit Plan 
 
For purposes of determining whether it qualifies as a public retirement system, a defined 
benefit plan is any plan other than a defined contribution plan. A defined benefit plan 
determines benefits on the basis of a formula, generally based on age, years of service 
and salary level. 
 
A defined benefit retirement system that qualifies as an alternative to social security 
provides for a retirement benefit to the employee that is comparable to the benefit 
provided by the social security part of FICA. Generally, a plan meets the requirement if 
the benefit under the system is at least 1.5 percent of average compensation during an 
employee’s last three years of employment, multiplied by the employee’s number of 
years of service. Apply the formulas in Revenue Procedure 91-40 and the IRS regulations 
to determine whether a defined benefit retirement system meets this requirement. 
 
Who Is a Qualified Participant?  
 
For an employee to be excluded from mandatory social security coverage, the employing 
entity must maintain a retirement system within the meaning of IRC section 
3121(b)(7)(F), and the employee must also be a qualified participant in that system, as 
defined in IRC section 3121(b)(7)(F) and Regulation 31.3121(b)(7)-2(d). This test must 
be applied to each employee separately. An entity may maintain a retirement system in 
which not every employee is a qualified participant. For both a defined contribution plan 
and for a defined benefit plan, the determination of whether an individual is a qualified 
participant is made as services are performed; however, there are different tests to 
determine participation, as discussed below. 
 
                                        6-3

- 83 -

Qualified Participant in a Defined Contribution Retirement System 
 
An employee is a qualified participant in a defined contribution retirement system with 
respect to services performed on a given day if, on that day, the employee has satisfied 
all conditions (other than vesting) for receiving an allocation to his or her account 
(exclusive of earnings) that meets the minimum retirement benefit requirement. The 
benefit must be calculated with respect to compensation during a period ending on that 
day and beginning on or after the beginning of the plan year of the retirement system. 
This is the case regardless of whether the allocations were made or accrued before the 
effective date of IRC section 3121(b)(7)(F). 
 
 Example  1:  A  state-owned  hospital  maintains  a  non-elective  defined 
 contribution plan that is a retirement system within the meaning of IRS 
 regulations. Under the terms of the plan, employees must be employed on 
 the last day of a plan year in order to receive any allocation for the year. 
 Employees may not be treated as qualified participants in the plan before 
 the last day of the year. 
  
 Example 2:   The situation is the same as in Example 1, except that under 
 the terms of the plan, an employee who terminates service before the end 
 of a plan year receives a pro rata portion of the allocation he or she would 
 have received at the end of the year, e.g., based on compensation earned 
 since the beginning of the year. If the pro rata allocation available on a 
 given day would meet the minimum retirement benefit requirement with 
 respect to compensation from the beginning of the plan year through that 
 day (or some later day), the employee is treated as a qualified participant 
 in the plan on that day.  
  
 Example  3:  A  political  subdivision  maintains  an  elective  defined 
 contribution plan that is a retirement system within the meaning of IRS 
 regulations.  The  plan  operates  on  a  calendar  year.  It  has  two  open 
 seasons—in  December  and  June—when  employees  can  change  their 
 contribution elections. In December, an employee elects not to contribute 
 to the plan. In June, the employee elects (beginning July 1) to contribute a 
 uniform percentage of compensation for each pay period to the plan for 
 the remainder of the plan year. The employee is not a qualified participant 
 in  the  plan  during  the  period  January-June,  because  no  allocations  are 
 made  to  the  employee’s  account  during  that  time.  If  the  level  of 
 contributions  during  the  period  of  July-December  meets  the  minimum 
 retirement  benefit  requirement  with  respect  to  compensation  during that 
 period, however, the employee is treated as a qualified participant during 
 that period. 
  
 Example 4: Assume the same facts as in Example 3, except that the plan 
 allows participants to cancel their elections in cases of economic hardship. 
 In  October, the employee suffers  an economic hardship and cancels the 

                           6-4

- 84 -

 election, effective November 1. If the contributions during the period July-
 October  are  high  enough  to  meet  the  minimum  retirement  benefit 
 requirement  with  respect  to  compensation  during  that  period,  the 
 employee  is  treated  as  a  qualified  participant  during  that  period.  In 
 addition,  if  the  contributions  during  the  period  July-October  are  high 
 enough to meet the requirements for the entire period July-December, the 
 employee is treated as a qualified participant in the plan throughout the 
 period  July-December,  even  though  no  allocations  are  made  to  the 
 employee’s  account  in  the  last  two  months  of  the  year.  There  is  no 
 requirement that the period used to determine whether an employee is a 
 qualified participant on a given day remain the same from day to day, as 
 long as the period begins on or after the beginning of the plan year and 
 ends  on  the  date  the  determination  is  being  made.  See  Regulation 
 31.3121(b)(7)-2(d)(1)(ii).  
 
Qualified Participant in a Defined Benefit Retirement System 
 
An employee is a qualified participant in a defined benefit retirement system with 
respect to services performed on a given day if (1) on that day, the employee is (or ever 
has been) an actual participant in the retirement system and (2) on that day, the employee 
actually has a total accrued benefit that meets the minimum retirement benefit 
requirement. An employee may not be treated as an actual participant or as actually 
having an accrued benefit for this purpose to the extent that such participation or benefit 
is subject to any conditions (other than vesting) that have not been satisfied. The 
disqualifying conditions might include a requirement that the employee attain a minimum 
age, perform a minimum period of service, make an election in order to participate, or be 
present at the end of the plan year in order to be credited with an accrual. 
 
 Example: A political subdivision maintains a defined benefit plan that is a 
 retirement system within the meaning of IRS regulations. Under the terms 
 of the plan, service during a plan year is not credited for accrual purposes 
 unless a participant has at least 1,000 hours of service during the year. For 
 purposes  of  determining  whether  mandatory  social  security  coverage 
 applies,  benefits  that  accrue  only  upon  satisfaction  of  this  1,000-hour 
 requirement  may  not  be  taken  into  account  in  determining  whether  an 
 employee  is  a  qualified  participant  in  the  plan  before  the  1,000-hour 
 requirement is satisfied. See Regulation 31.3121(b)(7)-2(d)(1)(i). 
 
Part-Time, Seasonal, Temporary Employees 
 
Special rules apply to part-time, seasonal and temporary employees for purposes of 
determining whether they are qualified participants in a public retirement system. To be 
exempt from mandatory social security coverage, these employees must not only be 
qualified participants; they must be fully vested in their benefits.  This means the 
benefits cannot be forfeited. If a part-time, seasonal or temporary employee (as defined 
below) is not a qualified participant in a public retirement system with benefits fully 

                                            6-5

- 85 -

vested from the first day of employment, that employee is subject to mandatory social 
security and Medicare tax until the employee becomes fully vested.  
 
The special vesting requirement is considered to be met if a part-time, seasonal or 
temporary employee in a defined contribution plan has the right to receive a single sum 
payment of at least 7.5 percent of the compensation the employee earned while covered 
under the retirement system (plus interest) when the employee separates from 
employment. 
 
Part-Time Employees 
 
For purposes of applying the qualified participant test, part-time employees are those who 
normally work 20 hours or less per week. (This definition of “part-time” should not be 
confused with a definition of “part-time” that may be used for a Section 218 Agreement.) 
If mandatory coverage applies, part-time positions cannot be excluded; but part-time 
positions may be excluded from coverage under a Section 218 Agreement, at the option 
of the state. Contact the State Social Security Administrator to determine the definition of 
part-time positions under the state’s Section 218 Agreement.  
 
A special rule provides that a teacher employed by a post-secondary educational 
institution (e.g., a community or junior college, post-secondary vocational school, 
college, university or graduate school) is not considered part-time if the teacher normally 
teaches classroom hours of one-half or more of the number of classroom hours normally 
considered to be full-time employment.  
 
          Example:  A  community  college  treats  a  teacher  as  a  full-time 
          employee  if  the  teacher  is  assigned  to  work  15  classroom  hours  per 
          week.  A  new  teacher  is  assigned  to  work  eight  classroom  hours  per 
          week. Because the assigned classroom hours of the teacher are at least 
          one-half of the hours designated by the school as constituting full-time 
          employment, the teacher is not a part-time employee. See Regulation 
          1.3121(b)(7)-2(d)(2)(iii)(A). 
 
Seasonal Employees 
 
For purposes of applying the qualified participant test, a seasonal employee is any 
employee who normally works on a full-time basis less than five months in a year. Thus, 
for example, individuals who are hired by a political subdivision during the tax return 
season in order to process incoming returns and work full-time over a three-month period 
are seasonal employees. See Regulation 31.3121(b)(7)-2(d)(2)(iii)(B). 
 
Temporary Employees 
 
For purposes of applying the qualified participant test, a temporary employee is one who 
performs services under a contractual arrangement that is expected to last two years or 
less. Under this rule, a teacher under an annual contract may or may not be a temporary 

                                        6-6

- 86 -

employee. Possible contract extensions must be considered in determining the duration of
a contractual arrangement if there is a significant likelihood that the employee’s contract
will be extended. Contract extensions are considered likely to occur if, on average, 80
percent of similarly situated employees have had bona fide offers to renew their contracts
in the immediately preceding two academic or calendar years. Contract extensions are
also considered significantly likely to occur if the employee has a history of contract
extensions in the current position. See Regulation 31.3121(b)(7)-2(d)(2)(iii)(C).

Individuals Employed in More Than One Position

If an employee is not covered by a Section 218 Agreement, but is a member of a
retirement system with respect to one full-time position, the employee is generally treated
as a member of a retirement system with respect to any other position with the same
employer.

Example: An individual is employed full-time by a county and is a qualified
participant in its retirement plan with regard to that employment. In addition
to this full-time employment, the individual is employed part-time in another
position with the same county. The part-time position is not covered by the
county retirement plan. Nevertheless, if the individual is a qualified
participant in the retirement plan with respect to the full-time position, the
part-time positio isn excluded from mandatory social security coverage. See
Regulation 31.3121(b)(7)-2(c)(2).

This rule does not apply to employment by two different employers.

Example. An individual is employed full-time by a state and is a member
of its retirement plan, and is also employed part-time by a city located in the
state, but does not participate in the city’s retirement plan. The services of
the individual for the city are not excluded from mandatory social security
coverage, because the determination of whether services constitute
employment for such purposes is made separately with respect to each
political subdivision for which services are performed. See Reg.
31.3121(b)(7)-2(c)(2).

Whether an employee is a part-time, seasonal or temporary employee is generally
determined on the basis of service in each position in which allocations or benefits were
earned. This determination generally does not take into account service in other positions
with the same or different public employers. However, all of an employee’s service in
other positions with the same or different employers may be taken into account for
purposes of determining whether an employee is a part-time, seasonal or temporary
employee with respect to benefits under the retirement system provided that:

 The employee’s service in the other positions is or was covered by the same
retirement system;

6-7

- 87 -

      All service aggregated for purposes of determining whether an employee is a part-
       time, seasonal or temporary employee (and related compensation) is aggregated 
       under the system for all purposes in determining benefits (including vesting); and 
      The employee is treated at least as favorably as a full-time employee under the 
       retirement system for benefit accrual purposes. 
   
       Example: Assume  that  an  employee  works  15  hours  per  week  for  a 
       county and 10 hours per week for a municipality, and that both of these 
       employers  contribute  to  the  same  statewide  public  employee  retirement 
       system.  Assume  further  that  the  employee’s  service  in  both  positions  is 
       aggregated  under  the  system  for  all  purposes  in  determining  benefits 
       (including  vesting).  If  the  employee  is  covered  under  the  retirement 
       system  with  respect  to  both  positions  and  is  treated  for  benefit  accrual 
       purposes at least as favorably as full-time employees, then the employee is 
       not considered a part-time employee of either employer. The requirement 
       of being fully vested for determining the applicability of mandatory social 
       security  coverage  does  not  apply.  See  Regulation  31.3121(b)(7)-
       2(d)(2)(iii)(D). 
        
Alternative Lookback Rule  
 
Under an alternative lookback rule, an employee may be treated as a qualified participant 
in a retirement system throughout a calendar year if he or she was a qualified participant 
in the system at the end of the plan year of the system ending in the preceding calendar 
year.  
 
       Example. An employee is a qualified participant in a retirement plan of a 
       city  on  the  last  day  of  the  plan  year,  May  31,  2014.  If  the  alternative 
       lookback  rule  is  used,  no  liability  for  social  security  tax  exists  for  the 
       employee for calendar year 2015. See Regulation 31.3121(b)(7)-2(d)(3) 
        
For the first year of participation, an employee who participates in the retirement system 
may be treated as a qualified participant during the year only if it is reasonable to believe 
that the employee will be a qualified participant on the last day of the plan year. 
  
Former Participants 
 
In general, the rules regarding qualified participants apply to former participants who 
continue to perform services for the employer or who return after a break in service. 
Thus, for example, a former employee, with a deferred benefit under a defined benefit 
retirement system, who is reemployed by the same employer but does not resume 
participation in the retirement system, may continue to be a qualified participant in the 
system after becoming reemployed if the individual’s total accrued benefit under the 
system meets the minimum retirement benefit requirement (taking into account all 
periods of service, including current service). If this is so, the employer is not required to 
withhold and pay social security tax, or make additional payments to the retirement 

                           6-8

- 88 -

system on his behalf. The individual’s status as a qualified participant must be 
continually reevaluated, however, for employment of more than a short period. See 
Regulation 31.3121(b)(7)-2(d)(4)(i). 
 
Rehired Annuitants 
 
A rehired annuitant is a retiree who is rehired by his or her employer or another employer 
that participates in the same retirement system as the former employer. A rehired 
annuitant is either receiving a retirement benefit from that retirement system, or has 
reached retirement age under the retirement system.  
 
Rehired annuitants are excluded from mandatory social security coverage.  
 
      Example.  A  teacher  retires  from  service  with  a  school  district  that 
      participated in a statewide teachers’ retirement system and did not have 
      a  Section  218  Agreement.  She  begins  to  receive  benefits  from  the 
      system, and later becomes a substitute teacher in another school district 
      that participates in the same statewide system. The employee is treated 
      as a rehired annuitant and is not subject to mandatory social security tax. 
      The teacher is subject to Medicare tax. See Regulation  31.3121(b)(7)-
      2(d)(4)(ii). 
 
However, if an employee is rehired to perform services in a state or local government 
position that is covered for social security under a Section 218 Agreement, services in 
that position are covered for social security. If an individual returns to work for an 
employer under mandatory coverage, the employment is subject to the mandatory 
coverage. 
 
Note: Retirees rehired after March 31, 1986, are subject to the Medicare tax regardless 
of whether they qualify as rehired annuitants for social security purposes. 
 
Frequently Asked Questions 
 
 1)   What is a “public retirement system” for purposes of of the mandatory 
      coverage rules? A “public retirement system” (sometimes referred to as a “FICA 
      replacement plan or simply as a “retirement system”) is a pension or other 
      retirement plan maintained by a public employer that meets the requirements of 
      IRC Section 3121(b)(7)(F). See Revenue Procedure 91-40 in the Appendix, and 
      Section 31.3121(b)(7)-2 of the Employment Tax Regulations. These requirements 
      must be met for a retirement system to be used as an alternative to mandatory 
      social security coverage. A retirement system may be a pension, annuity, 
      retirement or similar fund or system established by a state or political 
      subdivision. The system need not be created by the legislature of the state, nor 
      does it have to be a plan under which the benefits are guaranteed by the state 
      constitution. A retirement system can include a group annuity policy purchased 
      by the state or political subdivision from a private insurance company. Whether a 

                                     6-9

- 89 -

    system qualifies as a “public retirement system” does not depend on whether it 
    meets the requirements be a qualified plan under the Employees’ Retirement 
    Income Security Act of 1974 (ERISA). [IRS] 
  
 2) What does it mean to be a qualified participant in a retirement system?  To 
    be a qualified participant, a member must actually participate in the system. An 
    employee who is eligible for an optional system, but decides not to participate, 
    will be subject to mandatory social security tax. Under an alternate rule, an 
    employer is entitled to treat an employee as a qualified participant for the entire 
    year if he or she was a qualified participant in the retirement system on the last 
    day of the plan year ending in the previous calendar year. [IRS] 
 
 3) How are part-time, seasonal and temporary workers defined for purposes of 
    determining whether they are qualified participants in a public retirement 
    system under IRC section 3121(b)(7)(F)? A part-time employee normally works 
    20 hours or less per week. A seasonal employee may work full-time, but for less 
    than five months a year. In the case of teachers above the high-school level, part-
    time is defined as less than one-half the classroom hours designated as full-time 
    by the school. A temporary employee performs services under a contractual 
    arrangement of two years or less. Possible contract extensions must be considered 
    in determining the duration of a contractual arrangement if there is a significant 
    likelihood that the employee’s contract will be extended. Future contract 
    extensions are considered likely if (1) on average 80 percent of similarly situated 
    employees have had bona fide offers to renew their contracts in the immediately 
    preceding two academic or calendar years, or (2) the contract history of an 
    employee indicates that the employee is not a temporary employee. [IRS] 
 
 4) Are there special vesting rules for part-time, seasonal and temporary 
    workers? For part-time, seasonal and temporary employees to be qualified 
    participants in an employer-sponsored retirement plan, they must be immediately 
    and fully (100 percent) vested in the plan. The vesting requirement for a defined 
    contribution plan is met if an employee has a nonforfeitable right to receive a 
    payment equal to 7.5 percent of the compensation the employee earned while 
    participating in the system plus a reasonable rate of interest. [IRS] 
 
 5) If a local government participates in a statewide retirement system, is the 
    plan considered “established” by the employer? Yes. The fact that each local 
    government is a separate employer for tax purposes is irrelevant. Even though the 
    plan is not maintained by the local government, it is offered through that entity as 
    an employer and is considered established by the employer. [IRS] 
 
 6) For new employees, entering a retirement system s there, iany waiting period 
    for coverage during which mandatory social security and Medicare taxes do 
    not have to be paid? If a full-time employee can be enrolled in the plan by the 
    first day of the first full calendar month of service, social security and Medicare 
    taxes do not have to be paid during the partial month in which he or she begins 

                                  6-10

- 90 -

    work. This rule does not apply to part-time, seasonal and temporary employees. 
    [IRS] 
 
 7) Is a retirement system that does not cover all employees a “retirement 
    system” within the meaning of Regulations section 31.3121(b)7-2? A 
    retirement system is not required to cover all employees; it may be a retirement 
    system for some employees and not for others. The coverage determination is 
    made separately for each individual. [IRS] 
 
 8) A teacher who is a participant in a retirement system during the academic 
    year also works a few hours per week in the summer in the school library. 
    The library job is not covered by a Section 218 Agreement or by the public 
    retirement system because it does not fall during the normal 10-month school 
    year. Are the wages for the summer job subject to social security and 
    Medicare taxes?  The wages are not subject to social security taxes because the 
    teacher is a qualified participant in the public retirement system with respect to 
    her full-time job. A teacher who is expected to be employed on a continuing basis 
    qualifies for treatment as employed simultaneously in multiple positions with the 
    same entity. Consequently, the determination may be made solely by reference to 
    service in the teacher’s full-time position. The Medicare tax applies, unless the 
    employee is was hired prior to April 1, 1986, and qualifies for the continuing 
    employment exception. [IRS] 
 
 9) A teacher retires from a school district, starts collecting a pension under the 
    state retirement system, and returns to work for the same school district as a 
    bus driver. The bus driving position is not covered by a Section 218 
    Agreement and is not covered by the state retirement system. Is the employee 
    subject to mandatory social security tax on the wages as a bus driver?  No. 
    The employee is a rehired annuitant. He is deemed to be a qualified participant in 
    the retirement system without regard to whether he continues to accrue a benefit. 
    He is subject to Medicare tax because the continuing employment exception 
    cannot apply because the original employment relationship terminated at 
    retirement. [IRS] 

                                6-11

- 91 -

Chapter 7

Social Security Administration

This chapter discusses the functions of the Social Security Administration (SSA) that
relate to employer tax and information reporting responsibilities.

SSA is the primary income security agency for Americans. It administers the federal Old-
Age, Survivors and Disability Insurance (OASDI) program, the largest income-
maintenance program in the United States. The Supplemental Security Income (SSI)
program provides monthly benefits designed to replace, in part, the loss of income due to
retirement, disability or death. The SSI program provides or supplements the income of
aged, blind or disabled individuals with limited income and resources. Children, as well
as adults, can receive payments because of disability or blindness.

Organization

SSA’s organization features centralized management in Baltimore, Maryland, and a
nationwide network of 10 regional offices overseeing approximately 1,230 field offices
(FOs), 162 hearing offices, 35 teleservice centers, 6 processing centers and a national
data operations center in Wilkes-Barre, Pennsylvania.

All components within SSA’s central office perform a supporting role to SSA FOs by
providing direction, guidance and material resources. FOs are located in cities and rural
communities across the nation and are the agency’s main personal point of contact with
beneficiaries and the public. Additionally, the Social Security Disability Insurance
(SSDI) program depends on the work of 54 offices of Disability Determination Services
in all 50 states, the District of Columbia, Guam and Puerto Rico.

For questions about social security coverage for specific workers or groups of workers,
public employers should first consult the State Social Security Administrator for the state.
Public employers who have questions regarding electronic filing or other SSA reporting
processes or reporting applications, should contact the appropriate Employer Services
Liaison Officer (ESLO) listed at the SSA ESLO page on the SSA website. Questions
related to employer or employee tax liability should be directed to the IRS.

Inquiries regarding state and local coverage issues should be directed to the State and
Local Coverage Specialist for your state or territory. A list is provided on the SSA state
and local government employer's page. For other inquiries, see the SSA home page.

Parallel Social Security Office (PSSO)

The PSSO, in most cases located in the state capital, is the on-site representative of the
SSA to the state under the leadership of the Regional Commissioner. The PSSO:

7-1

- 92 -

  Conducts day-to-day negotiations with the state; 
  Assists the state in drafting Section 218 Agreements and modifications; 
  Reviews agreements and modifications from the state for technical accuracy and 
   appropriate documentation before forwarding to the Regional Office; and 
  Makes coverage and wage determinations, as appropriate. 
 
To locate a PSSO, use the SSA local office search. 
 
Regional Office (RO) 
 
RO staff works under the direction of the Regional Commissioner (RC). The RO 
provides leadership and technical direction in the coverage area for the state and local 
program within the region, consistent with established policy. Within the RO structure is 
the Assistant Regional Commissioner (ARC), who has ongoing responsibility for state 
and local coverage activities within the region. The Regional Office: 
 
  Interprets, reviews, processes and executes Section 218 Agreements and 
   modifications; 
  Reviews supporting documentation to state notices to remove legally dissolved 
   entities from coverage under Section 218 Agreements; 
  Makes and reviews coverage and wage determinations consistent with established 
   policy; 
  Provides guidance and advice to states on proposed legislation and regulations 
   that may have impact on the state's Section 218 Agreement; 
  Interprets and advises states on established policies and procedures;  
  Refers to Central Office questions for which no policy has been established, or for 
   which present policy may require a change that may have national impact; 
  Maintains file of original agreements and modifications; 
  Maintains the summaries of state agreements; and 
  Handles inquiries and answers questions about electronic filing and paper 
   reporting of wages. 
 
Office of Income Security Programs (OISP) 
 
OISP is primarily responsible for administering the state and local coverage program. 
Organizationally, OISP is located under the Deputy Commissioner, Retirement and 
Disability Policy. 
 
Social Security Earnings Records 
 
The social security number (SSN) is used for posting and maintaining the earnings and 
employment records of persons covered under the social security program. Employers 
withhold social security and Medicare taxes from employee paychecks and, with  the 
employer tax, deposit these amounts or pay them with the tax return. (See Chapter 3 for 
information on reporting and deposit rules.) By the end of February (the end of March if 

                                 7-2

- 93 -

Form W-2 data is submitted electronically), employers file wage reports with the SSA
showing the wages paid to each employee during the preceding year. SSA shares this
information with the IRS. SSA also sends weekly updates to IRS with information on
newly established SSN records and corrected information for previously established SSN
records. Reported earnings are posted to the worker’s earnings record.

When a worker or a worker’s family member applies for social security benefits, the
worker’s earnings record is used to determine the eligibility for benefits and the amount
of any cash benefits payable. It is thus critical that employers maintain accurate, up-to-
date SSN information on their employees to make sure each employee’s earnings are
correctly posted to that employee’s earnings record.

Under the Federal Insurance Contributions Act (FICA), social security and Medicare
benefits are financed through taxes paid by employees and their employers. The social
security and Medicare tax rates are set by law. The tax rate on wages for the Old-Age,
Survivors and Disability Insurance (OASDI) program applies to earnings up to an annual
maximum amount. This amount, called the earnings base, is adjusted annually based on
changes in average wages. Medicare Hospital Insurance (HI) taxes are paid on total
earnings; there is no wage base limit for Medicare tax. The Supplementary Medical
Insurance (SMI) part of Medicare is financed by monthly premiums charged to
beneficiaries and by payments from general federal revenues.

Earning Credits

Individuals become eligible for social security benefits and Medicare hospital insurance
based on credits for work covered by social security and/or Medicare. (In 2015, one
credit is earned for each quarter with $1,220 in earnings, for up to four quarters per year.)
The amount of earnings required for each credit increases each year to reflect average
wage increases. The table below shows the required amounts for recent years.

Credits earned remain on the worker’s social security earnings record, regardless of
periods of no earnings. The number of credits an individual needs to be eligible for social
security and Medicare benefits depends on age and the type of benefit. Most people need
40 credits (10 years of work) to qualify for benefits. Younger people need fewer credits
to be eligible for disability benefits, or for their family members to be eligible for
survivors’ benefits in case of death.

Beginning in 1957, basic pay earned from active military duty or training in military
service may earn social security credits. In addition, military service before 1957 may
qualify a person for additional earnings credits. A determination of these additional
credits is made at the time a person applies for benefits.

State and local government employees covered for Medicare-only must earn the same
number of credits to qualify for Medicare as required for social security benefits.

7-3

- 94 -

If a question arises concerning the employment relationship of a worker for claims
purposes, SSA determines whether there was a common-law employer-employee
relationship for the purpose of determining the benefits of the claimant.
Retirement Income
Full social security retirement benefits are payable to individuals with 40 credits (10
years of work) at full retirement age (FRA). An individual can elect social security
retirement benefits as early as age 62, but in that case, the individual’s monthly benefit is
reduced by an established percentage. In 2003, FRA began to increase in gradual steps
from age 65 to 67. This provision affects people born in 1938 and later.
If an individual receives social security benefits before reaching FRA, benefits are further
reduced if the individual continues to work and earn more than an annual exempt amount.
The annual exempt amount changes each year. A worker can earn up to that amount and
not experience any additional reduction of social security benefits. If the worker is under
FRA and earns over the exempt amount, the benefits will be reduced $1 for every $2 in
earnings above the exempt amount. In the year the individual reaches FRA, benefits will
be reduced $1 for every $3 in earnings above the exempt amount.
A spouse or former spouse may qualify for benefits upon a worker’s retirement or
disability. Benefits are paid as early as age 62, or at any age if the spouse is caring for the
worker’s child. In this case the child must be under 16 or disabled and receive benefits on
the worker’s record. A spouse’s benefits will be one-half or less of FRA monthly benefit.

The table below indicates earnings requirements and exempt amounts for recent years.

2011 2012 2013 2014 2015
Earnings required for one credit $1,120 $1,130 $1,160 $1,200 $1,220
Exempt annual amount - under full
retirement age $14,160 $14,640 $15,120 $15,480 $15,720
Exempt amount - year attaining
normal/full retirement age $37,680 $38,880 $40,080 $41,400 $41,880

Full retirement age or older No limits effective January 2000.

Benefits for divorced spouses age 62 or older may be payable if the insured former
spouse is eligible for retirement benefits, even though not yet retired. Unmarried children
under the age of 18 (under 19 if in high school) or any age if disabled before age 22 may
qualify for social security benefits on a retired or disabled parent’s social security record.

Note: Although the full retirement age for social security may vary, Medicare (HI)
eligibility is age 65 for everyone. Eligibility for HI is based on benefits as a retired
worker, as a spouse of a retired or disabled worker, or as a spouse of a deceased worker.
The individual qualifies even if the individual is not receiving monthly social security
retirement benefits because the individual or the individual’s spouse continues to work.

7-4

- 95 -

Special rules apply to uninsured persons who are at least 65 but who are not eligible for
HI under the regular rules. See Chapter 5.

Effect on Benefits from Work not Covered by Social Security

There are two situations in which receipt of a pension based on employment not covered
by social security will affect the amount of a social security benefit. Employees who
participated in a public retirement system and also have a social security benefit based on
another retirement system should be aware of these provisions.

The Windfall Elimination Provision (WEP) affects the way the social security
retirement or disability benefit is computed for some individuals with non-covered
employment.

The Government Pension Offset (GPO) affects the amount of the social security benefit
received by a spouse or widow(er).

Windfall Elimination Provision (WEP)

The WEP affects some individuals who receive a monthly pension based in whole or in
part on work not covered by social security. The weighting in the social security benefit
formula is intended to help people who spend most of their working lives in low-paying
jobs by providing them with a benefit that is higher in relation to their prior earnings than
the benefit provided for workers with high career earnings. Before 1983, people who
worked mainly in jobs not covered by social security had their benefits calculated as if
they were long-term, low-wage workers.

Therefore, prior to the WEP, the benefit formula created an unintended advantage for
workers who had pensions from non-covered employment in addition to social security
coverage. It benefited people who worked for only a portion of their careers in jobs
covered by social security but had their benefits computed as if they were long-term, low-
wage workers. WEP was enacted to eliminate this unintended advantage by providing for
a different, less heavily weighted benefit formula for persons who receive a pension
based on non-covered employment.

If you receive a pension based on work not covered by social security, your social
security retirement or disability benefit is computed using a modified benefit formula.
The resulting benefit amount is lower than you would receive if you did not also receive a
pension based on non-covered employment.

The modified formula applies to those who reach age 62 or become disabled after 1985
and first become eligible after 1985 for a monthly pension based in whole or in part on
work not covered by social security. You are considered eligible to receive a pension if
you meet the requirements of the pension, even if you continue to work.

7-5

- 96 -

Workers with relatively low pensions are less affected by the law because the reduction 
in the social security benefit cannot be more than one-half of that part of the pension 
attributable to earnings not covered by social security. 
 
The Windfall Elimination Provision does not apply to: 
 
  A federal worker performing service on January 1, 1984, who becomes newly 
   covered under social security on January 1, 1984, under the mandatory coverage 
   provision in PL 98-21;  
  An employee of a non-profit organization who is exempt from social security 
   coverage on December 31, 1983, and who becomes covered for the first time as 
   an employee of that organization on January 1, 1984, under the mandatory 
   coverage provision of PL 98-21; 
  Pensions based on earnings under the Railroad Retirement Act; 
  Pensions based entirely on non-covered employment before 1957;  
  Persons who have 30 or more years of substantial earnings under social security; 
   or 
  Survivor benefits. 
 
For more information about the WEP, see the SSA Windfall Elimination Provision     page. 
 
Government Pension Offset (GPO) 
 
The Government Pension Offset (GPO) applies to a worker who gets a government 
pension that is based on employment not covered by social security and is also eligible 
for social security as a spouse or widow(er). Two-thirds of the government pension is 
used to offset any spouse’s or widow(er)’s social security benefit. 

Before the GPO provisions were enacted in December 1977, many government 
employees qualified for a pension from their government agencies and for a spouse’s 
benefit from social security, even though they were not dependent on that spouse. 

This situation was considered unfair to employees in social security covered positions 
because social security rules require that an individual’s benefit as a spouse or widow(er) 
be offset dollar for dollar by the amount of his/her own social security retirement benefit.  

   Example. Under  GPO  rules,  a  woman  eligible  for  $1,200  in  social 
   security retirement benefits on her own work record and also eligible for 
   a spousal benefit of $900 receives only the higher of the two benefits - 
   $1,200 in this case. But before enactment of the GPO provision, if that 
   woman was a government employee who did not pay into social security 
   and who earned a $1,200 government pension, there was no offset; and 
   she would receive the $900 social security wife’s benefit as well as her 
   $1,200 government pension. The GPO provision was enacted to prevent 
   such inequities.   

                                   7-6

- 97 -

For applications filed before April 1, 2004, state and local government workers needed to 
be covered by social security only on the last day of employment with the government 
entity in order to be exempt from GPO. Many teachers, in particular, were able to take 
advantage of this exemption. Congress further tightened the GPO provision, and on 
March 2, 2004, the President signed the Social Security Protection Act of 2004.         

The Social Security Protection Act of 2004 required that beginning with applications 
filed April 1, 2004, state and local government workers be covered by social security 
throughout their last 60 months of employment with the government entity in order to be 
exempt from the GPO. If the worker’s last day of government employment was covered 
by both social security and the pension system, and the last day occurred before July 1, 
2004, the worker is exempt from GPO with respect to all current and future applications 
for spouse’s or widow(er)’s benefits. For example, a teacher whose last day of 
government employment in June 2004 was covered under social security and the pension 
system would be exempt from the GPO regardless of when he/she filed for benefits. 

The Act did provide a transition for workers whose last day of government employment 
occurred within 5 years after the date of enactment (March 2, 2004). Any state or local 
government worker whose last day of government employment occurred after June 30, 
2004, and before March 2, 2009, could have the requirement for 60 months of social 
security covered government employment reduced. For these workers, the requirement 
for 60 consecutive months of social security covered employment was reduced (but not to 
less than one month) by the total number of months that the worker had in social security 
covered government service under the same retirement system before March 2, 2004. If 
the 60-month period was reduced, the remaining months of service needed to fulfill the 
requirement must have been performed after March 2, 2004.  

 Example. Ms. Jones was working in a non-covered position at the time of 
 enactment  of  the  GPO,  but  had  previously  worked  in  a  social  security 
 covered job in the same retirement system for 12 months in 1997. Because 
 she had previously worked in social security covered employment for 12 
 months, the requirement that her last 60 months of employment be in a 
 social security covered position would be reduced to 48 months, or four 
 years. If Ms. Jones began working after March 2, 2004, in social security-
 covered  employment  under  the  same  retirement  system  as  her  prior 
 government work, and worked continuously in the covered position for at 
 least the final 48-month period of her employment,        and her last day of 
 employment  was  before  March  2,  2009,  Ms.  Jones  would  have  been 
 exempt from the GPO offset.  

All other non-covered state and local government workers who first switched to 
government employment covered by social security and their pension plan after June 30, 
2004, had to work in covered government employment for the entire final 60-month 
period of their government employment in order to avoid the GPO.  

The Government Pension Offset does not apply to pension benefits that are: 

                              7-7

- 98 -

  Not based on earnings, or 
  Based on earnings in a job where the retiree was paying social security taxes, and 
   a) the recipient filed for and was entitled to a benefit as a spouse, widow, or 
            widower, before April 1, 2004; or 
   b) the last day of employment that the pension is based on is before July 1, 
            2004; or 
   c) the retiree paid social security taxes on earnings during the last 60 months 
            of government service. 
 
Benefits as a spouse, widow or widower will also not be reduced by the GPO if the 
individual: 
 
  Is a federal employee who elected to switch from the Civil Service Retirement 
   System (CSRS) to the Federal Employees’ Retirement System (FERS) after 
   December 31, 1987; and either: 
 
   a) filed for and were entitled to spouse’s, widow’s or widower’s benefits 
            before April 1, 2004; or 
   b) the last day of service (that your pension is based on) is before July 1, 
            2004; or 
   c) paid social security taxes on earnings for 60 months or more during the 
            period beginning January 1988 and ending with the first month of 
            entitlement to benefits; or 
 
  Received or was eligible to receive a government pension before December 1982 
   and met all the requirements for social security spouse’s benefits in effect in 
   January 1977; or  
 
  Received or was eligible to receive a federal, state or local government pension 
   before July 1, 1983, and were receiving one-half support from the spouse.  

For more information, see the GPO Fact Sheet on the SSA website.  

Savings Plans for WEP or GPO Purposes                        
 
The WEP and GPO apply to pensions provided by state and local government entities. 
Some public employers not covered by social security have established alternative 
retirement plans, such as a savings plan, instead of a conventional pension plan.  

A plan is considered a savings plan and is not a pension for WEP/GPO purposes if: 
 
  An employee voluntarily contributes to a plan that is separate from and in 
   addition to a primary retirement plan; 
  The employer makes no contributions to the plan; 
  The withdrawals from the plan do not exceed the employee’s contributions (plus 
   interest); and 

                                        7-8

- 99 -

 Withdrawals are not based upon age, length of service or earnings.

In addition to savings plans, the following are not considered pensions for purposes of the
WEP and GPO:

 A social security retirement or disability benefit
 An early incentive retirement payment

A survivor annuity is exempt from the Windfall Elimination Provision; however, social
security survivor benefits may be affected by the Government Pension Offset.

Example 1: A part-time employee for a city is not covered by a Section 218
Agreement or mandatory social security. In July 1991, the employee elected to
participate in the state’s public employees deferred compensation plan in lieu
of mandatory social security coverage. The employee, upon retirement, will
receive a payment from the deferred compensation plan based on employee
and employer contributions to the plan, as this is the only plan to which the
employee contributes. This plan is not considered a savings plan and the
payment will be considered a pension and subject to the GPO or WEP
provisions.

Example 2: A state employee is not covered by a 218 Agreement, but is
covered by a state employee retirement system and has also elected to make
contributions to a deferred compensation plan. The payment from this deferred
compensation plan is separate from and in addition to the primary retirement
plan. The employer made no contributions to the deferred compensation plan
and the payment from the deferred compensation plan is not based on age,
length of service or earnings. While the payment from the retirement system is
subject to GPO or WEP, the payment from the deferred compensation plan is
not.

SSA Publication 05-10045, covering the WEP, and SSA Publication 05-10007, covering
the GPO, address these topics further. You can also request these publications from the
Social Security Administration by calling 1-800-772-1213. Employers assisting in
retirement planning are urged to provide copies of these publications to their employees.

Medicare

SSA is the primary public contact point regarding eligibility and premium issues for the
Centers for Medicare & Medicaid Services (CMS), which is responsible for
administering the Medicare program. SSA staff determines, and answers questions
regarding Medicare eligibility. SSA also maintains records of Medicare eligibility and
collects Medicare Part B premiums through withholding from social security payments.

7-9

- 100 -

The Medicare tax supports a federally-funded health insurance program for people 65
years of age and older and people with certain disabilities. Medicare has four parts:

 Hospital insurance (Part A) that helps pay for inpatient care in a hospital or skilled
nursing facility (following a hospital stay), some home health care and hospice
care.
 Medical insurance (Part B) that helps pay for doctors’ services and many other
medical services and supplies that are not covered by hospital insurance.
 Medicare Advantage (Part C) plans, available in many areas through third-party
insurers. People with Medicare Parts A and B can choose to receive all of their
health care services through one of these provider organizations under Part C.
 Prescription drug coverage (Part D) that helps pay for medications doctors
prescribe for treatment.

You can get more information about Medicare at the CMS site www.medicare.gov.

Medicaid

Medicaid provides free or low-cost health insurance coverage to qualifying individuals
and families. In 32 states and the District of Columbia, eligibility for SSI benefits confers
automatic entitlement to Medicaid. SSA provides information and referral services in
support of Medicaid and is directly funded by the states and CMS.

For more information, see the CMS Medicaid site at cms.gov/MedicaidGenInfo/.

Reporting Wages to SSA

As discussed in Chapter 3, all employers are responsible for collecting social security
numbers from employees, filing tax returns to the Internal Revenue Service, filing annual
wage reports (Forms W-2) with the Social Security Administration, and furnishing copies
of Forms W-2 to employees. To avoid costly errors, it is crucial that Form W-2 filing be
accurate.

All Forms W-2 sent to SSA are subject to:

 Balancing and validation programs to determine whether the reports are accurate
and can be “read” by SSA systems; and

 Employee name and social security number (SSN) verification.
Reports that have errors, do not match, or do not meet edit conditions are returned to the
employer (or submitter) for correction and resubmission.
Employers failing to meet filing requirements by the deadlines are subject to IRS late
filing penalties (see Chapter 3).

Note: If the initial report was filed timely and later returned for corrections, the
employer will be subject to late filing penalties if the corrected report is not resubmitted
by the due date.

7-10

- 101 -

Electronic Wage Reporting

Employers with Internet access can submit their W-2 files using SSA’s SSA Business
Services Online. This option is fast, free and secure. For security, a PIN and a password
are required before you submit your W-2 file over this web page; most registrations can
be completed on the web page. For more information, visit the SSA employer page or
call your ESLO (see list at website).

Social Security Statement

SSA sends a statement annually to workers and former workers aged 25 and older who
have paid social security taxes during their working years. This statement shows all
earnings on which a worker has paid social security taxes during his/her working years.
The statements should be examined closely by the employee to ensure all earnings are
properly credited. If the earnings shown on the statement are not correct, the employee
should call SSA at 1-800-772-1213.

Note: Individuals who have worked only in non-covered employment (no social security
and Medicare taxes) will not receive a Social Security Statement.

The Medicare portion of the Social Security Statement reflects the amount of earnings
that was taxed and an estimate of the amount of taxes paid to support the Medicare
program. The taxes are estimated because SSA does not keep records of Medicare taxes
paid. If an employee had both social security earnings and government earnings that
qualified for Medicare in the same year, the statement would reflect an estimate of the
combined Medicare taxes paid.

Workers may access on-line benefit planning tools at the SSA planning page. These can
be used to project potential benefits using various earnings scenarios.
Verifying Employee Names and Social Security Numbers
After wage reports have been entered into SSA’s system, each employee name and social
security number (SSN) is compared to SSA’s records to verify that it is correct. Matched
wage reports are updated to the individual employee’s record; reports that do not match
are identified and the employer or employee is contacted and asked to provide a corrected
name or SSN to SSA. Additionally, IRS may impose a penalty of up to $100 per
misreported name and SSN. Accurate crediting of earnings to individual records is
essential to the correct payment of social security benefits; this is one reason obtaining a
correct name and SSN is very important. See IRS Publication 15, for a discussion of
requirements for new hires.

Social Security Number Verification Service

The Social Security Number Verification Service (SSNVS) is a free, internet-based
service of the SSA Business Services Online (BSO) where employers and third-party
submitters can verify their employees’ names and SSNs against SSA’s records. For more

7-11

- 102 -

information on SSNVS, see the SSA SSNVS Handbook. Employers are required to
register with SSA to use the service.

With SSNVS, you may verify up to 10 names and SSNs online and receive immediate
results. There is no limit to the number of times the SSN Verification web page may be
used within a session. You may upload electronic files of up to 250,000 names and SSNs
and will usually receive results the next government business day.

In addition to SSNVS, the BSO offers Registration Services and Employer Services.
Registration Services offers a User Identification Number (User ID) assignment,
password selection and various registration maintenance functions. Employer Services
offers Form W-2 file upload, W-2 and W-2c online key-in functions (no special software
or forms required) and the ability to track files and view processing results and notices.
See the SSA BSO page for more information.

Note: SSNVS should only be used for the purpose for which it was intended. SSA will
verify SSNs and names solely to ensure that the records of current or former employees
are correct for the purpose of completing Form W-2.

Verifying Employment Eligibility

Under the Immigration and Nationality Act, employers must verify the identity and
employment eligibility of anyone hired for employment in the United States. This
includes citizens and non-citizens.

Form I-9 Employment Eligibility Verification, was developed by the former Immigration
and Naturalization Service (INS) to verify that persons are eligible to work in the United
States. Completion of this form is required for every employee hired after November 6,
1986. The functions of the INS are now carried out by the U.S. Citizenship and
Immigration Service (USCIS). The USCIS operates I-9 Central, a free website providing
employers and employees access to resources, tips and guidance to properly complete
Form I-9 and better understand the Form I-9 process.

USCIS also operates an electronic employment eligibility verification system, E-Verify,
for employers. If you have questions about Form I-9, contact E-Verify Customer Support
at 1-888-464-4218 or the E-Verify web page.

You can download copies of Form I-0 from www.uscis.gov. USCIS Publication M-274,
Handbook for Employers, includes Form I-9 and addresses questions relating to the form
and employment issues related to immigration. Print copies are available to employers at
USCIS regional and district offices, as well as local Government Printing Office
bookstores. For questions not addressed in the Handbook, visit the USCIS website at
www.uscis.gov or call (202) 375-5283.

7-12

- 103 -

Correcting Wage Reports

Once information returns have been filed with SSA, you must make any corrections using
Form W-2c and Form W-3c.

Forms W-2c may be filed on paper or via electronic transmission. Electronic submissions
should be formatted following the instructions in SSA Publication 42-007, Specifications
for Filing Forms W2 Electronically (EFW2), are available on SSA's website or from any
Employer Service Liaison Officer (ESLO). A list of the ESLOs is also available at this
site.

Note: As of February 28, 2006, SSA no longer accepts magnetic media submissions for
wage reports. If you are required to file 250 or more Forms W-2c during a calendar
year, you must file them electronically unless IRS grants you a waiver. For information
on filing Form 8508, Request for Waiver From Filing Information Returns
Electronically, contact IRS at 1-866-455-7438, or visit www.irs.gov.

If the employee has a name change, the employee must notify SSA and request a new
social security card. Never change an employee's name in your payroll system until the
employee has shown you a new social security card showing the change. See IRS
Publication 15 (Circular E) for rules on name changes.

If an error is identified before Form W-2 is filed with the SSA, but after providing the
form to the employee, changes should be shown on a new original form. This form
should be marked “Reissued Statement” at the top. Be sure to change the information
submitted to SSA as well, either by marking the original paper W-2 "VOID" at the top (if
you submit on paper) or by correcting the data file before filing electronically.

Form W-3c must accompany Copy A of Forms W-2c when they are sent to SSA. A
separate Form W-3c must be used for each type of Form W-2 being corrected and must
accompany a single Form W-2c or multiple Forms W-2c. Large numbers of Forms W-2c
may also be filed electronically. Contact your ESLO for details.

Common Reporting Errors

Incorrect or missing Employer Identification Number (EIN). SSA and IRS maintain
records by the EIN. Reports received with missing or erroneous EINs may be credited to
the wrong record and result in IRS assessing penalties for failure to file correct reports.

Incorrect employee names and social security numbers. SSA cannot credit earnings to
an employee’s record unless the employee’s name and social security number on the
wage report matches the name and number in the SSA files. Use the name exactly as it is
shown on the employee’s social security card.

Wage reports for years after employee’s death. Payments on behalf of a deceased
employee made after the year of death cannot be credited as wages for social security

7-13

- 104 -

purposes. Such payments should be reported to the employee’s estate on Form 1099-
MISC, Miscellaneous Income. See Section 3.

Errors resulting in out-of-balance reports. Errors may occur due to application of an
incorrect wage base for social security or a wage base limitation to the Medicare wages.

Tips. If an employee has tips, they must be reported in the “Social security tips” field of
Form W-2). They are not included in the “Social security wages” field. These two fields
are added together by SSA to obtain the total social security earnings.

Omitted wage or tax fields on wage reports. All fields must be completed.

Wrong tax year form used. SSA optical scanning and imaging systems are modified
annually to meet changes in Form W-2 formats. The version of Form W-2 for the year
reported must be used or SSA may be unable to read the form, or post the earnings to the
wrong year.

Unscannable reports. Reports that are not scannable by the SSA’s optical equipment are
more costly to process and subject to error.

Failure to file Copy A of Form W-2 with SSA. Employers must always file Copy A of
Form W-2 with SSA, unless they submit the same data electronically.

“Void” indicator on Form W-2 checked in error. SSA will not credit wages shown on
any Form W-2 that is void.

Wrong tax year entered. Make sure you show the correct tax year on the code “RE”
records. Dollar totals ("RT" Record) are used by SSA to determine whether the report is
in balance; and, if it is not, to show where the error may be found. Make sure you report
employee names and social security numbers correctly.

Missing/Incorrect submitter (Code “RA”). This information helps SSA properly
identify and control each report. It provides contact information for use if there is a
problem with the submission.

Unreadable reports. Reports must meet the requirements set out in EFW2 to be
processable on SSA’s electronic equipment. Unprocessable reports will be returned to the
transmitter for correction and returned to SSA. Failure to return the correction reports
timely may result in IRS penalty assessment.

Incorrect or omitted Medicare wage/tip amounts. Medicare wages/tips must be shown
separately from social security wages on Forms 941 filed with the IRS. All Medicare
wages/tips are subject to Medicare taxes.

Showing non-covered amounts as social security and/or Medicare wages. Examples
of non-covered amounts include employee earnings that exceed the wage base for social
security and payments to an independent contractor shown as wages. See “Special Rules

7-14

- 105 -

for Various Types of Services and Payments” in Publication 15 for information on other 
non-covered payments. 

Failure to file Form W-2c and/or Form W-3c with SSA when adjusting prior year 
earnings on Form 941 and/or Form 941c. Adjustments of tax liability filed with IRS 
that are based on changes in social security and/or Medicare wages must be matched by 
the filing of Forms W-2c and W-3c with SSA to allow entry of the wage changes on the 
employee’s social security earnings records. 

Filing of duplicate or partially duplicate Forms 941. Social security and/or Medicare 
wages shown on duplicate Forms 941 may lead to costly and otherwise unnecessary 
reconciliations between SSA, the IRS and the employer. 
 
                                       7-15

- 106 -

Publications and Forms – Social Security Administration 
 
To request SSA publications, telephone 1-800-772-1213 (toll-free), or TTY 1-800-325-
0778, or e-mail to mailto:OPLM.OSWM.RQCT.Orders@ssa.gov. You can also   
download most forms and publications from the SSA employer page.  
 
 Publication/Fo Title 
 rm 
 SS-5          Application for a Social Security Card 
  
 Social Security Number Verification Service (SSNVS) Handbook 
  
 SSA  42-007 Specifications for Filing Forms W-2 Electronically (EFW2) 

 SSA 42-014  Specifications for Filing Forms W-2c Electronically (EFW2) 

 Form SSA-   Statement Concerning Your Employment in a Job Not Covered by Social 
 1945        Security 

Other SSA Services 
 
SSA Speaker’s Bureau 
 
SSA can arrange to have speakers available for wage reporting seminars, pre-retirement 
sessions and other employer-sponsored onsite meetings with employees to discuss social 
security matters. For more information, contact any Social Security office or call            
1-800-772-1213. For a local SSA office near you, see SSA contact page. 

Employer Training Seminars 
 
Each year, Employer Service Liaison Officers (ESLOs) provide a series of free training 
seminars to annual wage reporters. Call your local ESLO to find out when a seminar is 
held in your area. Or check the website for a list of seminars held around the nation. 

Key SSA Web Pages 
 
Employer Reporting Instructions and Information 
 
This SSA website addresses employer reporting and other interests.  

Social Security Online 

SSA's home page that lists available online services such as benefit planners, Social 
Security Statements, Medicare card replacement, etc. 

State and Local Government Employers 

                                       7-16

- 107 -

This site is for state and local government employers who are responsible for
withholding, reporting and paying social security and Medicare taxes for public
employees.

POMS State and Local Coverage Handbook

Explains the provisions applicable to State Social Security Administrators and Social
Security’s regional and parallel office (PSSO) staffs to administer the social security and

Research, Statistics and Policy Analysis

The research and policy analysis information on the SSA website is the result of a
collaborative effort among three ORDP offices—the Office of Research, Demonstration,
and Employment Support, the Office of Research, Evaluation, and Statistics, and the
Office of Retirement Policy. All three offices work together to conduct research and
policy analysis and disseminate the results of their research in a variety of publications
that are available on the website.

Frequently Asked Questions

1) If the IRS is responsible for answering questions on withholding and paying
social security and Medicare taxes, why do we get reporting information
from SSA and why do we have to send IRS Forms W-2 to SSA? SSA is
responsible for keeping records of earnings, and for determining eligibility and
amounts for individuals applying for retirement, disability or survivor benefits.
The amount of benefits an individual receives is based in part on that individual’s
earnings over his or her working career. The information on an individual’s
earnings record is taken directly from the social security and Medicare wage
fields on the Form W-2 sent to SSA by the employer. After SSA processes this
information, it is forwarded to the IRS. Either IRS or SSA can help you with
Form W-2 reporting questions. [IRS/SSA]

2) How does an employee verify the information that SSA shows on her/his
earnings record? A Social Security Statement is mailed annually to workers and
former workers aged 25 and older who have worked in covered employment.
There is no charge for this service. [SSA]

3) What information can be provided by SSA to State Social Security
Administrators to help them perform their responsibilities? SSA may provide
interpretations of the Social Security Act, Social Security regulations, rulings, the
state Section 218 Agreement and its modifications, as they apply to a public
employer. [SSA]

4) Whom should I call when I have questions about Annual Wage Reporting?
Call your local SSA Employer Services Liaison Officer. See Chapter 7, or go to
the SSA website for contact information. [SSA]

7-17

- 108 -

 5) My employees are paying into the State Teachers’ Retirement System and 
    some have enough social security credits from former employment to be 
    eligible for social security benefits. Will they receive benefits from both?  
    Yes, but the Windfall Elimination Provision may reduce social security benefits. 
    Additionally, spouses’ benefits may be reduced by the Government Pension 
    Offset formula. See Chapter 6, Social Security and Public Retirement Systems. 
    [SSA]

                                 7-18

- 109 -

Chapter 8

Internal Revenue Service

The Internal Revenue Service (IRS), an agency of the U.S. Department of Treasury, is
charged with the administration of the tax laws passed by Congress. This includes
assisting taxpayers with education, account issues, and filing responsibilities, as well as
conducting compliance and enforcement activities. For many years, the IRS was
organized geographically with a national office in Washington and regional, district and
local offices throughout the country. With the Restructuring and Reform Act of 1998, the
Internal Revenue Service began a major reorganization in an effort to improve
compliance and customer service. This restructuring marked the most sweeping overhaul
of the agency since 1952. The reorganization and its impact on federal, state, and local
government entities are discussed in this chapter.

More information about the programs and responsibilities of the IRS is available at
www.irs.gov. For information about the IRS office of Federal, State, and Local
Governments, see the FSLG web site.

Organization

National Headquarters for the Internal Revenue Service, in Washington, DC, develops
nationwide policies and programs for the administration of the agency. The chief
executive of the agency is the IRS Commissioner. Several functions report directly to the
Commissioner, including:

 Chief Counsel
 Appeals
 National Taxpayer Advocate
 Communications and Liaison
 Office of Research, Analysis, and Statistics
 Equity, Diversity & Inclusion

With the 1998 reorganization, the IRS is now organized around four specific “customer
bases,” or groups of taxpayers with generally common interests and needs. Each
operating division has a Commissioner and its own Counsel to provide legal expertise
and guidance. This structure replaces the system of Regional and District Offices that
existed under the previous, geographically-based organization.

The following are the four customer-based operating divisions:

Wage and Investment (W&I) is focused on individual taxpayers and income tax returns.

Small Business/Self-Employed (SB/SE) is oriented to S-corporations, partnerships, small
corporations and sole proprietors.

8-1

- 110 -

Large Business and International (LB&I),  deals with the largest businesses and 
international tax issues. (This was formerly the Large and Mid-Size Business division). 
 
Tax Exempt and Government Entities (TE/GE) serves all government organizations as 
well as nonprofit and other exempt organizations. Most or all of the contact with the IRS 
that a government entity has will be with TE/GE, so it is discussed in more detail below. 
TE/GE has responsibility for providing assistance and education to taxpayers, as well as 
performing compliance activities related to these organizations. 

Tax Exempt and Government Entities Operating Division 
 
The Tax-Exempt and Government Entities (TE/GE) Operating Division was established 
in late 1999 and replaced the former office of Assistant Commissioner (Employee Plans 
and Exempt Organizations). It serves three distinct customer segments: 

      Employee Plans (EP) 
      Exempt Organizations (EO) 
      Government Entities (GE) 

TE/GE deals with entities that are or may be exempt from certain taxes under the Internal 
Revenue Code. Customers range from small local community organizations and 
municipalities to major universities, large pension funds, state governments, federal 
agencies, Indian tribal governments and issuers of tax-exempt bonds. These organizations 
represent a large economic sector with unique needs. They are governed by often 
complex, highly specialized provisions of the tax law. 

The Government Entities (GE) segment contains three offices serving distinct customer 
bases: 
  
      Federal, State, and Local Government (FSLG) 
      Indian Tribal Governments (ITG) 
      Tax-Exempt Bonds (TEB) 
 
Federal, State, and Local Governments: Provides a clear point of contact for all 
government entities (other than Indian tribal governments) for their tax issues with the 
primary focus on information return reporting and employment tax issues. FSLG is 
responsible for administering the tax laws affecting these entities and ensuring 
compliance. It also develops and delivers communication and education programs and 
provides easily accessible and equitable voluntary compliance programs for its 
government customers.  

The Federal, State and Local Governments website contains the most recent technical 
developments and links to additional information, including: 
 
      How to contact an FSLG Specialist in your area 

                                         8-1

- 111 -

     How to e-mail FSLG with a question 
     A toolkit providing all basic federal tax reporting materials in one location 
     Links to text of recent IRS rulings and announcements 
     Fact sheets and frequently asked questions 
     FSLG Fringe Benefit Guide (Publication 5137)  
     Quick Reference Guide for Public Employers (Publication 5138)  
     The semiannual FSLG Newsletter  
     Announcements and registration information for educational events  
     Explanation of the compliance process (examinations and compliance checks) 
     Archived webinar and phone forum presentations on tax topics 
     Links to related sites of interest 
 
Indian Tribal Governments:   Helps Indian tribes deal with their federal tax matters, and 
provides a single point of contact for assistance and service. The Specialists in this area 
address issues and provide guidance to Indian tribes, whose concerns may relate to tribal 
governments as employers, distributions to tribal members, and the establishment of 
governmental programs, trusts, and businesses. For more information visit the Indian 
Tribal Governments website. 
 
Tax-Exempt Bonds: Provides information to the tax-exempt bond community in the 
form of education and outreach programs. This office encourages voluntary compliance 
through rulings and agreements. It also administers and conducts the tax-exempt bond 
examination program. For more information, visit the Tax Exempt Bond website. 
  
Customer Account Services 

If you are authorized to represent a taxpayer, you can call toll-free at (877) 829-5500 
concerning the following as they relate to government entities: 

     Account-related questions 
     Request for general information letter concerning tax exemption of a government  
     Request for private letter ruling 
     FSLG telephone numbers  
     Local FSLG Offices 
 
Note: Although the State Administrator is responsible for maintaining and interpreting 
your Section 218 Agreement, federal disclosure laws prohibit the State Administrator 
from inspecting your tax information without your consent. If you would like the State 
Administrator to assist you with a Section 218 Agreement or related social security 
coverage issue, you can expedite the process by completing Form 8821, Tax Information 
Authorization, and filing it with the IRS.  
  
You may contact your local FSLG Specialist for assistance with any of the following: 
 
     General information about a Section 218 Agreement between your state and the 
      Social Security Administration 

                                            8-2

- 112 -

    Classification of a worker as an employee or independent contractor 
    Form SS-8, Determination of Worker Status for Purposes of Federal Employment 
     Taxes and Income Tax Withholding 
    Special employment tax rules for public employees (election workers, emergency 
     workers, public officials, etc.) 
    Withholding from nonresident aliens 
    Other federal tax issues for government entities 

Publications and Forms — Internal Revenue Service 

You can download most IRS forms and publications from the IRS website. To order by 
phone, call 1-800-829-3676 (toll-free). To request forms by fax, call 1-703-368-9694 
from your fax machine. Forms and publications are also available at IRS walk-in offices. 
 
Publication     Title 

1               Your Rights as a Taxpayer 

15              Circular E, Employer's Tax Guide 

15-A            Employer's Supplemental Tax Guide 

15-B            Employer’s Tax Guide to Fringe Benefits 

80              Circular SS, Federal Tax Guide for Employers in the U.S. Virgin Islands, 
                Guam, American Samoa, and the Commonwealth of the Northern 
                Mariana Islands 

463             Travel, Entertainment, Gift and Car Expenses 

515             Withholding of Tax on Nonresident Aliens and Foreign Entities 

571             Tax-Sheltered Annuity Plans (403(b) Plans)  

594             The IRS Collection Process 

910             IRS Guide to Free Tax Services 

947             Practice Before the IRS and Power of Attorney 

957             Reporting Back Pay and Special Wage Payments to the Social Security 
                Administration 

1141            General Rules and Specifications for Substitute Forms W-2 and W-3 

1179            General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 
                5498, and Certain Other Information Returns 

1976            Do You Qualify for Relief Under Section 530? 

2108A           On-Line Taxpayer Identification Number (TIN) Matching Program 

4268            Employment Tax Desk Guide (available only at www.irs.gov/tribes) 

                                      8-3

- 113 -

Form      Title 

SS-4      Application for Employer Identification Number 

SS-8      Determination of Worker Status for Purposes of Federal Employment 
          Taxes and Income Tax Withholding 

W-2       Wage and Tax Statement 

W-2c      Corrected Wage and Tax Statement 

W-3       Transmittal of Wage and Tax Statements 

W-3c      Transmittal of Corrected Wage and Tax Statements 

W-4       Employee’s Withholding Allowance Certificate 

W-9       Request for Taxpayer Identification Number and Certification 

941       Employer’s Quarterly Federal Tax Return 

941-X     Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund 

943       Employer’s Annual Tax Return for Agricultural Employees 

944       Employer’s Annual Federal Tax Return 

944-X     Adjusted Employer’s Annual Federal Tax Return or Claim for Refund 

945       Annual Return Of Withheld Federal Income Tax 

945-A     Annual Record of Federal Tax Liability 

1042      Annual Withholding Tax Return for U.S. Source Income of Foreign 
          Persons 

1042-S    Foreign Person’s U.S. Source Income Subject to Withholding 

1096      Annual Summary and Transmittal of U.S. Information Returns 

1099-MISC Miscellaneous Income 

2848      Power of Attorney and Declaration of Representative 

8233      Exemption from Withholding on Compensation for Independent (and 
          Certain Dependent) Personal Services of a Nonresident Alien Individual 
           
8821      Tax Information Authorization 

The IRS website also offers the following free of charge: 
 
     Forms and Publications on CD/DVD 
     IRS press releases and fact sheets 
     TeleTax (automated) information on about 100 tax topics (1-800-829-4477) 
     Educational Materials 
 
Telephone assistance is available at 1-800-829-1040. 

                                         8-4

- 114 -

Frequently Asked Questions 
 
 1) What information can IRS provide to a governmental unit about its social 
    security coverage and tax liability?  The IRS is responsible for assessing and 
    collecting all taxes, and interpreting and applying the tax law. By contacting 
    Customer Account Services, an authorized person can receive tax information 
    about an entity. Your local Federal, State, and Local Government (FSLG) 
    Specialist can assist you with tax law questions, including identifying the services 
    subject to income and social security taxes. Questions about Section 218 
    Agreement coverage should be directed to your State Social Security 
    Administrator.  
  
 2) What information can IRS provide to State Social Security Administrators to 
    help them perform their responsibilities, especially when an audit or review 
    is to be conducted of a public employer in his/her state?     Section 6103 of the 
    IRC governs the disclosure of tax information by the IRS to other federal and 
    state agencies. Without the consent of the taxpayer, no provision in section 6103 
    authorizes the IRS to share specific taxpayer information with State Social 
    Security Administrators. However, in performing a tax investigation, the IRS may 
    request information from the State Social Security Administrator. State 
    administrators are encouraged to share information, consistent with state law, with 
    the IRS to help resolve matters of mutual interest. Your State Social Security 
    Administrator can better assist you if you consent to make your federal tax 
    information available for the Administrator’s review. A government entity can 
    grant a State Administrator access to its tax information by completing Form 
    8821, Tax Information Authorization. [IRS] 
     
 3) Can I arrange for the State Social Security Administrator to receive my tax 
    information or discuss it with the IRS? If you have a Section 218 Agreement to 
    provide social security coverage for your employees, you may wish to have the 
    State Social Security Administrator consulted or otherwise involved in the 
    examination. The State Administrator is not considered an official responsible for 
    the administration of state or federal tax laws under section 6103; therefore, there 
    is no provision in the law allowing the IRS to disclose tax information in this 
    situation. If you are reviewing an issue with the IRS involving section 218 
    coverage, and you wish to have the State Administrator or a representative 
    participate in the discussion, you should complete either Form 2848, Power of 
    Attorney or Declaration of Representative, or Form 8821, Tax Information 
    Authorization , as appropriate. These forms are discussed on the Disclosure Laws 
    page on the FSLG website.  
 
                                       8-5

- 115 -

Chapter 9  

State Social Security Administrators 

SSA Regulation 20 CFR §404.1204 requires each state to designate at least one state 
official to act for the state in administering that state's Section 218 Agreement. This 
official, the State Social Security Administrator, acts for the state with respect to its 
responsibilities for maintaining and administering the provisions of the agreement and for 
the proper application of Social Security and Medicare.  
 
The designated State Social Security Administrator (State Administrator) acts for the 
state in negotiations with the Social Security Administration. This includes acting for the 
state with respect to the initial Section 218 Agreement and modifications, the 
performance of the state’s responsibilities under the Agreement, and in all state dealings 
concerning the administration of the Agreement. Each state’s Section 218 Agreement 
(“Agreement”), and Social Security Regulations 404.1204, provide a legal obligation for 
each state to designate such an official. In many states, however, the actual day-to-day 
responsibilities are delegated to the staff of the designated state official. 
The state is responsible for notifying SSA of any changes regarding its designated state 
official. That official should send a notification to the SSA Regional and Parallel Social 
Security Offices for that state.  
The extent of the responsibilities of the State Administrator vary from state to state. The 
location of State Social Security Administrators’ offices and the extent and scope of their 
responsibilities are determined by each state. Details on each state are contained in the 
respective state’s enabling legislation, citations for which are listed in the Appendix of 
this Guide. Frequently, a State Administrator has other responsibilities, including those 
related to  non-218 entities as well. A detailed list of basic State Administrator 
responsibilities is available on the Social Security Administration’s POMS web at the 
Program Operations Manual System (POMS) web page. Also see the SSA State and 
Local Government Employer web page. 

For Section 218 Agreement purposes, the State Administrator: 

 Administers and maintains the federal-state Section 218 Agreement that governs 
  voluntary social security and Medicare coverage by state and local government 
  employers in the state;   
 Negotiates modifications to the original Agreement to include additional coverage 
  groups, corrects errors in modifications; conducts referendums and identifies 
  additional political subdivisions that join a covered retirement system; 
 Maintains in a secured location the state's master Agreements, modifications, 
  dissolutions and intrastate agreements; 
 Provides SSA with notice and evidence of the legal dissolution of covered state or 
  political subdivision entities; 

                                          9-1

- 116 -

 Resolves coverage and taxation questions related to the Agreement and modifications 
  with SSA and IRS; and 
 Negotiates with SSA to resolve social security contribution payment and wage 
  reporting questions concerning wages paid before 1987; 
 Informs SSA of name, title, and address of designated officials involved in Section 
  218 administration, and notifies SSA of any changes; 
 Informs SSA of any changes in a government entity’s legal status, such as name 
  changes, dissolutions, or consolidations. 
 Communicates regularly with SSA, IRS, employers, and stakeholders on Section 218-
  related issues; 
 Provides information to state and local public employers covered under Agreements 
  in accordance with the Act; and   
 Determines necessary funding and staffing for administration of Section 218 
  program. 

Note: Section 6103 of the Internal Revenue Code (IRC) governs the disclosure of tax 
information by the IRS to other federal and state agencies. Without the consent of the 
taxpayer, no provision in section 6103 authorizes the IRS to share specific taxpayer 
information with State Social Security Administrators. However, in performing a tax 
investigation, the IRS may request information from the State Social Security 
Administrator.  
 
The State Administrator is the principal state official responsible for these functions. The 
Administrator serves as the main resource to state and local employers for information 
and advice about social security coverage, taxation and many reporting issues. SSA, IRS, 
public employers and employees should contact the designated Administrator to help 
resolve coverage questions concerning groups or individual employees. More detailed 
information is available at the SSA POMS web page.  

By allowing the State Administrator to inspect your tax information, you can 
significantly expedite the process of resolving any coverage or federal tax issues with the 
IRS. A government entity may consent to have a State Administrator or representative 
review tax information by filing Form 8821, Tax Information Authorization, and filing it 
with the IRS.  

National Conference of State Social Security Administrators (NCSSSA) 
 
The ever-changing and complex social security coverage statutes, withholding 
requirements, reporting obligations and associated employment tax regulations require 
constant monitoring and interpretation. For more than 50 years the National Conference 
of State Social Security Administrators (NCSSSA) has provided an effective network of 
communication for federal, state, and local governments concerning social security 
coverage and federal employment tax policy. 

With the enactment of Section 218 to the Act in 1950, states could exercise the option of 
providing social security coverage for state and local employees. By the end of 1951, 30 

                                    9-2

- 117 -

states had executed Section 218 Agreements with the federal government. The
responsibility for administering the social security program varied from state to state,
depending on the particular state’s enabling legislation.

State Administrators began to operate in an area where no precedent existed. It became
apparent that a forum was needed where the administrators could address the many
problems and questions posed by the new program. The first forum between State Social
Security Administrators and federal officials was held in January 1952, in Bloomington,
Indiana. As a result, the NCSSSA was established to provide a unified state perspective at
the federal level to provide an on-going medium for problem-solving and to maintain an
open forum for the development of new policy.

Since its formation in 1952, the NCSSSA has worked closely with SSA and IRS to
address social security (and later Medicare) coverage and employment tax issues raised
by state and local employers and State Social Security Administrators throughout the
United States. The NCSSSA works with the federal officials to ensure that legislative and
regulatory changes address state and local concerns. The NCSSSA provides leadership to
state and local governments through accurate interpretation of federal laws and
regulations, communication of federal tax policy, and resolution of problems arising at
the state and local level. The NCSSSA hosts national workshops and annual meetings
where SSA and IRS officials address the concerns of state and local government
representatives in a face-to-face format. NCSSSA officials represent public sector
employers on various SSA and IRS committees and work groups.

Audits and Reviews of Public Employers

When the IRS or SSA conducts an audit or review of a public employer, it may contact
the State Administrator for that state to clarify the employer’s status, including:

 Whether the employees are covered under a Section 218 Agreement; and, if so,
 The specific exclusions (mandatory and optional) that are applicable to that entity
that must be taken into account during the audit or review, including any that are
unique to individual employees (for example, whether any employees are subject
to the Medicare continuing employment exemption).

For further information about the NCSSSA, contact your State Social Security
Administrator. (See the list at NCSSSA's website, www.ncsssa.org.)

9-3

- 118 -

Glossary 
   
Absolute Coverage Group (also called a “non-retirement coverage group) - for Section 
218 coverage purposes, a group of employees whose positions are not covered under a 
public retirement system; also referred to as a “non-retirement system coverage group” or 
a “Section 218(b)(5) coverage group”.  
 
Alternative Lookback Rule – An optional method for determining whether an employee 
can be treated as a qualified participant in a retirement plan for purposes of determining 
whether mandatory social security applies. Under this rule, an employer may treat an 
employee as a qualified participant in the first year of employment if it is reasonable to 
believe the employee will be a qualified participant on the last day of the plan year. An 
employer may treat an employee as a qualified participant in a calendar year if the 
employee was a qualified participant at the end of the previous plan year. See Section 
31.3121(b)(7)-2(d)(3), Employment Tax Regulations. 
 
Continuing Employment Exception – Provision for exclusion of an employee from 
Medicare tax and coverage for services of a state or local government employee who is 
not covered by a Section 218 Agreement and is a participant in a public retirement 
system and meets all of the following requirements: 

 The employee was performing regular and substantial services for remuneration for 
  the employer before April 1, 1986; 
 The employee was a bona fide employee on March 31, 1986; 
 The employment relationship was not entered into for purposes of avoiding the 
  Medicare tax; and 
 The employment relationship with the employer has not been terminated after March 
  31, 1986. 
 
Coverage Groups – Categories of state and local government employees with respect to  
a Section 218 Agreement. There are two types of coverage groups: 

    1. Absolute coverage groups, composed of employees in positions not covered 
    under a retirement system; and 
    2. Retirement system coverage groups, composed of employees in positions 
    covered by a retirement system. 

The Social Security Act gives each state the right, within the limits of state and federal 
laws, to decide which coverage groups are to be included under its Agreement and any 
modifications to the Agreement. 
 
Defined Benefit Plan – An employer plan that determines retirement benefits under a 
formula, generally based on age, years of service and salary level. 
 
                                         1

- 119 -

Defined Contribution Plan – An employer plan that provides for an individual account 
for each participant and for benefits based solely on the amount contributed to the 
participant’s account, and any income, expenses, gains, losses and forfeitures of accounts 
of other participants that may be allocated to the participant’s account. 
 
Earnings Record - The information maintained by the Social Security Administration 
for an individual indicating social security and Medicare covered wages and self-
employment income. Each individual’s record is accessed by social security number 
(SSN). 
 
Employee – Generally any individual who, under the usual common-law rules applicable 
in determining the employer-employee relationship, is subject to the employment tax 
requirements of Internal Revenue Code (IRC) 3121 and 3401. The term is defined for 
social security and Medicare purposes in Sections 210(j) and 218(b)(3) of the Social 
Security Act and IRC section 3121(d)  . 
 
Employer Identification Number (EIN)     – A unique nine-digit identification number 
assigned by IRS to state and local governments, businesses, and other entities for tax-
filing and reporting purposes, including withholding and paying FICA taxes. An entity 
can obtain an EIN by filing Form SS-4, Application for Employer Identification Number, 
with the IRS.  
 
Entity – A separate legal “person,” that is not an individual; includes a corporation, 
partnership, LLC, or a political unit, including a state, a political subdivision, a wholly-
owned instrumentality, a municipality, etc. 
 
Federal Insurance Contributions Act (FICA) – Federal statute providing for payroll 
tax deduction to fund social security and Medicare coverage. 
 
Federal Unemployment Tax Act (FUTA) – Federal statute imposing tax on employers 
in order to provide for payments of unemployment compensation to workers who have 
lost their jobs. States and political subdivisions of a state are exempt from paying FUTA, 
but under state unemployment law, most state and local government employees must be 
covered for state unemployment insurance.  
 
Fee-Based Public Official – A public official who receives and retains remuneration 
directly from members of the public; for example, a justice of the peace. An official who 
receives payment for services from government funds in the form of a wage or salary is 
not a fee-based public official, even if the compensation is called a fee. 
 
FICA - Federal Insurance Contributions Act; refers to social security and Medicare taxes 
withheld from wages to fund the social security system. 
 
FICA Replacement Plan – Alternate name for a public retirement system, as described 
in the regulations for section 3121(b)(7)(F). Refers to a pension, annuity, retirement, or 

                                            2

- 120 -

similar fund or system established by a state or political subdivision for the purpose of
providing retirement benefits to employees. See Public Retirement System.

FRA (Full Retirement Age) – The age at which unreduced social security benefits are
payable. Depending on the date of birth, an individual’s FRA ranges from 65 to 67.

Full Social Security – Coverage for both the Old-Age, Survivors, and Disability
Insurance (OASDI) program and Medicare Hospital Insurance (HI). Both the employer
and employee pay these taxes.

FUTA - Federal Unemployment Tax Act; refers to tax paid by employers to fund
unemployment insurance. Government employers are generally not subject to FUTA.

Governmental Function – Activity normally associated with the authority of
government, legislative, executive, judicial, such as the control and prevention of crime,
promoting the general welfare, and providing for public safety. Income derived from any
essential governmental function is exempt from federal income tax under IRC section
115.

Government Pension Offset (GPO) – A reduction in the social security benefits that
applies to individuals who (1) receive a government pension from work not covered for
social security and (2) are eligible for social security as a spouse or widow(er). Two-
thirds of the government pension offsets any spouse’s or widow(er)’s social security
benefit.

HI - Hospital Insurance (Medicare Part A).

Indian Tribal Government – The governing body of any federally recognized tribe,
band, community, village or group of Indians or Alaska Natives that is determined by the
Secretary of the Treasury, with the Secretary of the Interior, to exercise governmental
functions, under IRC section 7701(a)(40). Under IRC section 7871, an Indian tribal
government is treated as a state for certain purposes. Likewise, a subdivision of an Indian
tribal government is treated as a political subdivision of a state if that the subdivision has
been delegated the right to exercise one or more of the substantial governmental
functions of the Indian
Tribal government. However, a tribal government is not a “state” for purposes of Section
218 and is not eligible for a Section 218 Agreement.

Interstate Instrumentality – An independent legal entity organized by two or more
states to carry out one or more governmental functions. For purposes of a Section 218
Agreement, an interstate instrumentality has the status of a state.

IRC - Internal Revenue Code.

IRS - Internal Revenue Service.

- 121 -

Mandatory Exclusions – Categories of services that are not covered for social security 
under Sections 210 and 218 of the Social Security Act. These exclusions should not be 
confused with the the different set of exclusions that apply to those services not covered 
under the Section 210 mandatory social security provisions. 
 
Mandatory Medicare (HI) – Medicare tax and coverage not included as part of a 
Section 218 Agreement; imposed on all state and local government employees hired or 
rehired after March 31, 1986. 
 
Mandatory Social Security – Required social security coverage for state and local 
government employees who are not members of a public retirement system and who are 
not covered by a Section 218 Agreement; effective July 2, 1991. 
 
Medicare – Federally established health insurance program for people age 65 and older 
and certain people with disabilities. Part A (Hospital Insurance – HI) is financed through 
employer and employee taxes on covered wages/self-employment or by individual 
payment of monthly premiums. Part B (Supplemental Medical Insurance – SMI) is 
financed by individuals paying monthly premiums. 
 
Medicare Qualified Government Employment (MQGE) – Services of state and local 
government employees subject to Medicare tax but not to social security tax. 
 
Modification – An amendment to an original Section 218 Agreement to extend coverage 
to additional groups of employees or to implement changes in federal and state laws. 
Each modification, like the original Agreement, is a legally binding document. 
 
MQGE – Medicare Qualified Government Employment. 
 
NCSSSA (National Conference of State Social Security Administrators) – 
Professional association of State Social Security Administrators. These state officials are 
authorized by state law to administer Section 218 Agreements with the Social Security 
Administration and responsible for all other activities associated with federal and state 
laws addressing social security and Medicare coverage of state and local public 
employers. Additional duties of individual State Administrators vary from state to state. 
 
Non-Covered Employment   – Employment not covered by social security under the 
Social Security Act and the Internal Revenue Code.  
 
Nonproprietary Function – Governmental activity integral to the operation of a state or 
political subdivision, e.g., maintaining order or levying tax; distinguished from activity in 
the nature of a private or commercial venture). 
 
Old-Age, Survivors and Disability Insurance Program (OASDI) – Program 
administered by the Social Security Administration, providing monthly benefits to retired 
and disabled workers, their spouses and children, and to survivors of insured workers. 
 
                                      4

- 122 -

Optional Exclusions – Categories of services that, under social security law, may be 
included or excluded from coverage under a Section 218 Agreement at the option of the 
state. 
 
Parallel Social Security Office (PSSO) – The SSA office, usually located in the state 
capital, responsible for day-to-day negotiations with the states on state and local coverage 
issues. 
 
Pension Plan – A plan that provides systematically for the payment of definitely 
determinable benefits to employees over a period of years, usually for life, after 
retirement. Retirement benefits are generally determined by factors such as an 
employee’s years of service, age, and compensation. 
 
Political Subdivision – A separate legal entity of a state that has governmental powers 
and functions. Examples of political subdivisions include a county, city, town, village, 
school district and other similar governmental entities. 
 
Proprietary Function – Function of a governmental entity, such as a business venture 
for profit or in competition with private industry, or other discretionary act on behalf of 
citizens, that by its nature is not an integral governmental activity. 
 
PSSO    – Parallel Social Security Office. 
 
Public Retirement System   (– Also called a “FICA replacement plan”) A plan, fund or 
system established by a state or political subdivision for the purpose of providing 
retirement benefits to employees that meets the tests under IRC section 3121(b)(7)(F) and 
section 31.3121(b)(7)-2(e) of the Employment Tax Regulations. A public retirement 
system may be a pension, annuity, retirement, or similar system. For this purpose, it is 
irrelevant whether a public retirement system is a “qualified plan” within the meaning of 
the Employees’ Retirement Income Security Act of 1974 (ERISA).  
 
Qualified Participant – An individual who is (or has been) an actual participant in a 
public retirement system and who has a total accrued benefit under the retirement system 
that meets the minimum retirement benefit requirements of IRC section 3121(b)(7) and 
regulations thereunder. Section 31.3121(b)(7)-2(d) of the Employment Tax Regulations 
establishes standards for defined contribution retirement systems. See Rev. Proc. 91-40 in 
the Appendix, for safe-harbor formulas for defined benefit retirement systems.  
 
Retirement System – See Public Retirement System. 
 
Retirement System Coverage Group – A group of employees whose positions are 
covered under a retirement system by referendum under the provisions of Section 218(d). 
The retirement system does not need to meet the tests under IRC Section 3121(b)(7)(F) 
and Section 31.3121(b)(7)-2(e) of the Employment Tax Regulations to secure coverage 
under a Section 218 Agreement. 
 
                                           5

- 123 -

SECA - Self Employment Contributions Act.

Section 218 Agreement – Voluntary agreement between a state and the Commissioner of
Social Security (prior to March 31, 1995, the Secretary of Health and Human Services);
allows states to voluntarily provide social security and Medicare or Medicare-only
coverage for the services of state and local government employees. The Section 218
Agreements cover positions, not individuals; if the position is covered under the
agreement, then any employee filling that position is subject to FICA taxes.

Self-Employment Contributions Act (SECA) – Federal statute imposing tax on the net
earnings of self-employed individuals, to fund social security and Medicare.

Social Security Act (Act) – Federal statute providing Old-Age, Survivors and Disability
Insurance (OASDI) and Hospital Insurance (Medicare), as well as other benefits.

Social Security Administration (SSA) – An independent agency in the executive branch
of the federal government responsible for administering the Old-Age, Survivors and
Disability (OASDI) insurance program and for determining eligibility for Medicare
benefits.

Social Security Statement – Annual statement issued by SSA to workers, with
information about their individual social security and Medicare earnings as reported by
employers, with estimates of the different types of benefits for which they and their
family may qualify.

Social Security Number (SSN) – The identification number assigned by the Social
Security Administration to individuals. It must always be used in reporting an
individual’s earnings and in correspondence regarding specific employees. Each
individual’s earnings record is maintained under this number.

State – For purposes of a Section 218 Agreement, one of the fifty states, Puerto Rico, the
Virgin Islands and interstate instrumentalities. The term, for this purpose, does not
include the District of Columbia, Guam or American Samoa.

State Social Security Administrator (SSSA) – The principal state official authorized by
state law to administer the Section 218 Agreement with the Social Security
Administration, responsible for all other activities associated with applicable federal and
state laws addressing social security and Medicare by state and local public employers in
the state.

Taxpayer Identification Number (TIN) – The number used to identify employee (SSN)
or employer (EIN) for tax reporting purposes.

Wage Base – The maximum amount of wages of each worker that is subject to the
OASDI portion of social security tax in any calendar year. The social security wage base
is adjusted annually. There has been no wage base limit for Medicare since 1994.

- 124 -

Wholly-Owned Instrumentality – An entity created by or pursuant to state statute to 
carry on a governmental function of a state or political subdivision. It is an independent 
legal entity with the power to hire, supervise, and discharge its employees and, generally, 
it may sue and be sued, may enter into contracts, and may hold or transfer property in its 
own name. Normally a wholly-owned instrumentality of a state or political subdivision 
does not exercise governmental powers, e.g., the police power, the taxing power and the 
power of eminent domain. An instrumentality can also be created by a state and a 
political subdivision, by more than one political subdivision, or by more than one state. 
See “Interstate Instrumentality.” 
 
Windfall Elimination Provision (WEP) – A social security benefit formula that may be 
applied to workers who receive both a social security retirement or disability benefit 
AND a pension based on work not covered under social security. The WEP benefit 
formula produces a lower social security retirement or disability insurance benefit.  
 
                                       7

- 125 -

Appendix 

The following pages contain important documents referred to in the text. Many other 
related documents may be found at the web sites www.irs.gov and www.ssa.gov. 

           viii

- 126 -

VOLUNTARY AGREEMENTS FOR COVERAGE OF STATE AND LOCAL 
EMPLOYEES  
                            Purpose of Agreement  
SEC. 218. [42 U.S.C. 418] (a)(1) The Commissioner of Social Security shall, at the 
request of any state, enter into an agreement with such state for the purpose of extending 
the insurance system established by this title to services performed by individuals as 
employees of such state or any political subdivision thereof. Each such agreement shall 
contain such provisions, not inconsistent with the provisions of this section, as the state 
may request.  
(2) Notwithstanding section 210(a), for the purposes of this title the term "employment" 
includes any service included under an agreement entered into under this section.  
                                        Definitions  
(b) For the purposes of this section--  
(1) The term "State" does not include the District of Columbia, Guam, or 
American Samoa.  
(2) The term "political subdivision" includes an instrumentality of (A) a State, (B) 
one or more political subdivisions of a State, or (C) a State and one or more of its 
political subdivisions.  
(3) The term "employee" includes an officer of a State or political subdivision.  
(4) The term "retirement system" means a pension, annuity, retirement, or similar 
fund or system established by a State or by a political subdivision thereof.  
(5) The term "coverage group" means (A) employees of the State other than those 
engaged in performing service in connection with a proprietary function; (B) 
employees of a political subdivision of a State other than those engaged in 
performing service in connection with a proprietary function; (C) employees of a 
State engaged in performing service in connection with a single proprietary 
function; or (D) employees of a political subdivision of a State engaged in 
performing service in connection with a single proprietary function. If under the 
preceding sentence an employee would be included in more than one coverage 
group by reason of the fact that he performs service in connection with two or 
more proprietary functions or in connection with both a proprietary function and a 
nonproprietary function, he shall be included in only one such coverage group. 
The determination of the coverage group in which such employee shall be 
included shall be made in such manner as may be specified in the agreement. 
Persons employed under section 709 of title 32, United States Code, who elected 
under section  6of the National Guard Technicians Act of 1968 to remain covered 
by an employee retirement system of, or plan sponsored by, a State or the 
Commonwealth of Puerto Rico, shall, for the purposes of this Act, be employees 
of the State or the Commonwealth of Puerto Rico and (notwithstanding the 
preceding provisions of this paragraph), shall be deemed to be a separate coverage 
group. For purposes of this section, individuals employed pursuant to an 
agreement, entered into pursuant to section 205 of the Agricultural Marketing Act 
of 1946 (7 U.S.C. 1624) or section 14 of the Perishable Agricultural Commodities 
Act, 1930 (7 U.S.C. 499n), between a State and the United States Department of 
Agriculture to perform services as inspectors of agricultural products may be 

                                          ix

- 127 -

deemed, at the option of the State, to be employees of the State and 
(notwithstanding the preceding provisions of this paragraph) shall be deemed to 
be a separate coverage group.  
                                 Services Covered  
(c)(1) An agreement under this section shall be applicable to any one or more coverage 
groups designated by the State.  
(2) In the case of each coverage group to which the agreement applies, the agreement 
must include all services (other than services excluded by or pursuant to subsection (d) or 
paragraph (3), (5), or (6) of this subsection) performed by individuals as members of such 
group.  
(3) Such agreement shall, if the State requests it, exclude (in the case of any coverage 
group) any one or more of the following:  
(A) All services in any class or classes of (i) elective positions, (ii) part-time 
positions, or (iii) positions the compensation for which is on a fee basis;  
(B) All services performed by individuals as members of a coverage group in 
positions covered by a retirement system on the date such agreement is made 
applicable to such coverage group, but only in the case of individuals who, on 
such date (or, if later, the date on which they first occupy such positions), are not 
eligible to become members of such system and whose services in such positions 
have not already been included under such agreement pursuant to subsection 
(d)(3).  
(4) The Commissioner of Social Security shall, at the request of any State, modify the 
agreement with such State so as to (A) include any coverage group to which the 
agreement did not previously apply, or (B) include, in the case of any coverage group to 
which the agreement applies, services previously excluded from the agreement; but the 
agreement as so modified may not be inconsistent with the provisions of this section 
applicable in the case of an original agreement with a State. A modification of an 
agreement pursuant to clause (B) of the preceding sentence may apply to individuals to 
whom paragraph (3)(B) is applicable (whether or not the previous exclusion of the 
service of such individuals was pursuant to such paragraph), but only if such individuals 
are, on the effective date specified in such modification, ineligible to be members of any 
retirement system or if the modification with respect to such individuals is pursuant to 
subsection (d)(3).  
(5) Such agreement shall, if the State requests it, exclude (in the case of any coverage 
group) any agricultural labor, or service performed by a student, designated by the State. 
This paragraph shall apply only with respect to service which is excluded from 
employment by any provision of section 210(a)  other than paragraph (7) of such section 
and service the remuneration for which is excluded from wages by subparagraph (B) of 
section 209(a)(7).  
(6) Such agreement shall exclude--  
(A) service performed by an individual who is employed to relieve him from 
unemployment,  
(B) service performed in a hospital, home, or other institution by a patient or 
inmate thereof,  
(C) covered transportation service (as determined under section 210(k)),  

                                            x

- 128 -

(D) service (other than agricultural labor or service performed by a student) which 
is excluded from employment by any provision of section 210(a) other than 
paragraph (7) of such section,  
(E) service performed by an individual as an employee serving on a temporary 
basis in case of fire, storm, snow, earthquake, flood, or other similar emergency, 
and  
(F) service described in section       210(a)(7)(F) which is included as "employment" 
under section 210(a).  
(7) No agreement may be made applicable (either in the original agreement or by any 
modification thereof) to service performed by any individual to whom paragraph (3)(B) is 
applicable unless such agreement provides (in the case of each coverage group involved) 
either that the service of any individual to whom such paragraph is applicable and who is 
a member of such coverage group shall continue to be covered by such agreement in case 
he thereafter becomes eligible to be a member of a retirement system, or that such service 
shall cease to be so covered when he becomes eligible to be a member of such a system 
(but only if the agreement is not already applicable to such system pursuant to subsection 
(d)(3)), whichever may be desired by the State.  
(8)(A) Notwithstanding any other provision of this section, the agreement with any State 
entered into under this section may at the option of the State be modified at any time to 
exclude service performed by election officials or election workers if the remuneration 
paid in a calendar year for such service is less than $1,000 with respect to service 
performed during any calendar year commencing on or after January 1, 1995, ending on 
or before December 31, 1999, and the adjusted amount determined under subparagraph 
(B) for any calendar year commencing on or after January 1, 2000, with respect to service 
performed during such calendar year. Any modification of an agreement pursuant to this 
paragraph shall be effective with respect to services performed in and after the calendar 
year in which the modification is mailed or delivered by other means to the 
Commissioner of Social Security.  
(B) For each year after 1999, the Commissioner of Social Security shall adjust the 
amount referred to in subparagraph (A) at the same time and in the same manner as is 
provided under section 215(a)(1)(B)(ii) with respect to the amounts referred to in section 
215(a)(1)(B)(i), except that--  
(i) for purposes of this subparagraph, 1997 shall be substituted for the calendar 
year referred to in section 215(a)(1)(B)(ii)(II), and  
(ii) such amount as so adjusted, if not a multiple of $100, shall be rounded to the 
next higher multiple of $100 where such amount is a multiple of $50 and to the 
nearest multiple of $100 in any other case.  
The Commissioner of Social Security shall determine and publish in the Federal Register 
each adjusted amount determined under this subparagraph not later than November 1 
preceding the year for which the adjustment is made.  
                       Positions Covered By Retirement Systems  
(d)(1) No agreement with any State may be made applicable (either in the original 
agreement or by any modification thereof) to any service performed by employees as 
members of any coverage group in positions covered by a retirement system either (A) on 
the date such agreement is made applicable to such coverage group, or (B) on the date of 
enactment of the succeeding paragraph of this subsection (except in the case of positions 

                                         xi

- 129 -

which are, by reason of action by such State or political subdivision thereof, as may be 
appropriate, taken prior to the date of enactment of such succeeding paragraph, no longer 
covered by a retirement system on the date referred to in clause (A), and except in the 
case of positions excluded by paragraph (5)(A)). The preceding sentence shall not be 
applicable to any service performed by an employee as a member of any coverage group 
in a position (other than a position excluded by paragraph (5)(A)) covered by a retirement 
system on the date an agreement is made applicable to such coverage group if, on such 
date (or, if later, the date on which such individual first occupies such position), such 
individual is ineligible to be a member of such system.  
(2) It is hereby declared to be the policy of the Congress in enacting the succeeding 
paragraphs of this subsection that the protection afforded employees in positions covered 
by a retirement system on the date an agreement under this section is made applicable to 
service performed in such positions, or receiving periodic benefits under such retirement 
system at such time, will not be impaired as a result of making the agreement so 
applicable or as a result of legislative enactment in anticipation thereof.  
(3) Notwithstanding paragraph (1), an agreement with a State may be made applicable 
(either in the original agreement or by any modification thereof) to service performed by 
employees in positions covered by a retirement system (including positions specified in 
paragraph (4) but not including positions excluded by or pursuant to paragraph (5)), if the 
governor of the State, or an official of the State designated by him for the purpose, 
certifies to the Commissioner of Social Security that the following conditions have been 
met:  
      (A) A referendum by secret written ballot was held on the question of whether 
      service in positions covered by such retirement system should be excluded from 
      or included under an agreement under this section;  
      (B) An opportunity to vote in such referendum was given (and was limited) to 
      eligible employees;  
      (C) Not less than ninety days' notice of such referendum was given to all such 
      employees;  
      (D) Such referendum was conducted under the supervision of the governor or an 
      agency or individual designated by him; and  
      (E) A majority of the eligible employees voted in favor of including service in 
      such positions under an agreement under this section.  
An employee shall be deemed an "eligible employee" for purposes of any referendum 
with respect to any retirement system if, at the time such referendum was held, he was in 
a position covered by such retirement system and was a member of such system, and if he 
was in such a position at the time notice of such referendum was given as required by 
clause (C) of the preceding sentence; except that he shall not be deemed an "eligible 
employee" if, at the time the referendum was held, he was in a position to which the State 
agreement already applied, or if he was in a position excluded by or pursuant to 
paragraph (5). No referendum with respect to a retirement system shall be valid for 
purposes of this paragraph unless held within the two-year period which ends on the date 
of execution of the agreement or modification which extends the insurance system 
established by this title to such retirement system, nor shall any referendum with respect 
to a retirement system be valid for purposes of this paragraph if held less than one year 
after the last previous referendum held with respect to such retirement system.  

                             xii

- 130 -

(4) For the purposes of subsection (c) of this section, the following employees shall be 
deemed to be a separate coverage group--  
(A) all employees in positions which were covered by the same retirement system 
on the date the agreement was made applicable to such system (other than 
employees to whose services the agreement already applied on such date);  
(B) all employees in positions which became covered by such system at any time 
after such date; and  
(C) all employees in positions which were covered by such system at any time 
before such date and to whose services the insurance system established by this 
title has not been extended before such date because the positions were covered 
by such retirement system (including employees to whose services the agreement 
was not applicable on such date because such services were excluded pursuant to 
subsection (c)(3)(B)).  
(5)(A) Nothing in paragraph (3) of this subsection shall authorize the extension of the 
insurance system established by this title to service in any policeman's or fireman's 
position.  
(B) At the request of the State, any class or classes of positions covered by a retirement 
system which may be excluded from the agreement pursuant to paragraph (3) or (5) of 
subsection (c), and to which the agreement does not already apply, may be excluded from 
the agreement at the time it is made applicable to such retirement system; except that, 
notwithstanding the provisions of paragraph (3)(B) of such subsection, such exclusion 
may not include any services to which such paragraph (3)(B) is applicable. In the case of 
any such exclusion, each such class so excluded shall, for purposes of this subsection, 
constitute a separate retirement system in case of any modification of the agreement 
thereafter agreed to.  
(6)(A) If a retirement system covers positions of employees of the State and positions of 
employees of one or more political subdivisions of the State, or covers positions of 
employees of two or more political subdivisions of the State, then, for purposes of the 
preceding paragraphs of this subsection, there shall, if the State so desires, be deemed to 
be a separate retirement system with respect to any one or more of the political 
subdivisions concerned and, where the retirement system covers positions of employees 
of the State, a separate retirement system with respect to the State or with respect to the 
State and any one or more of the political subdivisions concerned. Where a retirement 
system covering positions of employees of a State and positions of employees of one or 
more political subdivisions of the State, or covering positions of employees of two or 
more political subdivisions of the State, is not divided into separate retirement systems 
pursuant to the preceding sentence or pursuant to subparagraph (C), then the State may, 
for purposes of subsection (e) only, deem the system to be a separate retirement system 
with respect to any one or more of the political subdivisions concerned and, where the 
retirement system covers positions of employees of the State, a separate retirement 
system with respect to the State or with respect to the State and any one or more of the 
political subdivisions concerned.  
(B) If a retirement system covers positions of employees of one or more institutions of 
higher learning, then, for purposes of such preceding paragraphs there shall, if the State 
so desires, be deemed to be a separate retirement system for the employees of each such 
institution of higher learning. For the purposes of this subparagraph, the term "institutions 

                                            xiii

- 131 -

of higher learning" includes junior colleges and teachers colleges. If a retirement system 
covers positions of employees of a hospital, which is an integral part of a political 
subdivision, then, for purposes of the preceding paragraphs there shall, if the State so 
desires, be deemed to be a separate retirement system for the employees of such hospital.  
(C) For the purposes of this subsection, any retirement system established by the State of 
Alaska, California, Connecticut, Florida, Georgia, Illinois, Massachusetts, Minnesota, 
Nevada, New Jersey, New Mexico, New York, North Dakota, Pennsylvania, Rhode 
Island, Tennessee, Texas, Vermont, Washington, Wisconsin, or Hawaii, or any political 
subdivision of any such State, which, on, before, or after the date of enactment of this 
subparagraph, is divided into two divisions or parts, one of which is composed of 
positions of members of such system who desire coverage under an agreement under this 
section and the other of which is composed of positions of members of such system who 
do not desire such coverage, shall, if the State so desires and if it is provided that there 
shall be included in such division or part composed of members desiring such coverage 
the positions of individuals who become members of such system after such coverage is 
extended, be deemed to be a separate retirement system with respect to each such 
division or part. If, in the case of a separate retirement system which is deemed to exist 
by reason of subparagraph (A) and which has been divided into two divisions or parts 
pursuant to the first sentence of this subparagraph, individuals become members of such 
system by reason of action taken by a political subdivision after coverage under an 
agreement under this section has been extended to the division or part thereof composed 
of positions of individuals who desire such coverage, the positions of such individuals 
who become members of such retirement system by reason of the action so taken shall be 
included in the division or part of such system composed of positions of members who do 
not desire such coverage if (i) such individuals, on the day before becoming such 
members, were in the division or part of another separate retirement system (deemed to 
exist by reason of subparagraph (A)) composed of positions of members of such system 
who do not desire coverage under an agreement under this section, and (ii) all of the 
positions in the separate retirement system of which such individuals so become members 
and all of the positions in the separate retirement system referred to in clause (i) would 
have been covered by a single retirement system if the State had not taken action to 
provide for separate retirement systems under this paragraph.  
(D)(i) The position of any individual which is covered by any retirement system to which 
subparagraph (C) is applicable shall, if such individual is ineligible to become a member 
of such system on August 1, 1956, or, if later, the day he first occupies such position, be 
deemed to be covered by the separate retirement system consisting of the positions of 
members of the division or part who do not desire coverage under the insurance system 
established under this title.  
(ii) Notwithstanding clause (i), the State may, pursuant to subsection (c)(4)(B) and 
subject to the conditions of continuation or termination of coverage provided for in 
subsection (c)(7), modify its agreement under this section to include services performed 
by all individuals described in clause (i) other than those individuals to whose services 
the agreement already applies. Such individuals shall be deemed (on and after the 
effective date of the modification) to be in positions covered by the separate retirement 
system consisting of the positions of members of the division or part who desire coverage 
under the insurance system established under this title.  

                                 xiv

- 132 -

(E) An individual who is in a position covered by a retirement system to which 
subparagraph (C) is applicable and who is not a member of such system but is eligible to 
become a member thereof shall, for purposes of this subsection (other than paragraph 
(8)), be regarded as a member of such system; except that, in the case of any retirement 
system a division or part of which is covered under the agreement (either in the original 
agreement or by a modification thereof), which coverage is agreed to prior to 1960, the 
preceding provisions of this subparagraph shall apply only if the State so requests and 
any such individual referred to in such preceding provisions shall, if the State so requests, 
be treated, after division of the retirement system pursuant to such subparagraph (C), the 
same as individuals in positions referred to in subparagraph (F).  
(F) In the case of any retirement system divided pursuant to subparagraph (C), the 
position of any member of the division or part composed of positions of members who do 
not desire coverage may be transferred to the separate retirement system composed of 
positions of members who desire such coverage if it is so provided in a modification of 
such agreement which is mailed, or delivered by other means, to the Commissioner of 
Social Security prior to 1970 or, if later, the expiration of two years after the date on 
which such agreement, or the modification thereof making the agreement applicable to 
such separate retirement system, as the case may be, is agreed to, but only if, prior to 
such modification or such later modification, as the case may be, the individual 
occupying such position files with the State a written request for such transfer. 
Notwithstanding subsection (e)(1), any such modification or later modification, providing 
for the transfer of additional positions within a retirement system previously divided 
pursuant to subparagraph (C) to the separate retirement system composed of positions of 
members who desire coverage, shall be effective with respect to services performed after 
the same effective date as that which was specified in the case of such previous division.  
(G) For the purposes of this subsection, in the case of any retirement system of the State 
of Florida, Georgia, Minnesota, North Dakota, Pennsylvania, Washington, or Hawaii 
which covers positions of employees of such State who are compensated in whole or in 
part from grants made to such State under title III, there shall be deemed to be, if such 
State so desires, a separate retirement system with respect to any of the following:  
(i) the positions of such employees;  
(ii) the positions of all employees of such State covered by such retirement system 
who are employed in the department of such State in which the employees 
referred to in clause (i) are employed; or  
(iii) employees of such State covered by such retirement system who are 
employed in such department of such State in positions other than those referred 
to in clause (i).  
(7) The certification by the governor (or an official of the State designated by him for the 
purpose) required under paragraph (3) shall be deemed to have been made, in the case of 
a division or part (created under subparagraph (C) of paragraph (6) or the corresponding 
provision of prior law) consisting of the positions of members of a retirement system who 
desire coverage under the agreement under this section, if the governor (or the official so 
designated) certifies to the Commissioner of Social Security that--  
(A) an opportunity to vote by written ballot on the question of whether they wish 
to be covered under an agreement under this section was given to all individuals 
who were members of such system at the time the vote was held;  

                                        xv

- 133 -

(B) not less than ninety days' notice of such vote was given to all individuals who 
were members of such system on the date the notice was issued;  
(C) the vote was conducted under the supervision of the governor or an agency or 
individual designated by him; and  
(D) such system was divided into two parts or divisions in accordance with the 
provisions of subparagraphs (C) and (D) of paragraph (6) or the corresponding 
provision of prior law.  
For purposes of this paragraph, an individual in a position to which the State agreement 
already applied or in a position excluded by or pursuant to paragraph (5) shall not be 
considered a member of the retirement system.  
(8)(A) Notwithstanding paragraph (1), if under the provisions of this subsection an 
agreement is, after December 31, 1958, made applicable to service performed in positions 
covered by a retirement system, service performed by an individual in a position covered 
by such a system may not be excluded from the agreement because such position is also 
covered under another retirement system.  
(B) Subparagraph (A) shall not apply to service performed by an individual in a position 
covered under a retirement system if such individual, on the day the agreement is made 
applicable to service performed in positions covered by such retirement system, is not a 
member of such system and is a member of another system.  
(C) If an agreement is made applicable, prior to 1959, to service in positions covered by 
any retirement system, the preceding provisions of this paragraph shall be applicable in 
the case of such system if the agreement is modified to so provide.  
(D) Except in the case of State agreements modified as provided in subsection (l) and 
agreements with interstate instrumentalities, nothing in this paragraph shall authorize the 
application of an agreement to service in any policeman's or fireman's position.  
           Effective Date of Agreement  
(e)(1) Any agreement or modification of an agreement under this section shall be 
effective with respect to services performed after an effective date specified in such 
agreement or modification; except that such date may not be earlier than the last day of 
the sixth calendar year preceding the year in which such agreement or modification, as 
the case may be, is mailed or delivered by other means to the Commissioner of Social 
Security.  
(2) In the case of service performed by members of any coverage group--  
(A) to which an agreement under this section is made applicable, and  
(B) with respect to which the agreement, or modification thereof making the 
agreement so applicable, specifies an effective date earlier than the date of 
execution of such agreement and such modification, respectively,  
the agreement shall, if so requested by the State, be applicable to such services (to the 
extent the agreement was not already applicable) performed before such date of execution 
and after such effective date by any individual as a member of such coverage group if he 
is such a member on a date, specified by the State, which is earlier than such date of 
execution, except that in no case may the date so specified be earlier than the date such 
agreement or such modification, as the case may be, is mailed, or delivered by other 
means, to the Commissioner of Social Security.  
(3) Notwithstanding the provisions of paragraph (2) of this subsection, in the case of 
services performed by individuals as members of any coverage group to which an 

                                            xvi

- 134 -

agreement under this section is made applicable, and with respect to which there were 
timely paid in good faith to the Secretary of the Treasury amounts equivalent to the sum 
of the taxes which would have been imposed by sections 3101 and 3111 of the Internal 
Revenue Code of 1986 had such services constituted employment for purposes of chapter 
21 of such Code at the time they were performed, and with respect to which refunds were 
not obtained, such individuals may, if so requested by the State, be deemed to be 
members of such coverage group on the date designated pursuant to paragraph (2).  
                            Duration of Agreement  
(f) No agreement under this section may be terminated, either in its entirety or with 
respect to any coverage group, on or after the date of the enactment of the Social Security 
Amendments of 1983.  
                     Instrumentalities of Two or More States  
(g)(1) The Commissioner of Social Security may, at the request of any instrumentality of 
two or more States, enter into an agreement with such instrumentality for the purpose of 
extending the insurance system established by this title to services performed by 
individuals as employees of such instrumentality. Such agreement, to the extent 
practicable, shall be governed by the provisions of this section applicable in the case of 
an agreement with a State.  
(2) In the case of any instrumentality of two or more States, if--  
(A) employees of such instrumentality are in positions covered by a retirement 
system of such instrumentality or of any of such States or any of the political 
subdivisions thereof, and  
(B) such retirement system is (on, before, or after the date of enactment of this 
paragraph) divided into two divisions or parts, one of which is composed of 
positions of members of such system who are employees of such instrumentality 
and who desire coverage under an agreement under this section and the other of 
which is composed of positions of members of such system who are employees of 
such instrumentality and who do not desire such coverage, and  
(C) it is provided that there shall be included in such division or part composed of 
the positions of members desiring such coverage the positions of employees of 
such instrumentality who become members of such system after such coverage is 
extended,  
then such retirement system shall, if such instrumentality so desires, be deemed to be a 
separate retirement system with respect to each such division or part. An individual who 
is in a position covered by a retirement system divided pursuant to the preceding sentence 
and who is not a member of such system but is eligible to become a member thereof 
shall, for purposes of this subsection, be regarded as a member of such system. Coverage 
under the agreement of any such individual shall be provided under the same conditions, 
to the extent practicable, as are applicable in the case of the States to which the 
provisions of subsection (d)(6)(C) apply. The position of any employee of any such 
instrumentality which is covered by any retirement system to which the first sentence of 
this paragraph is applicable shall, if such individual is ineligible to become a member of 
such system on the date of enactment of this paragraph or, if later, the day he first 
occupies such position, be deemed to be covered by the separate retirement system 
consisting of the positions of members of the division or part who do not desire coverage 

                            xvii

- 135 -

under the insurance system established under this title. Services in positions covered by a 
separate retirement system created pursuant to this subsection (and consisting of the 
positions of members who desire coverage under an agreement under this section) shall 
be covered under such agreement on compliance, to the extent practicable, with the same 
conditions as are applicable to coverage under an agreement under this section of services 
in positions covered by a separate retirement system created pursuant to subparagraph (C) 
of subsection (d)(6) or the corresponding provision of prior law (and consisting of the 
positions of members who desire coverage under such agreement).  
(3) Any agreement with any instrumentality of two or more States entered into pursuant 
to this Act may, notwithstanding the provisions of subsection (d)(5)(A) and the 
references thereto in subsections (d)(1) and (d)(3), apply to service performed by 
employees of such instrumentality in any policeman's or fireman's position covered by a 
retirement system, but only upon compliance, to the extent practicable, with the 
requirements of subsection (d)(3). For the purpose of the preceding sentence, a retirement 
system, which covers positions of policemen or firemen or both, and other positions, 
shall, if the instrumentality concerned so desires, be deemed to be a separate retirement 
system with respect to the positions of such policemen or firemen, or both, as the case 
may be.  
                               Delegation of Functions  
(h) The Commissioner of Social Security is authorized, pursuant to agreement with the 
head of any federal agency, to delegate any of the Commissioner's functions under this 
section to any officer or employee of such agency and otherwise to utilize the services 
and facilities of such agency in carrying out such functions, and payment therefore shall 
be in advance or by way of reimbursement, as may be provided in such agreement.  
                               Wisconsin Retirement Fund  
(i)(1) Notwithstanding paragraph (1) of subsection (d), the agreement with the State of 
Wisconsin may, subject to the provisions of this subsection, be modified so as to apply to 
service performed by employees in positions covered by the Wisconsin retirement fund 
or any successor system.  
(2) All employees in positions covered by the Wisconsin retirement fund at any time on 
or after January 1, 1951, shall, for the purposes of subsection (c) only, be deemed to be a 
separate coverage group; except that there shall be excluded from such separate coverage 
group all employees in positions to which the agreement applies without regard to this 
subsection.  
(3) The modification pursuant to this subsection shall exclude (in the case of employees 
in the coverage group established by paragraph (2) of this subsection) service performed 
by any individual during any period before he is included under the Wisconsin retirement 
fund.  
(4) The modification pursuant to this subsection shall, if the State of Wisconsin requests 
it, exclude (in the case of employees in the coverage group established by paragraph (2) 
of this subsection) all service performed in policemen's positions, all service performed in 
firemen's positions, or both.  
             Certain Positions No Longer Covered By Retirement Systems  
(j) Notwithstanding subsection (d), an agreement with any State entered into under this 
section prior to the date of the enactment of this subsection may, prior to January 1, 1958, 

                               xviii

- 136 -

be modified pursuant to subsection (c)(4) so as to apply to services performed by 
employees, as members of any coverage group to which such agreement already applies 
(and to which such agreement applied on such date of enactment), in positions (1) to 
which such agreement does not already apply, (2) which were covered by a retirement 
system on the date such agreement was made applicable to such coverage group, and (3) 
which, by reason of action by such State or political subdivision thereof, as may be 
appropriate, taken prior to the date of the enactment of this subsection, are no longer 
covered by a retirement system on the date such agreement is made applicable to such 
services.  
                        Certain Employees of the State of Utah  
(k) Notwithstanding the provisions of subsection (d), the agreement with the State of 
Utah entered into pursuant to this section may be modified pursuant to subsection (c)(4) 
so as to apply to services performed for any of the following, the employees performing 
services for each of which shall constitute a separate coverage group: Weber Junior 
College, Carbon Junior College, Dixie Junior College, Central Utah Vocational School, 
Salt Lake Area Vocational School, Center for the Adult Blind, Union High School 
(Roosevelt, Utah), Utah High School Activities Association, State Industrial School, 
State Training School, State Board of Education, and Utah School Employees Retirement 
Board. Any modification agreed to prior to January 1, 1955, may be made effective with 
respect to services performed by employees as members of any of such coverage groups 
after an effective date specified therein, except that in no case may any such date be 
earlier than December 31, 1950. Coverage provided for in this subsection shall not be 
affected by a subsequent change in the name of a group.  
                        Policemen and Firemen in Certain States  
(l) Any agreement with a State entered into pursuant to this section may, notwithstanding 
the provisions of subsection (d)(5)(A) and the references thereto in subsections (d)(1) and 
(d)(3), be modified pursuant to subsection (c)(4) to apply to service performed by 
employees of such State or any political subdivision thereof in any policeman's or 
fireman's position covered by a retirement system in effect on or after the date of the 
enactment of this subsection, but only upon compliance with the requirements of 
subsection (d)(3). For the purposes of the preceding sentence, a retirement system which 
covers positions of policemen or firemen, or both, and other positions shall, if the State 
concerned so desires, be deemed to be a separate retirement system with respect to the 
positions of such policemen or firemen, or both, as the case may be.  
           Positions Compensated Solely on a Fee Basis  
(m)(1) Notwithstanding any other provision in this section, an agreement entered into 
under this section may be made applicable to service performed after 1967 in any class or 
classes of positions compensated solely on a fee basis to which such agreement did not 
apply prior to 1968 only if the State specifically requests that its agreement be made 
applicable to such service in such class or classes of positions.  
(2) Notwithstanding any other provision in this section, an agreement entered into under 
this section may be modified, at the option of the State, at any time after 1967, so as to 
exclude services performed in any class or classes of positions compensation for which is 
solely on a fee basis.  

                          xix

- 137 -

(3) Any modification made under this subsection shall be effective with respect to 
services performed after the last day of the calendar year in which the modification is 
mailed or delivered by other means to the Commissioner of Social Security.  
(4) If any class or classes of positions have been excluded from coverage under the State 
agreement by a modification agreed to under this subsection, the Commissioner of Social 
Security and the State may not thereafter modify such agreement so as to again make the 
agreement applicable with respect to such class or classes of positions.  
(n)(1) The Commissioner of Social Security shall, at the request of any State, enter into 
or modify an agreement with such State under this section for the purpose of extending 
the provisions of title XVIII, and sections 226 and 226A, to services performed by 
employees of such State or any political subdivision thereof who are described in 
paragraph (2).  
(2) This subsection shall apply only with respect to employees--  
(A) whose services are not treated as employment as that term applies under 
section 210(p)   by reason of paragraph (3) of such section; and  
(B) who are not otherwise covered under the State's agreement under this section.  
(3) For purposes of sections 226 and 226A of this Act, services covered under an 
agreement pursuant to this subsection shall be treated as "medicare qualified government 
employment".  
(4) Except as otherwise provided in this subsection, the provisions of this section shall 
apply with respect to services covered under the agreement pursuant to this subsection.  

                  xx

- 138 -

  Amended Section 530 of the Revenue Act of 1978 
                                                                  
 (a) Termination of Certain Employment Tax Liability.  
  (1) In general. 

  - If -  

          (A) for purposes of employment taxes, the 
          taxpayer did not treat an individual as an 
          employee for any period, and  

          (B) in the case of periods after December 
          31, 1978, all federal tax returns (including 
          information returns) required to be filed by 
          the taxpayer with respect to such individual 
          for such period are filed on a basis 
          consistent with the taxpayer's treatment of 
          such individual as not being an employee, 

  then, for purposes of applying such taxes for such period 
  with respect to the taxpayer, the individual shall be deemed 
  not to be an employee unless the taxpayer had no 
  reasonable basis for not treating such individual as an 
  employee.  

  (2) Statutory standards providing one method of satisfying the 
  requirements of paragraph (1). 

  - For purposes of paragraph (1), a taxpayer shall in any case 
  be treated as having a reasonable basis for not treating an 
  individual as an employee for a period if the taxpayer's 
  treatment of such individual for such period was in 
  reasonable reliance on any of the following:  

          (A) judicial precedent, published rulings, 
          technical advice with respect to the 
          taxpayer, or a letter ruling to the taxpayer;  

          (B) a past Internal Revenue Service audit of 
          the taxpayer in which there was no 
          assessment attributable to the treatment (for 
          employment tax purposes) of the individuals 
          holding positions substantially similar to the 
          position held by this individual; or  

                                   xxi

- 139 -

                  (C) long-standing recognized practice of a 
                  significant segment of the industry in which 
                  such individual was engaged.  

(3) Consistency required in the case of prior tax treatment. 

- Paragraph (1) shall not apply with respect to the treatment 
of any individual for employment tax purposes for any 
period ending after December 31, 1978, if the taxpayer (or 
a predecessor) has treated any individual holding a 
substantially similar position as an employee for purposes 
of the employment taxes for any period beginning after 
December 31, 1977.  

(4) Refund or credit of overpayment. 

- If refund or credit of any overpayment of an employment 
tax resulting from the application of paragraph (1) is not 
barred on the date of the enactment of this Act (Nov. 6, 
1978) by any law or rule of law, the period for filing a 
claim for refund or credit of such overpayment (to the 
extent attributable to the application of paragraph (1)) shall 
not expire before the date 1 year after the date of the 
enactment of this Act (Nov. 6, 1978).  

(b) Prohibition Against Regulations and Rulings on Employment Status.  

- No regulation or Revenue Ruling shall be published on or after the date 
of the enactment of this Act (Nov. 6, 1978) and before the effective date of 
any law hereafter enacted clarifying the employment status of individuals 
for purposes of the employment taxes by the Department of the Treasury 
(including the Internal Revenue Service) with respect to the employment 
status of any individual for purposes of the employment taxes.  

(c) Definitions.  

- For purposes of this section - 

(1) Employment tax. - The term 'employment tax' means 
any tax imposed by subtitle C of the Internal Revenue Code 
of 1986 (formerly I.R.C. 1954, section 3101 et seq. of this 
title).  

(2) Employment status.            - The term 'employment status' 
means the status of an individual, under the usual common 
law rules applicable in determining the employer-employee 

                                 xxii

- 140 -

relationship, as an employee or as an independent 
contractor (or other individual who is not an employee).  

(d) Exception.  

- This section shall not apply in the case of an individual who, pursuant to 
an arrangement between the taxpayer and another person, provides 
services for such other person as an engineer, designer, drafter, computer 
programmer, systems analyst, or other similarly skilled worker engaged in 
a similar line of work. 

(e) Special Rules For Application of Section.  
(1) NOTICE OF AVAILABILITY OF SECTION 

- An officer or employee of the Internal Revenue Service 
shall, before or at the commencement of any audit inquiry 
relating to the employment status of one or more 
individuals who perform services for the taxpayer, provide 
the taxpayer with a written notice of the provisions of this 
section. 

(2) RULES RELATING TO STATUTORY STANDARDS 

- For purposes of subsection (a)(2) - 

                (A) a taxpayer may not rely on an audit 
                commenced after December 31, 1996, for 
                purposes of subparagraph (B) thereof unless 
                such audit included an examination for 
                employment tax purposes of whether the 
                individual involved (or any individual 
                holding a position substantially similar to 
                the position held by the individual involved) 
                should be treated as an employee of the 
                taxpayer, 

                (B) in no event shall the significant segment 
                requirement of subparagraph (C) thereof be 
                construed to require a reasonable showing of 
                the practice of more than 25 percent of the 
                industry (determined by not taking into 
                account the taxpayer), and 

                (C) in applying the long-standing 
                recognized practice requirement of 
                subparagraph (C) thereof- 

                          xxiii

- 141 -

           (i) such requirement shall not 
           be construed as requiring the 
           practice to have continued for 
           more than 10 years, and 

           (ii) a practice shall not fail to 
           be treated as long-standing 
           merely because such practice 
           began after 1978. 

(3) AVAILABILITY OF SAFE HARBORS 

- Nothing in this section shall be construed to provide that 
subsection (a) only applies where the individual involved is 
otherwise an employee of the taxpayer. 

(4) BURDEN OF PROOF- 

(A) IN GENERAL 

     - If- 

           (i) a taxpayer establishes a 
           prima facie case that it was 
           reasonable not to treat an 
           individual as an employee for 
           purposes of this section, and 

           (ii) the taxpayer has fully 
           cooperated with reasonable 
           requests from the Secretary 
           of the Treasury or his 
           delegate, 

     then the burden of proof with respect to such 
     treatment shall be on the Secretary. 

(B) EXCEPTION FOR OTHER REASONABLE 
BASIS 

     - In the case of any issue involving whether 
     the taxpayer had a reasonable basis not to 
     treat an individual as an employee for 
     purposes of this section, subparagraph (A) 
     shall only apply for purposes of determining 
     whether the taxpayer meets the requirements 

                     xxiv

- 142 -

        of subparagraph (A), (B), or (C) of 
        subsection (a)(2). 

 (5) PRESERVATION OF PRIOR PERIOD SAFE HARBOR 

 - If - 

        (A) an individual would (but for the 
        treatment referred to in subparagraph (B)) be 
        deemed not to be an employee of the 
        taxpayer under subsection (a) for any prior 
        period, and 

        (B) such individual is treated by the 
        taxpayer as an employee for employment tax 
        purposes for any subsequent period, 

 then, for purposes of applying such taxes for such prior 
 period with respect to the taxpayer, the individual shall be 
 deemed not to be an employee. 

 (6) SUBSTANTIALLY SIMILAR POSITION 

 - For purposes of this section, the determination as to 
 whether an individual holds a position substantially similar 
 to a position held by another individual shall include 
 consideration of the relationship between the taxpayer and 
 such individuals. 

                           xxv

- 143 -

Revenue Procedure 85-18

SECTION 1. PURPOSE
The purpose of this revenue procedure is to amplify and supersede Rev. Proc. 81-43,
1981-2 C.B. 616, which provides instructions for implementing the provisions of section
530 of the Revenue Act of 1978, 1978-3 (Vol. 1) C.B. xi, 119 (the Act), relating to the
employment tax status of independent contractors and employees.
SEC. 2. BACKGROUND
.01 Rev. Proc. 81-43 is superseded to reflect changes made to section 530 of the Act by
section 269(c) of the Tax Equity and Fiscal Responsibility Act of 1982, 1982-2 C.B. 462,
536, which extends the provisions of section 530 indefinitely.
Section 530(a)(1) of the Act, as amended, provides that if, for purposes of the
employment taxes under subtitle C of the Internal Revenue Code, a taxpayer did not treat
an individual as an employee for any period, then the individual will be deemed not to be
an employee for that period, unless the taxpayer had no reasonable basis for not treating
the individual as an employee. For any period after December 31, 1978, the relief applies
only if (1) all federal tax returns (including information returns) required to be filed by
the taxpayer with respect to the individual for the period are filed on a basis consistent
with the taxpayer's treatment of the individual as not being an employee, and (2) the
treatment is consistent with the treatment for periods beginning after December 31, 1977.
.02 A new section 3.02 titled "Filing of Returns" has been added stating that relief
under section 530(a)(1) of the Act will not be granted if a Form 1099 has not been timely
filed for each worker for any period after December 31, 1978.
.03 Section 3.05 (relating to refunds, credits, and abatements) is clarified to state that it
does not apply to periods in which a taxpayer "treated" an individual as an employee.
SEC. 3. APPLICATION
.01 "Safe Haven" Rules
There are several alternative standards that constitute "safe havens" in determining
whether a taxpayer has a "reasonable basis" for not treating an individual as an employee.
Reasonable reliance on any one of the following "safe havens" is sufficient:
(A) judicial precedent or published rulings, whether or not relating to the particular
industry or business in which the taxpayer is engaged, or technical advice, a letter ruling,
or a determination letter pertaining to the taxpayer; or
(B) a past Internal Revenue Service audit (not necessarily for employment tax
purposes) of the taxpayer, if the audit entailed to assessment attributable to the taxpayer's
employment tax treatment of individuals holding positions substantially similar to the
position held by the individual whose status is at issue (a taxpayer does not meet this test
if, in the conduct of a prior audit, an assessment attributable to the taxpayer's treatment of
the individual was offset by other claims asserted by the taxpayer); or
(C) long-standing recognized practice of a significant segment of the industry in which
the individual was engaged (the practice need not be uniform throughout an entire
industry).
A taxpayer who fails to meet any of the three "safe havens" may nevertheless be
entitled to relief if the taxpayer can demonstrate, in some other manner, a reasonable
basis for not treating the individual as an employee. In H.R. Rep. No. 95-1748, 95th

xxvi

- 144 -

Cong., 2d Sess. 5 (1978), 1978-3 (Vol. 1) C.B. 629, 633, it is indicated that "reasonable 
basis" should be construed liberally in favor of the taxpayer. 
.02 Filing of Returns. 
For any period after December 31, 1978, the relief under section 530(a)(1) will not 
apply, even if the taxpayer has met the "safe haven" rules of paragraph 3.01 of this 
revenue procedure, if the appropriate Form 1099 has not been timely filed with respect to 
the workers involved. See Rev. Rul. 81-224, 1981-2 C.B. 197. 
.03 Interpreting the Word "Treat" 
In determining whether a taxpayer did not "treat" an individual as an employee for any 
period within the meaning of section 530(a)(1) of the Act, the following guidelines 
should be followed: 
(A) The withholding of income tax or the Federal Insurance Contributions Act (FICA) 
tax from an individual's wages is "treatment" of the individual as an employee, whether 
or not the tax is paid over to the Government. 
(B) Except as provided in paragraph (C) and (E) below, the filing of an employment tax 
return (including Forms 940 (Employer's Annual Federal Unemployment Tax Return), 
941 (Employer's Quarterly Federal Tax Return), 942 (Employer's Quarterly Tax Return 
for Household Employees), 943 (Employer's Annual Tax Return for Agricultural 
Employees), and W-2 (Wage and Tax Statement)) for a period with respect to an 
individual, whether or not tax was withheld from the individual, is "treatment" of the 
individual as an employee for that period. 
(C) The filing of a delinquent or amended employment tax return for a particular tax 
period with respect to an individual as a result of Service compliance procedures is not 
"treatment" of the individual as an employee for that period. For this purpose, Collection 
or Examination activities constitute compliance procedures. For example, if the Service 
determines as a result of an audit that a taxpayer's workers are common law employees, 
that determination is not "treatment" of the workers as employees for the period under 
audit. However, if the taxpayer withholds employment taxes or files employment tax 
returns with respect to those workers for the periods following the period under audit, the 
action is "treatment" of the workers as employees for those later periods. 
(D) Internal Revenue Service Center notices that merely advise the taxpayer that no 
return has been filed and request information from the taxpayer are not compliance 
procedures. 
(E) A return prepared by the Service under section 6020(b) of the Code is not 
"treatment" of an individual as an employee; nor is the signing of an audit Form 2504 
(Agreement to Assessment and Collection of Additional Tax and Acceptance of 
Overassessment). 
.04 Consistency in prior periods 
The relief under section 530(a)(1) of the Act, as amended, does not apply to the 
employment tax treatment of any individual for any period ending after December 31, 
1978, if the taxpayer (or a predecessor) treated any individual holding a substantially 
similar position as an employee for employment tax purposes for any period beginning 
after December 31, 1977. However, relief will not be denied under the consistency 
provision for any periods prior to the period in which the individuals were treated as 
employees. For example, a taxpayer did not treat an individual as an employee in 1978 
and 1979. In 1980, the taxpayer began treating individuals holding substantially similar 

                                           xxvii

- 145 -

positions as employees. This subsequent treatment does not prevent the taxpayer from
receiving relief under section 530(a)(1) for 1978 and 1979. The application of the
consistency rule prevents taxpayers from changing the way they treat workers solely to
take advantage of the relief provisions. The application of this provision to predecessors
is intended to prevent evasion of this rule, for example, by reincorporations.
.05 Refunds, Credits, and Abatements
Relief under section 530(a)(1) of the Act is available to taxpayers who are under audit
by the Service or who are involved in administrative (including Appellate) or judicial
processes with respect to assessments based on employment status reclassifications.
Relief also is extended to any claim for a refund or credit of any overpayment of an
employment tax resulting from the termination of liability under section 530(a)(1),
provided the claim is not barred on the date of enactment of this provision (November 6,
1978) by any law or rule of law.
Taxpayers who have entered into final closing agreements under section 7121 of the
Code or compromises under section 7122 with respect to employment status
controversies are ineligible for relief under the Act, unless they have not completely paid
their liability. Thus, for example, a taxpayer who has agreed to or compromised a liability
for an amount which is to be paid in installments, but who still has one or more
installments to pay, is relieved of liability for such outstanding installments. Taxpayers
who settled employment status controversies administratively with the Service on any
basis other than section 7121 or 7122 of the Code or who unsuccessfully litigated such
cases also are eligible for relief, provided their claims are not barred by the statute of
limitations or by the application of the doctrine of res judicata. However, unpaid
judgments will be abated if section 530(a)(1) of the Act applies. Thus, an unsuccessful
litigant in an employment status case who fulfills the Act's requirements can avoid
collection of any unpaid employment tax liabilities, regardless of the doctrine of res
judicata.
The application of the doctrine of res judicata will prevent a refund based on section
530(a)(1) of the Act if a taxpayer paid a judgment in an action relating to the same issue
as to the same taxpayer. Thus, if the specific matter was judicially decided and the
judgment paid, relief under section 530(a)(1) is not available.
This subsection will not apply to those periods in which a taxpayer "treated" an
individual as an employee within the meaning of subsection .03 of this section.
.06 Handling of Claims
Relief under section 530(a)(1) of the Act applies to the taxes imposed on an employer
by sections 3111 or 3301 of the Code. It also applies to an employer's liability under
section 3102 and 3403 to withhold and pay the taxes imposed by sections 3101 and 3402.
Therefore, an unpaid assessment of those taxes against an employer who qualifies for
relief under section 530(a)(1) of the Act should be abated. Timely claims for refund of
such taxes paid by a taxpayer who qualifies for relief will be honored.
.07 Interest and Penalties
If a taxpayer is relieved of liability under section 530(a)(1) of the Act, any liability for
interest or penalties attributable to that liability is forgiven automatically. This relief from
interest and penalties applies whether charged directly against the taxpayer or personally
against a corporate taxpayer's officers.
.08 Status of Workers

xxviii

- 146 -

Section 530 of the Act does not change in any way the status, liabilities, and rights of 
the worker whose status is at issue. Section 530(a)(1) terminates the liability of the 
employer for the employment taxes but has no effect on the workers. It does not convert 
individuals from the status of employee to the status of self-employed. 
Section 31.3102-1(c) of the regulations provides, with respect to the collection and 
payment of the employee's share of the FICA tax, that "until collected from him [by [*10] 
the employer] the employee is also liable for the employee tax with respect to all wages 
received by him." Therefore, if an employer's liability under section 3102 of the Code for 
the employee's share of the tax imposed by section 3101 is terminated under section 
530(a)(1) of the Act, the employee remains liable for that tax. Employees who incorrectly 
paid the self-employment tax (section 1401 of the Code) may file a claim for refund; 
however, the amount of the self-employment tax refund will be offset by the amount of 
the employee's share of the tax imposed on the employee as a result of the application of 
section 31.3102-1(c) of the regulations. 
.09 Definition of Employee 
For purposes of section 530(a) of the Act, the term employee means employees under 
sections 3121(d), 3306(i), and 3401(c) of the Code. 
SEC. 4.EFFECT ON OTHER DOCUMENTS 
Rev. Proc. 81-43 is amplified and superseded. 

                                         xxix

- 147 -

Internal Revenue Service
Revenue Ruling 86-88

FICA; HOSPITAL INSURANCE; EXTENSION TO STATE AND POLITICAL
SUBDIVISION EMPLOYEES

This revenue ruling provides guidelines concerning the applicability of the Medicare tax
to employees of states and political subdivisions.

For purposes of this revenue ruling, the term 'state' includes the Commonwealth of
Puerto Rico, the Virgin Islands, and the District of Columbia.

For purposes of this revenue ruling, the term 'political subdivision' has the same
meaning that it has under section 218(b)(2) of the Social Security Act, 42 U.S.C. section
418(b)(2). Thus, 'political subdivision' ordinarily includes a county, city, town, village, or
school district. In many states, depending upon the manner in which such entities are
created under state law, 'political subdivision' includes a sanitation, utility, reclamation,
improvement, drainage, irrigation, flood control, or similar district.

For purposes of this revenue ruling, the term 'state employer' of a state includes the state
and any agency or instrumentality of that state that is a separate employer for purposes of
withholding, paying, and reporting the federal income taxes of employees. The term
'political subdivision employer' of a political subdivision includes the political
subdivision and any agency or instrumentality of that political subdivision that is a
separate employer for purposes of withholding, reporting, and paying the federal income
taxes of employees.

SERVICES SUBJECT TO THE MEDICARE TAX

Q1. What services are subject to the Medicare tax under the Act?

A1. As a general rule, services performed for a state employer or political subdivision
employer by an employee hired by the state employer or political

subdivision employer after March 31, 1986, are subject to the Medicare tax. The
following services, however, are NOT subject to the Medicare tax even though the
services are performed by an employee hired after March 31, 1986:

(1) services covered by an agreement between the state and the Secretary of Health and
Human Services entered into pursuant to section 218 of the Social Security Act, 42
U.S.C. section 418 (218 agreement) providing for social security coverage including
Medicare,

(2) services excluded from the definition of employment under any provision of section
3121(b) of the Code other than section 3121(b)(7),

xxx

- 148 -

  (3) services performed by an individual who is employed by a state employer  

(except for a District of Columbia employer) or a political subdivision employer to 
relieve the individual of unemployment, 

  (4) services performed in a hospital, home, or other institution by a patient or inmate 
thereof as an employee of a state employer or a political subdivision employer, 

  (5) services performed by an individual as an employee of a state employer or a political 
subdivision employer serving on a temporary basis in case of fire, storm, snow, 
earthquake, flood, or other similar emergency, or 

  (6) services performed by any individual as an employee included under section 5351(2) 
of title 5, United States Code (relating to certain interns, student nurses, and other student 
employees of the District of Columbia government), other than as a medical or dental 
intern or a medical or dental resident in training. 

  THE CONTINUING EMPLOYMENT EXCEPTION 

  Q2. If an employee was hired before April 1, 1986, by a state employer or a political 
subdivision employer and services are performed for the state employer or political 
subdivision employer by that employee after March 31,  

1986, are those services subject to the Medicare tax? 

  A2. Services are not subject to the tax if they are performed after March 31,  

1986, for a state employer or political subdivision employer by an employee who was 
hired by the state employer or the political subdivision employer before April 1, 1986, 
and if the employee meets the following requirements: 

  (i) the employee was performing regular and substantial services for remuneration for 
the state employer or political subdivision employer before April 1, 1986, 

  (ii) the employee was a bona fide employee of that employer on March 31, 1986, 

  (iii) the employment relationship with that employer was not entered into for purposes 
of avoiding the Medicare tax, and 

  (iv) the employment relationship of the employee with that employer has not been 
terminated after March 31, 1986 (other than as provided in the rules described in Q&A8 
below, which concern employees who transfer from one state employer, or one political 
subdivision employer, to another). 

  Section 3121(u)(2)(C) of the Code. 

                                        xxxi

- 149 -

For purposes of this revenue ruling, this exception to the Medicare tax is called the
'continuing employment exception.'

Q3. An employee signed an employment contract before April 1, 1986, but did not
begin to perform services until after March 31, 1986. Does the employee qualify for the
continuing employment exception?

A3. No. The employee does not qualify for the continuing employment exception
because the employee was not performing regular and substantial services for
remuneration before April 1, 1986. Section 3121(u)(2)(C)(ii)(I) of the Code.

Q4. Before April 1, 1986, an individual was performing services for remuneration as a
substitute teacher on an 'as needed' basis for a state employer or a political subdivision
employer, and the individual continued performing those services on that basis after
March 31, 1986. Does the individual qualify for the continuing employment exception?

A4. No. The individual does not qualify for the continuing employment exception. Even
though the services performed may have been substantial, the services were not regular
because they were performed on an 'as needed' basis. Section 3121(u)(2)(C)(ii)(I) of the
Code.

Q5. A was a state employee performing regular and substantial services for
remuneration prior to April 1, 1986. A's employment relationship with the state employer
was terminated after March 31, 1986. but A was later rehired by the state employer. Does
the continuing employment exception apply to A?

A5. No. Section 3121(u)(2)(C)(iii) of the Code.

Q6. How is termination of employment defined for purposes of determining whether the
Medicare tax is applicable?

A6. The question of whether an employment relationship has terminated is a question of
fact that must be determined on the basis of all the relevant facts and circumstances.
Great weight, however, will be given to the personnel rules of the state employer or
political subdivision employer to determine whether an employment relationship has
been terminated.

Q7. An employee who was hired before April 1, 1986, by a state employer transferred
after March 31, 1986, to another state employer of that state. The transfer was made
without a termination of the employee's overall employment relationship with that state.
Does the employee qualify for the continuing employment exception?

A7. Yes. An employee hired before April 1, 1986, by a state employer who transfers
after March 31, 1986, to another state employer of that state may qualify for the
continuing employment exception, provided the transfer was made without a termination
of the employee's overall employment relationship with that state. The same rule applies

xxxii

- 150 -

to an employee hired before April 1, 1986, by a political subdivision employer, who
transfers after March 31, 1986, to another political subdivision employer of that political
subdivision.

On the other hand, an employee hired before April 1, 1986, does not qualify for the
continuing employment exception if after March 31, 1986, the employee transfers from a
state employer to a political subdivision employer or from a political subdivision
employer to a state employer. Likewise, an employee does not qualify for the exception if
the employee transfers from a political subdivision employer in one political subdivision
to a political subdivision employer in a different political subdivision, or from a state
employer in one state to a state employer in a different state. Section 3121(u)(2)(D) of the
Code.

Different rules, however, control whether a transfer affects an employee's status for
purposes of the Medicare tax wage base. In the case of an employee who is subject to the
Medicare tax, even if the employee transfers from one state employer to another state
employer of that state or from one political subdivision employer to another political
subdivision employer of that political subdivision, a new Medicare tax wage base applies
to wages received from the second employer. Thus, the rules that determine whether
there is a new Medicare tax wage base are the same as those applicable to employees of
private employers.

SERVICES EXCLUDED FROM EMPLOYMENT

Q8. What services are excluded from the definition of employment?

A8. See sections 3121(b)(1)-(6), (8)-(20) of the Code for a list of services that are
excluded from the definition of employment for purposes of the social security taxes,
including the Medicare portion of the taxes.

Q9. A 218 agreement may contain terms optionally excluding from social security
coverage certain types of employment. 42 U.S.C. section 418(c)(3). If employment is
optionally excluded from coverage under the terms of a 218 agreement, is that
employment subject to the Medicare tax if services are performed by an individual
otherwise subject to the Medicare tax under the rules of Q&A1 and Q&A2?

A9. Yes. The optionally excluded services are subject to the Medicare tax if they are
performed by an individual otherwise subject to the tax under the rules of Q&A1 and
Q&A2 above.

Q10. A student is hired by a school, college, or university after March 31,

xxxiii

- 151 -

1986, to perform services for the school, college, or university. The student is in a group
optionally excluded from coverage under the terms of an applicable 218 agreement. Are
the services performed by the student subject to the Medicare tax?

A10. Services performed by a student employed by a school, college, or university are
not subject to the Medicare tax if the student is enrolled and regularly attending classes at
the school, college, or university. Section

3121(b)(10) of the Code. Services of a student that are subject to contributions under a
218 agreement continue to be subject to such contributions.

DEFINITION OF WAGES

Q11. Is the definition of wages for Medicare tax purposes the same as the definition of
wages for making social security contributions under 218 agreements?

A11. No, not in all cases. The term 'wages' for purposes of paying Medicare tax is
defined by section 3121(a) of the Code. The term 'wages' for purposes of making
contributions under a 218 agreement is defined by section 209 of the Social Security Act.
42 U.S.C. section 409. Questions concerning the definition of wages (and employment)
for purposes of paying Medicare tax should be directed to the Service. Questions
concerning the definition of wages (and employment) for purposes of making 218
contributions should be directed to the Social Security Administration (SSA).

RULES FOR REPORTING AND PAYMENT OF MEDICARE TAX

Q12. Is the Medicare tax reported and paid to the Internal Revenue Service or to the
SSA?

A12. The Medicare tax is reported and paid to the Service (1) by a state employer of a
state if on April 7, 1986, NO employee of any state employer of that state was covered
under a 218 agreement, and (2) by a political subdivision employer of a political
subdivision if on April 7, 1986, NO employee of any political subdivision employer of
that political subdivision was covered under a 218 agreement.

The Medicare tax is reported to the State Social Security Administrator (1) by a state
employer of a state if on April 7, 1986, ANY employee of any state employer of that state
was covered under a 218 agreement, and (2) by a political subdivision employer of a
political subdivision if on April 7, 1986, ANY employee of any political subdivision
employer of that political subdivision was covered under a 218 agreement.

Q13. A 218 agreement was in effect with state X on or before April 7, 1986. The
agreement provided for coverage of employees of a political subdivision employer of
political subdivision A but not for coverage of any employee of any political subdivision
employer of political subdivision B. After April 7, 1986, a modification of the 218
agreement was executed providing for coverage of some, but not all, employees of a

xxxiv

- 152 -

political subdivision employer of political subdivision B. The effective date of the new
coverage was April 1, 1986. When that political subdivision employer of political
subdivision B reports and pays the Medicare tax on wages for services performed by
those of its employees who are not subject to the modification, is the tax reported and
paid to the State Social Security Administrator or to the Internal Revenue Service?

A13. The tax is reported and paid to the Internal Revenue Service. Modifying a 218
agreement after April 7, 1986, to extend coverage on a retroactive basis does not change
the agency to which the employer must report and pay the Medicare tax for services
performed by employees who are subject to the Medicare tax.

Q14. How is the Medicare tax reported and paid to the Internal Revenue Service?

A14. Taxable wages must be reported on line 6 of Form 941E, Quarterly Return of
Withheld Federal Income Tax and Hospital Insurance (Medicare) Tax. The reporting,
depositing, and paying of the Medicare tax are subject to the same rules applicable to
private employers. These rules are similar to those applicable to income tax withholding.

Q15. How is the Medicare tax reported and paid to the SSA?

A15. The Medicare tax is reported and paid to the SSA just as contributions under a 218
agreement are reported and paid to the SSA.

Q16. Will all penalties for failure to pay the Medicare tax and failure to make timely
deposits of that tax be assessed against state and political subdivision employers?

A16. The Service will waive penalties for failure to pay and for failure to make timely
deposits of the Medicare tax with respect to services performed through the fourth quarter
of 1986, so long as all payments due for April through December of 1986 are paid by
February 2, 1987. If all payments due for April through December 1986 are not paid by
February 2, 1987, this automatic waiver of penalties is not applicable, even with respect
to amounts paid by February 2, 1987. Penalties may be waived, however, if the employer
shows reasonable cause for failure to pay and failure to make timely deposits of the tax.
See sections 6651 and 6656 of the Code. A state employer or political subdivision
employer should not report any Medicare tax wages on line 6 of Form 941E for the
second or third quarter unless appropriate deposits and/or payments are made for that
quarter.

Q17. If a state employer or a political subdivision employer has federal employees on
the state or political subdivision payroll, how should that employer report the full social
security tax or the Medicare portion of the social security tax, whichever is applicable?

A17. The state employer or political subdivision employer should use Form

941E to report the full social security taxes and or the Medicare portion of the taxes. For
those federal employees subject to the FULL social security taxes, the tax must be

xxxv

- 153 -

included with the withheld federal income tax on line 3 of Form 941E, with an attached
supporting statement showing the amount of wages subject to the social security taxes,
the amount of the taxes withheld, and the employer's share of the taxes. For those federal
employees subject ONLY to the Medicare portion of the social security taxes, the
Medicare tax must be reported on line 6 of Form 941E.

Q18. If a state employer or a political subdivision employer must report and pay the
Medicare tax to the Service as explained in Q&A12, how should the employer transmit
Copy A of Forms W-2 for newly hired employees who are subject to the Medicare tax?

A18. For newly hired employees subject to the Medicare tax. the employer should
transmit Copy A of Forms W-2 with a Form W-3, Transmittal of Income and Tax
Statements, and should check the 'Medicare Fed. emp.' checkbox in Box 2 on the Form
W-3. This checkbox will be changed to 'Medicare government employee' on the 1987
Form W-3 to reflect the extension of the Medicare tax to state and political subdivision
employees. For employees not subject to the Medicare tax, the employers should follow
the current practice of transmitting Copy A of Forms W-2 with a Form W-3, checking the
' 941/941r ' checkbox in Box 2 on the Form W-3.

Q19. If a state employer or a political subdivision employer must report and pay the
Medicare tax to the State Social Security Administrator as explained in Q&A12, how
should the employer transmit Copy A of Forms W-2 for newly hired employees subject
to the Medicare tax?

A19. For newly hired employees subject to the Medicare tax, the employer should
transmit Copy A of Forms W-2 with a Form W-3 S&L, Transmittal of Income and Tax
Statements for State and Local Governmental Employers, and should check the 'Medicare
Government Employee' checkbox on the Form W-3 S&L IN ADDITION TO the 'Section
218' checkbox. For those employees covered under a 218 agreement, the state employer
or the political subdivision employer should follow the current practice of transmitting
the Forms W-2 with a Form W-3 S&L, checking the 'Section 218' checkbox in Box 2 on
the Form W- 3 S&L. If the employer also has employees who are not covered under the
218 agreement and who were hired before April 1, 1986, then for those employees, the
employer should transmit Forms W-2 with a Form W-3 and should check the ' 941/941u '
box on the Form W-3.

xxxvi

- 154 -

Internal Revenue Service

Revenue Ruling 88-36

FICA, HOSPITAL INSURANCE; STATE AND POLITICAL SUBDIVISION
EMPLOYEES

SECTION 3121. - DEFINITIONS

FICA, hospital insurance; state and political subdivision employees. Guidance is
provided, in question and answer form, concerning the application of the hospital
insurance (medicare) tax portion of the Federal Insurance Contributions Act (FICA) by
section 3121(u) of the Code, to wages for services performed by state and political
subdivision employees hired after March 31, 1986. Rev. Rul. 86-88 supplemented.

The Service has issued Rev. Rul. 88-36, supplementing Rev. Rul. 86-88, 1986-2 C.B.
172, in question and answer format, which provides guidelines concerning the 1985
amendment to section 3121(u), which extended Medicare (the hospital portion of FICA)
to wages for services rendered by state and political subdivision employees hired after
March 31, 1986. The ruling addresses such areas as the types of services which are
subject to the medicare tax and the continuing employment exception. In general, an
individual, who was employed by a state or political subdivision before March 31, 1986
and who was performing regular and substantial services for remuneration, will not be
subject to the tax on services performed after that date. This rule applies only if the
employment was not terminated after April 1.

This revenue ruling supplements Rev. Rul. 86-88, 1986-2 C.B. 172, which provides
guidelines, in question and answer form, concerning the 1985 amendment of section
3121(u) of the Internal Revenue Code. In general, the amendment extends the hospital
insurance (medicare) tax portion of the Federal Insurance Contributions Act (FICA) to
wages for services rendered by state and political subdivision employees hired after
March 31, 1986.

In this revenue ruling, the terms 'state,' 'political subdivision,' 'state employer,' 'political
subdivision employer,' and 'continuing employment exception' have the same meanings
as in Rev. Rul. 86-88.

SERVICES SUBJECT TO THE MEDICARE TAX

Q1. If an individual receiving social security retirement insurance benefits was hired as
an employee of a state or political subdivision after March 31, 1986, are the services
performed by the individual for the state or political subdivision subject to the medicare
tax?

A1. Yes. The fact that an employee is receiving social security retirement insurance
benefits does not affect the employee's liability for the medicare tax.

xxxvii

- 155 -

Q2. Are services performed by an election official or election worker for a state
employer or political subdivision employer subject to the medicare tax?

A2. Yes, unless the remuneration paid in a calendar year for such service is less than
$100. Section 3121(u)(2)(B)(ii)(V) of the Code, added by section 1895(b)(18)(A) of the
Tax Reform Act of 1986, 1986-3 (Vol. 1) C.B. 852. This amendment is effective for
services rendered after March 31, 1986.

Q3. A township has a small number of regularly employed fire fighters. To assist these
fire fighters, certain residents of the township have volunteered their services in cases of
emergency. The township alerts these residents to emergencies by sounding a siren. The
township keeps a record of the residents who respond to the emergency calls and
periodically pays each such resident a nominal amount for each emergency for which the
resident performed services. Are the payments made to the residents by the township
subject to the medicare tax?

A3. No. The services are considered to be performed by an employee of a state or
political subdivision on a temporary basis in case of fire, storm, snow, earthquake, flood,
or other similar emergency and thus are not subject to the medicare tax. See Section
3121(u)(2)(B)(ii)(III) of the Code.

THE CONTINUING EMPLOYMENT EXCEPTION

Q4. An individual was hired in September 1984 as a part-time cook by a state hospital
to perform two hours of paid service each Sunday preparing the evening meal. The
individual is not a patient or inmate of the hospital and has worked two hours each week
as an employee of the hospital continuously since September 1984. Are the individual's
services performed after March 31, 1986, subject to the medicare tax?

A4. No. The continuing employment exception applies here if the individual was
performing regular and substantial services for remuneration for the state employer or
political subdivision employer before April 1, 1986. Whether this requirement is met is a
question of fact. On these facts, the individual's services are determined to be regular and
substantial, and the exception applies.

Q5. In November 1982, an individual was elected to a state public office for a four-year
term beginning in January 1983, making the individual an employee of the state. In
November 1986, the individual was re-elected. Are the individual's services performed in
the second term that begins in January 1987 subject to the medicare tax?

A5. No. The continuing employment exception applies here if the employment
relationship has not been terminated after March 31, 1986. The individual was re-elected
before the first term expired, so there was no break in the employment relationship.

Q6. B, a school district employee, performed regular and substantial services for
remuneration for a political subdivision employer during the school year beginning in

xxxviii

- 156 -

September 1985 and ending in May 1986. In May 1986, the school district notified B that 
B's employment would be terminated as of the end of May 1986 because the school 
district might not receive sufficient funding. B continued to be covered under the school 
district's health insurance program through August 1986 on the same basis as before May  

1986. Sufficient funding was provided, and in September 1986 B began working on the 
same basis as before. Are B's services performed after August 31, 1986, subject to the 
medicare tax? 

  A6. No. In fact, B's employment with the school district was continuous because the 
school district received sufficient funding. The school district's personnel policies 
indicate that the employment relationship continued because B retained health insurance 
coverage. See Q&A6 of Rev. Rul. 86-88. 

  Q7. C, a professor at a state university, performed regular and substantial services for 
remuneration for the university from September 1985 to June 1986. C was granted a 
leave of absence for the 1986-1987 school year, with the right to return to the same 
position at the end of the leave. In September 1987, C returned from the leave and 
resumed the same position with the university. Are C's services performed after returning 
from the leave of absence subject to the medicare tax? 

  A7. No. The leave of absence was granted by the university and did not terminate the 
employment relationship. The university's personnel policies indicate that the 
employment relationship continued because C was given the right to return to the same 
position. See Q&A6 of Rev. Rul. 86-88. 

  Q8. D taught a two-hour photography course twice a week at a local community college 
in the spring semester, which began on March 1, 1986. D then signed a three-year 
agreement with the college that he would teach the same course every spring. When D 
returned in the spring of 1987, were his services subject to the medicare tax? 

  A8. No. D was performing regular and substantial services for remuneration prior to 
April 1, 1986. The employment relationship was not terminated, as D had a commitment 
to return to the same position each spring. 

  Q9. Each summer, a Township Parks Department advertises for workers to cut grass. E 
was hired by the township in May 1985 to cut grass during that summer. E stopped 
performing services for the township at the end of that summer. In May 1986, E was 
again hired by the township to cut grass. Are E's services performed when E returned in  

  A9. Yes. E's employment relationship was terminated after April 1, 1986, as E had no 
commitment to perform services for the township each summer. 

  Q10. A part-time police officer has been paid on a weekly basis since March 10, 1986, 
to be 'on call' for a set schedule of hours each week. When the officer is 'on call,' he must 
stay at his residence and be available to provide assistance in the case of an emergency or 

                                       xxxix

- 157 -

to handle any police business that may arise. Are the services performed by the officer 
after April 1, 1986 subject to the medicare tax? 

  A10. No. Although the officer responds to calls on an 'as needed' basis, he has a set 
schedule of hours during which he is performing the service of being available to respond 
to such calls. Based on the above facts, the officer was performing regular and substantial 
services for remuneration prior to April 1, 1986 and thus, qualifies for the continuing 
employment exception to the medicare tax. 

Revenue Procedure 91-40 
SECTION 1. PURPOSE 
This revenue procedure sets forth rules relating to the minimum retirement benefit 
requirement prescribed under section 31.3121(b)(7)-2 of the Employment Tax 
Regulations. 
 
SECTION 2. BACKGROUND 
Section 3121(b)(7)(F), added to the Internal Revenue Code by section 11332(b) of the 
Omnibus Budget 
Reconciliation Act of 1990, Public Law No. 101-508, 104 Stat. 1388, generally expands 
the definition of employment, for purposes of the Federal Insurance Contributions Act 
(FICA), to include service as an employee for a state or local government entity unless 
the employee is a “member of a retirement system” of such entity. Section 3121(b)(7)(F) 
is effective with respect to service performed after July 1, 1991. Thus, wages for services 
performed after July 1, 1991, received by an employee of a state or local government 
entity who is not a member of a retirement system of such entity will generally be subject 
to FICA taxes, and will also be taken into account in determining the employee’s 
eligibility for Social Security and Medicare benefits. Under section 31.3121(b)(7)-2(e) of 
the regulations, a retirement system generally includes any pension, annuity, retirement 
or similar fund or system within the meaning of section 218 of the Social Security Act 
that is maintained by a state, political subdivision or instrumentality thereof to provide 
retirement benefits to its employees who are participants. However, the definition of 
retirement system is limited in order to carry out the purposes of section 3121(b)(7)(F) of 
the Code and the corresponding provisions of the Social Security Act. Under the 
regulations, in order for service in the employ of a state or local government entity to 
qualify for the exception from employment 
under section 3121(b)(7), the employee must be a member of a retirement system that 
provides certain minimum retirement benefits to that employee. To meet this minimum 
retirement benefit requirement with respect to an employee, section 31.3121(b)(7)-
2(e)(2)(i) of the regulations generally requires that a retirement system provide benefits to 
the employee that are comparable to those provided in the Old-Age portion of the Old-
Age, Survivor, Disability Insurance program under Social Security. Section 
31.3121(b)(7)-2(e)(2)(vi) of the regulations provides that the Commissioner may, through 
guidance of general applicability, promulgate additional testing methods to determine 
whether, a retirement system meets the minimum retirement benefit requirement. This 
revenue procedure is an exercise of this authority. It outlines a set of safe harbor formulas 
for defined benefit retirement systems. Benefits calculated under one of these formulas 

                                            xl

- 158 -

are deemed to meet the minimum retirement benefit requirement. In addition, procedures 
are set out by which an employer may determine whether retirement benefits calculated 
under other formulas meet the minimum retirement benefit requirement of the regulations 
with respect to an employee. 
 
SECTION 3. DEFINED BENEFIT RETIREMENT SYSTEM SAFE HARBOR 
FORMULAS 
 
.01 Final and highest average pay formulas. 
 (1) Periods of 36 months or less. A defined benefit retirement system that calculates 
     benefits by reference to a participant’s average compensation meets the minimum 
     retirement benefit requirement with respect to an employee if it makes available 
     to the employee a single life annuity payable beginning no later than age 65 that is 
     at least 1.5 percent of average compensation for each year (or fraction thereof) of 
     credited service. For this purpose, average compensation may be defined as the 
     average of the employee’s compensation over the 36 (or fewer) consecutive or 
     non-consecutive months that provides the highest such average, the average of the 
     employee’s compensation for his or her last 36 (or fewer) months of service with 
     the employer, or the average of the employee’s compensation for his or her high 
     consecutive or nonconsecutive or final 3 (or fewer) calendar or plan years of 
     service. 
 (2) Periods of more than 36 months. A defined benefit retirement system that 
     calculates benefits by reference to a participant’s average compensation over a 
     period of more than 36 months meets the minimum benefit requirement in the 
     same manner as a retirement system described in section 3.01(l) except that the 
     1.5 percent factor is replaced with a higher factor in accordance with the 
     following table: 
 Averaging period Factor 
 37-48 months 1.55 percent 
 49-60 months 1.60 percent 
 61-120 months 1.75 percent 
 Over 120 months 2.00 percent 
.02 Formulas using fractional accrual rule. 
A defined benefit retirement system that calculates benefits based on a pro rata accrual 
towards a projected normal retirement benefit may meet the minimum retirement benefit 
requirement in the same manner as provided in section 3.01(l) provided the projected 
normal retirement benefit under the plan formula is greater than or equal to the benefit 
described in such section. 
.03 Additional requirements for defined benefit plan formulas to meet safe harbors. 
(1) Calculation of compensation. 
(a) To meet the requirements of any of the defined benefit safe harbor formulas for plan 
years beginning after July 1, 1991, a retirement system must calculate benefits based on a 
definition of compensation that meets the requirements of section 31.3121(b)(7)-
2(e)(2)(iii)(B) of the regulations. 
(b) In the event that the definition of compensation under the retirement system is less 
inclusive than the definition otherwise permitted under this section, the applicable benefit 

                                              xli

- 159 -

percentage in the safe harbor formula of section 3.01 must be increased to account for the 
lower compensation base. The benefit percentage for employees in a retirement system 
whose benefits are computed using this definition must be multiplied by the ratio of (i) 
aggregate compensation (defined as under section 3.03(l)(a) and assuming that 
compensation considered in determining retirement benefits is limited to the contribution 
base described in section 3121(x)(1)) of these employees to (ii) aggregate compensation 
(as defined under the plan) of these employees. This ratio may be determined based upon 
the compensation during the immediately preceding plan year. In the case of a retirement 
system sponsored by more than one employer, this ratio must be calculated separately 
with respect to the employees of each employer whose benefits are computed using this 
definition. The rule in this section 3.03(l)(b) is illustrated by the following example: 
Example. A defined benefit retirement system maintained by a political subdivision 
provides a retirement benefit equal to 2.5 percent of a participant’s average compensation 
during his or her last calendar year of service. The compensation used for this purpose 
satisfies section 3.03(l)(a), except that it caps the compensation taken into account at 
$30,000. Assume that the ratio under section 3.03(t)(b) is 150 percent. This figure is 
derived by comparing the total compensation of employees in the plan (using the plan 
definition but capping compensation at the FICA contribution base (rather than at 
$30,000)) to the total compensation (using only the plan definition of compensation) of 
employees in the plan. The retirement system meets the requirements of 3.03(l) because 
the plan benefit percentage of 2.5 percent is more than 150 percent of the applicable safe 
harbor benefit percentage of 1.5 percent. 
 
(2) Credited service. 
(a) In order to meet the requirements of any of the defined benefit safe harbor formulas, a 
formula must generally include in credited service the employee’s entire period of actual 
service with the employer since commencing participation in the retirement system, plus 
any past service credited under the retirement system. A formula may, however, exclude 
any periods of actual service for the employer that are treated as employment under 
section 3121(b) of the Code, provided that during such periods the employee did not 
participate in the retirement system. A retirement system subject to paragraph (f)(2)(i)(B) 
of section 31.3121(b)(7)-2 of the regulations (relating to the treatment of benefits accrued 
in plan years beginning prior to January 1, 1993) may also limit service consistent with 
the rules contained in that paragraph. 
(b) A formula may limit the maximum period of service that is credited for accrual 
purposes under this rule. If this limit is less than 30 years in the case of formulas 
described in section 3.01(l) or (2), or 35 years in the case of formulas described in section 
3.02, however, the benefit formula must be increased by the ratio of 30 (or 35) years to 
such lower limit. 
(c) Except as provided in section 3.03(4) with respect to part-time and other classes of 
employees, a formula may limit the periods of actual service actually credited for accrual 
purposes under this rule to whole years or similar periods, provided the periods are 
reasonable. 
(d) The rules in this subsection are illustrated by the following example: 
Example. In 1995, an employee is a participant in a retirement system with 5 years of 
credited service. Assume that the retirement system provides benefits under a formula 

                                            xlii

- 160 -

described in section 3.01. In January 1996, the employee moves to a position that is not
covered by the retirement system. Assume that service in the new position constitutes
covered employment under section 3121(b) of the Code for purposes of the FICA (e.g.,
because a section 218 voluntary agreement is in effect with regard to such position). In
January 1998, the employee returns to the old position and recommences participation
under the retirement system. The employee must be treated as being in the employee’s
sixth year of credited service in determining whether the benefit under the retirement
system meets the minimum retirement benefit requirement. This is because the retirement
system may generally disregard the service of an employee that constitutes employment
under section 3121(b) for purposes of the FICA.
(3) Treatment of prior distributions from the retirement system.
In determining whether the requirements of any of the defined benefit safe harbor
formulas are met, prior distributions may continue to be considered as part of the benefit
accrued under the retirement system unless they were distributed by the employer without
any election by the employee. In addition, if a retirement system gives a former employee
credit for benefit determination purposes for periods of prior service with respect to
which a prior distribution was made only if the employee contributes to the system an
amount equal to all or a portion of the prior distribution (with or without interest), and
this option is provided on reasonable terms, such prior service is not required to be taken
into account in determining whether the requirements of any of the defined benefit safe
harbors are met until the required contribution is actually made. If prior service is not
taken into account under this rule, the prior distribution may not be taken into account
either. The rules of this paragraph is illustrated by the following example:
Example. An employee retires under the early retirement option under a retirement
system maintained by a state government. The employee elects to receive a single sum
distribution representing the entire accrued benefit under the plan. Subsequently, the
employee is rehired by the same employer. The plan does not provide for any
recontribution of the prior distribution. Whether the employee is a member of the
retirement system from which the employee received the distribution is determined
without regard to the single sum distribution. That is, a single life annuity that is the
actuarial equivalent of the single sum may be treated as part of the accrued benefit under
the plan. Similarly, all periods of service credited under the plan during the employee’s
previous service must be considered.
(4) Credited service for part-time, seasonal, and temporary employees.
To meet the requirements of any of the defined benefit safe harbor formulas with respect
to a part-time, seasonal or temporary employee for plan years beginning after December
31, 1992, a safe harbor formula may not permit double proration of the employee’s
benefits under the retirement system. See 29 CFR §2530.204-2(d) for a description of
double proration of benefit accruals. Under this rule, the benefit under the retirement
system may be prorated either on the basis of full-time service or on the basis of full-time
compensation, but may not be prorated based on both service and compensation. In
addition, a safe harbor formula may not subject the crediting of service used in
calculating the benefit of any part-time, seasonal or temporary employee to any
conditions, such as a requirement that the employee attain a minimum age, perform a
minimum period of service, be credited with a minimum number of hours of service,
make an election in order to participate, or be present at the end of the plan year. The

xli ii

- 161 -

requirements of this section 3.03(4) will be deemed met with respect to an employee, 
however, if the requirements of section 31.3121(b)(7)-2(d)(2)(ii) of the regulations 
relating to amounts distributable upon certain events are met with respect to such 
employee. See section 31.3121(b)(7)-2(d)(2)(iii) of the regulations for the definitions of 
part-time, seasonal, and temporary employee for this purpose. 
.04 Examples of application of safe harbor formulas. 
The application of the defined benefit safe harbors are illustrated in the following 
examples: 
Example 1. An employee has been a participant in a state retirement system for 9 years 
and several months at the beginning of a plan year of the system. The employee has only 
9 years of credited service under the system at the beginning of the plan year, however, 
because the retirement system calculates service for accrual purposes on the basis of 
whole years of actual service. Under the retirement system, each participant is credited 
with a retirement benefit based upon the participant’s highest average compensation over 
36 consecutive months times his or her years of service (as so determined). Assume the 
retirement system imposes no other conditions on the accrual of benefits and meets the 
service crediting requirements of section 3.03(2). If at all times during the plan year prior 
to being credited with a tenth year of service the employee has a total accrued benefit of 
at least 13.5 percent of his or her highest average compensation (1.5 percent times 9 
years), and at all times during the plan year after being credited with the tenth year of 
service the employee has a total accrued benefit of at least 15 percent of his or her highest 
average compensation (1.5 percent times 10 years), and the retirement otherwise meets 
the requirements of this revenue procedure and the regulations, the employee will be 
treated as a qualified participant throughout the plan year. This analysis applies without 
regard to whether the participant actually accrues a benefit in the plan year or is credited 
with an additional year of service for accrual purposes (e.g., if future accruals under the 
plan have been frozen or if the participant has obtained the maximum level of benefits 
under the plan). 
Example 2. Assume the same facts as in Example 1, except that the plan grants 1 month 
of credited service for every whole month of actual service, and that the employee had 
111 months of service (9 years and 3 months) at the beginning of the plan year. If at all 
times during the first month of the plan year prior to being credited with the 112th month 
of service the employee has a total accrued benefit of at least 13.875 percent of his 
highest average compensation (1.5 percent times 111 months, divided by 12), and at all 
times during the first month of the plan year after being credited with the 112th month of 
service the employee has a total accrued benefit of at least 14 percent of his highest 
average compensation (1.5 percent times 112 months, divided by 12), and the retirement 
system otherwise meets the requirements of this revenue procedure and section 
31.3121(b)(7)-2(e) of the regulations, the participant is a qualified participant in the plan 
within the meaning of section 31.3121(b)(7)-2(d)(1) for the entire first month of the plan 
year. 
Example 3. Assume the same facts as in Example 1, except that, instead of crediting only 
whole years of participation for accrual purposes, the retirement system credits only 
service during plan years in which a participant has at least 1,000 hours of service. Thus, 
as in Example 1, the participant has 9 years of credited service at the beginning of the 
plan year. If at all times during the plan year prior to meeting the 1,000-hour requirement 

                 xli v

- 162 -

the employee has a total accrued benefit of at least 13.5 percent of his or her highest 
average compensation (1.5 percent times 9 years), and at all times during the plan year 
after meeting the 1,000-hour requirement the employee has a total accrued benefit of at 
least 15 percent of his or her highest average compensation (1.5 percent times 10 years), 
the employee will be treated as a qualified participant in the retirement system within the 
meaning of section 31.3121(b)(7)-2(d)(1) of the regulations throughout the plan year. 
 
SECTION 4. DEFINED BENEFIT RETIREMENT SYSTEMS WITH BENEFIT 
FORMULAS NOT DESCRIBED IN THE SAFE HARBORS OF SECTION 3 
.01 In general. 
A defined benefit retirement system that calculates benefits under a formula that does not 
meet one of the safe harbor formulas described in section 3 of this revenue procedure 
meets the minimum retirement benefit requirement with respect to an employee if the 
employee’s accrued benefit as of the date of the determination is at least as great as the 
accrued benefit the employee would have if his or her accrued benefit had been 
calculated under the safe harbor formula in section 3.01(l). In determining whether this 
requirement is satisfied, the additional requirements set forth in section 3.03 must be 
taken into account. The rules in this paragraph are illustrated by the following example: 
Example. A defined benefit plan maintained by a political subdivision and described in 
section 457(b) of the Code provides only for single sum distributions and thus does not 
meet the requirements of any of the defined benefit safe harbor formulas. The plan may 
still meet the minimum retirement benefit requirement with respect to an employee if it 
provides a single sum with respect to such employee that is the actuarial equivalent 
(using reasonable actuarial assumptions) of a single life annuity meeting the requirements 
of section 3.01(1). 
.02 Treatment of past service credit. 
In determining whether an employee’s accrued benefit under a defined benefit retirement 
system that calculates benefits under a formula that does not meet one of the defined 
benefit safe harbor formulas is at least as great as the accrued benefit the employee would 
have if his or her accrued benefit had been calculated under the safe harbor formula in 
section 3.01(1), a retirement system may ignore periods of service by an employee with 
the employer prior to his or her commencement of participation in the retirement system, 
notwithstanding the additional rules relating to credited service in section 3.03(2). If such 
periods of service are ignored, however, any accrued benefits attributable to such period 
of service must also be ignored. The rule in this paragraph is illustrated by the following 
example: 
Example: An employee begins to participate in a retirement system in the employee’s 
fifth year of service. The retirement system provides credit for all past service with the 
employer. Assume the retirement system does not provide benefits under a formula that 
meets the requirements of any of the safe harbors. The employee must be treated as being 
in the employee’s fifth year of credited service if benefits attributable to the past service 
are to be taken into account in comparing the benefit under the retirement system to the 
benefit the employee would have under the safe harbor formula of section 3.01(1) to 
determine whether the minimum retirement benefit requirement is met. 
SECTION 5. EMPLOYEES WITH MULTIPLE POSITIONS OR WHO PARTICPATE 
IN CERTAIN 

                                        xlv

- 163 -

RETIREMENT SYSTEMS 
See section 31.3121(b)(7)-2(e)(2)(iv) and (v) of the regulations for rules to be used in 
determining the service, compensation and benefits taken into account for purposes of 
this revenue procedure in the case of employees who are employed in more than one 
position with the employer, and employees who are participants in retirement systems 
maintained by more than one employer, respectively. 
SECTION 6. EFFECTIVE DATE 
This revenue procedure is effective with respect to service performed after July 1, 1991. 
                    
                          xlvi

- 164 -

                Guide to the Citations in this Publication 
 
Citation Source  Example            Purpose 
Internal Revenue  IRC §132(a)(1)    Title 26 of the United States Code, the primary 
Code                                statutory authority for laws dealing with federal 
                                    tax. 
Treasury        Reg. §1.162-2(a)(2) Provides guidance for new legislation or to address 
Regulation                          issues that arise with respect to existing Internal 
                                    Revenue Code sections. Regulations interpret and 
                                    give directions on complying with the law. 
Treasury        Prop. Reg. 106897-08  Generally, regulations are first published in 
Proposed                            proposed form in a Notice of Proposed 
Regulation                          Rulemaking (NPRM). 
Treasury        TD 9696             Document that contains the text of a final or 
Decision                            temporary regulation 
Revenue         RP 2014-1           An official statement of a procedure that affects 
Procedure                           the rights or duties of taxpayers or other members 
                                    of the public under the Internal Revenue Code, 
                                    related statutes, tax treaties and regulations and 
                                    that should be a matter of public knowledge. 
Revenue Ruling  RR 2012-25          An official interpretation by the IRS of the Internal 
                                    Revenue Code, related statutes, tax treaties and 
                                    regulations. It is the conclusion of the IRS on how 
                                    the law is applied to a specific set of facts. 
Notice          Notice 98-03        A public pronouncement that may contain 
                                    guidance that involves substantive interpretations 
                                    of the Internal Revenue Code or other provisions 
                                    of the law. 
Announcements   Ann. 85-113         A public pronouncement that has only immediate 
                                    or short-term value. 
Private Letter  PLR 200437030       A private letter ruling, or PLR, is a written 
Ruling                              statement issued to a taxpayer that interprets and 
                                    applies tax laws to the taxpayer's specific set of 
                                    facts. A PLR may not be relied on as precedent by 
                                    other taxpayers or IRS personnel. 
Technical       TAM 200222003       Guidance furnished by the Office of Chief Counsel 
Advice                              to IRS personnel in response to an internal request, 
Memorandum                          concerning technical or procedural questions that 
                                    develop during a proceeding. 
Supreme Court   269 U.S. 514 (1926) Final decision on tax matter presented to Supreme 
Decision                            Court from lower courts. 
Social Security 42 U.S.C. section 418  Original 1935 legislation establishing social 
Act                                 security; now Title 42 of the United States Code. 
 
                                    xlvii

- 165 -

Statutory Citations for State Enabling Laws

As of July 2014
State or U.S. Citation
Territory
Alabama Code of Alabama, Title 36. Public Officers and Employees, Chapter 28, Social
Security for State, Municipal, Etc., Employees, § 36-28-1, et seq.
Alaska Alaska Statutes Annotated, Title 39, Public Officers and Employees, Chapter 30.
Insurance and Supplemental Employee Benefits, Article 1, Old Age and
Survivors Insurance, § 39.30.010, et seq.
Arizona Arizona Revised Statutes Annotated, Title 38. Public Officers and Employees,
Chapter 5. Social Security and Retirement, Article 1, Social Security for Public
Officers and Employees, § 38-701 et seq.
Arkansas Arkansas Code Annotated, Title 24. Retirement and Pensions, Chapter 1.
General Provisions, Subchapter 2. Public Employees' Social Security, § 24-1-
201, et seq.
California Annotated California Codes, Government Code, Title 2. Government of the State
of California, Division 5. Personnel, Part 4. Federal Old Age and Survivors'
Insurance, Chapter 1. General Provisions, Definitions, Designation of Special
Groups, Article 1. General Provisions and Definitions, § 22000, et seq.
Colorado Colorado Revised Statutes Annotated, Title 24. Government—State Public
Employees' Retirement Systems, Article 53. Public Employees' Social Security,
§ 24-53-101, et seq.
Connecticut Connecticut General Statutes Annotated, Title 5. State Employees, Chapter 66.
State Employees Retirement Act, Part I. General Provisions, § 5-152 et seq.
Delaware Delaware Code Annotated, Title 29. State Government, Part V. Public Officers
and Employees, Chapter 57. Social Security, § 5701, et seq.
Florida Florida Statutes Annotated, Title XXXVII. Insurance (Chapters 624-651),
Chapter 650. Social Security for Public Employees 650.01, et seq.
Georgia Code of Georgia Annotated, Title 47. Retirement and Pensions, Chapter 18.
Social Security Coverage for Employees of the State and Political Subdivisions of
the State, Article 1. General Provisions § 47-18-1, et seq.
Hawaii Hawai‘i Revised Statutes Annotated, Division 1. Government, Title 7. Public
Officers and Employees, Chapter 88. Pension and Retirement Systems, Part VI.
Federal Social Security for Public Employees, § 88-211, et seq.
Idaho Idaho Code Annotated, Title 59. Public Officers in General, Chapter 11. Social
Security Benefits, § 59-1101, et seq.
Illinois Smith-Hurd Illinois Compiled Statutes Annotated, Chapter 40. Pensions, Act 5.
Illinois Pension Code, Article 21, Social Security Enabling Act 5/21-101, et seq.
Indiana Annotated Indiana Code, Title 5. State and Local Administration, Article 10.1.
Social Security Coverage for Public Employees, Chapter 1. Definitions, 5-10.1-1-
1, et seq.
Iowa Iowa Code Annotated, Title III. Public Services and Regulation [Chs. 80-122C],
Subtitle 3. Retirement Systems [Chs. 97-98A], Chapter 97C. Federal Social
Security Enabling Act, 97C.1, et seq.
Kansas Kansas Statutes Annotated, Chapter 40. Insurance, Article 23. Old-Age and

xlviii

- 166 -

Statutory Citations for State Enabling Laws

As of July 2014
State or U.S. Citation
Territory
Survivors Insurance for Public Employees, 40-2301.
Kentucky Baldwin's Kentucky Revised Statutes Annotated, Title VIII. Offices and Officers,
Chapter 61, General Provisions as to Offices and Officers; Social Security for
Public Employees; Employees Retirement System, General Provisions, Social
Security for Public Employees, 61.410 , et seq.
Louisiana Louisiana Statutes Annotated, Louisiana Revised Statutes, Title 42. Public
Officers and Employees, Chapter 13. Old Age, Survivors, Disability, and Health
Insurance, § 1001, et seq.
Maine Maine Revised Statutes Annotated, Title 5. Administrative Procedures and
Services, Part 21. Social Security for State and Municipal Employees, Chapter
431. Social Security for State and Municipal Employees, § 19001, et seq.
Maryland Annotated Code of Maryland, State Personnel and Pensions, Division III. Other
Retirement and Pension Provisions [Titles 35-End], Title 36. Social Security
Benefits, § 36-101, et seq.
Massachusetts Massachusetts General Laws Annotated, Part I. Administration of the
Government (Ch. 1-182), Title XVII. Public Welfare (Ch. 115-123B), Chapter
118C. Coverage of Certain Employees Under the Federal Social Security Act, §
1, et seq.
Michigan Michigan Compiled Laws Annotated, Chapter 38. Civil Service and Retirement,
Social Security for Public Employees, 38.851, et seq.
Minnesota Minnesota Statutes Annotated, Retirement (Ch. 352-356B), Chapter 355. Social
Security Coverage, State and Local Government Employees, § 355.01, et seq.
Mississippi West’s Annotated Mississippi Code, Title 25. Public Officers and Employees;
Public Records, Chapter 11. Social Security and Public Employees' Retirement
and Disability Benefits, Article 1. Social Security Benefits, § 25-11-1, et seq.
Missouri Vernon's Annotated Missouri Statutes, Title VIII. Public Officers and Employees,
Bonds and Records, Chapter 105. Public Officers and Employees--Miscellaneous
Provisions Generally, § 105.005, et seq.
Montana Montana Code Annotated, Title 19. Public Retirement Systems, Chapter 1. Social
Security, Part 1. General Provisions, § 19-1-101, et seq.
Nebraska Revised Statutes of Nebraska Annotated, Chapter 68. Public Assistance, Article
6. Social Security, §68-601, et seq.
Nevada Nevada Revised Statutes Annotated , Title 23. Public Officers and Employees
(Chapters 281-289), Chapter 287. Programs for Public Employees, Participation
of Employees of State and Its Political Subdivisions in Federal Old-Age and
Survivors' Insurance, §287.050, et seq.
New Revised Statutes Annotated of the State of New Hampshire, Title VI. Public
Hampshire Officers and Employees (Ch. 91 to 103), Chapter 101. Old Age and Survivors'
Insurance, §101:1, et seq.
New Jersey New Jersey Statutes, TITLE 43. Pensions and Retirement and Unemployment
Compensation, Subtitle 9 Social Security, Chapter 22, Old Age and Survivors

xli x

- 167 -

Statutory Citations for State Enabling Laws

As of July 2014
State or U.S. Citation
Territory
Insurance for Public Employees, § 43:22-1, et seq.
New Mexico New Mexico Statutes Annotated, Chapter 10. Public Officers and Employees,
Article 14. Social Security Coverage § 10-14-1, et seq.
New York McKinney's Consolidated Laws of New York Annotated, Retirement and Social
Security Law, Chapter 51-A of the Consolidated Laws, Article 1. Short Title § 1.
Short title of chapter, Article 3. Federal Old-Age and Survivors Insurance
Coverage for Certain Public Employees § 130, et seq.
North North Carolina General Statutes Annotated, Chapter 135. Retirement System for
Carolina Teachers and State Employees; Social Security; State Health Plan for Teachers
and State Employees, Article 2. Coverage of Governmental Employees Under
Title II of the Social Security Act § 135-19, et seq.
North Dakota North Dakota Century Code Annotated, Title 52. Social Security, Chapter 52-10.
Public Employees Under Federal Social Security § 52-10-01, et seq.
Ohio Baldwin's Ohio Revised Code Annotated, Title I. State Government, Chapter 144.
Old Age and Survivors Insurance--Municipal Employees 144.01, et seq.
Oklahoma Oklahoma Statutes Annotated, Title 51. Officers, Chapter 4. Old Age and
Survivors Insurance Under Federal Act, § 121, et seq.
Oregon Oregon Revised Statutes Annotated, Title 22. Public Officers and Employees,
Chapter 237. Public Employee Retirement Generally, Social Security Act
Coverage, 237.410, et seq.
Pennsylvania Purdon's Pennsylvania Statutes and Consolidated Statutes, Title 65 P.S. Public
Officers, Chapter 10. Public Officer and Employee Social Security Contribution
Law § 201, et seq.
Puerto Rico Laws of Puerto Rico Annotated, Title Three. Executive, Chapter 33. Retirement
of Government Personnel Federal social security for Puerto Rico § 813, et seq.
Rhode Island General Laws of Rhode Island Annotated, Title 36. Public Officers and
Employees, Chapter 7. Federal Old-Age and Survivors' Insurance, § 36-7-1, et
seq.
South Code of Laws of South Carolina 1976 Annotated, Title 9. Retirement Systems,
Carolina Chapter 3. Coverage of Public Officers and Employees, Under Federal Social
Security Act, Article 1. General Provisions § 9-3-10, et seq.
South Dakota South Dakota Codified Laws, Title 3. Public Officers and Employees, Chapter 3-
11. Social Security Coverage 3-11-1, et seq.
Tennessee West's Tennessee Code Annotated, Title 8. Public Officers and Employees,
Chapter 38. Social Security § 8-38-101, et seq.
Texas Vernon's Texas Statutes and Codes Annotated, Government Code, Title 6. Public
Officers and Employees, Subtitle A. Provisions Generally Applicable to Public
Officers and Employees, Chapter 606. Social Security, Subchapter A. General
Provisions § 606.001, et seq.
Utah Utah Code Annotated, Title 67. State Officers and Employees, Chapter 11.
Federal Social Security § 67-11-1, et seq.

- 168 -

Statutory Citations for State Enabling Laws

As of July 2014
State or U.S. Citation
Territory
Vermont Vermont Statutes Annotated, Title Three. Executive, Part 1. Generally, Chapter
19. Social Security for State and Municipal Employees § 571, et seq.
Virginia Annotated Code of Virginia, Title 51.1. Pensions, Benefits, and Retirement,
Chapter 7. Federal Social Security for State and Local Employees § 51.1-700, et
seq.
Virgin Islands Bill Number 10, Sixteenth Session, 1951.
Washington Revised Code of Washington Annotated, Title 41. Public Employment, Civil
Service, and Pensions, Chapter 41.48. Federal Social Security for Public
Employees 41.48.010, et seq.
West Virginia Annotated Code of West Virginia, Chapter 5. General Powers and Authority of
the Governor, Secretary of State and Attorney General; Board of Public Works;
Miscellaneous Agencies, Commissions, Offices, Programs, Etc., Article 7. Social
Security Agency, § 5-7-1, et seq.
Wisconsin Wisconsin Statutes Annotated, Public Employee Trust Fund (Ch. 40), Chapter 40.
Public Employee Trust Fund, Subchapter III. Social Security for Public
Employees 40.40, et seq.
Wyoming Wyoming Statutes Annotated, Title 9. Administration of the Government,
Chapter 3. Compensation and Benefits, Article 3. Social Security § 9-3-301, et
seq.

- 169 -

Index 

Absolute coverage group, 5-3                  retirement system, 5-3 
Accountable plan, 3-7                         Coverage under section 218, 5-1 
Additional Medicare tax, 3-2                  Deceased employee wages, 3-5 
Alternative lookback rule, retirement         Defined benefit plan, 6-3 
 system, 6-8                                  Defined contribution plan, 6-2 
Appointed officials, 5-20                     Deposit rules, 3-18 
Back pay, 3-5                                 Disclosure of tax information, 8-5 
Board members, 3-24                           Divided retirement system, 5-4 
Cafeteria plans, 3-9                          Earnings record, 7-3 
Catch-up contributions                        Elected officials, 4-9 
 403(b), 3-12                                 Election workers/officials, 3-17 
 457(b) plans, 3-12                           Elective positions, 4-9 
Cents-per-mile rule, 3-8                      Electronic Federal Tax Payment System 
Clothing provided by employer, 3-9            (EFTPS), 3-18 
COBRA, 5-17                                   Emergency workers, 3-24, 5-15 
Common-law employee, 4-2                      Employer Identification Number (EIN), 
Commuting rule, 3-8                           3-13 
Conservation district, 2-4                    Employer pick-up contributions, 3-12 
Continuation of coverage, social              Employer-provided clothing, 3-9 
 security, 5-5                                Employer-provided vehicles, 3-8 
Continuing employment exception, 5-18         Estimated tax penalty, 3-21 
Correcting employment tax returns, 3-18       Exceptions to social security coverage, 
Correcting wage reports, 7-13                 3-3 
Coverage group                                Excluded services, 5-19 
 absolute, 5-3                                Federal government, authority, 2-1 
 defined, 5-2                                 Federal income tax withholding,  3-21 

                                          lii

- 170 -

Federal, State and Local Governments              Information reporting 
(FSLG), 8-1                                       penalties, 3-23 
Fee-based public officials, 5-13                  requirements, 3-18 
FICA (Federal Insurance Contributions             Information return reporting,  3-14 
Act), 7-3                                         Inmates, 3-24 
FICA replacement plan. See Public                 Instrumentality, defined, 2-2 
retirement system                                 Interest on tax due, 3-23 
Fire associations, 2-4                            Internal Revenue Service, 1-2, 1-3, 1-7, 
Firefighters, 4-10                                8-1 
Firefighters, social security coverage, 5-        Interstate instrumentalities, 2-3 
15                                                Lease value rule, 3-8 
Flexible spending arrangement, 3-9                Leased workers, 4-11 
Foreign workers, 5-15                             Local government 
Form                                              authority, 2-2 
1099-MISC, 4-11                                   defined, 2-2 
2848, 8-5                                         Lookback period, deposit rules, 3-19 
8821,8-2  , 8-5                                   Mandatory exclusions 
941, 3-15                                         social security coverage, 5-6 
941X, 3-16                                        volunteer coverage, 5-6 
943, 3-15                                         Mandatory Medicare 
944, 3-15                                         continuing employment exception, 5-
945, 3-20                                           18 
I-9, 7-12                                         Mandatory Medicare coverage, 5-17 
SS-8, 4-7                                         Mandatory social security coverage, 5-
SSA-7004, 7-11                                    10 
W-2, 3-14                                         Meals furnished by employer, 3-11 
W-3, 3-14                                         Medicaid, 7-10 
W-4, 3-21                                         Medicare 
W-9, 4-11                                         benefits, 7-3 
Former participants, retirement plan, 6-8         coverage rules, 5-18 
Forms                                             services not covered, 5-18 
SSA-1945, 3-14                                    voluntary, 5-19 
Fringe benefits, 3-7                              Medicare Qualified Government 
FSLG  (Federal, State, and Local                  Employment (MQGE), 3-16 
Governments), 8-1                                 Military differential pay, 3-4 
Full retirement age, 7-4                          Modifications, Section 218 Agreement, 
FUTA (unemployment tax), 2-6, 3-21                5-2 
Government Pension Offset (GPO),     7-6          Multiple employers and wage base, 3-16 
Group-term life insurance, 3-10                   Multiple positions, employee, 6-7 
Health benefits, 3-9                              National Conference of State Social 
Identity of employer, 4-11, 5-16                  Security Administrators (NCSSSA), 9-
Income tax withholding, 3-21                      2 
Independent contractor                            Noncash payments, 3-6 
defined, 4-1                                      Nonpayroll withholding, 3-20 
tax responsibilities, 4-11                        Nonqualified plan, 3-13 
Indian Tribal Governments, ii, 2-5 5-17,          Nonretirement coverage group, 5-3 

                                             liii

- 171 -

Optional exclusions                              benefits, 7-3 
section 218 coverage, 5-8                        coverage, 5-1 
Parallel Social Security Office (PSSO),          earnings record, 7-2 
7-1                                              exclusions, 5-6 
Part-time employees, 6-5, 6-6                    history, 1-1 
Penalties, 3-21                                  key dates,  1-2
estimated tax, 3-21                              optional exclusions, 5-8 
information reporting, 3-23                      Section 218 Agreement, 5-2 
trust fund recovery penalty, 3-22                Social Security Administration, 1-7, 7-1, 
Pick-up contributions, 3-12                      7-9 8-3,  
Police officers, social security coverage,       Social security and Medicare wages, 
5-15                                             defined, 3-1 
Prisoners. See Inmates                           Social security coverage, 1-3 
Public officials, 4-8                            mandatory, 5-10 
Public retirement system, 1-4, 6-1, 6-9          Social security coverage exclusions, 5-6 
alternative lookback rule, 6-8                   Social security number, 7-2, 7-11 
definition, 6-1                                  Social security number verification 
qualified participant, 6-3                       service, 7-11 
Qualified nonpersonal use vehicle, 3-8           Social Security Statement, 7-11 
Qualified participant, retirement plan, 6-       Social security wage base, 3-2 
3                                                Soil conservation district, 2-4 
Qualified retirement plan, income tax            State government 
withholding, 3-11                                authority, 2-1 
Referendum (social security coverage)            State Social Security Administrator, 1-7, 
divided system, 5-4                              9-1 
majority vote, 5-4                               Subdivisions of government, 2-2 
Regional Commissioner, SSA, 7-2                  Tax sheltered annuity, 3-12 
Rehired annuitants, 6-9                          Taxing authority, 2-2 
Reimbursements, business expenses, 3-7           Temporary employees, 6-6 
Retirement plans, 3-11                           Temporary workers, 6-10 
Retirement system. See Public                    Third-party sick pay, 3-3 
retirement system                                Tool rate reimbursement, 3-8 
Retirement system coverage group, 5-3            Trust fund recovery penalty, 3-22 
Seasonal employees, 6-5, 6-6                     Vacation pay, 3-4 
Section 115, Internal Revenue Code, 2-1          Vehicle, employer-provided, 3-8 
Section 218 Agreement, 1-1, 1-3, 1-5, 1-         Vehicle, qualified nonpersonal use, 3-8 
8, 4-1, 5-1, 5-2, 5-17, 6-1, 6-11                Vesting requirements, 6-5 
mandatory exclusions, 5-6                        Voluntary coverage, section 218, 5-1 
modification, 1-9, 5-2                           Voluntary Medicare, 5-19 
termination, 5-2                                 Volunteer firefighters, 4-10 
Section 403(b) plan, 3-12                        Wage base, social security, 3-2 
Section 457 plan, 3-13                           Wages 
Section 530 (Revenue Act of 1978), 4-            deceased employee, 3-5 
12                                               noncash, 3-6 
Sick pay, 3-3                                    Water conservation district, 2-4 
Social security                                  Wholly-owned instrumentality, 2-3, 7 

                                             liv

- 172 -

Withholding                        Worker classification, 4-1 4-13,  
 qualified plans, 3-11             Worker status. See Worker classification 
Withholding, income tax, 3-21      Working condition fringe benefit, 3-8 
 
                                lv

PDF file checksum: 582174214

(Plugin #1/9.12/13.0)