[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2011 Edition]
[From the U.S. Government Printing Office]



[[Page i]]

          

                         Title 26

                      Internal Revenue


________________________

                     Parts 30 to 39

                         Revised as of April 1, 2011

          Containing a codification of documents of general 
          applicability and future effect

          As of April 1, 2011
                    Published by the Office of the Federal Register 
                    National Archives and Records Administration as a 
                    Special Edition of the Federal Register

[[Page ii]]

          U.S. GOVERNMENT OFFICIAL EDITION NOTICE

          Legal Status and Use of Seals and Logos
          
          
          The seal of the National Archives and Records Administration 
              (NARA) authenticates the Code of Federal Regulations (CFR) as 
              the official codification of Federal regulations established 
              under the Federal Register Act. Under the provisions of 44 
              U.S.C. 1507, the contents of the CFR, a special edition of the 
              Federal Register, shall be judicially noticed. The CFR is 
              prima facie evidence of the original documents published in 
              the Federal Register (44 U.S.C. 1510).

          It is prohibited to use NARA's official seal and the stylized Code 
              of Federal Regulations logo on any republication of this 
              material without the express, written permission of the 
              Archivist of the United States or the Archivist's designee. 
              Any person using NARA's official seals and logos in a manner 
              inconsistent with the provisions of 36 CFR part 1200 is 
              subject to the penalties specified in 18 U.S.C. 506, 701, and 
              1017.

          Use of ISBN Prefix

          This is the Official U.S. Government edition of this publication 
              and is herein identified to certify its authenticity. Use of 
              the 0-16 ISBN prefix is for U.S. Government Printing Office 
              Official Editions only. The Superintendent of Documents of the 
              U.S. Government Printing Office requests that any reprinted 
              edition clearly be labeled as a copy of the authentic work 
              with a new ISBN.

              
              
          U . S . G O V E R N M E N T P R I N T I N G O F F I C E

          ------------------------------------------------------------------

          U.S. Superintendent of Documents  Washington, DC 
              20402-0001

          http://bookstore.gpo.gov

          Phone: toll-free (866) 512-1800; DC area (202) 512-1800

[[Page iii]]




                            Table of Contents



                                                                    Page
  Explanation.................................................       v

  Title 26:
          Chapter I--Internal Revenue Service, Department of 
          the Treasury (Continued)                                   3
  Finding Aids:
      Table of CFR Titles and Chapters........................     485
      Alphabetical List of Agencies Appearing in the CFR......     505
      Table of OMB control numbers............................     515
      List of CFR Sections Affected...........................     533

[[Page iv]]





                     ----------------------------

                     Cite this Code: CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus,  26 CFR 31.0-1 
                       refers to title 26, part 
                       31, section 0-1.

                     ----------------------------

[[Page v]]



                               EXPLANATION

    The Code of Federal Regulations is a codification of the general and 
permanent rules published in the Federal Register by the Executive 
departments and agencies of the Federal Government. The Code is divided 
into 50 titles which represent broad areas subject to Federal 
regulation. Each title is divided into chapters which usually bear the 
name of the issuing agency. Each chapter is further subdivided into 
parts covering specific regulatory areas.
    Each volume of the Code is revised at least once each calendar year 
and issued on a quarterly basis approximately as follows:

Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1

    The appropriate revision date is printed on the cover of each 
volume.

LEGAL STATUS

    The contents of the Federal Register are required to be judicially 
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
evidence of the text of the original documents (44 U.S.C. 1510).

HOW TO USE THE CODE OF FEDERAL REGULATIONS

    The Code of Federal Regulations is kept up to date by the individual 
issues of the Federal Register. These two publications must be used 
together to determine the latest version of any given rule.
    To determine whether a Code volume has been amended since its 
revision date (in this case, April 1, 2011), consult the ``List of CFR 
Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative 
List of Parts Affected,'' which appears in the Reader Aids section of 
the daily Federal Register. These two lists will identify the Federal 
Register page number of the latest amendment of any given rule.

EFFECTIVE AND EXPIRATION DATES

    Each volume of the Code contains amendments published in the Federal 
Register since the last revision of that volume of the Code. Source 
citations for the regulations are referred to by volume number and page 
number of the Federal Register and date of publication. Publication 
dates and effective dates are usually not the same and care must be 
exercised by the user in determining the actual effective date. In 
instances where the effective date is beyond the cut-off date for the 
Code a note has been inserted to reflect the future effective date. In 
those instances where a regulation published in the Federal Register 
states a date certain for expiration, an appropriate note will be 
inserted following the text.

OMB CONTROL NUMBERS

    The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires 
Federal agencies to display an OMB control number with their information 
collection request.

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
amendments to existing regulations in the CFR. These OMB numbers are 
placed as close as possible to the applicable recordkeeping or reporting 
requirements.

OBSOLETE PROVISIONS

    Provisions that become obsolete before the revision date stated on 
the cover of each volume are not carried. Code users may find the text 
of provisions in effect on a given date in the past by using the 
appropriate numerical list of sections affected. For the period before 
April 1, 2001, consult either the List of CFR Sections Affected, 1949-
1963, 1964-1972, 1973-1985, or 1986-2000, published in eleven separate 
volumes. For the period beginning April 1, 2001, a ``List of CFR 
Sections Affected'' is published at the end of each CFR volume.

``[RESERVED]'' TERMINOLOGY

    The term ``[Reserved]'' is used as a place holder within the Code of 
Federal Regulations. An agency may add regulatory information at a 
``[Reserved]'' location at any time. Occasionally ``[Reserved]'' is used 
editorially to indicate that a portion of the CFR was left vacant and 
not accidentally dropped due to a printing or computer error.

INCORPORATION BY REFERENCE

    What is incorporation by reference? Incorporation by reference was 
established by statute and allows Federal agencies to meet the 
requirement to publish regulations in the Federal Register by referring 
to materials already published elsewhere. For an incorporation to be 
valid, the Director of the Federal Register must approve it. The legal 
effect of incorporation by reference is that the material is treated as 
if it were published in full in the Federal Register (5 U.S.C. 552(a)). 
This material, like any other properly issued regulation, has the force 
of law.
    What is a proper incorporation by reference? The Director of the 
Federal Register will approve an incorporation by reference only when 
the requirements of 1 CFR part 51 are met. Some of the elements on which 
approval is based are:
    (a) The incorporation will substantially reduce the volume of 
material published in the Federal Register.
    (b) The matter incorporated is in fact available to the extent 
necessary to afford fairness and uniformity in the administrative 
process.
    (c) The incorporating document is drafted and submitted for 
publication in accordance with 1 CFR part 51.
    What if the material incorporated by reference cannot be found? If 
you have any problem locating or obtaining a copy of material listed as 
an approved incorporation by reference, please contact the agency that 
issued the regulation containing that incorporation. If, after 
contacting the agency, you find the material is not available, please 
notify the Director of the Federal Register, National Archives and 
Records Administration, 8601 Adelphi Road, College Park, MD 20740-6001, 
or call 202-741-6010.

CFR INDEXES AND TABULAR GUIDES

    A subject index to the Code of Federal Regulations is contained in a 
separate volume, revised annually as of January 1, entitled CFR Index 
and Finding Aids. This volume contains the Parallel Table of Authorities 
and Rules. A list of CFR titles, chapters, subchapters, and parts and an 
alphabetical list of agencies publishing in the CFR are also included in 
this volume.
    An index to the text of ``Title 3--The President'' is carried within 
that volume.

[[Page vii]]

    The Federal Register Index is issued monthly in cumulative form. 
This index is based on a consolidation of the ``Contents'' entries in 
the daily Federal Register.
    A List of CFR Sections Affected (LSA) is published monthly, keyed to 
the revision dates of the 50 CFR titles.

REPUBLICATION OF MATERIAL

    There are no restrictions on the republication of material appearing 
in the Code of Federal Regulations.

INQUIRIES

    For a legal interpretation or explanation of any regulation in this 
volume, contact the issuing agency. The issuing agency's name appears at 
the top of odd-numbered pages.
    For inquiries concerning CFR reference assistance, call 202-741-6000 
or write to the Director, Office of the Federal Register, National 
Archives and Records Administration, 8601 Adelphi Road, College Park, MD 
20740-6001 or e-mail fedreg.info@nara.gov.

SALES

    The Government Printing Office (GPO) processes all sales and 
distribution of the CFR. For payment by credit card, call toll-free, 
866-512-1800, or DC area, 202-512-1800, M-F 8 a.m. to 4 p.m. e.s.t. or 
fax your order to 202-512-2104, 24 hours a day. For payment by check, 
write to: US Government Printing Office - New Orders, P.O. Box 979050, 
St. Louis, MO 63197-9000.

ELECTRONIC SERVICES

    The full text of the Code of Federal Regulations, the LSA (List of 
CFR Sections Affected), The United States Government Manual, the Federal 
Register, Public Laws, Public Papers of the Presidents of the United 
States, Compilation of Presidential Documents and the Privacy Act 
Compilation are available in electronic format via www.ofr.gov. For more 
information, contact the GPO Customer Contact Center, U.S. Government 
Printing Office. Phone 202-512-1800, or 866-512-1800 (toll-free). E-
mail, gpo@custhelp.com.
    The Office of the Federal Register also offers a free service on the 
National Archives and Records Administration's (NARA) World Wide Web 
site for public law numbers, Federal Register finding aids, and related 
information. Connect to NARA's web site at www.archives.gov/federal-
register.

    Raymond A. Mosley,
    Director,
    Office of the Federal Register.
    April 1, 2011.







[[Page ix]]



                               THIS TITLE

    Title 26--Internal Revenue is composed of twenty volumes. The 
contents of these volumes represent all current regulations issued by 
the Internal Revenue Service, Department of the Treasury, as of April 1, 
2011. The first thirteen volumes comprise part 1 (Subchapter A--Income 
Tax) and are arranged by sections as follows: Sec. Sec.  1.0-1.60; 
Sec. Sec.  1.61-1.169; Sec. Sec.  1.170-1.300; Sec. Sec.  1.301-1.400; 
Sec. Sec.  1.401-1.440; Sec. Sec.  1.441-1.500; Sec. Sec.  1.501-1.640; 
Sec. Sec.  1.641-1.850; Sec. Sec.  1.851-1.907; Sec. Sec.  1.908-1.1000; 
Sec. Sec.  1.1001-1.1400; Sec. Sec.  1.1401-1.1550; and Sec.  1.1551 to 
end. The fourteenth volume containing parts 2-29, includes the remainder 
of subchapter A and all of Subchapter B--Estate and Gift Taxes. The last 
six volumes contain parts 30-39 (Subchapter C--Employment Taxes and 
Collection of Income Tax at Source); parts 40-49; parts 50-299 
(Subchapter D--Miscellaneous Excise Taxes); parts 300-499 (Subchapter 
F--Procedure and Administration); parts 500-599 (Subchapter G--
Regulations under Tax Conventions); and part 600 to end (Subchapter H--
Internal Revenue Practice).

    The OMB control numbers for Title 26 appear in Sec.  602.101 of this 
chapter. For the convenience of the user, Sec.  602.101 appears in the 
Finding Aids section of the volumes containing parts 1 to 599.

    For this volume, Susannah C. Hurley was Chief Editor. The Code of 
Federal Regulations publication program is under the direction of 
Michael L. White, assisted by Ann Worley.

[[Page 1]]



                       TITLE 26--INTERNAL REVENUE




                   (This book contains parts 30 to 39)

  --------------------------------------------------------------------
                                                                    Part

chapter i--Internal Revenue Service, Department of the 
  Treasury (Continued)......................................          31

[[Page 3]]



    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)




  --------------------------------------------------------------------


  Editorial Note: IRS published a document at 45 FR 6088, Jan. 25, 1980, 
deleting statutory sections from their regulations. In Chapter I, cross 
references to the deleted material have been changed to the 
corresponding sections of the IRS Code of 1954 or to the appropriate 
regulations sections. When either such change produced a redundancy, the 
cross reference has been deleted. For further explanation, see 45 FR 
20795, March 31, 1980.

  SUBCHAPTER C--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE
Part                                                                Page
30             [Reserved]

31              Employment taxes and collection of income 
                    tax at source...........................           5
32              Temporary employment tax regulations under 
                    the Act of December 29, 1981 (Pub. L. 
                    97-123).................................         429
34             [Reserved]

35              Employment tax and collection of income tax 
                    at source regulations under the Tax 
                    Equity and Fiscal Responsibility Act of 
                    1982....................................         436
35a             Temporary employment tax regulations under 
                    the Interest and Dividend Tax Compliance 
                    Act of 1983.............................         462
36              Contract coverage of employees of foreign 
                    subsidiaries............................         470
37-39          [Reserved]

[[Page 5]]



  SUBCHAPTER C_EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE



                           PART 30 [RESERVED]



PART 31_EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE--
Table of Contents



                         Subpart A_Introduction

Sec.
31.0-1 Introduction.
31.0-2 General definitions and use of terms.
31.0-3 Scope of regulations.
31.0-4 Extent to which the regulations in this part supersede prior 
          regulations.

  Subpart B_Federal Insurance Contributions Act (Chapter 21, Internal 
                          Revenue Code of 1954)

                            Tax on Employees

31.3101-1 Measure of employee tax.
31.3101-2 Rates and computation of employee tax.
31.3101-3 When employee tax attaches.
31.3102-1 Collection of, and liability for, employee tax; in general.
31.3102-2 Manner and time of payment of employee tax.
31.3102-3 Collection of, and liability for, employee tax on tips.

                            Tax on Employers

31.3111-1 Measure of employer tax.
31.3111-2 Rates and computation of employer tax.
31.3111-3 When employer tax attaches.
31.3111-4 Liability for employer tax.
31.3111-5 Manner and time of payment of employer tax.
31.3112-1 Instrumentalities of the United States specifically exempted 
          from the employer tax.

                           General Provisions

31.3121(a)-1 Wages.
31.3121(a)-1T Question and answer relating to the definition of wages in 
          section 3121(a) (Temporary).
31.3121(a)-2 Wages; when paid and received.
31.3121(a)-3 Reimbursement and other expense allowance amounts.
31.3121(a)(1)-1 Annual wage limitation.
31.3121(a)(2)-1 Payments on account of sickness or accident disability, 
          medical or hospitalization expenses, or death.
31.3121(a)(3)-1 Retirement payments.
31.3121(a)(4)-1 Payments on account of sickness or accident disability, 
          or medical or hospitalization expenses.
31.3121(a)(5)-1 Payments from or to certain tax-exempt trusts, or under 
          or to certain annuity plans or bond purchase plans.
31.3121(a)(5)-2 Payments under or to an annuity contract described in 
          section 403(b).
31.3121(a)(6)-1 Payment by an employer of employee tax under section 
          3101 or employee contributions under a State law.
31.3121(a)(7)-1 Payments for services not in the course of employer's 
          trade or business or for domestic service.
31.3121(a)(8)-1 Payments for agricultural labor.
31.3121(a)(9)-1 Payments to employees for nonwork periods.
31.3121(a)(10)-1 Payments to certain home workers.
31.3121(a)(11)-1 Moving expenses.
31.3121(a)(12)-1 Tips.
31.3121(a)(13)-1 Payments under certain employers' plans after 
          retirement, disability, or death.
31.3121(a)(14)-1 Payments by employer to survivor or estate of former 
          employee.
31.3121(a)(15)-1 Payments by employer to disabled former employee.
31.3121(a)(18)-1 Payments or benefits under a qualified educational 
          assistance program.
31.3121(b)-1 Employment; services to which the regulations in this 
          subpart apply.
31.3121(b)-2 Employment; services performed before 1955.
31.3121(b)-3 Employment; services performed after 1954.
31.3121(b)-4 Employment; excepted services in general.
31.3121(b)(1)-1 Certain services performed by foreign agricultural 
          workers, or performed before 1959 in connection with 
          oleoresinous products.
31.3121(b)(2)-1 Domestic service performed by students for certain 
          college organizations.
31.3121(b)(3)-1 Family employment.
31.3121(b)(4)-1 Services performed on or in connection with a non-
          American vessel or aircraft.
31.3121(b)(5)-1 Services in employ of an instrumentality of the United 
          States specifically exempted from the employer tax.
31.3121(b)(6)-1 Services in employ of United States or instrumentality 
          thereof.
31.3121(b)(7)-1 Services in employ of States or their political 
          subdivisions or instrumentalities.
31.3121(b)(7)-2 Service by employees who are not members of a public 
          retirement system.

[[Page 6]]

31.3121(b)(8)-1 Services performed by a minister of a church or a member 
          of a religious order.
31.3121(b)(8)-2 Services in employ of religious, charitable, 
          educational, or certain other organizations exempt from income 
          tax.
31.3121(b)(9)-1 Railroad industry; services performed by an employee or 
          an employee representative as defined in section 3231.
31.3121(b)(10)-1 Services for remuneration of less than $50 for calendar 
          quarter in the employ of certain organizations exempt from 
          income tax.
31.3121(b)(10)-2 Services performed by certain students in the employ of 
          a school, college, or university, or of a nonprofit 
          organization auxiliary to a school, college, or university.
31.3121(b)(11)-1 Services in the employ of a foreign government.
31.3121(b)(12)-1 Services in employ of wholly owned instrumentality of 
          foreign government.
31.3121(b)(13)-1 Services of student nurse or hospital intern.
31.3121(b)(14)-1 Services in delivery or distribution of newspapers, 
          shopping news, or magazines.
31.3121(b)(15)-1 Services in employ of international organization.
31.3121(b)(16)-1 Services performed under share-farming arrangement.
31.3121(b)(17)-1 Services in employ of Communist organization.
31.3121(b)(18)-1 Services performed by a resident of the Republic of the 
          Philippines while temporarily in Guam.
31.3121(b)(19)-1 Services of certain nonresident aliens.
31.3121(b)(20)-1 Service performed on a boat engaged in catching fish.
31.3121(c)-1 Included and excluded services.
31.3121(d)-1 Who are employees.
31.3121(d)-2 Who are employers.
31.3121(e)-1 State, United States, and citizen.
31.3121(f)-1 American vessel and aircraft.
31.3121(g)-1 Agricultural labor.
31.3121(h)-1 American employer.
31.3121(i)-1 Computation to nearest dollar of cash remuneration for 
          domestic service.
31.3121(i)-2 Computation of remuneration for service performed by an 
          individual as a member of a uniformed service.
31.3121(i)-3 Computation of remuneration for service performed by an 
          individual as a volunteer or volunteer leader within the 
          meaning of the Peace Corps Act.
31.3121(i)-4 Computation of remuneration for service performed by 
          certain members of religious orders.
31.3121(j)-1 Covered transportation service.
31.3121(k)-1 Waiver of exemption from taxes.
31.3121(k)-2 Waivers of exemption; original effective date changed 
          retroactively.
31.3121(k)-3 Request for coverage of individual employed by exempt 
          organization before August 1, 1956.
31.3121(k)-4 Constructive filing of waivers of exemption from social 
          security taxes by certain tax-exempt organizations.
31.3121(l)-1 Agreements entered into by domestic corporations with 
          respect to foreign subsidiaries.
31.3121(o)-1 Crew leader.
31.3121(q)-1 Tips included for employee taxes.
31.3121(r)-1 Election of coverage by religious orders.
31.3121(s)-1 Concurrent employment by related corporations with common 
          paymaster.
31.3121(v)(2)-1 Treatment of amounts deferred under certain nonqualified 
          deferred compensation plans.
31.3121(v)(2)-2 Effective dates and transition rules.
31.3123-1 Deductions by an employer from remuneration of an employee.

Subpart C_Railroad Retirement Tax Act (Chapter 22, Internal Revenue Code 
                                of 1954)

                            Tax on Employees

31.3201-1 Measure of employee tax.
31.3201-2 Rates and computation of employee tax.
31.3202-1 Collection of, and liability for, employee tax.

                     Tax on Employee Representatives

31.3211-1 Measure of employee representative tax.
31.3211-2 Rates and computation of employee representative tax.
31.3211-3 Employee representative supplemental tax.
31.3212-1 Determination of compensation.

                            Tax on Employers

31.3221-1 Measure of employer tax.
31.3221-2 Rates and computation of employer tax.
31.3221-3 Supplemental tax.
31.3221-4 Exception from supplemental tax.

                           General Provisions

31.3231(a)-1 Who are employers.
31.3231(b)-1 Who are employees.
31.3231(c)-1 Who are employee representatives.
31.3231(d)-1 Service.
31.3231(e)-1 Compensation.

[[Page 7]]

31.3231(e)-2 Contribution base.

  Subpart D_Federal Unemployment Tax Act (Chapter 23, Internal Revenue 
                              Code of 1954)

31.3301-1 Persons liable for tax.
31.3301-2 Measure of tax.
31.3301-3 Rate and computation of tax.
31.3301-4 When wages are paid.
31.3302(a)-1 Credit against tax for contributions paid.
31.3302(a)-2 Refund of State contributions.
31.3302(a)-3 Proof of credit under section 3302(a).
31.3302(b)-1 Additional credit against tax.
31.3302(b)-2 Proof of additional credit under section 3302(b).
31.3302(c)-1 Limit on total credits.
31.3302(d)-1 Definitions and special rules relating to limit on total 
          credits.
31.3302(e)-1 Successor employer.
31.3306(a)-1 Who are employers.
31.3306(b)-1 Wages.
31.3306(b)-1T Question and answer relating to the definition of wages in 
          section 3306(b) (Temporary).
31.3306(b)-2 Reimbursement and other expense allowance amounts.
31.3306(b)(1)-1 $3,000 limitation.
31.3306(b)(2)-1 Payments under employers' plans on account of 
          retirement, sickness or accident disability, medical or 
          hospitalization expenses, or death.
31.3306(b)(3)-1 Retirement payments.
31.3306(b)(4)-1 Payments on account of sickness or accident disability, 
          or medical or hospitalization expenses.
31.3306(b)(5)-1 Payments from or to certain tax-exempt trusts, or under 
          or to certain annuity plans or bond purchase plans.
31.3306(b)(6)-1 Payment by an employer of employee tax under section 
          3101 or employee contributions under a State law.
31.3306(b)(7)-1 Payments other than in cash for service not in the 
          course of employer's trade or business.
31.3306(b)(8)-1 Payments to employees for non-work periods.
31.3306(b)(9)-1 Moving expenses.
31.3306(b)(10)-1 Payments under certain employers' plans after 
          retirement, disability, or death.
31.3306(b)(13)-1 Payments or benefits under a qualified educational 
          assistance program.
31.3306(c)-1 Employment; services performed before 1955.
31.3306(c)-2 Employment; services performed after 1954.
31.3306(c)-3 Employment; excepted services in general.
31.3306(c)(1)-1 Agricultural labor.
31.3306(c)(2)-1 Domestic service.
31.3306(c)(3)-1 Services not in the course of employer's trade or 
          business.
31.3306(c)(4)-1 Services on or in connection with a non-American vessel 
          or aircraft.
31.3306(c)(5)-1 Family employment.
31.3306(c)(6)-1 Services in employ of United States or instrumentality 
          thereof.
31.3306(c)(7)-1 Services in employ of States or their political 
          subdivisions or instrumentalities.
31.3306(c)(8)-1 Services in employ of religious, charitable, 
          educational, or certain other organizations exempt from income 
          tax.
31.3306(c)(9)-1 Railroad industry; services performed by an employee or 
          an employee representative under the Railroad Unemployment 
          Insurance Act.
31.3306(c)(10)-1 Services in the employ of certain organizations exempt 
          from income tax.
31.3306(c)(10)-2 Services of student in employ of school, college, or 
          university.
31.3306(c)(10)-3 Services before 1962 in employ of certain employees' 
          beneficiary associations.
31.3306(c)(11)-1 Services in employ of foreign government.
31.3306(c)(12)-1 Services in employ of wholly owned instrumentality of 
          foreign government.
31.3306(c)(13)-1 Services of student nurse or hospital intern.
31.3306(c)(14)-1 Services of insurance agent or solicitor.
31.3306(c)(15)-1 Services in delivery or distribution of newspapers, 
          shopping news, or magazines.
31.3306(c)(16)-1 Services in employ of international organization.
31.3306(c)(17)-1 Fishing services.
31.3306(c)(18)-1 Services of certain nonresident aliens.
31.3306(d)-1 Included and excluded service.
31.3306(i)-1 Who are employees.
31.3306(j)-1 State, United States, and citizen.
31.3306(k)-1 Agricultural labor.
31.3306(m)-1 American vessel and aircraft.
31.3306(n)-1 Services on American vessel whose business is conducted by 
          general agent of Secretary of Commerce.
31.3306(p)-1 Employees or related corporations.
31.3306(r)(2)-1 Treatment of amounts deferred under certain nonqualified 
          deferred compensation plans.
31.3307-1 Deductions by an employer from remuneration of an employee.
31.3308-1 Instrumentalities of the United States specifically exempted 
          from tax imposed by section 3301.

              Subpart E_Collection of Income Tax at Source

31.3401(a)-1 Wages.

[[Page 8]]

31.3401(a)-1T Question and answer relating to the definition of wages in 
          section 3401(a) (Temporary).
31.3401(a)-2 Exclusions from wages.
31.3401(a)-3 Amounts deemed wages under voluntary withholding 
          agreements.
31.3401(a)-4 Reimbursements and other expense allowance amounts.
31.3401(a)(1)-1 Remuneration of members of the Armed Forces of the 
          United States for active service in combat zone or while 
          hospitalized as a result of such service.
31.3401(a)(2)-1 Agricultural labor.
31.3401(a)(3)-1 Remuneration for domestic service.
31.3401(a)(4)-1 Cash remuneration for service not in the course of 
          employer's trade or business.
31.3401(a)(5)-1 Remuneration for services for foreign government or 
          international organization.
31.3401(a)(6)-1 Remuneration for services of nonresident alien 
          individuals.
31.3401(a)(6)-1A Remuneration for services of certain nonresident alien 
          individuals paid before January 1, 1967.
31.3401(a)(7)-1 Remuneration paid before January 1, 1967, for services 
          performed by nonresident alien individuals who are residents 
          of a contiguous country and who enter and leave the United 
          States at frequent intervals.
31.3401(a)(8)(A)-1 Remuneration for services performed outside the 
          United States by citizens of the United States.
31.3401(a)(8)(B)-1 Remuneration for services performed in possession of 
          the United States (other than Puerto Rico) by citizen of the 
          United States.
31.3401(a)(8)(C)-1 Remuneration for services performed in Puerto Rico by 
          citizen of the United States.
31.3401(a)(9)-1 Remuneration for services performed by a minister of a 
          church or a member of a religious order.
31.3401(a)(10)-1 Remuneration for services in delivery or distribution 
          of newspapers, shopping news, or magazines.
31.3401(a)(11)-1 Remuneration other than in cash for service not in the 
          course of employer's trade or business.
31.3401(a)(12)-1 Payments from or to certain tax-exempt trusts, or under 
          or to certain annuity plans or bond purchase plans, or to 
          individual retirement plans.
31.3401(a)(13)-1 Remuneration for services performed by Peace Corps 
          volunteers.
31.3401(a)(14)-1 Group-term life insurance.
31.3401(a)(15)-1 Moving expenses.
31.3401(a)(16)-1 Tips.
31.3401(a)(17)-1 Remuneration for services performed on a boat engaged 
          in catching fish.
31.3401(a)(18)-1 Payments or benefits under a qualified educational 
          assistance program.
31.3401(a)(19)-1 Reimbursements under a self-insured medical 
          reimbursement plan.
31.3401(b)-1 Payroll period.
31.3401(c)-1 Employee.
31.3401(d)-1 Employer.
31.3401(e)-1 Number of withholding exemptions claimed.
31.3401(f)-1 Tips.
31.3402(a)-1 Requirement of withholding.
31.3402(b)-1 Percentage method of withholding.
31.3402(c)-1 Wage bracket withholding.
31.3402(d)-1 Failure to withhold.
31.3402(e)-1 Included and excluded wages.
31.3402(f)(1)-1 Withholding exemptions.
31.3402(f)(2)-1 Withholding exemption certificates.
31.3402(f)(3)-1 When withholding exemption certificate takes effect.
31.3402(f)(4)-1 Period during which withholding exemption certificate 
          remains in effect.
31.3402(f)(4)-2 Effective period of withholding exemption certificate.
31.3402(f)(5)-1 Form and contents of withholding exemption certificates.
31.3402(f)(6)-1 Withholding exemptions for nonresident alien 
          individuals.
31.3402(g)-1 Supplemental wage payments.
31.3402(g)-2 Wages paid for payroll period of more than one year.
31.3402(g)-3 Wages paid through an agent, fiduciary, or other person on 
          behalf of two or more employers.
31.3402(h)(1)-1 Withholding on basis of average wages.
31.3402(h)(2)-1 Withholding on basis of annualized wages.
31.3402(h)(3)-1 Withholding on basis of cumulative wages.
31.3402(h)(4)-1 Other methods.
31.3402(i)-1 Additional withholding.
31.3402(i)-2 Increases or decreases in withholding.
31.3402(j)-1 Remuneration other than in cash for service performed by 
          retail commission salesman.
31.3402(k)-1 Special rule for tips.
31.3402(l)-1 Determination and disclosure of marital status.
31.3402(m)-1 Withholding allowances.
31.3402(n)-1 Employees incurring no income tax liability.
31.3402(o)-1 Extension of withholding to supplemental unemployment 
          compensation benefits.
31.3402(o)-2 Extension of withholding to annuity payments if requested 
          by payee.
31.3402(o)-3 Extension of withholding to sick pay.
31.3402(p)-1 Voluntary withholding agreements.
31.3402(q)-1 Extension of withholding to certain gambling winnings.
31.3402(r)-1 Withholding on distributions of Indian gaming profits to 
          tribal members.
31.3403-1 Liability for tax.

[[Page 9]]

31.3404-1 Return and payment by governmental employer.
31.3405(c)-1 Withholding on eligible rollover distributions; questions 
          and answers.
31.3406-0 Outline of the backup withholding regulations.
31.3406a-1 Backup withholding requirement on reportable payments.
31.3406a-2 Definition of payors obligated to backup withhold.
31.3406a-3 Scope and extent of accounts subject to backup withholding.
31.3406a-4 Time when payments are considered to be paid and subject to 
          backup withholding.
31.3406(b((2)-1 Reportable interest payment.
31.3406(b)(2)-2 Original issue discount.
31.3406(b)(2)-3 Window transactions.
31.3406(b)(2)-4 Reportable dividend payment.
31.3406(b)(2)-5 Reportable patronage dividend payment.
31.3406(b)(3)-1 Reportable payments of rents, commissions, nonemployee 
          compensation, etc.
31.3406(b)(3)-2 Reportable barter exchanges and gross proceeds of sales 
          of securities or commodities by brokers.
31.3406(b)(3)-3 Reportable payments by certain fishing boat operators.
31.3406(b)(3)-4 Reportable payments of royalties.
31.3406(b)(3)-5 Reportable payments of payment card and third party 
          network transactions.
31.3406(b)(4)-1 Exemption for certain minimal payments.
31.3406(c)-1 Notified payee underreporting of reportable interest or 
          dividend payments.
31.3406(d)-1 Manner required for furnishing a taxpayer identification 
          number.
31.3406(d)-2 Payee certification failure.
31.3406(d)-3 Special 30-day rules for certain reportable payments.
31.3406(d)-4 Special rules for readily tradable instruments acquired 
          through a broker.
31.3406(d)-5 Backup withholding when the Service or a broker notifies 
          the payor to withhold because the payee's taxpayer 
          identification number is incorrect.
31.3406(e)-1 Period during which backup withholding is required.
31.3406(f)-1 Confidentiality of information.
31.3406(g)-1 Exception for payments to certain payees and certain other 
          payments.
31.3406(g)-2 Exception for reportable payments for which withholding is 
          otherwise required.
31.3406(g)-3 Exemption while payee is waiting for a taxpayer 
          identification number.
31.3406(h)-1 Definitions.
31.3406(h)-2 Special rules.
31.3406(h)-3 Certificates.
31.3406(i)-1 Effective date.
31.3406(j)-1 Taxpayer Identification Number (TIN) matching program.

 Subpart F_General Provisions Relating to Employment Taxes (Chapter 25, 
                     Internal Revenue Code of 1954)

31.3501(a)-1T Question and answer relating to the time employers must 
          collect and pay the taxes on noncash fringe benefits 
          (Temporary).
31.3502-1 Nondeductibility of taxes in computing taxable income.
31.3503-1 Tax under chapter 21 or 22 paid under wrong chapter.
31.3504-1 Acts to be performed by agents.
31.3505-1 Liability of third parties paying or providing for wages.
31.3506-1 Companion sitting placement services.
31.3507-1 Advance payments of earned income credit.
31.3507-2 Earned income credit advance payment certificates.

Subpart G_Administrative Provisions of Special Application to Employment 
Taxes (Selected Provisions of Subtitle F, Internal Revenue Code of 1954)

31.6001-1 Records in general.
31.6001-2 Additional records under Federal Insurance Contributions Act.
31.6001-3 Additional records under Railroad Retirement Tax Act.
31.6001-4 Additional records under Federal Unemployment Tax Act.
31.6001-5 Additional records in connection with collection of income tax 
          at source on wages.
31.6001-6 Notice by district director requiring returns, statements, or 
          the keeping of records.
31.6011-4 Requirement of statement disclosing participation in certain 
          transactions by taxpayers.
31.6011(a)-1 Returns under Federal Insurance Contributions Act.
31.6011(a)-1T Returns under Federal Insurance Contributions Act 
          (temporary).
31.6011(a)-2 Returns under Railroad Retirement Tax Act.
31.6011(a)-3 Returns under Federal Unemployment Tax Act.
31.6011(a)-3A Returns of the railroad unemployment repayment tax.
31.6011(a)-4 Returns of income tax withheld.
31.6011(a)-4T Returns of income tax withheld (temporary).
31.6011(a)-5 Monthly returns.
31.6011(a)-6 Final returns.
31.6011(a)-7 Execution of returns.
31.6011(a)-8 Composite return in lieu of specified form.
31.6011(a)-9 Instructions to forms control as to which form is to be 
          used.

[[Page 10]]

31.6011(a)-10 Instructions to forms may waive filing requirement in case 
          of no liability tax returns.
31.6011(b)-1 Employers' identification numbers.
31.6011(b)-2 Employees' account numbers.
31.6051-1 Statements for employees.
31.6051-2 Information returns on Form W-3 and Internal Revenue Service 
          copies of Forms W-2.
31.6051-3 Statements required in case of sick pay paid by third parties.
31.6051-4 Statement required in case of backup withholding.
31.6053-1 Report of tips by employee to employer.
31.6053-2 Employer statement of uncollected employee tax.
31.6053-3 Reporting by certain large food or beverage establishments 
          with respect to tips.
31.6053-4 Substantiation requirements for tipped employees.
31.6060-1 Reporting requirements for tax return preparers.
31.6061-1 Signing of returns.
31.6065(a)-1 Verification of returns or other documents.
31.6071(a)-1 Time for filing returns and other documents.
31.6071(a)-1A Time for filing returns with respect to the railroad 
          unemployment repayment tax.
31.6081(a)-1 Extensions of time for filing returns and other documents.
31.6091-1 Place for filing returns.
31.6101-1 Period covered by returns.
31.6107-1 Tax return preparer must furnish copy of return to taxpayer 
          and must retain a copy or record.
31.6109-1 Supplying of identifying numbers.
31.6109-2 Tax return preparers furnishing identifying numbers for 
          returns or claims for refund.
31.6151-1 Time for paying tax.
31.6157-1 Cross reference.
31.6161(a)(1)-1 Extensions of time for paying tax.
31.6205-1 Adjustments of underpayments.
31.6205-2 Adjustments of underpayments of hospital insurance taxes that 
          accrue after March 31, 1986, and before January 1, 1987, with 
          respect to wages of State and local government employees.
31.6302-0 Table of Contents.
31.6302-0T Table of contents (temporary).
31.6302-1 Deposit rules for taxes under the Federal Insurance 
          Contributions Act (FICA) and withheld income taxes.
31.6302-1T Federal tax deposit rules for withheld income taxes and taxes 
          under the Federal Insurance Contributions Act (FICA) 
          attributable to payments made after December 31, 1992 
          (temporary).
31.6302-2 Deposit rules for taxes under the Railroad Retirement Tax Act 
          (RRTA).
31.6302-3 Federal tax deposit rules for amounts withheld under the 
          backup withholding requirements of section 3406 for payments 
          made after December 31, 1992.
31.6302-4 Deposit rules for withheld income taxes attributable to 
          nonpayroll payments.
31.6302(b)-1 Method of collection.
31.6302(c)-1 Use of Government depositories in connection with taxes 
          under Federal Insurance Contributions Act and income tax 
          withheld for amounts attributable to payments made before 
          January 1, 1993.
31.6302(c)-2 Use of Government depositories in connection with employee 
          and employer taxes under Railroad Retirement Tax Act for 
          amounts attributable to payments made before January 1, 1993.
31.6302(c)-3 Deposit rules for taxes under the Federal Unemployment Tax 
          Act.
31.6302(c)-4 Cross references.
31.6361-1 Collection and administration of qualified State individual 
          income taxes.
31.6402(a)-1 Credits or refunds.
31.6402(a)-2 Credit or refund of tax under Federal Insurance 
          Contributions Act or Railroad Retirement Tax Act.
31.6402(a)-3 Refund of Federal unemployment tax.
31.6404(a)-1 Abatements.
31.6413(a)-1 Repayment or reimbursement by employer of tax erroneously 
          collected from employee.
31.6413(a)-2 Adjustments of overpayments.
31.6413(a)-3 Repayment by payor of tax erroneously collected from payee.
31.6413(b)-1 Overpayments of certain employment taxes.
31.6413(c)-1 Special refunds.
31.6414-1 Credit or refund of income tax withheld from wages.
31.6652(c)-1 Failure of employee to report tips for purposes of the 
          Federal Insurance Contributions Act.
31.6674-1 Penalties for fraudulent statement or failure to furnish 
          statement.
31.6682-1 False information with respect to withholding.
31.6694-1 Section 6694 penalties applicable to tax return preparer.
31.6694-2 Penalties for understatement due to an unreasonable position.
31.6694-3 Penalty for understatement due to willful, reckless, or 
          intentional conduct.
31.6694-4 Extension of period of collection when tax return preparer 
          pays 15 percent of a penalty for understatement of taxpayer's 
          liability and certain other procedural matters.
31.6695-1 Other assessable penalties with respect to the preparation of 
          tax returns for other persons.
31.6696-1 Claims for credit or refund by tax return preparers.
31.7701-1 Tax return preparer.
31.7805-1 Promulgation of regulations.


[[Page 11]]


    Authority: 26 U.S.C. 7805.
    Sections 31.3121(a)-1, 31.3121(a)-3, 31.3231(e)-1, 31.3231(e)-3, 
31.3306(b)-1, 31.3306(b)-2, 31.3401(a)-1, and 31.3401(a)-4 also issued 
under 26 U.S.C. 62.
    Section 31.3121(b)(7)-2 also issued under 26 U.S.C. 3121(b)(7)(F).
    Section 31.3121(b)(19)-1 also issued under 26 U.S.C. 7701(b)(11).
    Section 31.3306(c)(18)-1 also issued under 26 U.S.C. 7701(b)(11).
    Section 31.3401(a)(6)-1 also issued under 26 U.S.C. 1441(c)(4) and 
26 U.S.C. 3401(a)(6).
    Section 31.3402(f)(1)-1 also issued under 26 U.S.C. 3402(m).
    Section 31.3402(f)(5)-1 also issued under 26 U.S.C. 3402 (i) and 
(m).
    Section 31.3402(f)(5)-1T also issued under 26 U.S.C. 3402 (i) and 
(m).
    Section 31.3402(n)-1 also issued under 26 U.S.C. 6001, 6011 and 
6364.
    Section 31.3402(r)-1 also issued under 26 U.S.C. 3402(p) and (r).
    Sections 31.3406(a)-1 through 31.3406(i)-1 also issued under 26 
U.S.C.3406(i).
    Section 31.3406(j)-1 also issued under 26 U.S.C. 3406(i).
    Section 31.6011(a)-3A is also issued under the authority of 26 
U.S.C. 6011.
    Section 31.6011(a)-4 also issued under 26 U.S.C. 6011.
    Section 31.6051-1 also issued under 26 U.S.C. 6051.
    Section 31.6051-2 also issued under 26 U.S.C. 6051.
    Sections 31.6053-3 (b)(5), (h) and (j)(9) and 31.6053-4 are also 
issued under sec. 1072 of Pub. L. 98-369, 98 Stat. 1052; and 26 U.S.C. 
6001.
    Sections 31.6053-3T and 31.6053-4T are also issued under sec. 1072 
of Pub. L. 98-369, 98 Stat. 1052; and 26 U.S.C. 6001.
    Section 31.6060-1 also issued under 26 U.S.C. 6060(a).
    Section 31.6071(a)-1 also issued under 26 U.S.C.6071.
    Section 31.6071(a)-1A is also issued under the authority of 26 
U.S.C. 6071.
    Section 31.6081-1 also issued under 26 U.S.C. 6081.
    Section 31.6109-2 also issued under 26 U.S.C. 6109(a).
    Section 31.6205-2 is also issued under 26 U.S.C. 6205(a)(1).
    Section 31.6302-1 also issued under 26 U.S.C. 6302(a) and (h).
    Section 31.6302-1T also issued under 26 U.S.C. 6302(a) and (h).
    Section 31.6302-2, 31.6302-3, and 31.6302-4 also issued under 26 
U.S.C. 6302(a) and (h).
    Section 31.6302(c)-2A also issued under 26 U.S.C. 6157(d) and 
6302(a) and (h).
    Section 31.6302(c)-3 also issued under 26 U.S.C. 6302(a) and (h).
    Section 31.6695-1 also issued under 26 U.S.C. 6695(b).

    Source: T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 
1960, unless otherwise noted.



                         Subpart A_Introduction



Sec. 31.0-1  Introduction.

    (a) In general. The regulations in this part relate to the 
employment taxes imposed by subtitle C (chapters 21 to 25, inclusive) of 
the Internal Revenue Code of 1954, as amended. References in the 
regulations to the ``Internal Revenue Code'' or the ``Code'' are 
references to the Internal Revenue Code of 1954, as amended, unless 
otherwise indicated. References to the Federal Insurance Contributions 
Act, the Railroad Retirement Tax Act, and the Federal Unemployment Tax 
Act are references to chapters 21, 22, and 23, respectively, of the 
Code. References to sections of law are references to sections of the 
Internal Revenue Code unless otherwise indicated. The regulations in 
this part also provide rules relating to the deposit of other taxes by 
electronic funds transfer.
    (b) Division of regulations. The regulations in this part are 
divided into 7 subparts. Subpart A contains provisions relating to 
general definitions and use of terms, the division and scope of the 
regulations in this part, and the extent to which the regulations in 
this part supersede prior regulations relating to employment taxes. 
Subpart B relates to the taxes under the Federal Insurance Contributions 
Act. Subpart C relates to the taxes under the Railroad Retirement Tax 
Act. Subpart D relates to the tax under the Federal Unemployment Tax 
Act. Subpart E relates to the collection of income tax at source on 
wages under chapter 24 of the Code. Subpart F relates to the provisions 
of chapter 25 of the Code which are applicable in respect of the taxes 
imposed by chapters 21 to 24, inclusive, of the Code. Subpart G relates 
to selected provisions of subtitle F of the Code, relating to procedure 
and administration, which have special application in respect of the 
taxes imposed by subtitle C of the Code. Inasmuch as these regulations 
constitute Part 31 of Title 26 of the Code of Federal Regulations, each 
section of the regulations is preceded by a

[[Page 12]]

section symbol and 31 followed by a decimal point (Sec. 31.). Sections 
of law or references thereto are preceded by ``Sec.'' or the word 
``section''.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 8723, 62 FR 
37492, July 14, 1997]



Sec. 31.0-2  General definitions and use of terms.

    (a) In general. As used in the regulations in this part, unless 
otherwise expressly indicated--
    (1) The terms defined in the provisions of law contained in the 
regulations in this part shall have the meanings so assigned to them.
    (2) The Internal Revenue Code of 1954 means the act approved August 
16, 1954 (26 U.S.C.), entitled ``An act to revise the internal revenue 
laws of the United States'', as amended.
    (3) The Internal Revenue Code of 1939 means the act approved 
February 10, 1939 (53 Stat., Part 1), as amended.
    (4) The Social Security Act means the act approved August 14, 1935 
(42 U.S.C. c. 7), as amended.
    (5) (i) The Social Security Amendments of 1954 means the act 
approved September 1, 1954 (68 Stat. 1052), as amended.
    (ii) The Social Security Amendments of 1956 means the act approved 
August 1, 1956 (70 Stat. 807), as amended.
    (iii) The Social Security Amendments of 1958 means the act approved 
August 28, 1958 (72 Stat. 1013), as amended.
    (iv) The Social Security Amendments of 1960 means the act approved 
September 13, 1960 (74 Stat. 924).
    (v) The Social Security Amendments of 1961 means the act approved 
June 30, 1961 (75 Stat. 131).
    (vi) The Social Security Amendments of 1965 means the act approved 
July 30, 1965 (79 Stat. 286).
    (vii) The Social Security Amendments of 1967 means the act approved 
January 2, 1968 (81 Stat. 821).
    (viii) The Social Security Amendments of 1972 means the act approved 
October 30, 1972 (86 Stat. 1329).
    (6) The Social Security Administration means the Social Security 
Administration of the Department of Health and Human Services. (See the 
Statement of Organization and delegations of Authority of the Department 
of Health and Human Services (20 CFR Part 1996).)
    (7) District director means district director of internal revenue. 
The term also includes the Director of International Operations in all 
cases where the authority to perform the functions which may be 
performed by a district director has been delegated to the Director of 
International Operations.
    (8) Person includes an individual, a corporation, a partnership, a 
trust or estate, a joint-stock company, an association, or a syndicate, 
group, pool, joint venture or other unincorporated organization or 
group, through or by means of which any business, financial operation, 
or venture is carried on. It includes a guardian, committee, trustee, 
executor, administrator, trustee in bankruptcy, receiver, assignee for 
the benefit of creditors, conservator, or any person acting in a 
fiduciary capacity.
    (9) Calendar quarter means a period of 3 calendar months ending on 
March 31, June 30, September 30, or December 31.
    (10) Account number means the identifying number of an employee 
assigned, as the case may be, under the Internal Revenue Code of 1954, 
under Subchapter A of Chapter 9 of the Internal Revenue Code of 1939, or 
under Title VIII of the Social Security Act. See also Sec. 301.7701-11 
of this chapter (Regulations on Procedure and Administration).
    (11) Identification number means the identifying number of an 
employer assigned, as the case may be, under the Internal Revenue Code 
of 1954, under Subchapter A or D of Chapter 9 of the Internal Revenue 
Code of 1939, or under Title VIII of the Social Security Act. See also 
Sec. 301.7701-12 of this chapter (Regulations on Procedure and 
Administration).
    (12) Regulations 90 means the regulations approved February 17, 1936 
(26 CFR (1939) Part 400), as amended, relating to the excise tax on 
employers under Title IX of the Social Security Act, and such 
regulations as made applicable to Subchapter C of Chapter 9 and other 
provisions of the Internal Revenue Code of 1939 by Treasury Decision 
4885, approved February 11, 1939 (26

[[Page 13]]

CFR (1939) 1943 Cum. Supp., p. 5876), together with any amendments to 
such regulations as so made applicable to the Internal Revenue Code of 
1939.
    (13) Regulations 91 means the regulations approved November 9, 1936 
(26 CFR (1939) Part 401), as amended, relating to the employees' tax and 
the employers' tax under Title VIII of the Social Security Act, and such 
regulations as made applicable to Subchapter A of Chapter 9 and other 
provisions of the Internal Revenue Code of 1939 by Treasury Decision 
4885, approved February 11, 1939 (26 CFR (1939) 1943 Cum. Supp., p. 
5876), together with any amendments to such regulations as so made 
applicable to the Internal Revenue Code of 1939.
    (14) Regulations 106 means the regulations approved February 24, 
1940 (26 CFR (1939) Part 402), as amended, relating to the employees' 
tax and the employers' tax under the Federal Insurance Contributions Act 
(Subchapter A of Chapter 9 of the Internal Revenue Code of 1939) with 
respect to the period after 1939 and before 1951.
    (15) Regulations 107 means the regulations approved September 12, 
1940 (26 CFR (1939) Part 403), as amended, relating to the excise tax on 
employers under the Federal Unemployment Tax Act (Subchapter C of 
Chapter 9 of the Internal Revenue Code of 1939) with respect to the 
period after 1939 and before 1955.
    (16) Regulations 114 means the regulations approved December 30, 
1948 (26 CFR (1939) Part 411), as amended, relating to the employers' 
tax, employees' tax, and employee representatives' tax under the 
Railroad Retirement Tax Act (Subchapter B of Chapter 9 of the Internal 
Revenue Code of 1939) with respect to compensation paid after 1948 for 
services rendered after 1946 and before 1955.
    (17) Regulations 120 means the regulations approved December 22, 
1953 (26 CFR (1939) Part 406), as amended, relating to collection of 
income tax at source on wages under Subchapter D of Chapter 9 of the 
Internal Revenue Code of 1939 with respect to the period after 1953 and 
before 1955.
    (18) Regulations 128 means the regulations approved December 6, 1951 
(26 CFR (1939) Part 408), as amended, relating to the employee tax and 
the employer tax under the Federal Insurance Contributions Act 
(Subchapter A of Chapter 9 of the Internal Revenue Code of 1939) with 
respect to the period after 1950 and before 1955.
    (19) The cross references in the regulations in this part to other 
portions of the regulations, when the word ``see'' is used, are made 
only for convenience and shall be given no legal effect.
    (b) Subpart B. As used in Subpart B of this part, unless otherwise 
expressly indicated--
    (1) Act means the Federal Insurance Contributions Act.
    (2) Taxes means the employee tax and the employer tax, as 
respectively defined in this paragraph.
    (3) Employee tax means the tax (with respect to wages received by an 
employee after Dec. 31, 1965, the taxes) imposed by section 3101 of the 
Code.
    (4) Employer tax means the tax (with respect to wages paid by an 
employer after Dec. 31, 1965, the taxes) imposed by section 3111 of the 
Code.
    (c) Subpart C. As used in Subpart C of this part, unless otherwise 
expressly indicated--
    (1) Act means the Railroad Retirement Tax Act.
    (2) Railway Labor Act means the act approved May 20, 1926 (45 U.S.C. 
c. 8), as amended.
    (3) Railroad Retirement Act of 1937 means the act approved June 24, 
1937 (45 U.S.C. 228a and following), as amended.
    (4) Railroad Retirement Board means the board established pursuant 
to section 10 of the Railroad Retirement Act of 1937 (45 U.S.C. 228j).
    (5) Tax means the employee tax, the employee representative tax, or 
the employer tax, as respectively defined in this paragraph.
    (6) Employee tax means the tax imposed by section 3201 of the Code.
    (7) Employee representative tax means the tax imposed by section 
3211 of the Code.
    (8) Employer tax means the tax imposed by section 3221 of the Code.
    (d) Subpart D. As used in Subpart D of this part, unless otherwise 
expressly indicated:
    (1) Act means the Federal Unemployment Tax Act.

[[Page 14]]

    (2) Railroad Unemployment Insurance Act means the act approved June 
25, 1938 (45 U.S.C. c. 11), as amended.
    (3) Tax means the tax imposed by section 3301 of the Code.
    (e) Subpart E. As used in Subpart E of this part, unless otherwise 
expressly indicated, tax means the tax required to be deducted and 
withheld from wages under section 3402 of the Code.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6606, 27 FR 
8516, Aug. 25, 1962; T.D. 6658, 28 FR 6631, June 27, 1963; T.D. 6983, 33 
FR 18013, Dec. 4, 1968; T.D. 7280, 38 FR 18369, July 10, 1973]



Sec. 31.0-3  Scope of regulations.

    (a) Subpart B. The regulations in Subpart B of this part relate to 
the imposition of the employee tax and the employer tax under the 
Federal Insurance Contributions Act with respect to wages paid and 
received after 1954 for employment performed after 1936. In addition to 
employment in the case of remuneration therefor paid and received after 
1954, the regulations in Subpart B of this part relate also to 
employment performed after 1954 in the case of remuneration therefor 
paid and received before 1955. The regulations in Subpart B of this part 
include provisions relating to the definition of terms applicable in the 
determination of the taxes under the Federal Insurance Contributions 
Act, such as ``employee'', ``wages'', and ``employment''. The provisions 
of Subpart B of this part relating to ``employment'' are applicable 
also, (1) to the extent provided in Sec. 31.3121(b)-2, to services 
performed before 1955 the remuneration for which is paid after 1954, and 
(2) to the extent provided in Sec. 31.3121(k)-3, to services performed 
before 1955 the remuneration for which was paid before 1955. (For prior 
regulations on similar subject matter, see 26 CFR (1939) Part 408 
(Regulations 128).)
    (b) Subpart C. The regulations in Subpart C of this part relate to 
the imposition of the employee tax, the employee representative tax, and 
the employer tax under the Railroad Retirement Tax Act with respect to 
compensation paid after 1954, for services rendered after such date. The 
regulations in Subpart C of this part include provisions relating to the 
definition of terms applicable in the determination of the taxes under 
the Railroad Retirement Tax Act, such as ``employee'', ``employee 
representative'', ``employer'', and ``compensation''. (For prior 
regulations on similar subject matter, see 26 CFR (1939) Part 411 
(Regulations 114).)
    (c) Subpart D. The regulations in Subpart D of this part relate to 
the imposition on employers of the excise tax under the Federal 
Unemployment Tax Act for the calendar year 1955 and subsequent calendar 
years with respect to wages paid after 1954 for employment performed 
after 1938. In addition to employment in the case of remuneration 
therefor paid after 1954, the regulations in Subpart D of this part 
relate also to employment performed after 1954 in the case of 
remuneration therefor paid before 1955. The regulations in Subpart D of 
this part include provisions relating to the definition of terms 
applicable in the determination of the tax under the Federal 
Unemployment Tax Act, such as ``employee'', ``employer'', 
``employment'', and ``wages''. The regulations in Subpart D of this part 
also include provisions relating to the credits against the Federal tax 
for State contributions. (For prior regulations on similar subject 
matter, see 26 CFR (1939) Part 403 (Regulations 107).)
    (d) Subpart E. The regulations in Subpart E of this part relate to 
the withholding under chapter 24 of the Code of income tax at source on 
wages paid after 1954, regardless of when such wages were earned. The 
regulations in Subpart E of this part include provisions relating to the 
definition of terms applicable in the determination of the tax under 
chapter 24 of the Code, such as ``employee'', ``employer'', and 
``wages''. (For prior regulations on similar subject matter, see 26 CFR 
(1939) Part 406 (Regulations 120).)
    (e) Subpart F. The regulations in Subpart F of this part deal with 
the general provisions contained in chapter 25 of the Code, which relate 
to the employment taxes imposed by chapters 21 to 24, inclusive, of the 
Code. (For prior regulations on the subject matter of section 3503, see 
26 CFR (1939) 411.802 and 408.803 (Regulations 114 and 128, 
respectively). For prior regulations on the subject matter of section 
3504, see

[[Page 15]]

26 CFR (1939) 406.807 and 408.906 (Regulations 120 and 128, 
respectively).)
    (f) Subpart G. The regulations in Subpart G of this part, which are 
prescribed under selected provisions of subtitle F of the Code, relate 
to the procedural and administrative requirements in respect of records, 
returns, deposits, payments, and related matters applicable to the 
employment taxes imposed by subtitle C (chapters 21 to 25, inclusive) of 
the Code. In addition, the provisions of Subpart G of this part relate 
to adjustments and to claims for refund, credit, or abatement, made 
after 1954, in connection with the employment taxes imposed by subtitle 
C of the Internal Revenue Code of 1954, by chapter 9 of the Internal 
Revenue Code of 1939, or by the corresponding provisions of prior law, 
but not to any adjustment reported, or credit taken, in whole or in part 
on any return or supplemental return filed on or before July 31, 1960. 
The provisions of Subpart G of this part also relate to deposits of 
taxes imposed by subchapter B of chapter 9 of the 1939 Code or by 
corresponding provisions of prior law with respect to compensation paid 
after 1954 for services rendered before 1955. For other administrative 
provisions which have application to the employment taxes imposed by 
subtitle C of the Code, see Part 301 of this chapter (Regulations on 
Procedure and Administration). (The administrative and procedural 
regulations applicable with respect to a particular employment tax for a 
prior period were combined with the substantive regulations relating to 
such tax for such period. For the regulations applicable to the 
respective taxes for prior periods, see paragraphs (a), (b), (c), and 
(d) of this section.) Subpart G of this part also provides rules 
relating to the deposit of other taxes by electronic funds transfer.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8305, July 2, 1964; T.D. 8723, 62 FR 37493, July 14, 1997]



Sec. 31.0-4  Extent to which the regulations in this part supersede
prior regulations.

    The regulations in this part, with respect to the subject matter 
within the scope thereof, supersede 25 CFR (1939) Parts 403, 406, 408, 
and 411 (Regulations 107, 120, 128, and 114, respectively). The 
Regulation on Monthly Returns and Payment of Employment Taxes (23 FR 
5006) are also superseded.



  Subpart B_Federal Insurance Contributions Act (Chapter 21, Internal 
                          Revenue Code of 1954)

                            Tax on Employees



Sec. 31.3101-1  Measure of employee tax.

    The employee tax is measured by the amount of wages received after 
1954 with respect to employment after 1936. See Sec. 31.3121(a)-1, 
relating to wages; and Sec. Sec. 31.3121(b)-1 to 31.3121(b)-4, 
inclusive, relating to employment. For provisions relating to the time 
of receipt of wages, see Sec. 31.3121(a)-2.

[T.D. 6744, 29 FR 8305, July 2, 1964]



Sec. 31.3101-2  Rates and computation of employee tax.

    (a) Old-age, survivors, and disability insurance. The rates of 
employee tax for old-age, survivors, and disability insurance with 
respect to wages received in calendar years after 1954 are as follows:

 
                        Calendar year                           Percent
 
1955 and 1956................................................          2
1957 and 1958................................................       2.25
1959.........................................................        2.5
1960 and 1961................................................          3
1962.........................................................      3.125
1963 to 1965, both inclusive.................................      3.625
1966.........................................................       3.85
1967.........................................................        3.9
1968.........................................................        3.8
1969 and 1970................................................        4.2
1971 and 1972................................................        4.6
1973.........................................................       4.85
1974 to 2010, both inclusive.................................       4.95
2011 and subsequent calendar years...........................       5.95
 

    (b) Hospital insurance. The rates of employee tax for hospital 
insurance with respect to wages received in calendar years after 1965 
are as follows:

 
                        Calendar year                           Percent
 
1966.........................................................       0.35
1967.........................................................        .50
1968 to 1972, both inclusive.................................        .60
1973.........................................................        1.0
1974 to 1977, both inclusive.................................       0.90
1978 to 1980, both inclusive.................................       1.10
1981 to 1985, both inclusive.................................       1.35
1986 and subsequent calendar years...........................       1.50
 

    (c) Computation of employee tax. The employee tax is computed by 
applying

[[Page 16]]

to the wages received by the employee the rate in effect at the time 
such wages are received.

    Example. In 1972, employee A performed for employer X services which 
constituted employment (see Sec. 31.3121(b)-2). In 1973 A receives from 
X $1,000 as remuneration for such services. The tax is payable at the 
5.85 percent rate (4.85 percent plus 1.0 percent) in effect for the 
calendar year 1973 (the year in which the wages are received) and not at 
the 5.2 percent rate which was in effect for the calendar year 1972 (the 
year in which the services were performed).

[T.D. 7374, 40 FR 30947, July 24, 1975]



Sec. 31.3101-3  When employee tax attaches.

    The employee tax attaches at the time that the wages are received by 
the employee. For provisions relating to the time of such receipt, see 
Sec. 31.3121(a)-2.



Sec. 31.3102-1  Collection of, and liability for, employee tax; in general.

    (a) The employer shall collect from each of his employees the 
employee tax with respect to wages for employment performed for the 
employer by the employee. The employer shall make the collection by 
deducting or causing to be deducted the amount of the employee tax from 
such wages as and when paid. (For provisions relating to the time of 
such payment, see Sec. 31.3121(a)-2.) The employer is required to 
collect the tax, notwithstanding the wages are paid in something other 
than money, and to pay over the tax in money. (As to the exclusion from 
wages of remuneration paid in any medium other than cash for certain 
types of services, see Sec. 31.3121(a)(7)-1, relating to such 
remuneration paid for service not in the course of the employer's trade 
or business or for domestic service in a private home of the employer; 
and Sec. 31.3121(a)(8)-1, relating to such remuneration paid for 
agricultural labor.) For provisions relating to the collection of, and 
liability for, employee tax in respect of tips, see Sec. 31.3102-3.
    (b) The employer is permitted, but not required, to deduct amounts 
equivalent to employee tax from payments to an employee of cash 
remuneration to which the sections referred to in this paragraph (b) are 
applicable prior to the time that the sum of such payments equals--
    (1) $100 in the calendar year, for service not in the course of the 
employer's trade or business, to which Sec. 31.3121(a)(7)-1 is 
applicable;
    (2) The applicable dollar threshold (as defined in section 3121(x)) 
in the calendar year, for domestic service in a private home of the 
employer, to which Sec. 31.3121(a)(7)-1 is applicable;
    (3) $150 in the calendar year, for agricultural labor, to which 
Sec. 31.3121(a)(8)-1(c)(1)(i) is applicable; or
    (4) $100 in the calendar year, for service performed as a home 
worker, to which Sec. 31.3121(a)(10)-1 is applicable.
    (c) At such time as the sum of the cash payments in the calendar 
year for a type of service referred to in paragraph (b)(1), (b)(2), 
(b)(3) or (b)(4) of this section equals or exceeds the amount specified, 
the employer is required to collect from the employee any amount of 
employee tax not previously deducted. If an employer pays cash 
remuneration to an employee for two or more of the types of service 
referred to in paragraph (b)(1), (b)(2), (b)(3) or (b)(4) of this 
section, the provisions of paragraph (b) of this section and this 
paragraph (c) are to be applied separately to the amount of remuneration 
attributable to each type of service. For provisions relating to the 
repayment to an employee, or other disposition, of amounts deducted from 
an employee's remuneration in excess of the correct amount of employee 
tax, see Sec. 31.6413(a)-1.
    (d) In collecting employee tax, the employer shall disregard any 
fractional part of a cent of such tax unless it amounts to one-half cent 
or more, in which case it shall be increased to 1 cent. The employer is 
liable for the employee tax with respect to all wages paid by him to 
each of his employees whether or not it is collected from the employee. 
If, for example, the employer deducts less than the correct amount of 
tax, or if he fails to deduct any part of the tax, he is nevertheless 
liable for the correct amount of the tax. Until collected from him the 
employee also is liable for the employee tax with respect to all the 
wages received by him. Any employee tax collected by or on behalf of an 
employer is

[[Page 17]]

a special fund in trust for the United States. See section 7501. The 
employer is indemnified against the claims and demands of any person for 
the amount of any payment of such tax made by the employer to the 
district director.
    (e)(1) The provisions of paragraphs (a) and (d) of this section 
apply to any payment made on or after January 1, 1955.
    (2) The provisions of paragraphs (b) and (c) of this section that 
apply to any payment made for service not in the course of the 
employer's trade or business or for service performed as a home worker 
within the meaning of section 3121(d)(3)(C) apply to any such payment 
made on or after January 1, 1978. The provisions of paragraphs (b) and 
(c) of this section that apply to any payment made for domestic service 
in a private home of the employer apply to any such payment made on or 
after January 1, 1994. The provisions of paragraphs (b) and (c) of this 
section that apply to any payment made for agricultural labor apply to 
any such payment made on or after January 1, 1988. For rules applicable 
to any payment for these services made prior to the dates set forth in 
this paragraph (e)(2), see Sec. 31.3102-1 in effect at such time (see 
26 CFR part 31 contained in the edition of 26 CFR Parts 30 to 39, 
revised as of April 1, 2006).

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8305, July 2, 1964; T.D. 7001, 34 FR 998, Jan. 23, 1969; T.D. 9266, 71 
FR 35154, June 19, 2006]



Sec. 31.3102-2  Manner and time of payment of employee tax.

    The employee tax is payable to the district director in the manner 
and at the time prescribed in Subpart G of the regulations in this part. 
For provisions relating to the payment by an employee of employee tax in 
respect of tips, see paragraph (d) of Sec. 31.3102-3.

[T.D. 7001, 34 FR 998, Jan. 23, 1969]



Sec. 31.3102-3  Collection of, and liability for, employee tax on tips.

    (a) Collection of tax from employee--(1) In general. Subject to the 
limitations set forth in subparagraph (2) of this paragraph, the 
employer shall collect from each of his employees the employee tax on 
those tips received by the employee which constitute wages for purposes 
of the tax imposed by section 3101. (For provisions relating to the 
treatment of tips as wages, see 3121(a)(12) and 3121(q).) The employer 
shall make the collection by deducting or causing to be deducted the 
amount of the employee tax from wages (exclusive of tips) which are 
under the control of the employer or other funds turned over by the 
employee to the employer (see subparagraph (3) of this paragraph). For 
purposes of this section the term ``wages (exclusive of tips) which are 
under the control of the employer'' means, with respect to a payment of 
wages, an amount equal to wages as defined in section 3121(a) except 
that tips and noncash remuneration which are wages are not included, 
less the sum of--
    (i) The tax under section 3101 required to be collected by the 
employer in respect of wages as defined in section 3121(a) (exclusive of 
tips);
    (ii) The tax under section 3402 required to be collected by the 
employer in respect of wages as defined in section 3401(a) (exclusive of 
tips); and
    (iii) The amount of taxes imposed on the remuneration of an employee 
withheld by the employer pursuant to State and local law (including 
amounts withheld under an agreement between the employer and the 
employee pursuant to such law) except that the amount of taxes taken 
into account in this subdivision shall not include any amount 
attributable to tips.
    (2) Limitations. An employer is required to collect employee tax on 
tips which constitute wages only in respect of those tips which are 
reported by the employee to the employer in a written statement 
furnished to the employer pursuant to section 6053(a). The employer is 
responsible for the collection of employee tax on tips reported to him 
only to the extent that the employer can--
    (i) During the period beginning at the time the written statement is 
submitted to him and ending at the close of the 10th day of the month 
following the month in which the statement was submitted, or
    (ii) In the case of an employer who elects to deduct the tax on an 
estimated basis (see paragraph (c) of this

[[Page 18]]

section), during the period beginning at the time the written statement 
is submitted to him and ending at the close of the 30th day following 
the quarter in which the statement was submitted,

collect the employee tax by deducting it or causing it to be deducted as 
provided in subparagraph (1).
    (3) Furnishing of funds to employer. If the amount of employee tax 
in respect of tips reported by the employee to the employer in a written 
statement (or statements) furnished pursuant to section 6053(a) exceeds 
the wages (exclusive of tips) which are under the control of the 
employer, the employee may furnish to the employer, within the period 
specified in subparagraph (2) (i) or (ii) of this paragraph (whichever 
is applicable), an amount of money equal to the amount of such excess.
    (b) Less than $20 of tips. Notwithstanding the provisions of 
paragraph (a) of this section, if an employee furnishes to his employer 
a written statement--
    (1) Covering a period of less than 1 month, and
    (2) The statement is furnished to the employer prior to the close of 
the 10th day of the month following the month in which the tips were 
actually received by the employee, and
    (3) The aggregate amount of tips reported in the statement and in 
all other statements previously furnished by the employee covering 
periods within the same month is less than $20, and the statements, 
collectively, do not cover the entire month,

the employer may deduct amounts equivalent to employee tax on such tips 
from wages (exclusive of tips) which are under the control of the 
employer or other funds turned over by the employee to the employer. For 
provisions relating to the repayment to an employee, or other 
disposition, of amounts deducted from an employee's remuneration in 
excess of the correct amount of employee tax, see Sec. 31.6413(a)-1. 
(As to the exclusion from wages of tips of less than $20, see Sec. 
31.3121(a)(12)-1.)
    (c) Collection of employee tax on estimated basis--(1) In general. 
Subject to certain limitations and conditions, an employer may, at his 
discretion, make collection of the employee tax in respect of tips 
reported by an employee to the employer on an estimated basis. An 
employer who elects to make collection of the employee tax on an 
estimated basis shall:
    (i) In respect of each employee, make an estimate of the amount of 
tips that will be reported, pursuant to section 6053(a), by the employee 
to the employer in a calendar quarter.
    (ii) Determine the amount which must be deducted upon each payment 
of wages (exclusive of tips) which are under the control of the employer 
to be made during the quarter by the employer to the employee in order 
to collect from the employee during the quarter an amount equal to the 
amount obtained by multiplying the estimated quarterly tips by the sum 
of the rates of tax under subsections (a) and (b) of section 3101.
    (iii) Deduct from any payment of such employee's wages (exclusive of 
tips) which are under the control of the employer, or from funds 
referred to in paragraph (a)(3) of this section, such amount as may be 
necessary to adjust the amount of tax withheld on the estimated basis to 
conform to the amount of employee tax imposed upon, and required to be 
deducted in respect of, tips reported by the employee to the employer 
during the calendar quarter in written statements furnished to the 
employer pursuant to section 6053(a). If an adjustment is required, the 
additional employee tax required to be collected may be deducted upon 
any payment of the employee's wages (exclusive of tips) which are under 
the control of the employer during the quarter and within the first 30 
days following the quarter or from funds turned over by the employee to 
the employer for such purposes within such period. For provisions 
relating to the repayment to an employee, or other disposition, of 
amounts deducted from an employee's remuneration in excess of the 
correct amount of employee tax, see Sec. 31.6413(a)-1.
    (2) Estimating tips employee will report--(i) Initial estimate. The 
initial estimate of the amount of tips that will be reported by a 
particular employee in a calendar quarter shall be made on the basis of 
the facts and circumstances surrounding the employment of that

[[Page 19]]

employee. However, if a number of employees are employed under 
substantially the same circumstances and working conditions, the initial 
estimate established for one such employee may be used as the initial 
estimate for other employees in that group.
    (ii) Adjusting estimate. If the quarterly estimate of tips in 
respect of a particular employee continues to differ substantially from 
the amount of tips reported by the employee and there are no unusual 
factors involved (for example, an extended absence from work due to 
illness) the employer shall make an appropriate adjustment of his 
estimate of the amount of tips that will be reported by the employee.
    (iii) Reasonableness of estimate. The employer must be prepared, 
upon request of the district director, to disclose the factors upon 
which he relied in making the estimate, and his reasons for believing 
that the estimate is reasonable.
    (d) Employee tax not collected by employer. If--
    (1) The amount of the employee tax imposed by section 3101 in 
respect of those tips received by an employee which constitute wages 
exceeds
    (2) The amount of employee tax imposed by section 3101 (in respect 
of tips reported by the employee to the employer) which can be collected 
by the employer from such employee's wages (exclusive of tips) which are 
under the control of the employer or from funds referred to in paragraph 
(a)(3) of this section,

the employee shall be liable for the payment of tax in an amount equal 
to such excess. For provisions relating to the manner and time of 
payment of employee tax by an employee, see paragraph (d) of Sec. 
31.6011(a)-1 and paragraph (a)(4) of Sec. 31.6071(a)-1. For provisions 
relating to statements required to be furnished by employers to 
employees in respect of uncollected employee tax on tips reported to the 
employer, see Sec. 31.6053-2.

[T.D. 7001, 34 FR 998, Jan. 23, 1969; 34 FR 1554, Jan. 31, 1969]

                            Tax on Employers



Sec. 31.3111-1  Measure of employer tax.

    The employer tax is measured by the amount of wages paid after 1954 
with respect to employment after 1936. See Sec. 31.3121(a)-1, relating 
to wages, and Sec. Sec. 31.3121(b)-1 to 31.3121(b)-4, inclusive, 
relating to employment. For provisions relating to time of payment of 
wages, see Sec. 31.3121(a)-2.

[T.D. 6744, 29 FR 8306, July 2, 1964]



Sec. 31.3111-2  Rates and computation of employer tax.

    (a) Old-age, survivors, and disability insurance. The rates of 
employer tax for old-age, survivors, and disability insurance with 
respect to wages paid in calendar years after 1954 are as follows:

 
                        Calendar year                           Percent
 
1955 and 1956................................................          2
1957 and 1958................................................       2.25
1959.........................................................        2.5
1960 and 1961................................................          3
1962.........................................................      3.125
1963 to 1965, both inclusive.................................      3.625
1966.........................................................       3.85
1967.........................................................        3.9
1968.........................................................        3.8
1969 and 1970................................................        4.2
1971 and 1972................................................        4.6
1973.........................................................       4.85
1974 to 2010, both inclusive.................................       4.95
2011 and subsequent calendar years...........................       5.95
 

    (b) Hospital insurance. The rates of employer tax for hospital 
insurance with respect to wages paid in calendar years after 1965 are as 
follows:

 
                        Calendar year                           Percent
 
1966.........................................................       0.35
1967.........................................................        .50
1968 to 1972, both inclusive.................................        .60
1973.........................................................        1.0
1974 to 1977, both inclusive.................................       0.90
1978 to 1980, both inclusive.................................       1.10
1981 to 1985, both inclusive.................................       1.35
1986 and subsequent calendar years...........................       1.50
 

    (c) Computation of employer tax. The employer tax is computed by 
applying to the wages paid by the employer the rate in effect at the 
time such wages are paid.

[T.D. 6983, 33 FR 18014, Dec. 4, 1968, as amended by T.D. 7374, 40 FR 
30948, July 24, 1975]



Sec. 31.3111-3  When employer tax attaches.

    The employer tax attaches at the time that the wages are paid by the

[[Page 20]]

employer. For provisions relating to the time of such payment, see Sec. 
31.3121(a)-2.



Sec. 31.3111-4  Liability for employer tax.

    The employer is liable for the employer tax with respect to the 
wages paid to his employees for employment performed for him.



Sec. 31.3111-5  Manner and time of payment of employer tax.

    The employer tax is payable to the district director in the manner 
and at the time prescribed in Subpart G of the regulations in this part.



Sec. 31.3112-1  Instrumentalities of the United States specifically
exempted from the employer tax.

    Section 3112 makes ineffectual as to the employer tax imposed by 
section 3111 those provisions of law which grant to an instrumentality 
of the United States an exemption from taxation, unless such provisions 
grant a specific exemption from the tax imposed by section 3111 by an 
express reference to such section or the corresponding section of prior 
law (section 1410 of the Internal Revenue Code of 1939). Thus, the 
general exemptions from Federal taxation granted by various statutes to 
certain instrumentalities of the United States without specific 
reference to the tax imposed by section 3111 or by section 1410 of the 
1939 Code are rendered inoperative insofar as such exemptions relate to 
the tax imposed by section 3111. For provisions relating to the 
exception from employment of services performed in the employ of an 
instrumentality of the United States specifically exempted from the 
employer tax, see Sec. 31.3121(b)(5)-1. For provisions relating to 
services performed for an instrumentality exempt on December 31, 1950, 
from the employer tax, see paragraph (c) of Sec. 31.3121 (b) (6)-1.

                           General Provisions



Sec. 31.3121(a)-1  Wages.

    (a)(1) Whether remuneration paid after 1954 for employment performed 
after 1936 constitutes wages is determined under section 3121(a). This 
section and Sec. Sec. 31.3121(a)(1)-1 to 31.3121(a)(15)-1, inclusive 
(relating to the statutory exclusions from wages), apply with respect 
only to remuneration paid after 1954 for employment performed after 
1936. Whether remuneration paid after 1936 and before 1940 for 
employment performed after 1936 constitutes wages shall be determined in 
accordance with the applicable provisions of law and of 26 CFR (1939) 
Part 401 (Regulations 91). Whether remuneration paid after 1939 and 
before 1951 for employment performed after 1936 constitutes wages shall 
be determined in accordance with the applicable provisions of law and of 
26 CFR (1939) Part 402 (Regulations 106). Whether remuneration paid 
after 1950 and before 1955 for employment performed after 1936 
constitutes wages shall be determined in accordance with the applicable 
provisions of law and of 26 CFR (1939) Part 408 (Regulations 128).
    (2) The term compensation as used in section 3231(e) of the Internal 
Revenue Code has the same meaning as the term wages as used in this 
section, determined without regard to section 3121(b)(9), except as 
specifically limited by the Railroad Retirement Tax Act (chapter 22 of 
the Internal Revenue Code) or regulation. The Commissioner may provide 
any additional guidance that may be necessary or appropriate in applying 
the definitions of sections 3121(a) and 3231(e).
    (b) The term ``wages'' means all remuneration for employment unless 
specifically excepted under section 3121(a) (see Sec. Sec. 
31.3121(a)(1)-1 to 31.3121(a)(15)-1, inclusive) or paragraph (j) of this 
section.
    (c) The name by which the remuneration for employment is designated 
is immaterial. Thus, salaries, fees, bonuses, and commissions on sales 
or on insurance premiums, are wages if paid as compensation for 
employment.
    (d) Generally the basis upon which the remuneration is paid is 
immaterial in determining whether the remuneration constitutes wages. 
Thus, it may be paid on the basis of piecework, or a percentage of 
profits; and it may be paid hourly, daily, weekly, monthly, or annually. 
See, however, Sec. 31.3121(a)(8)-1 which relates to the treatment of 
cash remuneration computed on a time basis for agricultural labor.

[[Page 21]]

    (e) Generally the medium in which the remuneration is paid is also 
immaterial. It may be paid in cash or in something other than cash, as 
for example, goods, lodging, food, or clothing. Remuneration paid in 
items other than cash shall be computed on the basis of the fair value 
of such items at the time of payment. See, however, Sec. Sec. 31.3121 
(a)(7)-1, 31.3121(a)(8)-1, 31.3121(a)(10)-1, and 31.3121(a)(12)-1, 
relating to the treatment of remuneration paid in any medium other than 
cash for services not in the course of the employer's trade or business 
and for domestic service in a private home of the employer, for 
agricultural labor, for services performed by certain homeworkers, and 
as tips, respectively.
    (f) Ordinarily, facilities or privileges (such as entertainment, 
medical services, or so-called ``courtesy'' discounts on purchases), 
furnished or offered by an employer to his employees generally, are not 
considered as remuneration for employment if such facilities or 
privileges are of relatively small value and are offered or furnished by 
the employer merely as a means of promoting the health, good will, 
contentment, or efficiency of his employees. The term ``facilities or 
privileges'', however, does not ordinarily include the value of meals or 
lodging furnished, for example, to restaurant or hotel employees, or to 
seamen or other employees aboard vessels, since generally these items 
constitute an appreciable part of the total remuneration of such 
employees.
    (g) Amounts of so-called ``vacation allowances'' paid to an employee 
constitute wages. Thus, the salary of an employee on vacation, paid 
notwithstanding his absence from work, constitutes wages.
    (h) Amounts paid specifically--either as advances or 
reimbursements--for traveling or other bona fide ordinary and necessary 
expenses incurred or reasonably expected to be incurred in the business 
of the employer are not wages. Traveling and other reimbursed expenses 
must be identified either by making a separate payment or by 
specifically indicating the separate amounts where both wages and 
expense allowances are combined in a single payment. For amounts that 
are received by an employee on or after July 1, 1990, with respect to 
expenses paid or incurred on or after July 1, 1990, see Sec. 
31.3121(a)-3.
    (i) Remuneration for employment, unless such remuneration is 
specifically excepted under section 3121(a) or paragraph (j) of this 
section, constitutes wages even though at the time paid the relationship 
of employer and employee no longer exists between the person in whose 
employ the services were performed and the individual who performed 
them.

    Example. A is employed by B during the month of January 1955 in 
employment and is entitled to receive remuneration of $100 for the 
services performed for B, the employer, during the month. A leaves the 
employ of B at the close of business on January 31, 1955. On February 
15, 1955 (when A is no longer an employee of B), B pays A the 
remuneration of $100 which was earned for the services performed in 
January. The $100 is wages and the taxes are payable with respect 
thereto.

    (j) In addition to the exclusions specified in Sec. Sec. 
31.3121(a)(1)-1 to 31.3121(a)(15)-1, inclusive, the following types of 
payments are excluded from wages:
    (1) Remuneration for services which do not constitute employment 
under section 3121(b) and which are not deemed to be employment under 
section 3121(c) (see Sec. 31.3121(c)-1).
    (2) Remuneration for services which are deemed not to be employment 
under section 3121(c) (see Sec. 31.3121(c)-1).
    (3) Tips or gratuities paid, prior to January 1, 1966, directly to 
an employee by a customer of an employer, and not accounted for by the 
employee to the employer. For provisions relating to the treatment of 
tips received by an employee after December 31, 1965, as wages, see 
Sec. Sec. 31.3121(a)(12) and 31.3121(q).
    (k) Split-dollar life insurance arrangements. Except as otherwise 
provided under section 3121(v), see Sec. Sec. 1.61-22 and 1.7872-15 of 
this chapter for rules relating to the treatment of split-dollar life 
insurance arrangements.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 7001, 34 FR 
999, Jan. 23, 1969; T.D. 7374, 40 FR 30948, July 24, 1975; T.D. 8276, 54 
FR 51027, Dec. 12, 1989; T.D. 8324, 55 FR 51696, Dec. 17, 1990; T.D. 
8582, 59 FR 66189, Dec. 23, 1994; T.D. 9092, 68 FR 45361, Sept. 17, 
2003]

[[Page 22]]



Sec. 31.3121(a)-1T  Question and answer relating to the definition of
wages in section 3121(a) (Temporary).

    The following question and answer relates to the definition of wages 
in section 3121(a) of the Internal Revenue Code of 1954, as amended by 
section 531(d)(1)(A) of the Tax Reform Act of 1984 (98 Stat. 885):
    Q-1: Are fringe benefits included in the definition of ``wages'' 
under section 3121(a)?
    A-1: Yes, unless specifically excluded from the definition of 
``wages'' pursuant to section 3121(a)(1) through (20). For example, a 
fringe benefit provided to or on behalf of an employee is excluded from 
the definition of ``wages'' if at the time such benefit is provided it 
is reasonable to believe that the employee will be able to exclude such 
benefit from income under section 117 or 132.

[T.D. 8004, 50 FR 755, Jan. 7, 1985]



Sec. 31.3121(a)-2  Wages; when paid and received.

    (a) In general, wages are received by an employee at the time that 
they are paid by the employer to the employee. Wages are paid by an 
employer at the time that they are actually or constructively paid 
unless under paragraph (c) of this section they are deemed to be 
subsequently paid. For provisions relating to the time when tips 
received by an employee are deemed paid to the employee, see Sec. 
31.3121(q)-1.
    (b) Wages are constructively paid when they are credited to the 
account of or set apart for an employee so that they may be drawn upon 
by him at any time although not then actually reduced to possession. To 
constitute payment in such a case the wages must be credited to or set 
apart for the employee without any substantial limitation or restriction 
as to the time or manner of payment or condition upon which payment is 
to be made, and must be made available to him so that they may be drawn 
upon at any time, and their payment brought within his own control and 
disposition. For provisions relating to the treatment of deductions from 
remuneration as payments of remuneration, see Sec. 31.3123-1.
    (c)(1) The first $100 of cash remuneration paid, either actually or 
constructively, by an employer in any calendar year to an employee for--
    (i) Service not in the course of the employer's trade or business, 
to which Sec. 31.3121(a)(7)-1 is applicable, shall be deemed to be paid 
by the employer to the employee at the first moment of time in such 
calendar year that the sum of such cash payments made within such year 
is at least $100; or
    (ii) Service performed as a home worker within the meaning of 
section 3121(d)(3)(C), to which Sec. 31.3121(a)(10)-1 is applicable, 
shall be deemed to be paid by the employer to the employee at the first 
moment of time in such calendar year that the sum of such cash payments 
made within such year is at least $100.
    (2) Cash remuneration paid, either actually or constructively, by an 
employer in any calendar year to an employee for domestic service in a 
private home of the employer to which Sec. 31.3121(a)(7)-1 is 
applicable, and before the sum of the payments of such cash remuneration 
equals or exceeds the applicable dollar threshold (as defined in section 
3121(x)) for such year, shall be deemed to be paid by the employer to 
the employee at the first moment of time in such calendar year that the 
sum of such cash payments made within such year equals or exceeds the 
applicable dollar threshold (as defined in section 3121(x)) for such 
year.
    (3) Cash remuneration paid, either actually or constructively, by an 
employer in any calendar year to an employee for agricultural labor to 
which Sec. 31.3121(a)(8)-1 is applicable, and before either of the 
events described in paragraphs (c)(3)(i) and (c)(3)(ii) of this section 
has occurred, shall be deemed to be paid by the employer to the employee 
at the first moment of time in such calendar year that--
    (i) The sum of the payments of such remuneration is $150 or more; or
    (ii) The employer's expenditures for agricultural labor in such 
calendar year equals or exceeds $2,500, except that this paragraph 
(c)(3)(ii) shall not apply in determining when such remuneration is 
deemed to be paid under this paragraph if such employee--

[[Page 23]]

    (A) Is employed as a hand-harvest laborer and is paid on a piece 
rate basis in an operation which has been, and is customarily and 
generally recognized as having been, paid on a piece rate basis in the 
region of employment;
    (B) Commutes daily from his permanent residence to the farm on which 
he is so employed; and
    (C) Has been employed in agriculture less than 13 weeks during the 
preceding calendar year.
    (4) If an employer pays cash remuneration to an employee for two or 
more of the types of service referred to in this paragraph, the 
provisions of this paragraph are to be applied separately to the amount 
of remuneration attributable to each type of service.
    (d)(1) The provisions of paragraphs (a) and (b) of this section 
apply to any payment of wages made on or after January 1, 1955.
    (2) The provisions of paragraph (c) of this section that apply to 
any payment of wages made for service not in the course of the 
employer's trade or business or for service performed as a home worker 
within the meaning of section 3121(d)(3)(C) apply to any such payment 
made on or after January 1, 1978. The provisions of paragraph (c) of 
this section that apply to any payment of wages made for domestic 
service in a private home of the employer apply to any such payment made 
on or after January 1, 1994. The provisions of paragraph (c) of this 
section that apply to any payment of wages made for agricultural labor 
apply to any such payment made on or after January 1, 1988. For rules 
applicable to any payment of wages for these services made prior to the 
dates set forth in this paragraph (d)(2), see Sec. 31.3121(a)-2 in 
effect at such time (see 26 CFR part 31 contained in the edition of 26 
CFR Parts 30 to 39, revised as of April 1, 2006).

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8306, July 2, 1964; T.D. 7001, 34 FR 999, Jan. 23, 1969; T.D. 9266, 71 
FR 35154, June 19, 2006]



Sec. 31.3121(a)-3  Reimbursement and other expense allowance amounts.

    (a) When excluded from wages. If a reimbursement or other expense 
allowance arrangement meets the requirements of section 62(c) of the 
Code and Sec. 1.62-2 and the expenses are substantiated within a 
reasonable period of time, payments made under the arrangement that do 
not exceed the substantiated expenses are treated as paid under an 
accountable plan and are not wages. In addition, if both wages and the 
reimbursement or other expense allowance are combined in a single 
payment, the reimbursement or other expense allowance must be identified 
either by making a separate payment or by specifically identifying the 
amount of the reimbursement or other expense allowance.
    (b) When included in wages--(1) Accountable plans--(i) General rule. 
Except as provided in paragraph (b)(1)(ii) of this section, if a 
reimbursement or other expense allowance arrangement satisfies the 
requirements of section 62(c) and Sec. 1.62-2, but the expenses are not 
substantiated within a reasonable period of time or amounts in excess of 
the substantiated expenses are not returned within a reasonable period 
of time, the amount paid under the arrangement in excess of the 
substantiated expenses is treated as paid under a nonaccountable plan, 
is included in wages, and is subject to withholding and payment of 
employment taxes no later than the first payroll period following the 
end of the reasonable period.
    (ii) Per diem or mileage allowances. If a reimbursement or other 
expense allowance arrangement providing a per diem or mileage allowance 
satisfies the requirements of section 62(c) and Sec. 1.62-2, but the 
allowance is paid at a rate for each day or mile of travel that exceeds 
the amount of the employee's expenses deemed substantiated for a day or 
mile of travel, the excess portion is treated as paid under a 
nonaccountable plan and is included in wages. In the case of a per diem 
or mileage allowance paid as a reimbursement, the excess portion is 
subject to withholding and payment of employment taxes when paid. In the 
case of a per diem or mileage allowance paid as an advance, the excess 
portion is subject to withholding and payment of employment taxes no 
later than the first payroll period following the payroll period in 
which the expenses with respect to which the advance was paid (i.e., the 
days or miles of travel) are

[[Page 24]]

substantiated. The Commissioner may, in his discretion, prescribe 
special rules in pronouncements of general applicability regarding the 
timing of withholding and payment of employment taxes on per diem and 
mileage allowances.
    (2) Nonaccountable plans. If a reimbursement or other expense 
allowance arrangement does not satisfy the requirements of section 62(c) 
and Sec. 1.62-2 (e.g., the arrangement does not require expenses to be 
substantiated or require amounts in excess of the substantiated expenses 
to be returned), all amounts paid under the arrangement are treated as 
paid under a nonaccountable plan, are included in wages, and are subject 
to withholding and payment of employment taxes when paid.
    (c) Effective dates. This section generally applies to payments made 
under reimbursement or other expense allowance arrangements received by 
an employee on or after July 1, 1990, with respect to expenses paid or 
incurred on or after July 1, 1990. Paragraph (b)(1)(ii) of this section 
applies to payments made under reimbursement or other expense allowance 
arrangements received by an employee on or after January 1, 1991, with 
respect to expenses paid or incurred on or after January 1, 1991.

[T.D. 8324, 55 FR 51696, Dec. 17, 1990]



Sec. 31.3121(a)(1)-1  Annual wage limitation.

    (a) In general. (1) The term ``wages'' does not include that part of 
the remuneration paid by an employer to an employee within any calendar 
year--
    (i) After 1954 and before 1959 which exceeds the first $4,200 of 
remuneration,
    (ii) After 1958 and before 1966 which exceeds the first $4,800 of 
remuneration,
    (iii) After 1965 and before 1968 which exceeds the first $6,600 of 
remuneration,
    (iv) After 1967 and before 1972 which exceeds the first $7,800 of 
remuneration,
    (v) After 1971 and before 1973 which exceeds the first $9,000 of 
remuneration,
    (vi) After 1972 and before 1974 which exceeds the first $10,800 of 
remuneration,
    (vii) After 1973 and before 1975 which exceeds the first $13,200 of 
remuneration, or
    (viii) After 1974 which exceeds the amount equal to the contribution 
and benefit base (as determined under section 230 of the Social Security 
Act) which is effective for such calendar year

(exclusive of remuneration excepted from wages in accordance with 
paragraph (j) of Sec. 31.3121(a)-1 or Sec. Sec. 31.3121(a)(2)-1 to 
31.3121(a)(15)-1, inclusive) paid within the calendar year by an 
employer to the employee for employment performed for him at any time 
after 1936. For provisions relating to the treatment of tips for 
purposes of the annual wage limitation see Sec. 31.3121(q)-1.
    (2) The annual wage limitation applies only if the remuneration 
received during any 1 calendar year by an employee from the same 
employer for employment performed after 1936 exceeds the amount of such 
limitation. The limitation in such case relates to the amount of 
remuneration received during any 1 calendar year for employment after 
1936 and not to the amount of remuneration for employment performed in 
any 1 calendar year.

    Example. Employee A, in 1967 receives $7,000 from employer B in part 
payment of $8,000 due him from employment performed in 1967. In 1968 A 
receives from employer B the balance of $1,000 due him for employment 
performed in 1967, and thereafter in 1968 also receives $7,000 for 
employment performed in 1968 for employer B. The first $6,600 of the 
$7,000 received during 1967 is subject to the taxes in 1967. The 
remaining $400 received in 1967 is not included as wages and is not 
subject to the taxes. The balance of $1,000 received in 1968 for 
employment during 1967 is subject to the taxes during 1968 as is also 
the first $6,800 of the $7,000 thereafter received in 1968 ($1,000 plus 
$6,800 totaling $7,800, which is the annual wage limitation applicable 
to remuneration received in 1968 by an employee from any one employer). 
The remaining $200 received in 1968 is not included as wages and is not 
subject to the taxes.

    (3) If during a calendar year the employee receives remuneration 
from more than one employer, the annual wage limitation does not apply 
to the aggregate remuneration received from

[[Page 25]]

all of such employers, but instead applies to the remuneration received 
during such calendar year from each employer with respect to employment 
after 1936. In such case the first remuneration received in any calendar 
year after 1974 up to the amount equal to the contribution and benefit 
base (as determined under section 230 of the Social Security Act) (the 
first $13,200 received in 1974, the first $10,800 received in 1973, the 
first $9,000 received in 1972, the first $7,800 received in any calendar 
year after 1967 and before 1972, the first $6,600 received in any 
calendar year after 1965 and before 1968, the first $4,800 received in 
any calendar year after 1958 and before 1966, or the first $4,200 
received in any calendar year after 1954 and before 1959) from each 
employer constitutes wages and is subject to the taxes, even though, 
under section 6413(c), the employee may be entitled to a special credit 
or refund of a portion of the employee tax deducted from his wages 
received during the calendar year. In this connection and in connection 
with the two examples immediately following, see Sec. 31.6413(c)-1, 
relating to special credits or refunds of employee tax. In connection 
with the annual wage limitation in the case of remuneration paid for 
services performed in the employ of the United States or a wholly owned 
instrumentality thereof, see Sec. 31.3122. In connection with the 
annual wage limitation in the case of remuneration paid for services 
performed in the employ of the Government of Guam, the Government of 
American Samoa, the District of Columbia, a political subdivision of the 
Government of Guam, or the Government of American Samoa, or any 
instrumentality of any of the foregoing which is wholly owned thereby, 
see Sec. 31.3125. In connection with the application of the annual wage 
limitation, see also paragraph (b) of this section, relating to the 
circumstances under which wages paid by a predecessor employer are 
deemed to be paid by his successor. In connection with the annual wage 
limitation in the case of remuneration paid after December 31, 1978, 
from two or more related corporations that compensate an employee 
through a common paymaster, see Sec. 31.3121(s)-1.

    Example 1. During 1968 employee C receives from employer D a salary 
of $1,300 a month for employment performed for D during the first 7 
months of 1968, or total remuneration of $9,100. At the end of the 6th 
month C has received $7,800 from employer D, and only that part of his 
total remuneration from D constitutes wages subject to the taxes. The 
$1,300 received by employee C from employer D in the 7th month is not 
included as wages and is not subject to the taxes. At the end of the 7th 
month C leaves the employ of D and enters the employ of E. C receives 
remuneration of $1,560 a month from employer E in each of the remaining 
5 months of 1968, or total remuneration of $7,800 from employer E. The 
entire $7,800 received by C from employer E constitutes wages and is 
subject to the taxes. Thus, the first $7,800 received from employer D 
and the entire $7,800 received from employer E constitute wages.
    Example 2. During the calendar year 1968 F is simultaneously an 
officer (an employee) of the X Corporation, the Y Corporation, and the Z 
Corporation and during such year receives a salary of $7,800 from each 
corporation. Each $7,800 received by F from each of the Corporations X, 
Y, and Z (whether or not such corporations are related) constitutes 
wages and is subject to the taxes.

    (b) Wages paid by predecessor attributed to successor. (1) If an 
employer (hereinafter referred to as a successor) during any calendar 
year acquires substantially all the property used in a trade or business 
of another employer (hereinafter referred to as a predecessor), or used 
in a separate unit of a trade or business of a predecessor, and if 
immediately after the acquisition the successor employs in his trade or 
business an individual who immediately prior to the acquisition was 
employed in the trade or business of such predecessor, then, for 
purposes of the application of the annual wage limitation set forth in 
paragraph (a) of this section, any remuneration (exclusive of 
remuneration excepted from wages in accordance with paragraph (j) of 
Sec. 31.3121(a)-1 or Sec. Sec. 31.3121(a)(2)-1 to 31.3121(a)(15)-1, 
inclusive) with respect to employment paid (or considered under this 
paragraph as having been paid) to such individual by the predecessor 
during such calendar year and prior to the acquisition shall be 
considered as having been paid by the successor.
    (2) The wages paid, or considered as having been paid, by a 
predecessor to an employee shall, for purposes of the

[[Page 26]]

annual wage limitation, be treated as having been paid to such employee 
by a successor if:
    (i) The successor during a calendar year acquired substantially all 
the property used in a trade or business, or used in a separate unit of 
a trade or business, of the predecessor;
    (ii) Such employee was employed in the trade or business of the 
predecessor immediately prior to the acquisition and is employed by the 
successor in his trade or business immediately after the acquisition; 
and
    (iii) Such wages were paid during the calendar year in which the 
acquisition occurred and prior to such acquisition.
    (3) The method of acquisition by an employer of the property of 
another employer is immaterial. The acquisition may occur as a 
consequence of the incorporation of a business by a sole proprietor or a 
partnership, the continuance without interruption of the business of a 
previously existing partnership by a new partnership or by a sole 
proprietor, or a purchase or any other transaction whereby substantially 
all the property used in a trade or business, or used in a separate unit 
of a trade or business, of one employer is acquired by another employer.
    (4) Substantially all the property used in a separate unit of a 
trade or business may consist of substantially all the property used in 
the performance of an essential operation of the trade or business, or 
it may consist of substantially all the property used in a relatively 
self-sustaining entity which forms a part of the trade or business.

    Example 1. The M Corporation which is engaged in the manufacture of 
automobiles, including the manufacture of automobile engines, 
discontinues the manufacture of the engines and transfers all the 
property used in such manufacturing operation to the N Company. The N 
Company is considered to have acquired a separate unit of the trade or 
business of the M Corporation, namely, its engine manufacturing unit.
    Example 2. The R Corporation which is engaged in the operation of a 
chain of grocery stores transfers one of such stores to the S Company. 
The S Company is considered to have acquired a separate unit of the 
trade or business of the R Corporation.

    (5) A successor may receive credit for wages paid to an employee by 
a predecessor only if immediately prior to the acquisition the employee 
was employed by the predecessor in his trade or business which was 
acquired by the successor and if immediately after the acquisition such 
employee is employed by the successor in his trade or business (whether 
or not in the same trade or business in which the acquired property is 
used). If the acquisition involves only a separate unit of a trade or 
business of the predecessor, the employee need not have been employed by 
the predecessor in that unit provided he was employed in the trade or 
business of which the acquired unit was a part.

    Example. The Y Corporation in 1968 acquires by purchase all the 
property of the X Company and immediately after the acquisition employs 
in its trade or business employee A, who, immediately prior to the 
acquisition, was employed by the X Company. The X Company has in 1968 
(the calendar year in which the acquisition occurs) and prior to the 
acquisition paid $5,000 of wages to A. The Y Corporation in 1968 pays to 
A remuneration of $5,000 with respect to employment. Only $2,800 of the 
remuneration paid by the Y Corporation is considered to be wages. For 
purposes of the $7,800 limitation, the Y Corporation is credited with 
the $5,000 paid to A by the X Company. If in the same calendar year, the 
Z Company acquires the property by purchase from the Y Corporation and A 
immediately after the acquistion is employed by the Z Company in its 
trade or business, no part of the remuneration paid to A by the Z 
Company in the year of the acquisition will be considered to be wages. 
The Z Company will be credited with the remuneration paid to A by the Y 
Corporation and also with the wages paid to A by the X Company 
(considered for purposes of the application of the $7,800 limitation as 
having also been paid by the Y Corporation).

    (6) Where a corporation described in section 501(c)(3) which is 
exempt from income tax under section 501(a) has in effect a certificate 
filed pursuant to section 3121(k), or pursuant to section 1426(1) of the 
Internal Revenue Code of 1939, waiving its exemption from the taxes 
imposed by the Act, the activity in which such corporation is engaged is 
considered to be its trade or business for the purpose of determining 
whether the transferred property was used in the trade or business of 
the predecessor and for the purpose of determining

[[Page 27]]

whether the employment by the predecessor and the successor of an 
individual whose services were retained by the successor constitute 
employment in a trade or business. Thus, if a charitable or religious 
organization, subject to the taxes by virtue of its certificate, 
acquires all the property of another such organization likewise subject 
to the taxes and retains the services of employees of the predecessor, 
wages paid to such employees by the predecessor in the year of the 
acquisition (and prior to such acquisition) will be attributed to the 
successor for purposes of the annual wage limitation.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8307, July 2, 1964; T.D. 6983, 33 FR 18015, Dec. 4, 1968; T.D. 7374, 40 
FR 30948, July 24, 1975; T.D. 7660, 44 FR 75139, Dec. 19, 1979]



Sec. 31.3121(a)(2)-1  Payments on account of sickness or accident 
disability, medical or hospitalization expenses, or death.

    (a) The term ``wages'' does not include the amount of any payment 
(including any amount paid by an employer for insurance or annuities, or 
into a fund, to provide for any such payment) made to, or on behalf of, 
an employee or any of his dependents under a plan or system established 
by an employer which makes provision for his employees generally (or for 
his employees generally and their dependents) or for a class or classes 
of his employees (or for a class or classes of his employees and their 
dependents), on account of--
    (1) Sickness or accident disability of an employee or any of his 
dependents, only if payment is received under a workers' compensation 
law;
    (2) Medical or hospitalization expenses in connection with sickness 
or accident disability of an employee or any of his dependents, or
    (3) Death of an employee or any of his dependents.
    (b) The plan or system established by an employer need not provide 
for payments on account of all of the specified items, but such plan or 
system may provide for any one or more of such items. Payments for any 
one or more of such items under a plan or system established by an 
employer solely for the dependents of his employees are not within this 
exclusion from wages.
    (c) Dependents of an employee include the employee's husband or 
wife, children, and any other members of the employee's immediate 
family.
    (d) Workers' compensation law. (1) For purposes of paragraph (a)(1) 
of this section, a payment made under a workers' compensation law 
includes a payment made pursuant to a statute in the nature of a 
workers' compensation act.
    (2) For purposes of paragraph (a)(1) of this section, a payment made 
under a workers' compensation law does not include a payment made 
pursuant to a State temporary disability insurance law.
    (3) If an employee receives a payment on account of sickness or 
accident disability that is not made under a workers' compensation law 
or a statute in the nature of a workers' compensation act, the payment 
is not excluded from wages as defined by section 3121(a)(2)(A) even if 
the payment must be repaid if the employee receives a workers' 
compensation award or an award under a statute in the nature of a 
workers' compensation act with respect to the same period of absence 
from work.
    (4) If an employee receives a payment on account of non-occupational 
injury sickness or accident disability such payment is not excluded from 
wages, as defined by section 3121(a)(2)(A).
    (e) Examples. The following examples illustrate the principles of 
paragraph (d) of this section:

    Example 1. A local government employee is injured while performing 
work-related activities. The employee is not covered by the State 
workers' compensation law, but is covered by a local government 
ordinance that requires the local government to pay the employee's full 
salary when the employee is out of work as a result of an injury 
incurred while performing services for the local government. The 
ordinance does not limit or otherwise affect the local government's 
liability to the employee for the work-related injury. The local 
ordinance is not a workers' compensation law, but it is in the nature of 
a workers' compensation act. Therefore, the salary the employee receives 
while out of work as a result of the work-related injury is excluded 
from wages under section 3121(a)(2)(A).

[[Page 28]]

    Example 2. The facts are the same as in Example 1 except that the 
local ordinance requires the employer to continue to pay the employee's 
full salary while the employee is unable to work due to an injury 
whether or not the injury is work-related. Thus, the local ordinance 
does not limit benefits to instances of work-related disability. A 
benefit paid under an ordinance that does not limit benefits to 
instances of work-related injuries is not a statute in the nature of a 
workers' compensation act. Therefore, the salary the injured employee 
receives from the employer while out of work is wages subject to FICA 
even though the employee's injury is work-related.
    Example 3. The facts are the same as in Example 1 except that the 
local ordinance includes a rebuttable presumption that certain injuries, 
including any heart attack incurred by a firefighter or other law 
enforcement personnel is work-related. The presumption in the ordinance 
does not eliminate the requirement that the injury be work-related in 
order to entitle the injured worker to full salary. Therefore, the 
ordinance is a statute in the nature of a workers' compensation act, and 
the salary the injured employee receives pursuant to the ordinance is 
excluded from wages under section 3121(a)(2)(A).

    (f) It is immaterial for purposes of this exclusion whether the 
amount or possibility of such benefit payments is taken into 
consideration in fixing the amount of an employee's remuneration or 
whether such payments are required, expressly or impliedly, by the 
contract of service.

[ T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 9233, 70 FR 74199, Dec. 15, 2005]



Sec. 31.3121(a)(3)-1  Retirement payments.

    The term ``wages'' does not include any payment made by an employer 
to an employee (including any amount paid by an employer for insurance 
or annuities, or into a fund, to provide for any such payment) on 
account of the employee's retirement. Thus, payments made to an employee 
on account of his retirement are excluded from wages under this 
exception even though not made under a plan or system.



Sec. 31.3121(a)(4)-1  Payments on account of sickness or accident 
disability, or medical or hospitalization expenses.

    The term ``wages'' does not include any payment made by an employer 
to, or on behalf of, an employee on account of the employee's sickness 
or accident disability or the medical or hospitalization expenses in 
connection with the employee's sickness or accident disability, if such 
payment is made after the expiration of 6 calendar months following the 
last calendar month in which such employee worked for such employer. 
Such payments are excluded from wages under this exception even though 
not made under a plan or system. If the employee does not actually 
perform services for the employer during the requisite period, the 
existence of the employer- employee relationship during that period is 
immaterial.



Sec. 31.3121(a)(5)-1  Payments from or to certain tax-exempt trusts,
or under or to certain annuity plans or bond purchase plans.

    (a) Payments from or to certain tax- exempt trusts. The term 
``wages'' does not include any payment made--
    (1) By an employer, on behalf of an employee or his beneficiary, 
into a trust, or
    (2) To, or on behalf of, an employee or his beneficiary from a 
trust.

If at the time of such payment the trust is exempt from tax under 
section 501(a) as an organization described in section 401(a). A payment 
made to an employee of such a trust for services rendered as an employee 
of the trust and not as a beneficiary thereof is not within this 
exclusion from wages.
    (b) Payments under or to certain annuity plans. (1) The term 
``wages'' does not include any payment made after December 31, 1962--
    (i) By an employer, on behalf of an employee or his beneficiary, 
into an annuity plan, or
    (ii) To, or on behalf of, an employee or his beneficiary under an 
annuity plan, if at the time of such payment the annuity plan is a plan 
described in section 403(a).
    (2) The term ``wages'' does not include any payment made before 
January 1, 1963--
    (i) By an employer, on behalf of an employee or his beneficiary, 
into an annuity plan, or
    (ii) To, or on behalf of, an employee or his beneficiary under an 
annuity plan,

[[Page 29]]


if at the time of such payment the annuity plan meets the requirements 
of section 401(a)(3), (4), (5), and (6).
    (c) Payments under or to certain bond purchase plans. The term 
``wages'' does not include any payment made after December 31, 1962--
    (1) By an employer, on behalf of an employee or his beneficiary, 
into a bond purchase plan, or
    (2) To, or on behalf of, an employee or his beneficiary under a bond 
purchase plan,

if at the time of such payment the plan is a qualified bond purchase 
plan described in section 405(a).

[T.D. 6876, 31 FR 2596, Feb. 10, 1966]



Sec. 31.3121(a)(5)-2  Payments under or to an annuity contract 
described in section 403(b).

    (a) Salary reduction agreement defined. For purposes of section 
3121(a)(5)(D), the term salary reduction agreement means a plan or 
arrangement (whether evidenced by a written instrument or otherwise) 
whereby payment will be made by an employer, on behalf of an employee or 
his or her beneficiary, under or to an annuity contract described in 
section 403(b)--
    (1) If the employee elects to reduce his or her compensation 
pursuant to a cash or deferred election as defined at Sec. 1.401(k)-
1(a)(3) of this chapter;
    (2) If the employee elects to reduce his or her compensation 
pursuant to a one-time irrevocable election made at or before the time 
of initial eligibility to participate in such plan or arrangement (or 
pursuant to a similar arrangement involving a one-time irrevocable 
election); or
    (3) If the employee agrees as a condition of employment (whether 
such condition is set by statute, contract, or otherwise) to make a 
contribution that reduces his or her compensation.
    (b) Effective/applicability date. This section is applicable on 
November 15, 2007.

[T.D. 9367, 72 FR 64942, Nov. 19, 2007]



Sec. 31.3121(a)(6)-1  Payment by an employer of employee tax under
section 3101 or employee contributions under a State law.

    The term ``wages'' does not include any payment by an employer 
(without deduction from the remuneration of, or other reimbursement 
from, the employee) of either (a) the employee tax imposed by section 
3101 or the corresponding section of prior law, or (b) any payment 
required from an employee under a State unemployment compensation law.



Sec. 31.3121(a)(7)-1  Payments for services not in the course of 
employer's trade or business or for domestic service.

    (a) Meaning of terms--(1) Services not in the course of employer's 
trade or business. The term ``services not in the course of the 
employer's trade or business'' includes services that do not promote or 
advance the trade or business of the employer. Such term does not 
include services performed for a corporation. As used in this section, 
the term does not include service not in the course of the employer's 
trade or business performed on a farm operated for profit or domestic 
service in a private home of the employer. See paragraph (f) of Sec. 
31.3121(g)-1 for provisions relating to services not in the course of 
the employer's trade or business performed on a farm operated for 
profit.
    (2) Domestic service in a private home of the employer. Services of 
a household nature performed by an employee in or about a private home 
of the person by whom he is employed constitute domestic service in a 
private home of the employer. A private home is a fixed place of abode 
of an individual or family. A separate and distinct dwelling unit 
maintained by an individual in an apartment house, hotel, or other 
similar establishment may constitute a private home. If a dwelling house 
is used primarily as a boarding or lodging house for the purpose of 
supplying board or lodging to the public as a business enterprise, it is 
not a private home. In general, services of a household nature in or 
about a private home include services performed by cooks, waiters, 
butlers, housekeepers, governesses, maids, valets, baby sitters, 
janitors, laundresses, furnacemen, caretakers, handymen, gardeners, 
footmen, grooms, and chauffeurs of automobiles for family use. The term 
``domestic service in a private home of the employer'' does not include 
the services

[[Page 30]]

enumerated above unless such services are performed in or about a 
private home of the employer. Services not of a household nature, such 
as services performed as a private secretary, tutor, or librarian, even 
though performed in the employer's home, are not included within the 
term ``domestic service in a private home of the employer''. As used in 
this section, the term does not include domestic service in a private 
home of the employer performed on a farm operated for profit or service 
not in the course of the employer's trade or business. See paragraph (f) 
Sec. 31.3121(g)-1 for provisions relating to domestic service in a 
private home of the employer performed on a farm operated for profit.
    (b) Payments other than in cash. The term ``wages'' does not include 
remuneration paid in any medium other than cash (1) for service not in 
the course of the employer's trade or business, or (2) for domestic 
service in a private home of the employer. Cash remuneration includes 
checks and other monetary media of exchange. Remuneration paid in any 
medium other than cash, such as lodging, food, clothing, car tokens, 
transportation passes or tickets, or other goods or commodities, for 
service not in the course of the employer's trade or business or for 
domestic service in a private home of the employer does not constitute 
wages.
    (c) Cash payments. (1) The term wages does not include cash 
remuneration paid by an employer in any calendar year to an employee 
for--
    (i) Domestic service in a private home of the employer, unless the 
cash remuneration paid in such year by the employer to the employee for 
such service equals or exceeds the applicable dollar threshold (as 
defined in section 3121(x)) for such year; or
    (ii) Service not in the course of the employer's trade or business, 
unless the cash remuneration paid in such year by the employer to the 
employee for such service equals or exceeds $100.
    (2) The tests relating to cash remuneration are based on the 
remuneration paid in a calendar year rather than on the remuneration 
earned during a calendar year. The following example illustrates this 
provision:

    Example. On March 31, 2004, employer X pays employee A cash 
remuneration of $100 for service not in the course of X's trade or 
business. Such remuneration constitutes wages subject to the taxes even 
though $10 thereof represents payment for such service performed by A 
for X in December 2003.

    (3) In determining whether wages have been paid either for domestic 
service in a private home of the employer or for service not in the 
course of the employer's trade or business, only cash remuneration for 
such service shall be taken into account. Cash remuneration includes 
checks and other monetary media of exchange. Remuneration paid in any 
other medium, such as lodging, food, clothing, car tokens, 
transportation passes or tickets, or other goods or commodities, is 
disregarded in determining whether the cash-remuneration test is met. If 
an employee receives cash remuneration from an employer in a calendar 
year for both types of services the pertinent cash-remuneration test is 
to be applied separately to each type of service. If an employee 
receives cash remuneration from more than one employer in a calendar 
year for domestic service in a private home of the employer or for 
service not in the course of the employer's trade or business, the 
pertinent cash-remuneration test is to be applied separately to the 
remuneration received from each employer.
    (d) Cross references. (1) For provisions relating to deduction of 
employee tax or amounts equivalent to the tax from cash payments for the 
services described in this section, see Sec. 31.3102-1;
    (2) For provisions relating to time of payment of wages for such 
services, see Sec. 31.3121(a)-2;
    (3) For provisions relating to computations to the nearest dollar of 
any payment of cash remuneration for domestic service in a private home 
of the employer, see Sec. 31.3121(i)-1.
    (e) Effective dates. (1) The provisions of this section apply to any 
cash payment for service not in the course of the employer's trade or 
business made on or after January 1, 1978 and for domestic service in a 
private home of the employer made on or after January 1, 1994.
    (2) For rules applicable to any cash payment made prior to the dates 
set forth in paragraph (e)(1), see

[[Page 31]]

Sec. 31.3121(a)(7)-1 in effect at such time (see 26 CFR part 31 
contained in the edition of 26 CFR Parts 30 to 39, revised as of April 
1, 2006).

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 9266, 71 FR 
35155, June 19, 2006]



Sec. 31.3121(a)(8)-1  Payments for agricultural labor.

    (a) Scope of this section. For purposes of the regulations in this 
section, the term ``agricultural labor'' means only such agricultural 
labor (see Sec. 31.3121(g)-1) as constitutes employment or is deemed to 
constitute employment by reason of the rules relating to included and 
excluded services contained in section 3121(c) (see Sec. 31.3121(c)-1) 
or the corresponding section of prior law.
    (b) Payments other than in cash. The term ``wages'' does not include 
remuneration paid in any medium other than cash for agricultural labor. 
For meaning of the term ``cash remuneration'', see paragraph (f) of the 
regulations in this section.
    (c) Cash payments. (1) The term wages does not include cash 
remuneration paid by an employer in any calendar year to an employee for 
agricultural labor unless--
    (i) The cash remuneration paid in such year by the employer to the 
employee for such labor is $150 or more; or
    (ii) The employer's expenditures for agricultural labor in such year 
equal or exceed $2,500, except that this paragraph (c)(1)(ii) shall not 
apply in determining whether remuneration paid to an employee 
constitutes wages for agricultural labor if such employee--
    (A) Is employed as a hand-harvest laborer and is paid on a piece 
rate basis in an operation which has been, and is customarily and 
generally recognized as having been, paid on a piece rate basis in the 
region of employment;
    (B) Commutes daily from his permanent residence to the farm on which 
he is so employed; and
    (C) Has been employed in agriculture less than 13 weeks during the 
preceding calendar year.
    (2) The application of the provisions of paragraph (c)(1) of this 
section may be illustrated by the following example:

    Example. Employer X pays A $140 in cash for agricultural labor in 
calendar year 2004. X makes no other payments to A during the year and 
makes no other payment for agricultural labor to any other employee. 
Employee A is not employed as a hand-harvest laborer. Neither the $150-
cash-remuneration test nor the $2,500-employer's-expenditures-for-
agricultural-labor test is met. Accordingly, the remuneration paid by X 
to A is not subject to the taxes. If in 2004 X had paid A $140 in cash 
for agricultural labor and had made expenditures of $2,360 or more to 
other employees for agricultural labor, the $140 paid by X to A would 
have been subject to tax because the $2,500-employer's-expenditures-for-
agricultural-labor test would have been met. Or, if X had paid A $150 in 
cash in 2004 and made no other payments to any other employee for 
agricultural labor, the $150 paid by X to A would have been subject to 
tax because the $150-cash-remuneration test would have been met.

    (d) Application of cash-remuneration test. (1) If an employee 
receives cash remuneration from an employer both for services which 
constitute agricultural labor and for services which do not constitute 
agricultural labor, only the amount of such remuneration which is 
attributable to agricultural labor shall be included in determining 
whether cash remuneration of $150 or more has been paid in the calendar 
year by the employer to the employee for agricultural labor. The 
following example illustrates this paragraph (d)(1):

    Example. Employer X operates a store and also is engaged in farming 
operations. Employee A, who regularly performs services for X in 
connection with the operation of the store, works on X's farm when 
additional help is required for the farm activities. In the calendar 
year 2004, X pays A $140 in cash for services performed in agricultural 
labor, and $4,000 for services performed in connection with the 
operation of the store. X has no additional expenditures for 
agricultural labor in 2004. Since the cash remuneration paid by X to A 
in the calendar year 2004 for agricultural labor is less than $150, the 
$150-cash-remuneration test is not met. The $140 paid by X to A in 2004 
for agricultural labor does not constitute wages and is not subject to 
the taxes.

    (2) The test relating to cash remuneration of $150 or more is based 
on the cash remuneration paid in a calendar year rather than on the 
remuneration earned during a calendar year. It is immaterial if such 
cash remuneration is paid in a calendar year other than the

[[Page 32]]

year in which the agricultural labor is performed. The following example 
illustrates this paragraph (d)(2):

    Example. Employer X pays cash remuneration of $150 in the calendar 
year 2004 to employee A for agricultural labor. Such remuneration 
constitutes wages even though $10 of such amount represents payment for 
agricultural labor performed by A for X in December 2003.
    (3) In determining whether $150 or more has been paid to an employee 
for agricultural labor, only cash remuneration for such labor shall be 
taken into account. If an employee receives cash remuneration in any one 
calendar year from more than one employer for agricultural labor, the 
cash-remuneration test is to be applied with respect to the remuneration 
received by the employee from each employer in such calendar year for 
such labor.
    (e) Application of employer's-expenditures-for-agricultural-labor 
test. (1) If an employer has expenditures in a calendar year for 
agricultural labor and for non-agricultural labor, only the amount of 
such expenditures for agricultural labor shall be included in 
determining whether the employer's expenditures for agricultural labor 
in such year equal or exceed $2,500. The following example illustrates 
this paragraph (e)(1):

    Example. Employer X operates a store and also is engaged in farming 
operations. Employee A, who regularly performs services for X in 
connection with the operation of the store, works on X's farm when 
additional help is required for the farm activities. In calendar year 
2004, X pays A $140 in cash for services performed in agricultural 
labor, and $4,000 for services performed in connection with the 
operation of the store. X has no additional expenditures for 
agricultural labor in 2004. Since X's expenditures for agricultural 
labor in 2004 are less than $2,500, the employer's-expenditures-for-
agricultural-labor test is not met. The $140 paid by X to A in 2004 for 
agricultural labor does not constitute wages and is not subject to the 
taxes.

    (2) The test relating to an employer's expenditures of $2,500 or 
more for agricultural labor is based on the expenditures paid by the 
employer in a calendar year rather than on the expenses incurred by the 
employer during a calendar year. It is immaterial if the expenditures 
are paid in a calendar year other than the year in which the 
agricultural labor is performed. The following example illustrates this 
paragraph (e)(2):

    Example. Employer X employs A to construct fences on a farm owned by 
X. The work constitutes agricultural labor and is performed over the 
course of November and December 2003. A is not employed by X at any 
other time, however X does have other employees to whom X pays 
remuneration of $2,000 for agricultural labor in 2003. X pays A $140 in 
cash in November 2003 and $140 in cash in January 2004, in full payment 
for the work. The $140 payment to A made in November is not wages for 
calendar year 2003 because the $150-cash-remuneration test is not met 
and X's total expenditures for agricultural labor for such year are not 
equal to or in excess of $2,500. The $140 payment to A made in January 
is not wages for 2004 because the $150 cash-remuneration test is not 
met. However, if X pays additional remuneration to employees for 
agricultural labor in 2004 that equals or exceeds $2,360, the 
employer's-expenditures-for-agricultural-labor test will be met and the 
$140 paid by X to A in 2004 will be considered wages. It is immaterial 
that the work was performed in 2003.

    (f) Meaning of ``cash remuneration.'' Cash remuneration includes 
checks and other monetary media of exchange. Cash remuneration does not 
include payments made in any other medium, such as lodging, food, 
clothing, car tokens, transportation passes or tickets, farm products, 
or other goods or commodities.
    (g) Cross references. (1) For provisions relating to deductions of 
employee tax or amounts equivalent to the tax from cash payments for 
agricultural labor, see Sec. 31.3102-1.
    (2) For provisions relating to the time of payment of wages for 
agricultural labor, see Sec. 31.3121(a)-2.
    (3) For provisions relating to records to be kept with respect to 
agricultural labor, see paragraph (b) of Sec. 31.6001-2.
    (h) Effective dates. The provisions of this section apply to any 
payment for agricultural labor made on or after January 1, 1988. For 
rules applicable to any payment for agricultural labor made prior to 
January 1, 1988, see Sec. 31.3121(a)(8)-1 in effect at such time (see 
26 CFR part 31 contained in the edition of 26 CFR parts 30 to 39, 
revised as of April 1, 2006).

[T.D. 6744, 29 FR 8308, July 2, 1964, as amended by T.D. 9266, 71 FR 
35155, June 19, 2006]

[[Page 33]]



Sec. 31.3121(a)(9)-1  Payments to employees for nonwork periods.

    (a) The term ``wages'' does not include any payment (other than 
vacation or sick pay) made by an employer to an employee for a period 
throughout which the employment relationship exists between the employer 
and the employee, but in which the employee does not work (other than 
being subject to call for the performance of work) for the employer, if 
such payment is made after the calendar month in which--
    (1) The employee attains age 65, if the employee is a man to whom 
the payment is made before January 1975, or if the employee is a woman 
to whom the payment is made before November 1956, or
    (2) The employee attains age 62, if the employee is a man to whom 
the payment is made after December 1974, or if the employee is a woman 
to whom the payment is made after October 1956.
    (b) Vacation or sick pay is not within this exclusion from wages. If 
the employee does any work for the employer in the period for which the 
payment is made, no remuneration paid by such employer to such employee 
with respect to such period is within this exclusion from wages.

    Example. Mrs. A, an employee of X, attained the age of 62 on 
September 15, 1956, and discontinued the performance of regular work for 
X on September 30, 1956. Their employment relationship continued for 
several years until Mrs. A's death, and X paid Mrs. A $50 per month as 
consideration for Mrs. A's agreement to work when asked by X. The 
payment for each month was made on the first day of each succeeding 
month. After September 30, 1956, the only work performed by Mrs. A for X 
was performed on one day in October 1956. The payment made by X to Mrs. 
A on November 1 (for October 1956) is not excluded from wages under this 
exception, but the payments made thereafter are excluded from wages. The 
payment on November 1 was not excluded because Mrs. A worked for X on 
one day in October 1956. (Inasmuch as Mrs. A had attained age 62 in 
September 1956, the November 1 payment would have been excluded if Mrs. 
A had not performed any work for X in October 1956.)

[T.D. 6744, 29 FR 8309, July 2, 1964, as amended by T.D. 7373, 40 FR 
30957, July 24, 1975; 40 FR 32831, Aug. 5, 1975]



Sec. 31.3121(a)(10)-1  Payments to certain home workers.

    (a) The term wages does not include remuneration paid by an employer 
in any calendar year to an employee for service performed as a home 
worker who is an employee by reason of the provisions of section 
3121(d)(3)(C) (see Sec. 31.3121(d)-1(d)), unless the cash remuneration 
paid in such calendar year by the employer to the employee for such 
services is $100 or more. The test relating to cash remuneration of $100 
or more is based on remuneration paid in a calendar year rather than on 
remuneration earned during a calendar year. If cash remuneration of $100 
or more is paid in a particular calendar year, it is immaterial whether 
such remuneration is in payment for services performed during the year 
of payment or during any other year.
    (b) The application of paragraph (a) of this section may be 
illustrated by the following example:

    Example. A, a home worker, performs services for X, a manufacturer, 
in 2003 and 2004. In the performance of the home work A is an employee 
by reason of section 3121(d)(3)(C). In March 2004, A returns to X 
articles made by A at home from materials received by A from X in 2003. 
X pays A cash remuneration of $100 for such work when the finished 
articles are delivered. The $100 includes $10 which represents 
remuneration for home work performed by A in 2003. The entire $100 is 
subject to the taxes. Any additional cash remuneration paid by X to A in 
2004 for such services is also subject to the taxes.

    (c) In the event an employee receives remuneration in any one 
calendar year from more than one employer for services performed as a 
home worker of the character described in paragraph (a) of this section, 
the regulations in this section are to be applied with respect to the 
remuneration received by the employee from each employer in such 
calendar year for such services. This exclusion from wages has no 
application to remuneration paid for services performed as a home worker 
who is an employee under section 3121(d)(2) (see Sec. 31.3121(d)-1(c)) 
relating to common law employees.
    (d) Cash remuneration includes checks and other monetary media of 
exchange. Remuneration paid in any

[[Page 34]]

other medium, such as clothing, car tokens, transportation passes or 
tickets, or other goods or commodities, is disregarded in determining 
whether the $100 cash-remuneration test is met. If the cash remuneration 
paid in any calendar year by an employer to an employee for services 
performed as a home worker of the character described in paragraph (a) 
of this section is $100 or more, then no remuneration, whether in cash 
or in any medium other than cash, paid by the employer to the employee 
in such calendar year for such services is excluded from wages under 
this exception.
    (e)(1) For provisions relating to deductions of employee tax or 
amounts equivalent to the tax from cash payments for services performed 
as a home worker within the meaning of section 3121(d)(3)(C), see Sec. 
31.3102-1.
    (2) For provisions relating to the time of payment of wages for 
services performed as a home worker within the meaning of section 
3121(d)(3)(C), see Sec. 31.3121(a)-2.
    (3) For provisions relating to records to be kept with respect to 
payment of wages for services performed as a home worker within the 
meaning of section 3121(d)(3)(C), see Sec. 31.6001-2.
    (f) The provisions of this section apply to any payment for services 
performed as a home worker within the meaning of section 3121(d)(3)(C) 
made on or after January 1, 1978. For rules applicable to any payment 
for services performed as a home worker within the meaning of section 
3121(d)(3)(C) made prior to January 1, 1978, see Sec. 31.3121(a)(10)-1 
in effect at such time (see 26 CFR part 31 contained in the edition of 
26 CFR parts 30 to 39, revised as of April 1, 2006).

[T.D. 9266, 71 FR 35156, June 19, 2006]



Sec. 31.3121(a)(11)-1  Moving expenses.

    (a) The term ``wages'' does not include remuneration paid on or 
after November 1, 1964, to or on behalf of an employee, either as an 
advance or a reimbursement, specifically for moving expenses incurred or 
expected to be incurred, if (and to the extent that) at the time of 
payment it is reasonable to believe that a corresponding deduction is or 
will be allowable to the employee under section 217. The reasonable 
belief contemplated by the statute may be based upon any evidence 
reasonably sufficient to induce such belief, even though such evidence 
may be insufficient upon closer examination by the district director or 
the courts finally to establish that a deduction is allowable under 
section 217. The reasonable belief shall be based upon the application 
of section 217 and the regulations thereunder in Part 1 of this chapter 
(Income Tax Regulations). When used in this section, the term ``moving 
expenses'' has the same meaning as when used in section 217 and the 
regulations thereunder.
    (b) Except as otherwise provided in paragraph (a) of this section, 
or in a numbered paragraph of section 3121(a), amounts paid to or on 
behalf of an employee for moving expenses are wages for purposes of 
section 3121(a).

[T.D. 7375, 40 FR 42350, Sept. 12, 1975]



Sec. 31.3121(a)(12)-1  Tips.

    The term ``wages'' does not include remuneration received by an 
employee after December 1965 in the form of tips if--
    (a) The tips are paid in any medium other than cash, or
    (b) The cash tips received by an employee in any calendar month in 
the course of his employment by an employer are less than $20.

If the cash tips received by an employee in a calendar month after 
December 1965 in the course of his employment by an employer amount to 
$20 or more, none of the cash tips received by the employee in such 
calendar month are excluded from the term ``wages'' under this section. 
The cash tips to which this section applies include checks and other 
monetary media of exchange. Tips received by an employee in any medium 
other than cash, such as passes, tickets, or other goods or commodities 
do not constitute wages. If an employee in any calendar month performs 
services for two or more employers and receives tips in the course of 
his employment by each employer, the $20 test is to be applied 
separately with respect to the cash tips received by the employee in 
respect of his services for each employer and not to the total cash tips 
received by the

[[Page 35]]

employee during the month. As to the time tips are deemed paid, see 
Sec. 31.3121(q)-1. For provisions relating to the treatment of tips 
received by an employee prior to 1966, see paragraph (j)(3) of Sec. 
31.3121 (a)-1.

[T.D. 7001, 34 FR 999, Jan. 23, 1969]



Sec. 31.3121(a)(13)-1  Payments under certain employers' plans after
retirement, disability, or death.

    (a) In general. The term ``wages'' does not include the amount of 
any payment or series of payments made after January 2, 1968, by an 
employer to, or on behalf of, an employee or any of his dependents under 
a plan established by the employer which makes provisions for his 
employees generally (or for his employees generally and their 
dependents) or for a class or classes of his employees (or for a class 
or classes of his employees and their dependents), which is paid or 
commences to be paid upon or within a reasonable time after the 
termination of an employee's employment relationship because of the 
employee's--
    (1) Death,
    (2) Retirement for disability, or
    (3) Retirement after attaining an age specified in the plan 
established by the employer or in a pension plan of the employer at the 
age at which a person in the employee's circumstances is eligible for 
retirement.

A payment or series of payments made under the circumstances described 
in the preceding sentence is excluded from ``wages'' even if made 
pursuant to an incentive compensation plan which also provides for the 
making of other types of payments. However, any payment or series of 
payments which would have been paid if the employee's relationship had 
not been terminated is not excluded from ``wages'' under this section 
and section 3121(a)(13). For example, lump-sum payments for unused 
vacation time or a final paycheck received after retirement are payments 
which the employee would have received whether or not he retired and 
therefore are not excluded from ``wages'' under this section. Further, 
if any payment is made upon or after termination of employment for any 
reason other than those set out in subparagraphs (1), (2), and (3) of 
this paragraph such payment is not excludable from ``wages'' by this 
section. For example, if a pension plan provides for retirement upon 
disability, completion of 30 years of service, or attainment of age 65, 
and if an employee who is not disabled retires at age 61 after 30 years 
of service, none of the retirement payments made to the employee under 
the pension plan (including any made after he is 65) is excludable from 
``wages'' under this section. However, if the pension plan had 
conditioned retirement after 30 years of service upon attainment of age 
60, all of the retirement payments would have been excludable.
    (b) Plan. The plan or system established by an employer need not 
provide for payments because of termination of employment for all the 
reasons set out in paragraphs (a)(1), (2), and (3) of this section, but 
such plan or system may provide for payments because of termination for 
any one or more of such reasons. Payments because of termination of 
employment for any one or more of such reasons under a plan or system 
established by an employer solely for the dependents of his employees 
are not within this exclusion from wages.
    (c) Dependents. Dependents of an employee include the employee's 
husband or wife, children, and any other members of the employee's 
immediate family.
    (d) Benefit payment. It is immaterial for purposes of this exclusion 
whether the amount or possibility of benefit payments is paid on account 
of services rendered or taken into consideration in fixing the amount of 
an employee's remuneration or whether such payments are required, 
expressly or impliedly, by the contract of service.
    (e) Example. The application of this section may be illustrated by 
the following example:

    Example. A, an employee, receives a salary of $1,500 a month, 
payable on the 5th day of the month following the month for which the 
salary is earned. A's employer has established an incentive compensation 
plan for a class of his employees, including A, providing for the 
payment of deferred compensation on termination of employment, including 
termination upon an employee's death, retirement at age 65 (the 
retirement age specified in the plan), or retirement for disability. On 
March 1, 1973, A attains the

[[Page 36]]

age of 65 and retires. On March 5, 1973, A receives $5,500 from his 
employer of which $1,500 represents A's salary for services he performed 
in February 1973, and $4,000 represents incentive compensation paid 
under the employer's plan. The amount of $4,000 is excluded from 
``wages'' under this section. The amount of $1,500 is not excluded from 
``wages'' under this section.

[T.D. 7374, 40 FR 30949, July 24, 1975]



Sec. 31.3121(a)(14)-1  Payments by employer to survivor or estate 
of former employee.

    The term ``wages'' does not include any payment by an employer to a 
survivor or the estate of a former employee made after 1972 and after 
the calendar year in which such employee died.

[T.D. 7374, 40 FR 30950, July 24, 1975, as amended by T.D. 7373, 40 FR 
30957, July 24, 1975]



Sec. 31.3121(a)(15)-1  Payments by employer to disabled former employee.

    The term ``wages'' does not include any payment made after 1972 by 
an employer to an employee, if at the time such payment is made such 
employee is entitled to disability insurance benefits under section 
223(a) of the Social Security Act and such entitlement commenced prior 
to the calendar year in which such payment is made, and if such employee 
did not perform any service for such employer during the period for 
which such payment is made.

[T.D. 7374, 40 FR 30950, July 24, 1975, as amended by T.D. 7373, 40 FR 
30957, July 24, 1975]



Sec. 31.3121(a)(18)-1  Payments or benefits under a qualified educational
assistance program.

    The term ``wages'' does not include any payment made, or benefit 
furnished, to or for the benefit of an employee in a taxable year 
beginning after December 31, 1978, if at the time of such payment or 
furnishing it is reasonable to believe that the employee will be able to 
exclude such payment or benefit from income under section 127.

[T.D. 7898, 48 FR 31019, July 6, 1983]



Sec. 31.3121(b)-1  Employment; services to which the regulations in
this subpart apply.

    (a) The provisions of the regulations in this subpart relating to 
the term ``employment'' apply with respect to services performed after 
1954. Certain provisions also apply with respect to services performed 
before 1955 for which the remuneration is paid after 1954 (see paragraph 
(b) of Sec. 31.3121(b)-2. For provisions relating generally to services 
performed before 1955, see paragraph (a) of Sec. 31.3121 (b)-2. For 
provisions relating to the circumstances under which services which do 
not constitute employment are nevertheless deemed to be employment, and 
relating to the circumstances under which services which constitute 
employment are nevertheless deemed not to be employment, see Sec. 
31.3121 (c)-1. For provisions relating to who are employees and who are 
employers see Sec. Sec. 31.3121 (d)-1 and 31.3121 (d)-2, respectively.
    (b) The taxes apply with respect to remuneration paid after 1954 for 
services performed before 1955, as well as for services performed after 
1954, to the extent that the remuneration and services constitute wages 
and employment. See Sec. Sec. 31.3121(a)-1 to 31.3121(a)(13)-1 relating 
to wages.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6983, 33 FR 
18015, Dec. 4, 1968]



Sec. 31.3121(b)-2  Employment; services performed before 1955.

    (a) General rule. (1) Subject to the provisions of paragraph (b) of 
this section:
    (i) Services performed after 1936 and before 1955 which were 
employment under the applicable law in effect before 1955 constitute 
employment under section 3121(b).
    (ii) Services performed after 1936 and before 1955 which were not 
employment under the applicable law in effect before 1955 do not 
constitute employment under section 3121(b).
    (2) Except as provided in paragraph (b) of this section, 
determination of whether services performed before 1955 constitute 
employment shall be made in accordance with the applicable provisions of 
law in effect before 1955 and

[[Page 37]]

of the regulations thereunder. The regulations applicable in determining 
whether service performed after 1936 and before 1955 constitute 
employment are as follows:
    (i) Services performed after 1936 and before 1940--26 CFR (1939) 
Part 401 (Regulations 91).
    (ii) Services performed after 1939 and before 1951--26 CFR (1939) 
Part 402 (Regulations 106).
    (iii) Services performed after 1950 and before 1955--26 CFR (1939) 
Part 408 (Regulations 128).
    (b) Certain services performed before 1955 the remuneration for 
which is paid after 1954. (1) Services of the following character 
performed before 1955, for which remuneration is paid after 1954, 
constitute employment under section 3121(b):
    (i) Agricultural labor, as defined in section 3121(g) (see Sec. 
31.3121(g)-1), other than services of the character described in section 
3121(b)(1) (relating to services performed in connection with the 
production or harvesting of certain oleoresinous products and services 
performed by certain foreign agricultural workers), which, at the time 
performed, constituted employment under section 1426(b) of the 1939 
Code, or would have constituted employment except for the provisions of 
section 1426(b)(1) of such Code, as in effect at the time the services 
were performed.
    (ii) Services not in the course of the employers' trade or business 
(see paragraph (a)(1) of Sec. 31.3121(a)(7)-1) which, at the time 
performed, constituted employment under section 1426(b) of the 1939 
Code, or would have constituted employment except for the provisions of 
section 1426(b)(3) of such Code, as in effect at the time the services 
were performed.
    (2) Services of the character described in paragraphs (a) and (b) of 
Sec. 31.3121(b)(1)-1, which were performed by certain foreign 
agricultural workers before 1955 and the remuneration for which is paid 
after 1954, do not constitute employment under section 3121(b), 
irrespective of whether they constituted employment under section 
1426(b) of the 1939 Code, as in effect at the time the services were 
performed.
    (3) This paragraph has no application to services performed before 
1955 and the remuneration for which was paid before 1955.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8309, July 2, 1964]



Sec. 31.3121(b)-3  Employment; services performed after 1954.

    (a) In general. Whether services performed after 1954 constitute 
employment is determined in accordance with the provisions of section 
3121(b).
    (b) Services performed within the United States. Services performed 
after 1954 within the United States (see Sec. 31.3121(e)-1) by an 
employee for his employer, unless specifically excepted by section 
3121(b), constitute employment. With respect to services performed 
within the United States, the place where the contract of service is 
entered into is immaterial. The citizenship or residence of the employee 
or of the employer also is immaterial except to the extent provided in 
any specific exception from employment. Thus, the employee and the 
employer may be citizens and residents of a foreign country and the 
contract of service may be entered into in a foreign country, and yet, 
if the employee under such contract performs services within the United 
States, there may be to that extent employment.
    (c) Services performed outside the United States--(1) In general. 
Except as provided in paragraphs (c)(2) and (3) of this section, 
services performed outside the United States (see Sec. 31.3121(e)-1) do 
not constitute employment.
    (2) On or in connection with an American vessel or American 
aircraft. (i) Services performed after 1954 by an employee for an 
employer ``on or in connection with'' an American vessel or American 
aircraft outside the United States (see Sec. 31.3121(e)-1) constitute 
employment if:
    (a) The employee is also employed ``on and in connection with'' such 
vessel or aircraft when outside the United States; and
    (b) The services are performed under a contract of service, between 
the employee and the employer, which is entered into within the United 
States, or during the performance of the contract under which the 
services are performed and while the employee is employed on

[[Page 38]]

the vessel or aircraft it touches at a port within the United States; 
and
    (c) The services are not excepted under section 3121(b).
    (ii) An employee performs services on and in connection with the 
vessel or aircraft if he performs services on such vessel or aircraft 
which are also in connection with the vessel or aircraft. Services 
performed on the vessel by employees as officers or members of the crew, 
or as employees of concessionaires, of the vessel, for example, are 
performed under such circumstances, since such services are also 
connected with the vessel. Similarly, services performed on the aircraft 
by employees as officers or members of the crew of the aircraft are 
performed on and in connection with such aircraft. Services may be 
performed on the vessel or aircraft, however, which have no connection 
with it, as in the case of services performed by an employee while on 
the vessel or aircraft merely as a passenger in the general sense. For 
example, the services of a buyer in the employ of a department store 
while he is a passenger on a vessel are not in connection with the 
vessel.
    (iii) If services are performed by an employee ``on and in 
connection with'' an American vessel or American aircraft when outside 
the United States and the conditions listed in paragraph (c)(2)(i) (b) 
and (c) of this section are met, then the services of that employee 
performed on or in connection with the vessel or aircraft constitute 
employment. The expression ``on or in connection with'' refers not only 
to services performed on the vessel or aircraft but also to services 
connected with the vessel or aircraft which are not actually performed 
on it (for example, shore services performed as officers or members of 
the crew, or as employees of concessionaires, of the vessel).
    (iv) Services performed by a member of the crew or other employee 
whose contract of service is not entered into within the United States, 
and during the performance of which and while the employee is employed 
on the vessel or aircraft it does not touch at a port within the United 
States, do not constitute employment under this subparagraph, 
notwithstanding services performed by other members of the crew or other 
employees on or in connection with the vessel or aircraft may constitute 
employment.
    (v) A vessel includes every description of watercraft, or other 
contrivance, used as a means of transportation on water. An aircraft 
includes every description of craft, or other contrivance, used as a 
means of transportation through the air. In the case of an aircraft, the 
term ``port'' means an airport. An airport means an area on land or 
water used regularly by aircraft for receiving or discharging passengers 
or cargo. For definitions of ``American vessel'' and ``American 
aircraft'', see Sec. 31.3121(f)-1.
    (vi) With respect to services performed outside the United States on 
or in connection with an American vessel or American aircraft, the 
citizenship or residence of the employee is immaterial, and the 
citizenship or residence of the employer is material only in case it has 
a bearing in determining whether a vessel is an American vessel.
    (3) By a citizen of the United States as an employee for an American 
employer. Services performed after 1954 outside the United States by a 
citizen of the United States as an employee for an American employer 
constitute employment provided the services are not specifically 
excepted under section 3121(b). For definitions of ``citizen of the 
United States'' and ``American employer'', see Sec. Sec. 31.3121(e)-1 
and 3121 (h)-1, respectively.
    (4) By a citizen of the United States as an employee for a foreign 
subsidiary corporation. For provisions relating to the extension of the 
Federal old-age, survivors, and disability insurance system established 
by title II of the Social Security Act to certain services not 
constituting employment which are performed outside the United States by 
citizens of the United States in the employ of a foreign subsidiary of a 
domestic corporation, see section 3121(1) and Part 36 of this chapter 
(Regulations Relating to Contract Coverage of Employees of Foreign 
Subsidiaries).

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8309, July 2, 1964]

[[Page 39]]



Sec. 31.3121(b)-4  Employment; excepted services in general.

    (a) Services performed by an employee for an employer do not 
constitute employment for purposes of the taxes if they are specifically 
excepted from employment under any of the numbered paragraphs of section 
3121(b). Services so excepted do not constitute employment for purposes 
of the taxes even though they are performed within the United States, or 
are performed outside the United States on or in connection with an 
American vessel or American aircraft, or are performed outside the 
United States by a citizen of the United States for an American 
employer. If not otherwise provided in the regulations relating to the 
numbered paragraphs of section 3121(b), such regulations apply to 
services performed after 1954.
    (b) The exception attaches to the services performed by the employee 
and not to the employee as an individual; that is, the exception applies 
only to the services in an excepted class rendered by the employee.

    Example. A is an individual who is employed part time by B to 
perform services which are specifically excepted from employment under 
one of the numbered paragraphs of section 312(b). A is also employed by 
C part time to perform services which constitute employment. While no 
tax liability is incurred with respect to A's remuneration for services 
performed in the employ of B (the services being excepted from 
employment), the exception does not embrace the services performed by A 
in the employ of C (which constitute employment) and the taxes attached 
with respect to the wages (see Sec. 31.3121(a)-1) for such services.

    (c) For provisions relating to the circumstances under which 
services which are excepted are nevertheless deemed to be employment, 
and relating to the circumstances under which services which are not 
excepted are nevertheless deemed not to be employment, see Sec. 
31.3121(c)-1.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8310, July 2, 1964]



Sec. 31.3121(b)(1)-1  Certain services performed by foreign agricultural
workers, or performed before 1959 in connection with oleoresinous products.

    (a) Services of workers from Mexico. Services performed before 1965 
by foreign agricultural workers from the Republic of Mexico under 
contracts entered into in accordance with title V of the Agricultural 
Act of 1949, as amended, are excepted from employment. Contracts entered 
into pursuant to the provisions of such title V may provide for the 
performance only of services which constitute ``agricultural 
employment''. The term ``agricultural employment'' includes certain 
services which do not constitute ``agricultural labor'' as that term is 
defined in section 3121(g) (see Sec. 31.3121(g)-1. For purposes of 
title V of the Agricultural Act of 1949, as amended, the term 
``agricultural employment'' includes services or activities included 
within the provisions of section 3(f) of the Fair Labor Standards Act of 
1938, as amended, or section 3121(g) of the Internal Revenue Code. Under 
section 507 of the Agricultural Act of 1949, as amended, and as in 
effect before October 3, 1961, the term ``agricultural employment'' 
included also horticultural employment, cotton ginning, compressing and 
storing, crushing of oil seeds, and the packing, canning, freezing, 
drying, or other processing of perishable or seasonable agricultural 
products.
    (b) Services of workers from British West Indies. Services performed 
by a foreign agricultural worker lawfully admitted to the United States 
from the Bahamas, Jamaica, or the other British West Indies, on a 
temporary basis to perform form agricultural labor are excepted from 
employment.
    (c) Services performed after 1956 by foreign workers. Services 
performed after 1956 by a foreign agricultural worker lawfully admitted 
to the United States from any foreign country or possession thereof, 
including the Republic of Mexico, on a temporary basis to perform 
agricultural labor are excepted from employment.
    (d) Services performed before 1959 in connection with the production 
or harvesting of certain oleoresinous products.

[[Page 40]]

Services performed before 1959 in connection with the production or 
harvesting of crude gum (oleoresin) from a living tree or the processing 
of such crude gum into gum spirits of turpentine and gum rosin, provided 
the processing is carried on by the original producer of the crude gum, 
are expected from employment. However, the services to which this 
paragraph relates constitute agricultural labor as defined in section 
3121(g) (see paragraph (d) of Sec. 31.3121(g)-1). Thus, any cash 
remuneration paid for such services, to the extent that the services are 
deemed to constitute employment by reason of the rules relating to 
included and excluded services continued in section 3121(c) (see Sec. 
31.3121(c)-1), is taken into account in applying the test prescribed in 
section 3121(a)(8)(B) for determining whether cash remuneration paid for 
agricultural labor constitutes wages (see paragraph (c) of Sec. 
31.3121(a)(8)-1).
    (e) Cross-reference. See paragraph (b) of Sec. 31.3121(b)-2 for 
provisions relating to the status of services of the character to which 
paragraphs (a) and (b) of this section apply which were performed before 
1955 and the remuneration for which is paid after 1954.

[T.D. 6744, 29 FR 8310, July 2, 1964]



Sec. 31.3121(b)(2)-1  Domestic service performed by students for certain
college organizations.

    (a) Services of a household nature performed in or about the club 
rooms or house of a local college club, or in or about the club rooms or 
house of a local chapter of a college fraternity or sorority, by a 
student who is enrolled and regularly attending classes at a school, 
college, or university are excepted from employment. For purposes of 
this exception, the statutory tests are the type of services performed 
by the employee, the character of the place where the services are 
performed, and the status of the employee as a student enrolled and 
regularly attending classes at a school, college, or university.
    (b) In general, services of a household nature in or about the club 
rooms or house of a local college club or local chapter of a college 
fraternity or sorority include services rendered by cooks, waiters, 
butlers, maids, janitors, laundresses, furnacemen, handymen, gardeners, 
housekeepers, and housemothers.
    (c) A local college club or local chapter of a college fraternity or 
sorority does not include an alumni club or chapter. If the club rooms 
or house of a local college club or local chapter of a college 
fraternity or sorority is used primarily for the purpose of supplying 
board or lodging to students or the public as a business enterprise, the 
services performed therein are not within the exception.
    (d) An organization is a school, college, or university within the 
meaning of section 3121(b)(2) if its primary function is the 
presentation of formal instruction, it normally maintains a regular 
faculty and curriculum, and it normally has a regularly enrolled body of 
students in attendance at the place where its educational activities are 
regularly carried on. See section 170(b)(1)(A)(ii) and the regulations 
thereunder.
    (e) Services of a household nature are not within the exception if 
performed in or about rooming or lodging houses, boarding houses, clubs 
(except local college clubs) hotels, hospitals, eleemosynary 
institutions, or commercial offices or establishments.
    (f) For provisions relating to domestic service in a private home of 
the employer, see Sec. 31.3121(a)(7)-1.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 9167, 69 FR 76405, Dec. 21, 2004]



Sec. 31.3121(b)(3)-1  Family employment.

    (a) Certain services are excepted from employment because of the 
existence of a family relationship between the employee and the 
individual employing him. The exceptions are as follows:
    (1) Services performed by an individual in the employ of his or her 
spouse;
    (2) (i) Services performed before 1961 by a father or mother in the 
employ of his or her son or daughter;
    (ii) Services not in the course of the employer's trade or business, 
or domestic service in a private home of the employer, performed after 
1960 but prior to 1968 by a father or mother in the employ of his or her 
son or daughter;

[[Page 41]]

    (iii) Services not in the course of the employer's trade or 
business, or domestic service in a private home of the employer, 
performed after 1967 by a father or mother in the employ of his or her 
son or daughter unless (a) the employer has a child (including an 
adopted child or stepchild) living in his or her home who is under age 
18 or who has a mental or physical condition which requires the personal 
care and supervision of an adult for at least 4 continuous weeks in the 
calendar quarter in which the services are rendered; and (b) the 
employer is during the calendar quarter in which the services are 
rendered:
    (1) A widow or widower;
    (2) A divorced person who has not remarried; or
    (3) A married person who has a spouse living in the home who has a 
mental or physical condition which results in such spouse's being 
incapable of caring for such child for at least 4 continuous weeks in 
the calendar quarter in which the services are rendered; and
    (3) Services performed by a son or daughter under the age of 21 in 
the employ of his or her father or mother.
    (b) Under paragraph (a) (1) and (2) (i) of this section, the 
exception is conditioned solely upon the family relationship between the 
employee and the individual employing him. Under paragraph (a)(2) (ii) 
and (iii) of this section, in addition to the family relationship, there 
is a further requirement that the services performed after 1960 and 
before 1968 for purposes of paragraph (a)(2)(ii) and after 1967 for 
purposes of paragraph (a)(2)(iii) shall be services not in the course of 
the employer's trade or business or shall be domestic service in a 
private home of the employer. The terms ``services not in the course of 
the employer's trade or business'' and ``domestic service in a private 
home of the employer'' have the same meaning as when used in Sec. 
31.3121(a) (7)-1, except that it is immaterial under paragraphs (a)(2) 
(ii) and (iii) of this section whether or not such services are 
performed on a farm operated for profit. The mere fact that a mental or 
physical disability, whether temporary or permanent, renders a child or 
spouse incapable of self-support does not necessarily mean that the 
child requires the personal care and supervision of an adult or that the 
spouse is incapable of caring for a child within the meaning of 
paragraph (a)(2)(iii) of this section. A written statement by a doctor 
of the existence of the mental or physical condition of the child or 
spouse which states that the child requires the personal care and 
supervision of an adult or that the spouse is incapable of caring for a 
child and which sets forth the period of time during which the condition 
has existed and is likely to exist will usually be sufficient evidence 
to establish the existence and duration of the condition at the time of 
the statement. Under paragraph (a)(3) of this section, in addition to 
the family relationship, there is a further requirement that the son or 
daughter shall be under the age of 21, and the exception continues only 
during the time that the son or daughter is under the age of 21.
    (c) Services performed in the employ of a corporation are not within 
the exception. Services performed in the employ of a partnership are not 
within the exception unless the requisite family relationship exists 
between the employee and each of the partners comprising the 
partnership.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8311, July 2, 1964; T.D. 7374, 40 FR 30950, July 24, 1975]



Sec. 31.3121(b)(4)-1  Services performed on or in connection with a
non-American vessel or aircraft.

    (a) Services performed within the United States by an employee for 
an employer ``on or in connection with'' a vessel not an American 
vessel, or ``on or in connection with'' an aircraft not an American 
aircraft, are excepted from employment if--
    (1) The employee is employed by such employer ``on and in connection 
with'' such vessel or aircraft when outside the United States, and
    (2) (i) The employee is not a citizen of the United States, or (ii) 
the employer is not an American employer.
    (b) An employee performs services on and in connection with the 
vessel or aircraft if he performs services on the vessel or aircraft 
when outside the

[[Page 42]]

United States which are also in connection with the vessel or aircraft. 
Services performed on the vessel outside the United States by employees 
as officers or members of the crew, or by employees of concessionaires, 
of the vessel, for example, are performed under such circumstances, 
since such services are also connected with the vessel. Similarly, 
services performed on the aircraft outside the United States by 
employees as officers or members of the crew of the aircraft are 
performed on and in connection with such aircraft. Services may be 
performed on the vessel or aircraft, however, which have no connection 
with it, as in the case of services performed by an employee while on 
the vessel or aircraft merely as a passenger in the general sense. For 
example, the services of a buyer in the employ of a department store 
while he is a passenger on a vessel are not in connection with the 
vessel.
    (c) The expression ``on or in connection with'' refers not only to 
services performed on the vessel or aircraft but also to services 
connected with the vessel or aircraft which are not actually performed 
on it (for example, shore services performed as officers or members of 
the crew, or as employees of concessionaires, of the vessel).
    (d) Services performed within the United States on or in connection 
with a non-American vessel or aircraft for an employer by an employee 
who is not a citizen of the United States are excepted from employment, 
irrespective of whether the employer is or is not an American employer, 
provided the employee also is employed by such employer on and in 
connection with the vessel or aircraft when outside the United States. 
Services performed within the United States on or in connection with a 
non-American vessel or aircraft by an employee for an employer who is 
not an American employer also are excepted from employment, irrespective 
of whether the employee is or is not a citizen of the United States, 
provided the employee also is employed by such employer on and in 
connection with the vessel or aircraft when outside the United States. 
Services performed within the United States on or in connection with a 
non-American vessel or aircraft for an American employer by an employee 
who is a citizen of the United States are not excepted from employment 
under section 3121(b)(4), irrespective of whether the employee is 
employed by such employer on and in connection with the vessel or 
aircraft when outside the United States. Further, section 3121(b)(4) 
does not except from employment services performed within the United 
States for an employer, whether or not an American employer, on or in 
connection with a non-American vessel or aircraft by an employee, 
whether or not a citizen of the United States, who is not also employed 
by such employer on and in connection with the vessel or aircraft when 
outside the United States.
    (e) Services performed outside the United States on or in connection 
with a vessel not an American vessel, or on or in connection with an 
aircraft not an American aircraft, by a citizen of the United States as 
an employee for an American employer are not excepted from employment 
under section 3121(b)(4), irrespective of whether the employee is 
employed on and in connection with such vessel or aircraft when outside 
the United States. Services performed outside the United States on or in 
connection with a vessel not an American vessel or on or in connection 
with an aircraft not an American aircraft, either by an employee who is 
not a citizen of the United States or for an employer who is not an 
American employer, do not, in any event, constitute employment. See 
paragraph (c) of Sec. 31.3121(b)-3, relating to services performed 
outside the United States which constitute employment.
    (f) See paragraph (c)(2)(v) of Sec. 31.3121(b)-3 for definitions of 
``vessel'' and ``aircraft'', Sec. 31.3121(f)-1, for definitions of 
``American vessel'' and ``American aircraft'', Sec. 31.3121(e)-1, for 
definition of ``citizen of the United States'', and Sec. 31.3121(h)-1, 
for definition of ``American employer''.

[[Page 43]]



Sec. 31.3121(b)(5)-1  Services in employ of an instrumentality of the 
United States specifically exempted from the employer tax.

    Services performed in the employ of an instrumentality of the United 
States are excepted from employment if such instrumentality is exempt 
from the employer tax imposed by section 3111 by virtue of any other 
provision of law which specifically refers to such section 3111 or the 
corresponding section of prior law (section 1410 of the Internal Revenue 
Code of 1939) in granting exemption from the employer tax. This 
exception does not operate to exclude from employment services performed 
in the employ of an instrumentality of the United States unless the 
Congress has granted to such instrumentality a specific exemption from 
the tax imposed by section 3111 or the corresponding section of prior 
law. For provisions which make general exemptions from Federal taxation 
ineffectual as to the employer tax imposed by section 3111, see Sec. 
31.3112-1. For other exceptions from employment applicable with respect 
to services performed in the employ of an instrumentality of the United 
States, see Sec. 31.3121(b)(6)-1.



Sec. 31.3121(b)(6)-1  Services in employ of United States or 
instrumentality thereof.

    (a) In general. This section relates to services performed in the 
employ of the United States Government or in the employ of an 
instrumentality of the United States. Particular services which are not 
excepted from employment under one rule set forth in this section may 
nevertheless be excepted under another rule set forth in this section or 
under Sec. 31.3121(b)(5)-1, relating to services in the employ of an 
instrumentality of the United States specifically exempted from the 
employer tax. Moreover, services performed in the employ of the United 
States or of any instrumentality thereof which are not excepted from 
employment under paragraph (5) or (6) of section 3121(b) may 
nevertheless be excepted under some other paragraph of such section. For 
provisions relating generally to the application of the taxes in the 
case of services performed in the employ of the United States or a 
wholly owned instrumentality thereof, see 3122. For provisions relating 
to the computation of remuneration for service performed by an 
individual as a member of a uniformed service or for service performed 
by an individual as a volunteer or volunteer leader within the meaning 
of the Peace Corps Act, see Sec. 31.3121(i)-2 and Sec. 31.3121(i)-3, 
respectively.
    (b) Services covered under a retirement system established by a law 
of the United States. Services performed in the employ of the United 
States or in the employ of any instrumentality thereof are excepted from 
employment under section 3121(b)(6)(A) if such services are covered 
under a law enacted by the Congress of the United States which 
specifically provides for the establishment of a retirement system for 
employees of the United States or of such instrumentality. 
Determinations as to whether services are covered by a retirement system 
of the requisite character are to be made as of the time such services 
are performed. Services of an employee who has an option to have his 
services covered under a retirement system are not covered under such 
retirement system unless and until he exercises such option. The test is 
whether particular services performed by an employee are covered by a 
retirement system of the requisite character rather than whether the 
position in which such services are performed is covered by such 
retirement system.
    (c) Services performed for an instrumentality not subject to 
employer tax on December 31, 1950, and covered under a retirement system 
established by such instrumentality. (1) Subject to the provisions of 
subparagraph (4) of this paragraph, services performed in the employ of 
an instrumentality of the United States are excepted from employment 
under section 3121(b)(6)(B) if--
    (i) The particular instrumentality was not subject on December 31, 
1950, to the employer tax imposed by section 1410 of the Internal 
Revenue Code of 1939, and
    (ii) The services are covered by a retirement system established by 
such instrumentality.
    (2) If the particular instrumentality was not in existence on 
December 31,

[[Page 44]]

1950, but is created thereafter under a law which was in effect on 
December 31, 1950, services performed in the employ of such 
instrumentality are excepted from employment (unless otherwise provided 
in paragraph (c)(4) of this section) if--
    (i) The instrumentality had it been in existence on December 31, 
1950, would not have been subject on that date to the employer tax 
imposed by section 1410 of the Internal Revenue Code of 1939, and
    (ii) The services are covered by a retirement system established by 
such instrumentality.

It is immaterial, for purposes of this exception, whether the exemption 
from the employer tax on December 31, 1950, resulted, or would have 
resulted, from a tax exemption as such in effect on December 31, 1950, 
or from the provisions of section 1426(b) (6) of the Internal Revenue 
Code of 1939 in effect on that date, relating to the exception from 
employment of services performed in the employ of certain 
instrumentalities of the United States.
    (3) Determinations as to whether services performed in the employ of 
an instrumentality referred to in paragraph (c)(1) or (2) of this 
section are covered by a retirement system established by such 
instrumentality are to be made as of the time such services are 
performed. Services of an employee who has an option to have his 
services covered under a retirement system established by the 
instrumentality are not covered under such retirement system unless and 
until he exercises such option. The test is whether particular services 
performed by an employee are covered by a retirement system established 
by the instrumentality rather than whether the position in which such 
services are performed is covered by such retirement system.
    (4) The exception from employment provided in section 3121(b)(6)(B) 
has no application with respect to any of the following classes of 
services:
    (i) Services performed in the employ of a corporation which is 
wholly owned by the United States;
    (ii) Services performed in the employ of a production credit 
association, a Federal Reserve Bank, or a Federal Credit Union; services 
performed before December 31, 1959, in the employ of a national farm 
loan association; services performed after December 30, 1959, in the 
employ of a Federal land bank association; services performed after 
December 31, 1959, in the employ of a Federal land bank, a Federal 
intermediate credit bank, or a bank for cooperatives; services performed 
after December 31, 1972, in the employ of a Federal home loan bank; and 
services performed after December 31, 1966, and before January 1, 1973, 
in the employ of a Federal home loan bank, in the case of individuals 
who are in such employ on the latter date, provided that an amount equal 
to the taxes imposed by sections 3101 and 3111 with respect to all such 
services performed by all such individuals are paid under the provisions 
of section 3122 by July 1, 1973;
    (iii) Services performed in the employ of a State, county, or 
community committee under the Commodity Stabilization Service;
    (iv) Services performed by a civilian employee, not compensated from 
funds appropriated by the Congress, in the Army and Air Force Exchange 
Service, Army and Air Force Motion Picture Service, Navy Exchanges, 
Marine Corps Exchanges, or other activities, conducted by an 
instrumentality of the United States subject to the jurisdiction of the 
Secretary of Defense, at installations of the Department of Defense for 
the comfort, pleasure, contentment, and mental and physical improvement 
of personnel of such Department; or
    (v) Services performed by a civilian employee, not compensated from 
funds appropriated by the Congress, in the Coast Guard Exchanges or 
other activities, conducted by an instrumentality of the United States 
subject to the jurisdiction of the Secretary of the Treasury, at 
installations of the Coast Guard for the comfort, pleasure, contentment, 
and mental and physical improvement of personnel of the Coast Guard.
    (d) Special classes of services. The following classes of services 
performed either in the employ of the United States or in the employ of 
any instrumentality thereof are excepted from employment under section 
3121(b)(6)(C):

[[Page 45]]

    (1) Services performed as the President or Vice President of the 
United States or a Member, Delegate, or Resident Commissioner, of or to 
the Congress of the United States;
    (2) Services performed in the legislative branch of the United 
States Government;
    (3) Services performed in a penal institution of the United States 
by an inmate thereof;
    (4) (i) Except as provided in paragraph (d)(4)(ii) of this section, 
services performed by student nurses, medical or dental interns, 
residents in training, student dietitians, student physical therapists, 
or student occupational therapists, assigned or attached to a hospital, 
clinic, or medical or dental laboratory operated by any department, 
agency, or instrumentality of the U.S. Government, or by certain other 
student employees described in section 5351(2) of title 5, United States 
Code.
    (ii) The provisions of paragraph (d)(4)(i) of this section have no 
application to services performed after 1965 by medical or dental 
interns or by medical or dental residents in training.
    (5) Services performed by an individual as an employee serving on a 
temporary basis in case of fire, storm, earthquake, flood, or other 
similar emergency; and
    (6) (i) Except as provided in paragraph (d)(6)(ii) of this section, 
services performed by an individual to whom subchapter III of chapter 83 
of title 5, United States Code (civil service retirement) does not apply 
because he is, with respect to such services, subject to another 
retirement system, established either by a law of the United States or 
by the agency or instrumentality of the United States for which such 
services are performed.
    (ii) The provisions of paragraph (d)(6)(i) of this section have no 
application to service performed by an individual to whom subchapter III 
of chapter 83 of title 5, United States Code (civil service retirement) 
does not apply because such individual is subject to the retirement 
system of the Tennessee Valley Authority, if such service is subject to 
the plan approved by the Secretary of Health and Human Services on 
December 28, 1956, pursuant to section 104 (i)(2) of the Social Security 
Amendments of 1956 (70 Stat. 827). See section 201(m)(4) of such 
amendments for provisions relating to the timeliness of payment of tax 
with respect to remuneration paid before 1957 for such services, and 
barring the imposition of interest on the amount of any such tax due for 
any period before December 28, 1956.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8311, July 2, 1964; T.D. 6983, 33 FR 18016, Dec. 4, 1968; T.D. 7373, 40 
FR 30957, July 24, 1975]



Sec. 31.3121(b)(7)-1  Services in employ of States or their political
subdivisions or instrumentalities.

    (a) In general. Except as provided in other paragraphs of this 
section, services performed in the employ of any State, any political 
subdivision of a State, or any instrumentality of one or more States or 
political subdivisions thereof which is wholly owned by one or more 
States or political subdivisions are excepted from employment. For the 
definition of the term ``State'', as used in this section, see Sec. 
31.3121(e)-1.
    (b) Covered transportation service. The exception from employment 
under section 3121(b)(7) does not apply to covered transportation 
service as defined in section 3121(j). See that section and 31.3121(j)-
1.
    (c) Government of American Samoa. The exception from employment 
under section 3121(b)(7) does not apply to services performed after 1960 
in the employ of the Government of American Samoa, any political 
subdivision thereof, or any instrumentality of such Government or 
political subdivision, or combination thereof, which is wholly owned 
thereby, performed by an officer or employee thereof (including a member 
of the legislature of such Government or political subdivision).
    (d) District of Columbia. The exception from employment under 
section 3121(b)(7) does not apply to services performed after September 
30, 1965, in the employ of the District of Columbia or any 
instrumentality which is wholly owned thereby, if such service is not 
covered by a retirement system established by a law of the United 
States. Notwithstanding the preceding sentence the following classes of 
services

[[Page 46]]

performed either in the employ of the District of Columbia or in the 
employ of any instrumentality which is wholly owned thereby are excepted 
from employment:
    (1) Services performed in a hospital or penal institution by a 
patient or inmate thereof.
    (2) Services performed by student nurses, student dietitians, 
student physical therapists, or student occupational therapists assigned 
or attached to a hospital, clinic, or medical or dental laboratory 
operated by the District of Columbia or by any wholly owned 
instrumentality thereof, or by certain other student employees described 
in section 5351(2) of title 5, United States Code. This subparagraph 
does not apply to services performed by medical or dental interns or by 
medical or dental residents in training described in such section 
5351(2).
    (3) Services performed by an individual as an employee serving on a 
temporary basis in case of fire, storm, snow, earthquake, flood, or 
other similar emergency.
    (4) Services performed by a member of a board, committee, or council 
of the District of Columbia, paid on a per diem, meeting, or other fee 
basis.
    (e) Government of Guam. The exception from employment under section 
3121(b)(7) does not apply to services performed after 1972 in the employ 
of the Government of Guam or any instrumentality which is wholly owned 
thereby, by an employee properly classified as a temporary or 
intermittent employee, if such service is not covered by a retirement 
system established by a law of Guam. The preceding sentence shall not 
apply to the services performed by an elected official or a member of 
the legislature or in a hospital or penal institution by a patient or 
inmate thereof. For purposes of this paragraph--
    (1) Any person whose services as an officer or employee of such 
Government or instrumentality is not covered by a retirement system 
established by a law of the United States shall not, with respect to 
such service, be regarded as an employee of the United States or any 
agency or instrumentality thereof, and
    (2) The remuneration for service described in subparagraph (1) 
(including fees paid to a public official) shall be deemed to have been 
paid by such Government or instrumentality.

[T.D. 6744, 29 FR 8312, July 2, 1964, as amended by T.D. 6983, 33 FR 
18016, Dec. 4, 1968; T.D. 7373, 40 FR 30958, July 24, 1975]



Sec. 31.3121(b)(7)-2  Service by employees who are not members of a
public retirement system.

    (a) Table of contents. This paragraph contains a listing of the 
major headings of this Sec. 31.3121(b)(7)-2.

  Sec. 31.3121(b)(7)-2 Service by employees who are not members of a 
                        public retirement system.

    (a) Table of contents.
    (b) Introduction.
    (c) General rule.
    (1) Inclusion in employment of service by employees who are not 
members of a retirement system.
    (2) Treatment of individuals employed in more than one position.
    (d) Definition of qualified participant.
    (1) General rule.
    (2) Special rule for part time, seasonal and temporary employees.
    (3) Alternative lookback rule.
    (4) Treatment of former participants.
    (e) Definition of retirement system.
    (1) Requirement that system provide retirement-type benefits.
    (2) Requirement that system provide minimum level of benefits.
    (f) Transition rules.
    (1) Application of qualified participant rules during 1991.
    (2) Additional transition rules for plans in existence on November 
5, 1990.

    (b) Introduction. Under section 3121(b)(7)(F), wages of an employee 
of a State or local government are generally subject to tax under FlCA 
after July 1, 1991, unless the employee is a member of a retirement 
system maintained by the State or local government entity. This section 
31.3121(b)(7)-2 provides rules for determining whether an employee is a 
``member of a retirement system''. These rules generally treat an 
employee as a member of a retirement system if he or she participates in 
a system that provides retirement benefits, and has an accrued benefit 
or receives an allocation under the system that is comparable to the

[[Page 47]]

benefits he or she would have or receive under Social Security. In the 
case of part-time, seasonal and temporary employees, this minimum 
retirement benefit is required to be nonforfeitable.
    (c) General rule--(1) Inclusion in employment of service by 
employees who are not members of a retirement system. Except in the case 
of service described in sections 3121(b)(7)(F) (i) through (v), the 
exception from employment under section 3121(b)(7) does not apply to 
service in the employ of a State or any political subdivision thereof, 
or of any instrumentality of one or more of the foregoing that is wholly 
owned thereby, after July 1, 1991, unless the employee is a member of a 
retirement system of such State, political subdivision or 
instrumentality at the time the service is performed. An employee is not 
a member of a retirement system at the time service is performed unless 
at that time he or she is a qualified participant (as defined in 
paragraph (d) of this section) in a retirement system that meets the 
requirements of paragraph (e) of this section with respect to that 
employee.
    (2) Treatment of individuals employed in more than one position. 
Under section 3121(b)(7)(F), whether an employee is a member of a 
retirement system is determined on an entity-by-entity rather than a 
position-by-position basis. Thus, if an employee is a member of a 
retirement system with respect to service he or she performs in one 
position in the employ of a State, political subdivision or 
instrumentality thereof, the employee is generally treated as a member 
of a retirement system with respect to all service performed for the 
same State, political subdivision or instrumentality in any other 
positions. A State is a separate entity from its political subdivisions, 
and an instrumentality is a separate entity from the State or political 
subdivision by which it is owned for purposes of this rule. See 
paragraph (e)(2) of this section, however, for rules relating to service 
and compensation required to be taken into account in determining 
whether an employee is a member of a retirement system for purposes of 
this section. This rule is illustrated by the following examples:

    Example 1. An individual is employed full-time by a county and is a 
qualified participant (as defined in paragraph (d) of this section) in 
its retirement plan with regard to such 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, however, and neither the service nor the 
compensation in the part-time position is considered in determining the 
employee's retirement benefit under the county retirement plan. 
Nevertheless, if the retirement plan meets the requirements of paragraph 
(e) of this section with respect to the individual, the exclusion from 
employment under section 3121(b)(7) applies to both the employee's full-
time and part-time service with the county.
    Example 2. An individual is employed full-time by a State and is a 
member of its retirement plan. The individual 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 employment under section 3121(b)(7), 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.

    (d) Definition of qualified participant--(1) General rule--(i) 
Defined benefit retirement systems. Whether an employee is a qualified 
participant in a defined benefit retirement system is determined as 
services are performed. An employee is a qualified participant in a 
defined benefit retirement system (within the meaning of paragraph 
(e)(1) of this section) with respect to services performed on a given 
day if, on that day, he or she is or ever has been an actual participant 
in the retirement system and, on that day, he or she actually has a 
total accrued benefit under the retirement system that meets the minimum 
retirement benefit requirement of paragraph (e)(2) of this section. 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), such as 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

[[Page 48]]

with an accrual, that have not been satisfied. The rules of this 
paragraph (d)(1)(i) are illustrated by the following examples:

    Example 1. A State maintains a defined benefit plan that is a 
retirement system within the meaning of paragraph (e)(1) of this 
section. Under the terms of the plan, employees in positions covered by 
the plan must complete 6 months of service before becoming participants. 
The exception from employment in section 3121(b)(7) does not apply to 
services of an employee during the employee's 6 months of service prior 
to his or her initial entry into the plan. The same result occurs even 
if, upon the satisfaction of this service requirement, the employee is 
given credit under the plan for all service with the employer (i.e., if 
service is credited for the 6-month waiting period). This is true even 
if the employee makes a required contribution in order to gain the 
retroactive credit. The same result also occurs if the employee can 
elect to participate in the plan before the end of the 6-month waiting 
period, but does not elect to do so.
    Example 2. A political subdivision maintains a defined benefit plan 
that is a retirement system within the meaning of paragraph (e)(1) of 
this section. 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. 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.

    (ii) Defined contribution retirement systems. Whether an employee is 
a qualified participant in a defined contribution retirement system is 
determined as services are performed. An employee is a qualified 
participant in a defined contribution or other individual account 
retirement system (within the meaning of paragraph (e)(1) of this 
section) with respect to services performed on a given day if, on that 
day, he or she 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 of paragraph 
(e)(2) of this section with respect to compensation during any 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 
section 3121(b)(7)(F). This rule is illustrated by the following 
examples:

    Example 1. A State-owned hospital maintains a nonelective defined 
contribution plan that is a retirement system within the meaning of 
paragraph (e)(1) of this section. 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. Assume the same facts 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 plan year. If the pro rata allocation 
available on a given day would meet the minimum retirement benefit 
requirement of paragraph (e)(2) of this section with respect to 
compensation from the beginning of the plan year through that day (or 
some later day), employees are treated as qualified participants in the 
plan on that day.
    Example 3. A political subdivision maintalns an elective defined 
contribution plan that is a retirement system within the meaning of 
paragraph (e)(1) of this section. The plan has a calendar year plan year 
and 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 with respect 
to compensation during that time, and it is not certain at that time 
that any allocations will be made. If the level of contributions during 
the period July-December meets the minimum retirement benefit 
requirement of paragraph (e)(2) of this section 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 election (effective November 1). If the contributions during 
the period July-October are high enough to meet the minimum retirement 
benefit requirement of paragraph (e)(2) of this section with respect to 
compensation during that period, the employee is treated as a qualified 
participant during

[[Page 49]]

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.
    (2) Special rule for part-time, seasonal and temporary employees--
(i) In general. A part-time, seasonal or temporary employee is generally 
not a qualified participant on a given day unless any benefit relied 
upon to meet the requirements of paragraph (d)(1) of this section is 
100-percent nonforfeitable on that day. This requirement may be applied 
solely to the portion of an employee's benefit under the retirement 
system attributable to compensation and service while an employee is a 
part-time, seasonal or temporary employee, provided that such service is 
taken into account with respect to the remaining portion of the benefit 
for vesting purposes. Rules similar to the rules in section 411(a)(11) 
are applicable in determining whether a benefit is nonforfeitable. Thus, 
a benefit does not fail to be nonforfeitable solely because it can be 
immediately distributed upon separation of service without the consent 
of the employee, provided that the present value of the benefit does not 
exceed the cash-out limit in effect under Sec. 1.411(a)-11(c)(3)(ii) of 
this chapter.
    (ii) Treatment of employees entitled to certain distributions upon 
death or separation from service. A part-time, seasonal or temporary 
employee's benefit under a retirement system is considered 
nonforfeitable within the meaning of paragraph (d)(2)(i) of this section 
on a given day if on that day the employee is unconditionally entitled 
under the retirement system to a single-sum distribution on account of 
death or separation from service of an amount that is at least equal to 
7.5 percent of the participant's compensation (within the meaning of 
paragraph (e)(2)(iii)(B) of this section) for all periods of credited 
service taken into account in determining whether the employee's benefit 
under the retirement system meets the minimum retirement benefit 
requirement of paragraph (e)(2) of this section. An employee will be 
considered to be unconditionally entitled to a single-sum distribution 
notwithstanding the fact that the distribution may be forfeitable (in 
whole or in part) upon a finding of such employee's criminal misconduct. 
The participant must be entitled to interest on the distributable amount 
through the date of distribution, at a rate meeting the requirements of 
paragraph (e)(2)(iii)(C) of this section, as part of the single sum. See 
paragraph (f)(2)(i)(C) for a transition rule relating to this 
nonforfeitable benefit safe harbor. The rule of this paragraph 
(d)(2)(ii) is illustrated by the following example:

    Example. An employee is required to contribute 7.5 percent of his or 
her compensation to a State's defined benefit plan each year. The 
contribution is ``picked up'' by the employer in accordance with section 
414(h). Under the plan, these amounts plus interest accrued since the 
date each amount was contributed are refundable to the employee in all 
cases upon the employee's death or separation from service with the 
employer. If the interest rate meets the requirements of paragraph 
(e)(2)(iii)(C) of this section, then the employee's benefits under the 
plan are considered nonforfeitable and thus meet the requirement of 
paragraph (d)(2)(i) of this section. Of course, the benefit under the 
plan must still meet the minimum retirement benefit requirement for 
defined benefit plans of paragraph (e)(2)(ii) of this section.

    (iii) Definitions of part-time, seasonal and temporary employee--(A) 
Definition of part-time employee. For purposes of this section, a part-
time employee is any employee who normally works 20 hours or less per 
week. 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 a part-time 
employee for purposes of this section if he or she normally has 
classroom hours of one-half or more of the number of classroom hours 
designated by the educational institution as constituting full-time 
employment, provided that such designation is reasonable under all the 
facts and circumstances. In addition, elected officials and election

[[Page 50]]

workers (otherwise described in section 3121(b)(7)(F)(iv) but paid in 
excess of $100 annually) are not considered part-time, seasonal or 
temporary employees for purposes of this section. The rules of this 
paragraph (d)(2)(iii) are illustrated by the following example:

    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 8 classroom hours per week. Because 
the assigned classroom hours of the teacher are at least one-half of the 
school's definition of full-time teacher, the teacher is not a part-time 
employee.

    (B) Definition of seasonal employee. For purposes of this section, a 
seasonal employee is any employee who normally works on a full-time 
basis less than 5 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 3-month 
period are seasonal employees.
    (C) Definition of temporary employee. For purposes of this section, 
a temporary employee is any employee performing services under a 
contractual arrangement with the employer of 2 years or less duration. 
Possible contract extensions may be considered in determining the 
duration of a contractual arrangement, but only if, under the facts and 
circumstances, there is a significant likelihood that the employee's 
contract will be extended. Future contract extensions are considered 
significantly likely to occur for purposes of this rule if on average 80 
percent of similarly situated employees (i.e., those in the same or a 
similar job classification with expiring employment contracts) have had 
bona fide offers to renew their contracts in the immediately preceding 2 
academic or calendar years. In addition, future contract extensions are 
considered significantly likely to occur if the employee with respect to 
whom the determination is being made has a history of contract 
extensions with respect to his or her current position. An employee is 
not considered a temporary employee for purposes of this rule solely 
because he or she is included in a unit of employees covered by a 
collective bargaining agreement of 2 years or less duration.
    (D) Treatment of employees participating in certain systems. Whether 
an employee is a part-time, seasonal or temporary employee with respect 
to allocations or benefits under a retirement system is generally 
determined based on service in the position in which the allocations or 
benefits were earned, and does not take into account service in other 
positions with the same or different States, political subdivisions or 
instrumentalities thereof. All of an employee's service in other 
positions with the same or different States, political subdivisions or 
instrumentalities thereof 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, however, 
Provided that: The employee's service in the other positions is or was 
covered by the retirement system; 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. The rule of this 
paragraph (d)(2)(iii)(D) is illustrated by the following example:

    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 
political subdivisions contribute to the same state-wide 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 
under the retirement system, then the employee is not considered a part-
time employee of either the county or the municipality for purposes of 
the nonforfeitable benefit requirement of paragraph (d)(2)(i) of this 
section.

    (3) Alternative lookback rule--(i) In general. An employee may be 
treated as a qualified participant in a retirement system throughout a 
calendar year if

[[Page 51]]

he or she was a qualified participant in such system (within the meaning 
of paragraphs (d) (1) and (2) of this section) at the end of the plan 
year of the system ending in the previous calendar year. This rule is 
illustrated by the following examples:

    Example 1. A political subdivision maintains a plan that is a 
retirement system within the meaning of paragraph (e)(1) of this 
section. An employee is a qualified participant within the meaning of 
paragraph (d)(1) of this section in the plan on the last day of the plan 
year ending on May 31, 1995. If the alternative lookback rule is used to 
determine FICA liability, no such liability exists with respect to the 
employee or employer for calendar year 1996 by reason of section 
3121(b)(7)(F). The same result would apply if the determination is being 
made with respect to calendar year 1992 and the lookback year was the 
plan year ending May 31, 1991, even though that plan year ended before 
the effective date of section 3121(b)(7)(F).
    Example 2. A political subdivision maintains an elective defined 
contribution plan described in section 457(b) of the Code. An employee 
is eligible to participate in the plan but does not elect to contribute 
for a plan year. Under the general rule of paragraph (d)(1) of this 
section, the employee is not a qualified participant in the plan during 
the plan year because contributions sufficient to meet the minimum 
retirement benefit requirement of paragraph (e)(2) of this section are 
not being made. However, if an employee's status as a qualified 
participant is being determined under the alternative lookback rule, 
then the employee is a qualified participant for the calendar year in 
which the determination is being made if he of she was a qualified 
participant as of the end of the plan year that ended in the previous 
calendar year.

    (ii) Application in first year of participation. If the alternative 
lookback rule is used, an employee who participates in the retirement 
system may be treated as a qualified participant on any given day during 
his or her first plan year of participation in a retirement system 
(within the meaning of paragraph (e)(1) of this section) if and only if 
it is reasonable on such day to believe that the employee will be a 
qualified participant (within the meaning of paragraphs (d)(1) and (2) 
of this section) on the last day of such plan year. In the case of a 
defined contribution retirement system, the determination of whether the 
employee is actually (or is expected to be) a qualified participant at 
the end of the plan year must take into account all compensation since 
the commencement of participation. See paragraph (d)(3)(iv) of this 
section. If this reasonable belief is correct, and the employee is a 
qualified participant on the last day of his or her first plan year of 
participation, then the exception from employment in section 3121(b)(7) 
will apply without regard to section 3121(b)(7)(F) to services of the 
employee for the balance of the calendar year in which the plan year 
ends. For purposes of this paragraph (d)(3)(ii), it is not reasonable to 
assume the establishment of a new plan until such establishment actually 
occurs. In addition, the rule in this paragraph (d)(3)(ii) may not be 
used to treat an employee as a qualified participant until the employee 
actually becomes a participant in the retirement system. In the case of 
a retirement system that does not permit a new employee to participate 
until the first day of the first month beginning after the employee's 
commencement of service, or some earlier date, a new employee who is not 
a part-time, seasonal or temporary employee may be treated as a 
qualified participant until such date. This 1-month rule of 
administrative convenience applies without regard to whether the 
employer has a reasonable belief that the employee will be a qualified 
participant. The rules of this paragraph (d)(3)(ii) are illustrated by 
the following examples:

    Example 1. A political subdivision maintains a plan that is a 
retirement system within the meaning of paragraph (e)(1) of this section 
and uses the alternative lookback rule of this paragraph (d)(3). 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. Assume that an employee becomes a participant. 
If it is reasonable to believe that the employee will be credited with 
1,000 hours of service by the last day of his or her first year of 
participation and thereby become a qualified participant by reason of 
accruing a benefit that meets the minimum retirement benefit requirement 
of paragraph (e)(2) of this section, the services of the employee are 
not subject to FICA tax from the date of initial participation until the 
end of that plan year. If the employee is a qualified participant on the

[[Page 52]]

last day of his or her first plan year of participation, then the 
exception from employment for purposes of FICA will apply to services of 
the employee for the balance of the calendar year in which the plan year 
ended.
    Example 2. Assume the same facts as Example 1, except that the 
employee is a newly hired employee and the plan provides that an 
employee may not participate until the first day of his or her first 
full month of employment. Under the 1-month rule of convenience, the 
employee may be treated as a qualified participant until the first date 
on which he or she could participate in the plan.

    (iii) Application in last year of participation. If the alternative 
lookback rule is used, an employee may be treated as a qualified 
participant on any given day during his or her last year of 
participation in a retirement system (within the meaning of paragraph 
(e)(1) of this section) if and only if it is reasonable to believe on 
such day that the employee, will be a qualified participant (within the 
meaning of paragraphs (d)(1) and (2) of this section) on his or her last 
day of participation. For purposes of this paragraph (d)(3)(iii), an 
employee's last year of participation means the plan year that the 
employer reasonably ascertains is the final year of such employee's 
participation (e.g., where the employee has a scheduled retirement date 
or where the employer intends to terminate the plan).
    (iv) Special rule for defined contribution retirement systems. An 
employee may not be treated as a qualified participant in a defined 
contribution retirement system under this paragraph (d)(3) if 
compensation for less than a full plan year or other 12-month period is 
regularly taken into account in determining allocations to the 
employee's account for the plan year unless, under all of the facts and 
circumstances, such arrangement is not a device to avoid the imposition 
of FICA taxes. For example, an arrangement under which compensation 
taken into account is limited to the contribution base described in 
section 3121(x)(1) is not considered a device to avoid FICA taxes by 
reason of such limitation. See paragraph (e)(2)(iii)(B) of this section 
for a rule permitting the use of such limitation. This rule is 
illustrated by the following example:

    Example. A political subdivision maintains a defined contribution 
plan that covers all of its full-time employees and is a retirement 
system within the meaning of paragraph (e)(1) of this section. Under the 
plan, a portion of each participant's compensation in the final month of 
every plan year is allocated to the participant's account. Employees 
covered under the plan generally may not be treated as qualified 
participants under the alternative lookback rule for any portion of the 
calendar year following the year in which such allocation is made.

    (v) Consistency requirement. Beginning with calendar year 1992, if 
the alternative lookback rule is used to determine whether an employee 
is a qualified participant, it must be used consistently from year to 
year and with respect to all employees of the State, political 
subdivision or instrumentality thereof making the determination. If a 
retirement system is sponsored by more than one State, political 
subdivision or instrumentality, this consistency requirement applies 
separately to each plan sponsor.
    (4) Treatment of former participants--(i) In general. In general, 
the rules of this paragraph (d) apply equally to former participants who 
continue to perform service for the same State, political subdivision or 
instrumentality thereof or who return after a break in service. Thus, 
for example, a former employee of a political subdivision with a 
deferred benefit under a defined benefit retirement system maintained by 
the political subdivision who is reemployed by the political subdivision 
but does not resume participation in the retirement system, may continue 
to be a qualified participant in the system after becoming reemployed if 
his or her total accrued benefit under the system meets the minimum 
retirement benefit requirement of paragraph (e)(2) of this section 
(taking into account all periods of service (including current service) 
required to be taken into account under that paragraph). See also 
paragraph (e)(2)(v) of this section for situations in which benefits 
under a retirement system may be taken into account even though they 
relate to service for another employer.
    (ii) Treatment of re-hired annuitants. An employee who is a former 
participant in a retirement system maintained by a State, political 
subdivision or instrumentality thereof, who has previously retired from 
service with

[[Page 53]]

the State, political subdivision or instrumentality, and who is either 
in pay status (i.e., is currently receiving retirement benefits) under 
the retirement system or has reached nomal retirement age under the 
retirement system, is deemed to be a qualified participant in the 
retirement system without regard to whether he or she continues to 
accrue a benefit or whether the distribution of benefits under the 
retirement system has been suspended pending cessation of services. This 
rule also applies in the case of an employee who has retired from 
service with another State, political subdivision or instrumentality 
thereof that maintains the same retirement system as the current 
employer, provided the employee is a former participant in the system by 
reason of the employee's former employment. Thus, for example, if a 
teacher retires from service with a school district that participates in 
a state-wide teachers' retirement system, begins to receive benefits 
from the system, and later becomes a substitute teacher in another 
school district that participates in the same state-wide system, the 
employee is treated as a re-hired annuitant under this paragraph 
(d)(4)(ii).
    (e) Definition of retirement system--(1) Requirement that system 
provide retirement-type benefits. For purposes of section 3121(b)(7)(F), 
a retirement system 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. Whether a plan is maintained to provide retirement 
benefits with respect to an employee is determined under the facts and 
circumstances of each case. For example, a plan providing only retiree 
health insurance or other deferred welfare benefits is not considered a 
retirement system for this purpose. The legal form of the system is 
generally not relevant. Thus, for example, a retirement system may 
include a plan described in section 401(a), an annuity plan or contract 
under section 403 or a plan described in section 457(b) or (f) of the 
Internal Revenue Code. In addition, the Social Security system is not a 
retirement system for purposes of section 3121(b)(7)(F) and this 
section. These rules are illustrated by the following examples:

    Example 1. Under an employment arrangement, a portion of an 
employee's compensation is regularly deferred for 5 years. Because a 
plan that defers the receipt of compensation for a short span of time 
rather than until retirement is not a plan that provides retirement 
benefits, this arrangement is not a retirement system for purposes of 
section 3121(b)(7)(F).
    Example 2. An individual holds two positions with the same political 
subdivision. The wages earned in one position are subject to FICA tax 
pursuant to an agreement (under section 218 of the Social Security Act) 
between the Secretary of Health and Human Services and the State in 
which the political subdivision is located. Because the Social Security 
system is not a retirement system for purposes of section 3121(b)(7)(F), 
the exception from employment in section 3121(b)(7) does not apply to 
service in the other position unless the employee is otherwise a member 
of a retirement system of such political subdivision.

    (2) Requirement that system provide minimum level of benefits--(i) 
In general. A pension, annuity, retirement or similar fund or system is 
not a retirement system with respect to an employee unless it provides a 
retirement benefit to the employee that is comparable to the benefit 
provided under the Old-Age portion of the Old-Age, Survivor and 
Disability Insurance program of Social Security. Whether a retirement 
system meets this requirement is generally determined on an individual-
by-individual basis. Thus, for example, a pension plan that is not a 
retirement system with respect to an employee may nevertheless be a 
retirement system with respect to other employees covered by the system.
    (ii) Defined benefit retirement systems. A defined benefit 
retirement system maintained by a State, political subdivision or 
instrumentality thereof meets the requirements of this paragraph (e)(2) 
with respect to an employee on a given day if and only if, on that day, 
the employee has an accrued benefit under the system that entitles the 
employee to an annual benefit commencing on or before his or her Social 
Security retirement age that is at least equal to the annual Primary 
Insurance Amount the employee would

[[Page 54]]

have under Social Security. For this purpose, the Primary Insurance 
Amount an individual would have under Social Security is determined as 
it would be under the Social Security Act if the employee had been 
covered under Social Security for all periods of service with the State, 
political subdivision or instrumentality, had never performed service 
for any other employer, and had been fully insured within the meaning of 
section 214(a) of the Social Security Act, except that all periods of 
service with the State, political subdivision or instrumentality must be 
taken into account (i.e., without reduction for low-earning years).
    (iii) Defined contribution retirement systems--(A) In general. A 
defined contribution retirement system maintained by a State, political 
subdivision or instrumentality thereof meets the requirements of 
paragraph (e)(2)(i) of this section with respect to an employee if and 
only if allocations to the employee's account (not including earnings) 
for a period are at least 7.5 percent of the employee's compensation for 
service for the State, political subdivision or instrumentality during 
the period. Matching contributions by the employer may be taken into 
account for this purpose.
    (B) Definition of compensation. The definition of compensation used 
in determining whether a defined contribution retirement system meets 
the minimum retirement benefit requirement must generally be no less 
inclusive than the definition of the employee's base pay as designated 
by the employer or the retirement system, provided such designation is 
reasonable under all the facts and circumstances. Thus, for example, a 
defined contribution retirement system will not fail to meet this 
requirement merely because it disregards for all purposes one or more of 
the following: overtime pay, bonuses, or single-sum amounts received on 
account of death or separation from service under a bona fide vacation, 
compensatory time or sick pay plan, or under severance pay plans. 
Furthermore, any compensation remaining after such amounts are 
disregarded that is in excess of the contribution base described in 
section 3121(x)(1) at the beginning of the plan year may also be 
disregarded. The rules of this paragraph are illustrated by the 
following example:

    Example. A political subdivision maintains an elective defined 
contribution plan that is a retirement system within the meaning of 
paragraph (e)(1) of this section. The plan has a calendar year plan 
year. In 1995, an employee contributes to the plan at a rate of 7.5 
percent of base pay. Assume that the employee will reach the maximum 
contribution base described in section 3121(x)(1) in October of 1995. 
The employee is a qualified participant in the plan for all of the 1995 
plan year without regard to whether the employee ceases to participate 
at any time after reaching the maximum contribution base.

    (C) Reasonable interest rate requirement. A defined contribution 
retirement system does not satisfy this paragraph (e)(2) with respect to 
an employee unless the employee's account is credited with earnings at a 
rate that is reasonable under all the facts and circumstances, or 
employees' accounts are held in a separate trust that is subject to 
general fiduciary standards and are credited with actual earnings on the 
trust fund. Whether the interest rate with which an employee's account 
is credited is reasonable is determined after reducing the rate to 
adjust for the payment of any administrative expenses. The rule of this 
paragraph (e)(2)(iii)(C) is illustrated by the following example:

    Example. A political subdivision maintains a defined contribution 
plan described in section 457(b). Under the plan, the accounts of 
participants are credited annually on the basis of a variable interest 
rate formula determined as of the beginning of the plan year. The 
formula requires an interest rate (after adjustment for administrative 
expense payments) equal to 100 percent of the Applicable Federal Rate 
for long-term debt instruments. This interest rate constitutes a 
reasonable rate of interest.

    (iv) Treatment of emloyees employed in more than one position with 
the same entity. All service and compensation of an employee with 
respect to his or her employment with a State, political subdivision or 
instrumentality thereof must generally be considered in determining 
whether a benefit meets the requirement of this paragraph (e)(2). 
However, for individuals employed simultaneously in multiple positions 
with the same entity, this determination may (but is not required to) be

[[Page 55]]

made solely by reference to the service and compensation related to a 
single position of the employee with the State, political subdivision or 
instrumentality thereof making the determination, provided that the 
position is not a part-time, seasonal or temporary position.
    (v) Treatment of employees participating in certain systems. In 
general, only compensation from and service for the State, political 
subdivision or instrumentality thereof that employs the employee (and 
the allocations or benefits related to such compensation or service) on 
a given day are considered in determining whether the employee's benefit 
under the retirement system on that day meets the requirements of this 
paragraph (e)(2), even if the employee has other allocations or benefits 
under the same retirement system from service with another State, 
political subdivision or instrumentality thereof. However, an employee's 
total allocations or benefits under a retirement system maintained by 
multiple States, political subdivisions or instrumentalities thereof 
(including the current employer) may be taken into account if:
    (A) The compensation and service on which the additional allocations 
or benefits are based are also taken into account in determining whether 
the employee's allocations or benefits satisfy the minimum retirement 
benefit requirement;
    (B) The retirement system takes all service and compensation of the 
employee in all positions covered by the system into account for all 
benefit determination purposes; and
    (C) If the employee is a part-time, seasonal or temporary employee, 
he or she is treated under the plan for benefit accrual purposes in as 
favorable a manner as a full-time employee participating in the system.
    (vi) Additional testing methods. Additional testing methods may be 
designated by the Commissioner in revenue procedures, revenue rulings, 
notices or other documents of general applicability.
    (f) Transition rules--(1) Application of qualified participant rules 
during 1991--(i) In general. An employee may be treated as a qualified 
participant in a retirement system (within the meaning of paragraph 
(e)(1) of this section) on a given day during the period July 1 through 
December 31, 1991, if it is reasonable on that day to believe that he or 
she will be a qualified participant under the general rule in paragraphs 
(d) (1) and (2) of this section by January 1, 1992 (taking into account 
only service and compensation on or after such date). For purposes of 
this paragraph (f)(1)(i), given the facts and circumstances of a 
particular case, it may be reasonable to assume that the terms of a plan 
will be changed or that a new retirement system will be established by 
the end of calendar year 1991, as long as affirmative steps have been 
taken to accomplish this result.
    (ii) Extension of reliance period if legislative action required. If 
a plan amendment or other action is necessary in order to treat an 
employee as a member of a retirement system for purposes of this 
section, such amendment or other action may only be taken by a 
legislative body that does not convene during the period July 1, 1991, 
through December 31, 1991, and the other requirements of paragraph 
(f)(1)(i) of this section are met, the end of the reasonable reliance 
period (including the rule that service and compensation prior to that 
date may be disregarded) provided under paragraph (f)(1)(i) of this 
section is extended from December 31, 1991, to the date that is the last 
day of the first legislative session commencing after December 31, 1991. 
These rules are illustrated by the following examples:

    Example 1. A State maintains a defined benefit plan that meets the 
requirements of paragraph (e) of this section. The plan does not cover a 
particular class of full-time employees as of July 1, 1991. However, in 
light of the enactment of section 3121(b)(7)(F), State officials 
administering the plan for the State intend to request that the 
legislature amend the State statute to include that class of employees 
in the existing plan and otherwise to modify the terms of the plan to 
meet the requirements of section 3121(b)(7)(F) and this section. The 
State legislature meets from January through March each year, and 
legislative action is required to expand coverage under the plan. State 
officials administering the plan have publicized the proposed amendment 
providing for the addition of these employees to the plan. Under the 
transition rule for 1991, if it is reasonable to believe that the 
legislature

[[Page 56]]

will pass this bill in the 1992 session, service by the employees who 
will be covered under the plan by reason of the amendment is not treated 
as employment by reason of section 3121(b)(7)(F) during the period prior 
to April 1, 1992. This is true regardless of whether the plan provides 
retroactive coverage for the period July 1, 1991 through March 31, 1992.
    Example 2. Assume the same facts as in Example 1, except that 
legislative action is not required in order to expand coverage under the 
plan, and that publication of the proposed change to the plan occurs in 
1991. Assume further that coverage is expanded under the plan to include 
the new class of full-time employees as of April 1, 1992. Despite this 
action, in this situation the service by those employees during the 
period January 1, 1992 through March 31, 1992 is not excluded from 
``employment'' under section 3121(b)(7)(F), and wages for that period 
are generally subject to FICA taxes even if the plan provides 
retroactive coverage for any portion of the period July 1, 1991 to March 
31, 1992.

    (2) Additional transition rules for plans in existence on November 
5, 1990--(i) Application of minimum retirement benefit requirement to 
defined benefit retirement systems in plan years beginning before 1993--
(A) In general. A defined benefit retirement system maintained by a 
State, political subdivision or instrumentality thereof on November 5, 
1990, is not subject to the minimum retirement benefit requirement of 
paragraph (e)(2) of this section for any plan year beginning before 
January 1, 1993, with respect to individuals who were actually covered 
under the system on November 5, 1990. Such a retirement system is also 
not subject to the minimum retirement benefit requirement of paragraph 
(e)(2) of this section with respect to an employee who becomes a 
participant after November 5, 1990, if he or she is employed in a 
position that was covered under the retirement system on November 5, 
1990, without regard to whether such coverage was mandatory or elective. 
A retirement system is not described in this paragraph (f)(2)(i)(A) if 
there has been a material decrease in the level of retirement benefits 
under the retirement system pursuant to an amendment adopted subsequent 
to November 5, 1990. Whether such a material decrease in benefits has 
occurred is determined under the facts and circumstances of each case. A 
decrease in benefits is not material to the extent that it does not 
decrease the benefit payable at normal retirement age. These rules are 
illustrated by the following examples:

    Example 1. The retirement formula under a retirement plan that was 
in existence on November 5, 1990, is amended to use career average 
compensation instead of a high 3-year average, without any increase in 
the benefit formula. This amendment constitutes a material decrease in 
the level of benefit under the retirement plan. Therefore, the 
retirement plan is subject to the minimum retirement benefit requirement 
for the plan year for which the amendment is effective and for all 
succeeding plan years.
    Example 2. A defined benefit retirement plan that was in existence 
on November 5, 1990, is subsequently amended to include part-time 
employees. Previously, this class of employees was not covered under the 
plan either on a mandatory or on an elective basis. The plan is subject 
to the minimum retirement benefit requirement with respect to the part-
time employees because this class of employees was previously excluded 
from coverage under the retirement plan. Of course, the nonforfeitable 
benefit rule applies to the benefit relied upon to meet the minimum 
retirement benefit requirement with respect to any part-time, seasonal 
or temporary employee covered during this period.

    (B) Treatment in plan years beginning after 1992 of benefits accrued 
during previous plan years. The general rule that a defined benefit 
retirement system meets the minimum retirement benefit requirement on 
the basis of total benefits and service accrued to date is modified for 
plans in existence on November 5, 1990. If a defined benefit retirement 
system in existence on November 5, 1990, does not meet the minimum 
retirement benefit requirement solely because the benefits accrued for 
an employee (with respect to whom the system is entitled to relief under 
paragraph (f)(2)(i)(A) of this section) as of the last day of the last 
plan year beginning before January 1, 1993, do not meet the minimum 
retirement benefit requirement of paragraph (e)(2) of this section with 
respect to service and compensation before that time, then the 
retirement system will be deemed to comply with the requirements of 
paragraph (e)(2) of this section if the future service accruals would 
comply with the requirement of paragraph

[[Page 57]]

(e)(2) of this section. If retirement benefits under a retirement system 
in existence on November 5, 1990 are materially decreased within the 
meaning of paragraph (f)(2)(i)(A) of this section, then the date the 
decrease is effective is substituted for January 1, 1993 for purposes of 
this paragraph. The rule of this paragraph (f)(2)(i)(B) is illustrated 
by the following example:

    Example. A defined benefit plan maintained by a State was in 
existence on November 5, 1990. It provides a retirement benefit on the 
last day of the 1992 plan year that is insufficient to meet the 
requirements of paragraph (e)(2) of this section based on employees' 
total service and compensation with the State at that time. The plan 
will nevertheless meet the requirements of paragraph (e)(2) of this 
section if it is amended to provide benefits sufficient to meet the 
requirements of paragraph (e)(2) of this section based on employees' 
service and compensation in plan years beginning after December 31, 
1992.

    (C) Treatment of part-time, seasonal or temporary employees. A 
defined benefit retirement system is not exempt from the minimum 
retirement benefit requirement with respect to a part-time, seasonal or 
temporary employee during the transition period provided in paragraph 
(f)(2)(i)(A) of this section unless any retirement benefit provided to 
the employee is 100-percent nonforfeitable within the meaning of 
paragraph (d)(2) of this section. In determining whether the benefit is 
nonforfeitable, the special rule in paragraph (d)(2)(ii) of this section 
is modified in two respects during the transition period: first, the 
percentage of compensation required to be available for distribution is 
reduced from 7.5 percent to 6 percent; and second, the period of service 
with respect to which compensation must be determined is modified to 
include all periods of participation by the employee in the system since 
July 1, 1991.
    (ii) Application of minimum retirement benefit requirement to 
defined contribution retirement systems in plan years beginning before 
1993. A defined contribution retirement system maintained by a State, 
political subdivision or instrumentality thereof on November 5, 1990, 
meets the minimum retirement benefit requirement of paragraph (e) (2) of 
this section with respect to an employee for any plan year beginning 
before January 1, 1993, if mandatory allocations to the employee's 
account (not including earnings) for a period are at least 6 percent 
(rather than 7.5 percent) of the employee's compensation for service to 
the State, political subdivision or instrumentality during the period, 
and the plan otherwise meets the requirements of paragraph (e)(2)(iii) 
of this section. This transition rule is only available with respect to 
an employee who is actually covered under the system on November 5, 
1990, and to an employee who becomes a participant after November 5, 
1990, if he or she is employed in a position that was covered under the 
retirement system on November 5, 1990, without regard to whether such 
coverage was mandatory or elective. In addition, this transition rule is 
not available with respect to a part-time, seasonal or temporary 
employee unless the mandatory allocation required under this paragraph 
(f)(2)(ii) is 100-percent nonforfeitable within the meaning of paragraph 
(d)(2) of this section. A retirement system is not described in this 
paragraph (f)(2)(ii) if there has been a material decrease in the level 
of retirement benefits under the retirement system pursuant to an 
amendment adopted subsequent to November 5, 1990. Whether such a 
material decrease in benefits has occurred is determined under all the 
facts and circumstances.
    (iii) Application of qualified participant rules. A participant with 
respect to whom relief is granted under paragraph (f)(2)(i)(A) of this 
section may be treated as a qualified participant in the defined benefit 
retirement system on a given day if, on that day, he or she is actually 
a participant in the retirement system, and, on that day, it is 
reasonable to believe that the participant will actually accrue a 
benefit before the end of the plan year of such retirement system in 
which the determination is made. A participant is not treated as 
accruing a benefit for purposes of this rule if his or her accrued 
benefits increase solely as a result of an increase in compensation. 
However, an employee is treated as a qualified participant for a plan 
year if the employee meets all of the applicable conditions for accruing 
the maximum current benefit for such year but fails to

[[Page 58]]

accrue a benefit solely because of a uniformly applicable benefit limit 
under the plan. In addition, an employee may be treated as a qualified 
participant in the system on a given day if the employee is a re-hired 
annuitant within the meaning of paragraph (d)(4)(ii) of this section. 
This rule is illustrated by the following example:

    Example. A political subdivision maintains a defined benefit plan 
that is a retirement system within the meaning of paragraph (e)(1) of 
this section but does not meet the requirements of paragraph (e)(2) of 
this section. If the plan is not subject to the minimum retirement 
benefit requirement, an employee who is a participant in the retirement 
plan as of the end of a plan year beginning before January 1, 1993, and 
may reasonably be expected to accrue a benefit under the plan by the end 
of such plan year may be treated as a qualified participant in the plan 
throughout the plan year regardless of the actual amount of the accrual.

[T.D. 8354, 56 FR 29570, June 28, 1991; 56 FR 40246, Aug. 14, 1991, as 
amended by T.D. 8794, 63 FR 70338, Dec. 21, 1998; T.D. 8891, 65 FR 
44682, July 19, 2000]



Sec. 31.3121(b)(8)-1  Services performed by a minister of a church 
or a member of a religious order.

    (a) In general. Services performed by a duly ordained, commissioned, 
or licensed minister of a church in the exercise of his ministry, or by 
a member of a religious order in the exercise of his duties required by 
such order, are excluded from employment, except that services performed 
by a member of such an order in the exercise of such duties (whether 
performed for the order or for another employer) are included in 
employment if an election of coverage under section 3121(r) and Sec. 
31.3121(r)-1 is in effect with respect to such order or with respect to 
the autonomous subdivision thereof to which such member belongs. For 
provisions relating to the election available to certain ministers and 
members of religious orders with respect to the extension of the Federal 
old-age, survivors, and disability insurance system established by title 
II of the Social Security Act to certain services performed by them, see 
Part 1 of this chapter (Income Tax Regulations).
    (b) Service by a minister in the exercise of his ministry. Except as 
provided in paragraph (c)(3) of this section, service performed by a 
minister in the exercise of his ministry includes the ministration of 
sacerdotal functions and the conduct of religious worship, and the 
control, conduct, and maintenance of religious organizations (including 
the religious boards, societies, and other integral agencies of such 
organizations), under the authority of a religious body constituting a 
church or church denomination. The following rules are applicable in 
determining whether services performed by a minister are performed in 
the exercise of his ministry:
    (1) Whether service performed by a minister constitutes the conduct 
of religious worship or the ministration of sacerdotal functions depends 
on the tenets and practices of the particular religious body 
constituting his church or church denomination.
    (2) Service performed by a minister in the control, conduct, and 
maintenance of a religious organization relates to directing, managing, 
or promoting the activities of such organization. Any religious 
organization is deemed to be under the authority of a religious body 
constituting a church or church denomination if it is organized and 
dedicated to carrying out the tenets and principles of a faith in 
accordance with either the requirements or sanctions governing the 
creation of institutions of the faith. The term ``religious 
organization'' has the same meaning and application as is given to the 
term for income tax purposes.
    (3) (i) If a minister is performing service in the conduct of 
religious worship or the ministration of sacerdotal functions, such 
service is in the exercise of his ministry whether or not it is 
performed for a religious organization.
    (ii) The rule in paragraph (b)(3)(i) of this section may be 
illustrated by the following example:

    Example. M, a duly ordained minister, is engaged to perform service 
as chaplain at N University. M devotes his entire time to performing his 
duties as chaplain which include the conduct of religious worship, 
offering spiritual counsel to the university students, and teaching a 
class in religion. M is performing service in the exercise of his 
ministry.


[[Page 59]]


    (4) (i) If a minister is performing service for an organization 
which is operated as an integral agency, of a religious organization 
under the authority of a religious body constituting a church or church 
denomination, all service performed by the minister in the conduct of 
religious worship, in the ministration of sacerdotal functions, or in 
the control conduct, and maintenance of such organization (see paragraph 
(b)(2) of this section) is in the exercise of his ministry.
    (ii) The rule in paragraph (b)(4)(i) of this section may be 
illustrated by the following example:

    Example. M, a duly ordained minister, is engaged by the N Religious 
Board to serve as director of one of its departments. He performs no 
other service. The N Religious Board is an integral agency of O, a 
religious organization operating under the authority of a religious body 
constituting a church denomination. M is performing service in the 
exercise of his ministry.

    (5) (i) If a minister, pursuant to an assignment or designation by a 
religious body constituting his church, performs service for an 
organization which is neither a religious organization nor operated as 
an integral agency of a religious organization, all service performed by 
him, even though such service may not involve the conduct of religious 
worship or the ministration of sacerdotal functions, is in the exercise 
of his ministry.
    (ii) The rule in paragraph (b)(5)(i) of this section may be 
illustrated by the following example:

    Example. M, a duly ordained minister, is assigned by X, the 
religious body constituting his church, to perform advisory service to Y 
Company in connection with the publication of a book dealing with the 
history of M's church denomination. Y is neither a religious 
organization nor operated as an integral agency of a religious 
organization. M performs no other service for X or Y. M is performing 
service in the exercise of his ministry.

    (c) Service by a minister not in the exercise of his ministry. (1) 
Section 3121(b)(8)(A) does not except from employment service performed 
by a duly ordained, commissioned, or licensed minister of a church which 
is not in the exercise of his ministry.
    (2) (i) If a minister is performing service for an organization 
which is neither a religious organization nor operated as an integral 
agency of a religious organization and the service is not performed 
pursuant to an assignment or designation by his ecclesiastical 
superiors, then only the service performed by him in the conduct of 
religious worship or the ministration of sacerdotal functions is in the 
exercise of his ministry. See, however, paragraph (c)(3) of this 
section.
    (ii) The rule in paragraph (c)(2)(i) of this section may be 
illustrated by the following example:

    Example. M, a duly ordained minister, is engaged by N University to 
teach history and mathematics. He performs no other service for N 
although from time to time he performs marriages and conducts funerals 
for relatives and friends. N University is neither a religious 
organization nor operated as an integral agency of a religious 
organization. M is not performing the service for N pursuant to an 
assignment or designation by his ecclesiastical superiors. The service 
performed by M for N University is not in the exercise of his ministry. 
However, service performed by M in performing marriages and conducting 
funerals is in the exercise of his ministry.

    (3) Service performed by a duly ordained, commissioned, or licensed 
minister of a church as an employee of the United States, or a State, 
Territory, or possession of the United States, or the District of 
Columbia, or a foreign government, or a political subdivision of any of 
the foregoing, is not considered to be in the exercise of his ministry 
for purposes of the taxes, even though such service may involve the 
ministration of sacerdotal function or the conduct of religious worship. 
Thus, for example, service performed by an individual as a chaplain in 
the Armed Forces of the United States is considered to be performed by a 
commissioned officer in his capacity as such, and not by a minister in 
the exercise of his ministry. Similarly, service performed by an 
employee of a State as a chaplain in a State prison is considered to be 
performed by a civil servant of the State and not by a minister in the 
exercise of his ministry.
    (d) Service in the exercise of duties required by a religious order. 
Service performed by a member of a religious

[[Page 60]]

order in the exercise of duties required by such order includes all 
duties required of the member by the order. The nature or extent of such 
service is immaterial so long as it is a service which he is directed or 
required to perform by his ecclesiastical superiors.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7280, 38 FR 18369, July 10, 1973]



Sec. 31.3121(b)(8)-2  Services in employ of religious, charitable,
educational, or certain other organizations exempt from income tax.

    (a) Services performed by an employee in the employ of a religious, 
charitable, educational, or other organization described in section 
501(c)(3) which is exempt from income tax under section 501(a) are 
excepted from employment. However, this exception does not apply to 
services with respect to which a certificate, filed pursuant to section 
3121 (k) or (r), or section 1426(l) of the Internal Revenue Code of 
1939, is in effect. For provisions relating to the services with respect 
to which such a certificate is in effect, see Sec. Sec. 31.3121(k)-1 
and 31.3121(r)-1.
    (b) For provisions relating to exemption from income tax of an 
organization described in section 501(c)(3), see Part 1 of this chapter 
(Income Tax Regulations). For provisions relating to waiver by an 
organization of its exemption from the taxes imposed by sections 3101 
and 3111, see Sec. 31.3121(k)-1. See also Sec. 31.3121(b)(8)-1, 
relating to services performed by a minister of a church in the exercise 
of his ministry or by a member of a religious order in the exercise of 
duties required by such order; Sec. 31.3121(b)(10)-1, relating to 
services for remuneration of less than $50 for calendar quarter in the 
employ of certain organizations exempt from income tax; Sec. 
31.3121(b)(10)-2, relating to services performed in the employ of a 
school, college, or university by certain students; and Sec. 
31.3121(b)(13)-1, relating to services performed by certain student 
nurses and hospital interns.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7280, 38 FR 18369, July 10, 1973]



Sec. 31.3121(b)(9)-1  Railroad industry; services performed by an
employee or an employee representative as defined in section 3231.

    Services performed by an individual as an ``employee'' or as an 
``employee representative'', as those terms are defined in section 3231, 
are excepted from employment. For definitions of employee and employee 
representatives, see Sec. Sec. 31.3231(b)-1 and 31.3231(c)-1.



Sec. 31.3121(b)(10)-1  Services for remuneration of less than $50
for calendar quarter in the employ of certain organizations exempt

from income tax.

    (a) Services performed by an employee in a calendar quarter in the 
employ of an organization exempt from income tax under section 501(a) 
(other than an organization described in section 401(a)) or under 
section 521 are excepted from employment if the remuneration for the 
services is less than $50. The test relating to remuneration of $50 is 
based on the remuneration earned during a calendar quarter rather than 
on the remuneration paid in a calendar quarter. The exception applies 
separately with respect to each organization for which the employee 
renders services in a calendar quarter. The type of services performed 
by the employee and the place where the services are performed are 
immaterial; the statutory tests are the character of the organization in 
the employ of which the services are performed and the amount of the 
remuneration for services performed by the employee in the calendar 
quarter. For provisions relating to exemption from income tax under 
section 501(a) or 521, see Part 1 of this chapter (Income Tax 
Regulations).

    Example 1. X is a local lodge of a fraternal organization and is 
exempt from income tax under section 501(a) as an organization of the 
character described in section 501(c)(8). X has two paid employees, A, 
who serves exclusively as recording secretary for the lodge, and B, who 
performs services for the lodge as janitor of its clubhouse. For 
services performed during the first calendar quarter of 1955 (that is, 
January 1, 1955, through March 31, 1955, both dates inclusive) A earns a 
total of $30. For services performed by certain student quarter B earns 
$180. Since the remuneration for the services performed by A during such 
quarter is less than $50, all of such services are expected, and the 
taxes do not

[[Page 61]]

attach with respect to any of the remuneration for such services. Since 
the remuneration for the services performed by B during such quarter, 
however, is not less than $50, none of such services are excepted, and 
the taxes attached with respect to all of the remuneration for such 
services (that is, $180) as and when paid.
    Example 2. The facts are the same as in example 1, above, except 
that on April 1, 1955, A's salary is increased and, for services 
performed during the calendar quarter beginning on that date (that is, 
April 1, 1955, through June 30, 1955, both dates inclusive), A earns a 
total of $60. Although all of the services performed by A during the 
first quarter were excepted, none of A's services performed during the 
second quarter are excepted since the remuneration for such services is 
not less than $50. The taxes attach with respect to all of the 
remuneration for services performed during the second quarter (that is, 
$60) as and when paid.
    Example 3. The facts are the same as in example 1, above, except 
that A earns $120 for services performed during the year 1955, and such 
amount is paid to him in a lump sum at the end of the year. The services 
performed by A in any calendar quarter during the year are excepted if 
the portion of the $120 attributable to services performed in that 
quarter is less than $50. If, however, the portion of the $120 
attributable to services performed in any calendar quarter during the 
year is not less than $50, the services during that quarter are not 
excepted, and the taxes attach with respect to that portion of the 
remuneration attributable to his services in that quarter.

    (b) See Sec. 31.3121(b)(8)-2, relating to services performed in the 
employ of religious, charitable, educational, and certain other 
organizations exempt from income tax; Sec. 31.3121(b)(8)-1, relating to 
services performed by a minister of a church in the exercise of his 
ministry or by a member of a religious order in the exercise of duties 
required by such order; Sec. 31.3121(b)(10)-2, relating to services 
performed by certain students in the employ of a school, college, or 
university or of a nonprofit organization auxiliary to a school, 
college, or university; and Sec. 31.3121(b)(13)-1, relating to services 
performed by certain student nurses and hospital interns.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7373, 40 FR 30958, July 24, 1975]



Sec. 31.3121(b)(10)-2  Services performed by certain students in the 
employ of a school, college, or university, or of a nonprofit

organization auxiliary to a 
          school, college, or university.

    (a) General rule. (1) Services performed in the employ of a school, 
college, or university within the meaning of paragraph (c) of this 
section (whether or not the organization is exempt from income tax) are 
excepted from employment, if the services are performed by a student 
within the meaning of paragraph (d) of this section who is enrolled and 
is regularly attending classes at the school, college, or university.
    (2) Services performed in the employ of an organization which is--
    (i) Described in section 509(a)(3) and Sec. 1.509(a)-4;
    (ii) Organized, and at all times thereafter operated, exclusively 
for the benefit of, to perform the functions of, or to carry out the 
purposes of a school, college, or university within the meaning of 
paragraph (c) of this section; and
    (iii) Operated, supervised, or controlled by or in connection with 
the school, college, or university; are excepted from employment, if the 
services are performed by a student who is enrolled and regularly 
attending classes within the meaning of paragraph (d) of this section at 
the school, college, or university. The preceding sentence shall not 
apply to services performed in the employ of a school, college, or 
university of a State or a political subdivision thereof by a student 
referred to in section 218(c)(5) of the Social Security Act (42 U.S.C. 
418(c)(5)) if such services are covered under the agreement between the 
Commissioner of Social Security and such State entered into pursuant to 
section 218 of such Act. For the definitions of ``operated, supervised, 
or controlled by'', ``supervised or controlled in connection with'', and 
``operated in connection with'', see paragraphs (g), (h), and (i), 
respectively, of Sec. 1.509(a)-4.
    (b) Statutory tests. For purposes of this section, if an employee 
has the status of a student within the meaning of paragraph (d) of this 
section, the amount of remuneration for services performed by the 
employee, the type of services performed by the employee,

[[Page 62]]

and the place where the services are performed are not material. The 
statutory tests are:
    (1) The character of the organization in the employ of which the 
services are performed as a school, college, or university within the 
meaning of paragraph (c) of this section, or as an organization 
described in paragraph (a)(2) of this section, and
    (2) The status of the employee as a student enrolled and regularly 
attending classes within the meaning of paragraph (d) of this section at 
the school, college, or university within the meaning of paragraph (c) 
of this section by which the employee is employed or with which the 
employee's employer is affiliated within the meaning of paragraph (a)(2) 
of this section.
    (c) School, College, or University. An organization is a school, 
college, or university within the meaning of section 3121(b)(10) if its 
primary function is the presentation of formal instruction, it normally 
maintains a regular faculty and curriculum, and it normally has a 
regularly enrolled body of students in attendance at the place where its 
educational activities are regularly carried on. See section 
170(b)(1)(A)(ii) and the regulations thereunder.
    (d) Student Status--general rule. Whether an employee has the status 
of a student performing the services shall be determined based on the 
relationship of the employee with the organization employing the 
employee. In order to have the status of a student, the employee must 
perform services in the employ of a school, college, or university 
within the meaning of paragraph (c) of this section at which the 
employee is enrolled and regularly attending classes in pursuit of a 
course of study within the meaning of paragraphs (d)(1) and (2) of this 
section. In addition, the employee's services must be incident to and 
for the purpose of pursuing a course of study within the meaning of 
paragraph (d)(3) of this section at such school, college, or university. 
An employee who performs services in the employ of an affiliated 
organization within the meaning of paragraph (a)(2) of this section must 
be enrolled and regularly attending classes at the affiliated school, 
college, or university within the meaning of paragraph (c) of this 
section in pursuit of a course of study within the meaning of paragraphs 
(d)(1) and (2) of this section. In addition, the employee's services 
must be incident to and for the purpose of pursuing a course of study 
within the meaning of paragraph (d)(3) of this section at such school, 
college, or university.
    (1) Enrolled and regularly attending classes. An employee must be 
enrolled and regularly attending classes at a school, college, or 
university within the meaning of paragraph (c) of this section at which 
the employee is employed to have the status of a student within the 
meaning of section 3121(b)(10). An employee is enrolled within the 
meaning of section 3121(b)(10) if the employee is registered for a 
course or courses creditable toward an educational credential described 
in paragraph (d)(2) of this section. In addition, the employee must be 
regularly attending classes to have the status of a student. For 
purposes of this paragraph (d)(1), a class is an instructional activity 
led by a faculty member or other qualified individual hired by the 
school, college, or university within the meaning of paragraph (c) of 
this section for identified students following an established 
curriculum. Traditional classroom activities are not the sole means of 
satisfying this requirement. For example, research activities under the 
supervision of a faculty advisor necessary to complete the requirements 
for a Ph.D. degree may constitute classes within the meaning of section 
3121(b)(10). The frequency of these and similar activities determines 
whether an employee may be considered to be regularly attending classes.
    (2) Course of study. An employee must be pursuing a course of study 
in order to have the status of a student. A course of study is one or 
more courses the completion of which fulfills the requirements necessary 
to receive an educational credential granted by a school, college, or 
university within the meaning of paragraph (c) of this section. For 
purposes of this paragraph, an educational credential is a degree, 
certificate, or other recognized educational credential granted by an 
organization described in paragraph (c)

[[Page 63]]

of this section. A course of study also includes one or more courses at 
a school, college or university within the meaning of paragraph (c) of 
this section the completion of which fulfills the requirements necessary 
for the employee to sit for an examination required to receive 
certification by a recognized organization in a field.
    (3) Incident to and for the purpose of pursuing a course of study. 
(i) General rule. An employee's services must be incident to and for the 
purpose of pursuing a course of study in order for the employee to have 
the status of a student. Whether an employee's services are incident to 
and for the purpose of pursuing a course of study shall be determined on 
the basis of the relationship of the employee with the organization for 
which such services are performed as an employee. The educational aspect 
of the relationship between the employer and the employee, as compared 
to the service aspect of the relationship, must be predominant in order 
for the employee's services to be incident to and for the purpose of 
pursuing a course of study. The educational aspect of the relationship 
is evaluated based on all the relevant facts and circumstances related 
to the educational aspect of the relationship. The service aspect of the 
relationship is evaluated based on all the relevant facts and 
circumstances related to the employee's employment. The evaluation of 
the service aspect of the relationship is not affected by the fact that 
the services performed by the employee may have an educational, 
instructional, or training aspect. Except as provided in paragraph 
(d)(3)(iii) of this section, whether the educational aspect or the 
service aspect of an employee's relationship with the employer is 
predominant is determined by considering all the relevant facts and 
circumstances. Relevant factors in evaluating the educational and 
service aspects of an employee's relationship with the employer are 
described in paragraphs (d)(3)(iv) and (v) of this section respectively. 
There may be facts and circumstances that are relevant in evaluating the 
educational and service aspects of the relationship in addition to those 
described in paragraphs (d)(3)(iv) and (v) of this section.
    (ii) Student status determined with respect to each academic term. 
Whether an employee's services are incident to and for the purpose of 
pursuing a course of study is determined separately with respect to each 
academic term. If the relevant facts and circumstances with respect to 
an employee's relationship with the employer change significantly during 
an academic term, whether the employee's services are incident to and 
for the purpose of pursuing a course of study is reevaluated with 
respect to services performed during the remainder of the academic term.
    (iii) Full-time employee. The services of a full-time employee are 
not incident to and for the purpose of pursuing a course of study. The 
determination of whether an employee is a full-time employee is based on 
the employer's standards and practices, except regardless of the 
employer's classification of the employee, an employee whose normal work 
schedule is 40 hours or more per week is considered a full-time 
employee. An employee's normal work schedule is not affected by 
increases in hours worked caused by work demands unforeseen at the start 
of an academic term. However, whether an employee is a full-time 
employee is reevaluated for the remainder of the academic term if the 
employee changes employment positions with the employer. An employee's 
work schedule during academic breaks is not considered in determining 
whether the employee's normal work schedule is 40 hours or more per 
week. The determination of an employee's normal work schedule is not 
affected by the fact that the services performed by the employee may 
have an educational, instructional, or training aspect.
    (iv) Evaluating educational aspect. The educational aspect of an 
employee's relationship with the employer is evaluated based on all the 
relevant facts and circumstances related to the educational aspect of 
the relationship. The educational aspect of an employee's relationship 
with the employer is generally evaluated based on the employee's course 
workload. Whether an employee's course workload is sufficient

[[Page 64]]

in order for the employee's employment to be incident to and for the 
purpose of pursuing a course of study depends on the particular facts 
and circumstances. A relevant factor in evaluating an employee's course 
workload is the employee's course workload relative to a full-time 
course workload at the school, college or university within the meaning 
of paragraph (c) of this section at which the employee is enrolled and 
regularly attending classes.
    (v) Evaluating service aspect. The service aspect of an employee's 
relationship with the employer is evaluated based on the facts and 
circumstances related to the employee's employment. Services of an 
employee with the status of a full-time employee within the meaning of 
paragraph (d)(3)(iii) of this section are not incident to and for the 
purpose of pursuing a course of study. Relevant factors in evaluating 
the service aspect of an employee's relationship with the employer are 
described in paragraphs (d)(3)(v)(A), (B), and (C) of this section.
    (A) Normal work schedule and hours worked. If an employee is not a 
full-time employee within the meaning of paragraph (d)(3)(iii) of this 
section, then the employee's normal work schedule and number of hours 
worked per week are relevant factors in evaluating the service aspect of 
the employee's relationship with the employer. As an employee's normal 
work schedule or actual number of hours worked approaches 40 hours per 
week, it is more likely that the service aspect of the employee's 
relationship with the employer is predominant. The determination of an 
employee's normal work schedule and actual number of hours worked is not 
affected by the fact that some of the services performed by the employee 
may have an educational, instructional, or training aspect.
    (B) Professional employee. (1) If an employee has the status of a 
professional employee, then that suggests the service aspect of the 
employee's relationship with the employer is predominant. A professional 
employee is an employee--
    (i) Whose primary duty consists of the performance of work requiring 
knowledge of an advanced type in a field of science or learning 
customarily acquired by a prolonged course of specialized intellectual 
instruction and study, as distinguished from a general academic 
education, from an apprenticeship, and from training in the performance 
of routine mental, manual, or physical processes;
    (ii) Whose work requires the consistent exercise of discretion and 
judgment in its performance; and
    (iii) Whose work is predominantly intellectual and varied in 
character (as opposed to routine mental, manual, mechanical, or physical 
work) and is of such character that the output produced or the result 
accomplished cannot be standardized in relation to a given period of 
time.
    (2) Licensed, professional employee. If an employee is a licensed, 
professional employee, then that further suggests the service aspect of 
the employee's relationship with the employer is predominant. An 
employee is a licensed, professional employee if the employee is 
required to be licensed under state or local law to work in the field in 
which the employee performs services and the employee is a professional 
employee within the meaning of paragraph (d)(3)(v)(B)(1) of this 
section.
    (C) Employment Benefits. Whether an employee is eligible to receive 
one or more employment benefits is a relevant factor in evaluating the 
service aspect of an employee's relationship with the employer. For 
example, eligibility to receive vacation, paid holiday, and paid sick 
leave benefits; eligibility to participate in a retirement plan or 
arrangement described in sections 401(a), 403(b), or 457(a); or 
eligibility to receive employment benefits such as reduced tuition 
(other than qualified tuition reduction under section 117(d)(5) provided 
to a teaching or research assistant who is a graduate student), or 
benefits under sections 79 (life insurance), 127 (qualified educational 
assistance), 129 (dependent care assistance programs), or 137 (adoption 
assistance) suggest that the service aspect of an employee's 
relationship with the employer is predominant. Eligibility to receive 
health insurance employment benefits is not considered in determining 
whether the service aspect of an employee's relationship with the 
employer is predominant. The weight

[[Page 65]]

to be given the fact that an employee is eligible for a particular 
employment benefit may vary depending on the type of benefit. For 
example, eligibility to participate in a retirement plan is generally 
more significant than eligibility to receive a dependent care employment 
benefit. Additional weight is given to the fact that an employee is 
eligible to receive an employment benefit if the benefit is generally 
provided by the employer to employees in positions generally held by 
non-students. Less weight is given to the fact that an employee is 
eligible to receive an employment benefit if eligibility for the benefit 
is mandated by state or local law.
    (e) Examples. The following examples illustrate the principles of 
paragraphs (a) through (d) of this section:

    Example 1. (i) Employee C is employed by State University T to 
provide services as a clerk in T's administrative offices, and is 
enrolled and regularly attending classes at T in pursuit of a B.S. 
degree in biology. C has a course workload during the academic term 
which constitutes a full-time course workload at T. C is considered a 
part-time employee by T during the academic term, and C's normal work 
schedule is 20 hours per week, but occasionally due to work demands 
unforeseen at the start of the academic term C works 40 hours or more 
during a week. C is compensated by hourly wages, and receives no other 
compensation or employment benefits.
    (ii) In this example, C is employed by T, a school, college, or 
university within the meaning of paragraph (c) of this section. C is 
enrolled and regularly attending classes at T in pursuit of a course of 
study. C is not a full-time employee based on T's standards, and C's 
normal work schedule does not cause C to have the status of a full-time 
employee, even though C may occasionally work 40 hours or more during a 
week due to unforeseen work demands. C's part-time employment relative 
to C's full-time course workload indicates that the educational aspect 
of C's relationship with T is predominant. Additional facts supporting 
this conclusion are that C is not a professional employee, and C does 
not receive any employment benefits. Thus, C's services are incident to 
and for the purpose of pursuing a course of study. Accordingly, C's 
services are excepted from employment under section 3121(b)(10).
    Example 2. (i) Employee D is employed in the accounting department 
of University U, and is enrolled and regularly attending classes at U in 
pursuit of an M.B.A. degree. D has a course workload which constitutes a 
half-time course workload at U. D is considered a full-time employee by 
U under U's standards and practices.
    (ii) In this example, D is employed by U, a school, college, or 
university within the meaning of paragraph (c) of this section. In 
addition, D is enrolled and regularly attending classes at U in pursuit 
of a course of study. However, because D is considered a full-time 
employee by U under its standards and practices, D's services are not 
incident to and for the purpose of pursuing a course of study. 
Accordingly, D's services are not excepted from employment under section 
3121(b)(10).
    Example 3. (i) The facts are the same as in Example 2, except that D 
is not considered a full-time employee by U, and D's normal work 
schedule is 32 hours per week. In addition, D's work is repetitive in 
nature and does not require the consistent exercise of discretion and 
judgment, and is not predominantly intellectual and varied in character. 
However, D receives vacation, sick leave, and paid holiday employment 
benefits, and D is eligible to participate in a retirement plan 
maintained by U described in section 401(a).
    (ii) In this example, D's half-time course workload relative to D's 
hours worked and eligibility for employment benefits indicates that the 
service aspect of D's relationship with U is predominant, and thus D's 
services are not incident to and for the purpose of pursuing a course of 
study. Accordingly, D's services are not excepted from employment under 
section 3121(b)(10).
    Example 4. (i) Employee E is employed by University V to provide 
patient care services at a teaching hospital that is an unincorporated 
division of V. These services are performed as part of a medical 
residency program in a medical specialty sponsored by V. The residency 
program in which E participates is accredited by the Accreditation 
Counsel for Graduate Medical Education. Upon completion of the program, 
E will receive a certificate of completion, and be eligible to sit for 
an examination required to be certified by a recognized organization in 
the medical specialty. E's normal work schedule, which includes services 
having an educational, instructional, or training aspect, is 40 hours or 
more per week.
    (ii) In this example, E is employed by V, a school, college, or 
university within the meaning of paragraph (c) of this section. However, 
E's normal work schedule calls for E to perform services 40 or more 
hours per week. E is therefore a full-time employee, and the fact that 
some of E's services have an educational, instructional, or training 
aspect does not affect that conclusion. Thus, E's services are not 
incident to and for the purpose of pursuing a course of study. 
Accordingly, E's services are not excepted from employment under section 
3121(b)(10) and there is no need to consider other relevant

[[Page 66]]

factors, such as whether E is a professional employee or whether E is 
eligible for employment benefits.
    Example 5. (i) Employee F is employed in the facilities management 
department of University W. F has a B.S. degree in engineering, and is 
completing the work experience required to sit for an examination to 
become a professional engineer eligible for licensure under state or 
local law. F is not attending classes at W.
    (ii) In this example, F is employed by W, a school, college, or 
university within the meaning of paragraph (c) of this section. However, 
F is not enrolled and regularly attending classes at W in pursuit of a 
course of study. F's work experience required to sit for the examination 
is not a course of study for purposes of paragraph (d)(2) of this 
section. Accordingly, F's services are not excepted from employment 
under section 3121(b)(10).
    Example 6. (i) Employee G is employed by Employer X as an apprentice 
in a skilled trade. X is a subcontractor providing services in the field 
in which G wishes to specialize. G is pursuing a certificate in the 
skilled trade from Community College C. G is performing services for X 
pursuant to an internship program sponsored by C under which its 
students gain experience, and receive credit toward a certificate in the 
trade.
    (ii) In this example, G is employed by X. X is not a school, college 
or university within the meaning of paragraph (c) of this section. Thus, 
the exception from employment under section 3121(b)(10) is not available 
with respect to G's services for X.
    Example 7. (i) Employee H is employed by a cosmetology school Y at 
which H is enrolled and regularly attending classes in pursuit of a 
certificate of completion. Y's primary function is to carry on 
educational activities to prepare its students to work in the field of 
cosmetology. Prior to issuing a certificate, Y requires that its 
students gain experience in cosmetology services by performing services 
for the general public on Y's premises. H is scheduled to work and in 
fact works significantly less than 30 hours per week. H's work does not 
require knowledge of an advanced type in a field of science or learning, 
nor is it predominantly intellectual and varied in character. H receives 
remuneration in the form of hourly compensation from Y for providing 
cosmetology services to clients of Y, and does not receive any other 
compensation and is not eligible for employment benefits provided by Y.
    (ii) In this example, H is employed by Y, a school, college or 
university within the meaning of paragraph (c) of this section, and is 
enrolled and regularly attending classes at Y in pursuit of a course of 
study. Factors indicating the educational aspect of H's relationship 
with Y is predominant are that H's hours worked are significantly less 
than 30 per week, H is not a professional employee, and H is not 
eligible for employment benefits. Based on the relevant facts and 
circumstances, the educational aspect of H's relationship with Y is 
predominant. Thus, H's services are incident to and for the purpose of 
pursuing a course of study. Accordingly, H's services are excepted from 
employment under section 3121(b)(10).
    Example 8. (i) Employee J is a graduate teaching assistant at 
University Z. J is enrolled and regularly attending classes at Z in 
pursuit of a graduate degree. J has a course workload which constitutes 
a full-time course workload at Z. J's normal work schedule is 20 hours 
per week, but occasionally due to work demands unforeseen at the start 
of the academic term J works more than 40 hours during a week. J's 
duties include grading quizzes and exams pursuant to guidelines set 
forth by the professor, providing class and laboratory instruction 
pursuant to a lesson plan developed by the professor, and preparing 
laboratory equipment for demonstrations. J receives a cash stipend and 
employment benefits in the form of eligibility to make elective employee 
contributions to an arrangement described in section 403(b). In 
addition, J receives qualified tuition reduction benefits within the 
meaning of section 117(d)(5) with respect to the tuition charged for the 
credits earned for being a graduate teaching assistant.
    (ii) In this example, J is employed by Z, a school, college, or 
university within the meaning of paragraph (c) of this section, and is 
enrolled and regularly attending classes at Z in pursuit of a course of 
study. J's full-time course workload relative to J's normal work 
schedule of 20 hours per week indicates that the educational aspect of 
J's relationship with Z is predominant. In addition, J is not a 
professional employee because J's work does not require the consistent 
exercise of discretion and judgment in its performance. On the other 
hand, the fact that J receives employment benefits in the form of 
eligibility to make elective employee contributions to an arrangement 
described in section 403(b) indicates that the employment aspect of J's 
relationship with Z is predominant. Balancing the relevant facts and 
circumstances, the educational aspect of J's relationship with Z is 
predominant. Thus, J's services are incident to and for the purpose of 
pursuing a course of study. Accordingly, J services are excepted from 
employment under section 3121(b)(10).

    (f) Effective date. Paragraphs (a), (b), (c), (d) and (e) of this 
section apply to services performed on or after April 1, 2005.
    (g) For provisions relating to domestic service performed by a 
student in a local college club, or local chapter of a

[[Page 67]]

college fraternity or sorority, see Sec. 31.3121(b)(2)-1.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7373, 40 FR 30958, July 24, 1975; T.D. 9167, 69 FR 
76407, Dec. 21, 2004]



Sec. 31.3121(b)(11)-1  Services in the employ of a foreign government.

    (a) Services performed by an employee in the employ of a foreign 
government are excepted from employment. The exception includes not only 
services performed by ambassadors, ministers, and other diplomatic 
officers and employees but also services performed as a consular or 
other officer or employee of a foreign government, or as a nondiplomatic 
representative thereof.
    (b) For purposes of this exception, the citizenship or residence of 
the employee is immaterial. It is also immaterial whether the foreign 
government grants an equivalent exemption with respect to similar 
services performed in the foreign country by citizens of the United 
States.



Sec. 31.3121(b)(12)-1  Services in employ of wholly owned 
instrumentality of foreign government.

    (a) Services performed by an employee in the employ of certain 
instrumentalities of a foreign government are excepted from employment. 
The exception includes all services performed in the employ of an 
instrumentality of the government of a foreign country, if--
    (1) The instrumentality is wholly owned by the foreign government;
    (2) The services are of a character similar to those performed in 
foreign countries by employees of the United States Government or of an 
instrumentality thereof; and
    (3) The Secretary of State certifies to the Secretary of the 
Treasury that the foreign government, with respect to whose 
instrumentality and employees thereof exemption is claimed, grants an 
equivalent exemption with respect to services performed in the foreign 
country by employees of the United States Government and of 
instrumentalities thereof.
    (b) For purposes of this exception, the citizenship or residence of 
the employee is immaterial.



Sec. 31.3121(b)(13)-1  Services of student nurse or hospital intern.

    (a) Services performed as a student nurse in the employ of a 
hospital or a nurses' training school are excepted from employment, if 
the student nurse is enrolled and regularly attending classes in a 
nurses' training school and such nurses' training school is chartered or 
approved pursuant to State law.
    (b) Services performed before 1966 as an intern (as distinguished 
from a resident doctor), in the employ of a hospital are excepted from 
employment, if the intern has completed a 4 years' course in a medical 
school chartered or approved pursuant to State law.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6983, 33 FR 
18017, Dec. 4, 1968]



Sec. 31.3121(b)(14)-1  Services in delivery or distribution of 
newspapers, shopping news, or magazines.

    (a) Services of individuals under age 18. Services performed by an 
employee under the age of 18 in the delivery or distribution of 
newspapers or shopping news, not including delivery or distribution (as, 
for example, by a regional distributor) to any point for subsequent 
delivery or distribution, are excepted from employment. Thus, the 
services performed by an employee under the age of 18 in making house-
to-house delivery or sale of newspapers or shopping news, including 
handbills and other similar types of advertising material, are excepted 
from employment. The services are excepted irrespective of the form or 
method of compensation. Incidental services by the employees who makes 
the house-to-house delivery, such as services in assembling newspapers, 
are considered to be within the exception. The exception continues only 
during the time that the employee is under the age of 18.
    (b) Services of individuals of any age. Services performed by an 
employee in, and at the time of, the sale of newspapers or magazines to 
ultimate consumers under an arrangement under which the newspapers or 
magazines are

[[Page 68]]

to be sold by him at a fixed price, his compensation being based on the 
retention of the excess of such price over the amount at which the 
newspapers or magazines are charged to him, are excepted from 
employment. The services are excepted whether or not the employee is 
guaranteed a minimum amount of compensation for such services, or is 
entitled to be credited with the unsold newspapers or magazines turned 
back. Moreover, the services are excepted without regard to the age of 
the employee. Services performed other than at the time of sale to the 
ultimate consumer are not within the exception. Thus, the services of a 
regional distributor which are antecedent to but not immediately part of 
the sale to the ultimate consumer are not within the exception. However, 
incidental services by the employee who makes the sale to the ultimate 
consumer, such as services in assembling newspapers or in taking 
newspapers or magazines to the place of sale, are considered to be 
within the exception.



Sec. 31.3121(b)(15)-1  Services in employ of international organization.

    (a) Subject to the provisions of section 1 of the International 
Organizations Immunities Act (22 U.S.C. 288), services performed in the 
employ of an international organization as defined in section 
7701(a)(18) are excepted from employment.
    (b) (1) Section 7701(a)(18) provides as follows:

    Sec. 7701. Definitions. (a) When used in this title, where not 
otherwise distinctly expressed or manifestly incompatible with the 
intent thereof--

                                * * * * *

    (18) International organization. The term ``international 
organization'' means a public international organization entitled to 
enjoy privileges, exemptions, and immunities as an international 
organization under the International Organizations Immunities Act (22 
U.S.C. 288-288f).

    (2) Section 1 of the International Organizations Immunities Act 
provides as follows:

    Sec. 1 [International Organizations Immunities Act.] For the 
purposes of this title [International Organizations Immunities Act], the 
term ``international organization'' means a public international 
organization in which the United States participates pursuant to any 
treaty or under the authority of any Act of Congress authorizing such 
participation or making an appropriation for such participation, and 
which shall have been designated by the President through appropriate 
Executive order as being entitled to enjoy the privileges, exemptions, 
and immunities herein provided. The President shall be authorized, in 
the light of the functions performed by any such international 
organization, by appropriate Executive order to withhold or withdraw 
from any such organization or its officers or employees any of the 
privileges, exemptions, and immunities provided for in this title 
(including the amendments made by this title) or to condition or limit 
the enjoyment by any such organization or its officers or employees of 
any such privilege, exemption, or immunity. The president shall be 
authorized, if in his judgment such action should be justified by reason 
of the abuse by an international organization or its officers and 
employees of the privileges, exemptions, and immunities herein provided 
or for any other reason, at any time to revoke the designation of any 
international organization under this section, whereupon the 
international organization in question shall cease to be classed as an 
international organization for the purposes of this title.



Sec. 31.3121(b)(16)-1  Services performed under share-farming arrangement.

    (a) The term ``employment'' does not include services performed by 
an individual under an arrangement with the owner or tenant of land 
pursuant to which--
    (1) Such individual undertakes to produce agricultural or 
horticultural commodities (including livestock, bees, poultry, and fur-
bearing animals and wildlife) on such land,
    (2) The agricultural or horticultural commodities produced by such 
individual, or the proceeds therefrom, are to be divided between such 
individual and such owner or tenant, and
    (3) The amount of such individual's share depends on the amount of 
the agricultural or horticultural commodities produced.

For purposes of this exception, the arrangement pursuant to which the 
individual's services are performed must meet the specified statutory 
conditions.
    (b) If the arrangement between the parties provides that the 
individual who undertakes to produce a crop or livestock is to be 
compensated at a

[[Page 69]]

specified rate of pay or is to receive a fixed sum of money or a 
stipulated quantity of the commodities to be produced, without regard to 
the amount actually produced, as distinguished from a proportionate 
share of the crop or livestock, or the proceeds therefrom, the services 
performed by such individual in the production of such crop or livestock 
is not within the exception.
    (c) For provisions relating to the status, under the Self-Employment 
Contributions Act of 1954, of the services which are excepted from 
``employment'' under this section, see the regulations under section 
1402(a) in Part 1 of this chapter (Income Tax Regulations).

[T.D. 6744, 29 FR 8313, July 2, 1964]



Sec. 31.3121(b)(17)-1  Services in employ of Communist organization.

    The term ``employment'' does not include services performed in the 
employ of any organization in any calendar quarter beginning after June 
30, 1956, and during any part of which such organization is registered, 
or there is in effect a final order of the Subversive Activities Control 
Board requiring such organization to register, under the Internal 
Security Act of 1950 (50 U.S.C. 781 et seq.), as amended, as a 
Communist-action organization, a Communist-front organization, or a 
Communist-infiltrated organization.

[T.D. 6744, 29 FR 8313, July 2, 1964]



Sec. 31.3121(b)(18)-1  Services performed by a resident of the Republic
of the Philippines while temporarily in Guam.

    (a) Services performed after 1960 by a resident of the Republic of 
the Philippines while in Guam on a temporary basis as a nonimmigrant 
alien admitted to Guam pursuant to section 101(a)(15)(H)(ii) of the 
Immigration and Nationality Act (8 U.S.C. 1101) are excepted from 
employment.
    (b) Section 101(a)(15)(H) of the Immigration and Nationality Act 
provides as follows:

    Sec. 101. Definitions. [Immigration and Nationality Act (66 Stat. 
166)]
    (a) As used in this chapter--

                                * * * * *

    (15) The term ``immigrant'' means every alien except an alien who is 
within one of the following classes of nonimmigrant aliens--

                                * * * * *

    (H) An alien having a residence in a foreign country which he has no 
intention of abandoning (i) who is of distinguished merit and ability 
and who is coming temporarily to the United States to perform temporary 
services of an exceptional nature requiring merit and ability; or (ii) 
who is coming temporarily to the United States to perform other 
temporary services or labor, if unemployed persons capable of performing 
such service or labor cannot be found in this country; or (iii) who is 
coming temporarily to the United States as an industrial trainee;

[T.D. 6744, 29 FR 8313, July 2, 1964]



Sec. 31.3121(b)(19)-1  Services of certain nonresident aliens.

    (a) (1) Services performed after 1961 by a nonresident alien 
individual who is temporarily present in the United States as a 
nonimmigrant under subparagraph (F) or (J) of section 101(a)(15) of the 
Immigration and Nationality Act (8 U.S.C. 1101), as amended, are 
excepted from employment if the services are performed to carry out a 
purpose for which the individual was admitted. For purposes of this 
section an alien individual who is temporarily present in the United 
States as a nonimmigrant under such subparagraph (F) or (J) is deemed to 
be a nonresident alien individual. The preceding sentence does not apply 
to the extent it is inconsistent with section 7701(b) and the 
regulations under that section. A nonresident alien individual who is 
temporarily present in the United States as a nonimmigrant under such 
subparagraph (J) includes an alien individual admitted to the United 
States as an ``exchange visitor'' under section 201 of the United States 
Information and Educational Exchange Act of 1948 (22 U.S.C. 1446).
    (2) If services are performed by a nonresident alien individual's 
alien spouse or minor child, who is temporarily present in the United 
States as a nonimmigrant under subparagraph (F) or (J) of section 
101(a)(15) of the Immigration and Nationality Act, as amended, the 
services are not deemed for purposes of this section to be performed to

[[Page 70]]

carry out a purpose for which such individual was admitted. The services 
of such spouse or child are excepted from employment under this section 
only if the spouse or child was admitted for a purpose specified in such 
subparagraph (F) or (J) and if the services are performed to carry out 
such purpose.
    (b) Section 101 of the Immigration and Nationality Act (8 U.S.C. 
1101), as amended, provides in part as follows:

    Sec. 101. Definitions. [Immigration and Nationality Act (68 Stat. 
166)]
    (a) As used in this chapter--* * *
    (15) The term ``immigrant'' means every alien except an alien who is 
within one of the following classes of nonimmigrant aliens--

                                * * * * *

    (F) (i) An alien having a residence in a foreign country which he 
has no intention of abandoning, who is a bona fide student qualified to 
pursue a full course of study and who seeks to enter the United States 
temporarily and solely for the purpose of pursuing such a course of 
study at an established institution of learning or other recognized 
place of study in the United States, particularly designated by him and 
approved by the Attorney General after consultation with the Office of 
Education of the United States, which institution or place of study 
shall have agreed to report to the Attorney General the termination of 
attendance of each nonimmigrant student, and if any such institution of 
learning or place of study fails to make reports promptly the approval 
shall be withdrawn, and (ii) the alien spouse and minor children of any 
such alien if accompanying him or following to join him;

                                * * * * *

    (J) An alien having a residence in a foreign country which he has no 
intention of abandoning who is a bona fide student, scholar, trainee, 
teacher, professor, research assistant, specialist, or leader in a field 
of specialized knowledge or skill, or other person of similar 
description, who is coming temporarily to the United States as a 
participant in a program designated by the Secretary of State, for the 
purpose of teaching, instructing or lecturing, studying, observing, 
conducting research, consulting, demonstrating special skills, or 
receiving training, and the alien spouse and minor children of any such 
alien if accompanying him or following to join him.

                                * * * * *

(Sec. 101, Immigration and Nationality Act, as amended by sec. 101, Act 
of June 27, 1952, 66 Stat. 166; sec. 109, Act of Sept. 21, 1961, 75 
Stat. 534)

[T.D. 6744, 29 FR 8313, July 2, 1964, as amended by T.D. 8411, 57 FR 
15241, Apr. 27, 1992]



Sec. 31.3121(b)(20)-1  Service performed on a boat engaged in catching fish.

    (a) In general. (1) Service performed on or after December 31, 1954, 
by an individual on a boat engaged in catching fish or other forms of 
aquatic animal life (hereinafter ``fish'') are excepted from employment 
if--
    (i) The individual receives a share of the boat's (or boats' for a 
fishing operation involving more than one boat) catch of fish or a share 
of the proceeds from the sale of the catch,
    (ii) The amount of the individual's share depends solely on the 
amount of the boat's (or boats' for a fishing operation involving more 
than one boat) catch of fish.
    (iii) The individual does not receive and is not entitled to 
receive, any cash remuneration, other than remuneration that is 
described in sub-division (1) of this subparagraph, and
    (iv) The crew of the boat (or of each boat from which the individual 
receives a share of the catch) normally is made up of fewer than 10 
individuals.
    (2) The requirement of paragraph (a)(1)(ii) is not satisfied if 
there exists an agreement with the boat's (or boats') owner or operator 
by which the individual's remuneration is determined partially or fully 
by a factor not dependent on the size of the catch. For example, if a 
boat is operated under a remuneration arrangement, e.g., a collective 
agreement which specifies that crew members, in addition to receiving a 
share of the catch, are entitled to an hourly wage for repairing nets, 
regardless of whether this wage is actually paid, then all the crew 
members covered by the arrangement are entitled to receive cash 
remuneration other than a share of the catch and their services are not 
excepted from employment by section 3121(b)(20).

[[Page 71]]

    (3) The operating crew of a boat includes all persons on the boat 
(including the captain) who receive any form of remuneration in exchange 
for services rendered while on a boat engaged in catching fish. See 
Sec. 1.6050A-1 for reporting requirements for the operator of a boat 
engaged in catching fish with respect to individuals performing services 
described in this section.
    (4) During the same return period, service performed by a crew 
member may be excepted from employment by section 3121(b)(20) and this 
section for one voyage and not so excepted on a subsequent voyage on the 
same or on a different boat.
    (5) During the same voyage, service performed by one crew member may 
be excepted from employment by section 3121(b)(20) and this section but 
service performed by another crew member may not be so excepted.
    (b) Special rule. Services performed after December 31, 1954, and 
before October 4, 1976, on a boat by an individual engaged in catching 
fish are not excepted from employment for any voyage (for purposes of 
section 3121(b) and the corresponding regulations), even though the 
individual satisfies the requirements of paragraphs (a)(1)(i) through 
(iv) of this section, if the owner or operator of the boat engaged in 
catching fish treated the individual as an employee. For purposes of 
this subparagraph, the individual was treated as an employee if--
    (1) Form 941 was voluntarily filed by the boat operator or owner, 
regardless of whether the tax imposed by chapter 21 was withheld. For 
purposes of this subdivision, the filing of Form 941 is not voluntary if 
the filing was the result of action taken by the Service pursuant to 
section 6651(a) (relating to addition to the tax for failure to file tax 
return or to pay tax);
    (2) The boat owner or operator withheld from the individual's share 
the tax imposed by chapter 21, regardless of whether the tax was paid 
over to the Service; or
    (3) The boat owner or operator made full or partial payment of the 
tax imposed by chapter 21, unless the payment was made pursuant to 
section 7422(a) (relating to no civil actions for refund prior to filing 
claim for refund). However, for purposes of this paragraph crew members 
whose services, but for paragraphs (a)(1)(i) through (iii), would have 
been excepted from employment by section 3121(b)(20) are not required to 
pay self-employment tax on income earned in performing those services. 
See Sec. 1.1402(c)-3(g). Moreover, in such cases the employer is not 
entitled to a refund of the employer's share of any tax imposed by 
chapter 21 that was paid.

[T.D. 7716, 45 FR 57123, Aug. 27, 1980]



Sec. 31.3121(c)-1  Included and excluded services.

    (a) If a portion of the services performed by an employee for an 
employer during a pay period constitutes employment, and the remainder 
does not constitute employment, all the services performed by the 
employee for the employer during the period shall for purposes of the 
taxes be treated alike, that is, either all as included or all as 
excluded. The time during which the employee performs services which 
under section 3121(b) constitute employment, and the time during which 
he performs services which under such section do not constitute 
employment, within the pay period, determine whether all the services 
during the pay period shall be deemed to be included or excluded.
    (b) If one-half or more of the employee's time in the employ of a 
particular person in a pay period is spent in performing services which 
constitute employment, then all the services of that employee for that 
person in that pay period shall be deemed to be employment.
    (c) If less than one-half of the employee's time in the employ of a 
particular person in a pay period is spent in performing services which 
constitute employment, then none of the services of that employee for 
that person in that pay period shall be deemed to be employment.
    (d) The application of the provisions of paragraphs (a), (b), and 
(c) of this section may be illustrated by the following example:

    Example. The AB Club, which is a local college club within the 
meaning of section 3121(b)(2), employs D, a student who is enrolled and 
is regularly attending classes at a

[[Page 72]]

university, to perform domestic service for the club and to keep the 
club's books. The domestic services performed by D for the AB Club do 
not constitute employment, and his services as the club's bookkeeper 
constitute employment. D receives a payment at the end of each month for 
all services which he performs for the club. During a particular month D 
spends 60 hours in performing domestic service for the club and 40 hours 
as the club's bookkeeper. None of D's services during the month are 
deemed to be employment, since less than one-half of his services during 
the month constitutes employment. During another month D spends 35 hours 
in the performance of domestic services and 60 hours in keeping the 
club's books. All of D's services during the month are deemed to be 
employment, since one-half or more of his services during the month 
constitutes employment.

    (e) For purposes of this section, a ``pay period'' is the period (of 
not more than 31 consecutive calendar days) for which a payment of 
remuneration is ordinarily made to the employee by the employer. Thus, 
if the periods for which payments of remuneration are made to the 
employee by the employer are of uniform duration, each such period 
constitutes a ``pay period''. If, however, the periods occasionally vary 
in duration, the ``pay period'' is the period for which a payment of 
remuneration is ordinarily made to the employee by the employer, even 
though that period does not coincide with the actual period for which a 
particular payment of remuneration is made. For example, if an employer 
ordinarily pays a particular employee for each calendar week at the end 
of the week, but the employee receives a payment in the middle of the 
week for the portion of the week already elapsed and receives the 
remainder at the end of the week, the ``pay period'' is still the 
calendar week; or if, instead, that employee is sent on a trip by such 
employer and receives at the end of the third week a single remuneration 
payment for three weeks' services, the ``pay period'' is still the 
calendar week.
    (f) If there is only one period (and such period does not exceed 31 
consecutive calendar days) for which a payment of remuneration is made 
to the employee by the employer, such period is deemed to be a ``pay 
period'' for purposes of this section.
    (g) The rules set forth in this section do not apply (1) with 
respect to any services performed by the employee for the employer if 
the periods for which such employer makes payments of remuneration to 
the employee vary to the extent that there is no period ``for which a 
payment of remuneration is ordinarily made to the employee'', or (2) 
with respect to any services performed by the employee for the employer 
if the period for which a payment of remuneration is ordinarily made to 
the employee by such employer exceeds 31 consecutive calendar days, or 
(3) with respect to any service performed by the employee for the 
employer during a pay period if any of such service is excepted by 
section 3121(b)(9) (see Sec. 31.3121(b)(9)-1).
    (h) If during any period for which a person makes a payment of 
remuneration to an employee only a portion of the employee's services 
constitutes employment, but the rules prescribed in this section are not 
applicable, the taxes attach with respect to such services as constitute 
employment as defined in section 3121(b).

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8313, July 2, 1964]



Sec. 31.3121(d)-1  Who are employees.

    (a) In general. (1) Whether an individual is an employee with 
respect to services performed after 1954 is determined in accordance 
with section 3121(d) and (o) and section 3506. This section of the 
regulations applies with respect only to services performed after 1954. 
Whether an individual is an employee with respect to services performed 
after 1936 and before 1940 shall be determined in accordance with the 
applicable provisions of law and of 26 CFR (1939) Part 401 (Regulations 
91). Whether an individual is an employee with respect to services 
performed after 1939 and before 1951 shall be determined in accordance 
with the applicable provisions of law and of 26 CFR (1939) Part 402 
(Regulations 106). Whether an individual is an employee with respect to 
services performed after 1950 and before 1955 shall be determined in 
accordance with the applicable provisions of law and of 26 CFR (1939) 
Part 408 (Regulations 128).

[[Page 73]]

    (2) Section 3121(d) contains three separate and independent tests 
for determining who are employees. Paragraphs (b), (c), and (d) of this 
section relate to the respective tests. Paragraph (b) relates to the 
test for determining whether an officer of a corporation is an employee 
of the corporation. Paragraph (c) relates to the test for determining 
whether an individual is an employee under the usual common law rules. 
Paragraph (d) relates to the test for determining which individuals in 
certain occupational groups who are not employees under the usual common 
law rules are included as employees. If an individual is an employee 
under any one of the tests, he is to be considered an employee for 
purposes of the regulations in this subpart whether or not he is an 
employee under any of the other tests.
    (3) If the relationship of employer and employee exists, the 
designation or description of the relationship by the parties as 
anything other than that of employer and employee is immaterial. Thus, 
if such relationship exists, it is of no consequence that the employee 
is designated as a partner, coadventurer, agent, independent contractor, 
or the like.
    (4) All classes or grades of employees are included within the 
relationship of employer and employee. Thus, superintendents, managers, 
and other supervisory personnel are employees.
    (5) Although an individual may be an employee under this section, 
his services may be of such a nature, or performed under such 
circumstances, as not to constitute employment (see Sec. 31.3121(b)-3).
    (b) Corporate officers. Generally, an officer of a corporation is an 
employee of the corporation. However, an officer of a corporation who as 
such does not perform any services or performs only minor services and 
who neither receives nor is entitled to receive, directly or indirectly, 
any remuneration is considered not to be an employee of the corporation. 
A director of a corporation in his capacity as such is not an employee 
of the corporation.
    (c) Common law employees. (1) Every individual is an employee if 
under the usual common law rules the relationship between him and the 
person for whom he performs services is the legal relationship of 
employer and employee.
    (2) Generally such relationship exists when the person for whom 
services are performed has the right to control and direct the 
individual who performs the services, not only as to the result to be 
accomplished by the work but also as to the details and means by which 
that result is accomplished. That is, an employee is subject to the will 
and control of the employer not only as to what shall be done but how it 
shall be done. In this connection, it is not necessary that the employer 
actually direct or control the manner in which the services are 
performed; it is sufficient if he has the right to do so. The right to 
discharge is also an important factor indicating that the person 
possessing that right is an employer. Other factors characteristic of an 
employer, but not necessarily present in every case, are the furnishing 
of tools and the furnishing of a place to work, to the individual who 
performs the services. In general, if an individual is subject to the 
control or direction of another merely as to the result to be 
accomplished by the work and not as to the means and methods for 
accomplishing the result, he is an independent contractor. An individual 
performing services as an independent contractor is not as to such 
services an employee under the usual common law rules. Individuals such 
as physicians, lawyers, dentists, veterinarians, construction 
contractors, public stenographers, and auctioneers, engaged in the 
pursuit of an independent trade, business, or profession, in which they 
offer their services to the public, are independent contractors and not 
employees.
    (3) Whether the relationship of employer and employee exists under 
the usual common law rules will in doubtful cases be determined upon an 
examination of the particular facts of each case.
    (d) Special classes of employees. (1) In addition to individuals who 
are employees under paragraph (b) or (c) of this section, other 
individuals are employees if they perform services for remuneration 
under certain prescribed circumstances in the following occupational 
groups:

[[Page 74]]

    (i) As an agent-driver or commission-driver engaged in distributing 
meat products, vegetable products, fruit products, bakery products, 
beverages (other than milk), or laundry or dry-cleaning services for his 
principal;
    (ii) As a full-time life insurance salesman;
    (iii) As a home worker performing work, according to specifications 
furnished by the person for whom the services are performed, on 
materials or goods furnished by such person which are required to be 
returned to such person or a person designated by him; or
    (iv) As a traveling or city salesman, other than as an agent-driver 
or commission-driver, engaged upon a full-time basis in the solicitation 
on behalf of, and the transmission to, his principal (except for side-
line sales activities on behalf of some other person) of orders from 
wholesalers, retailers, contractors, or operators of hotels, 
restaurants, or other similar establishments for merchandise for resale 
or supplies for use in their business operations.
    (2) In order for an individual to be an employee under this 
paragraph, the individual must perform services in an occupation falling 
within one of the enumerated groups. If the individual does not perform 
services in one of the designated occupational groups, he is not an 
employee under this paragraph. An individual who is not an employee 
under this paragraph may nevertheless be an employee under paragraph (b) 
or (c) of this section. The language used to designate the respective 
occupational groups relates to fields of endeavor in which particular 
designations are not necessarily in universal use with respect to the 
same service. The designations are addressed to the actual services 
without regard to any technical or colloquial labels which may be 
attached to such services. Thus, a determination whether services fall 
within one of the designated occupational groups depends upon the facts 
of the particular situation.
    (3) The factual situations set forth below are illustrative of some 
of the individuals falling within each of the above enumerated 
occupational groups. The illustrative factual situations are as follows:
    (i) Agent-driver or commission-driver. This occupational group 
includes agent-drivers or commission-drivers who are engaged in 
distributing meat or meat products, vegetables or vegetable products, 
fruit or fruit products, bakery products, beverages (other than milk), 
or laundry or dry-cleaning services for their principals. An agent-
driver or commission-driver includes an individual who operates his own 
truck or the truck of the person for whom he performs services, serves 
customers designated by such person as well as those solicited on his 
own, and whose compensation is a commission on his sales or the 
difference between the price he charges his customers and the price he 
pays to such person for the product or service.
    (ii) Full-time life insurance salesman. An individual whose entire 
or principal business activity is devoted to the solicitation of life 
insurance or annuity contracts, or both, primarily for one life 
insurance company is a full-time life insurance salesman. Such a 
salesman ordinarily uses the office space provided by the company or its 
general agent, and stenographic assistance, telephone facilities, forms, 
rate books, and advertising materials are usually made available to him 
without cost. An individual who is engaged in the general insurance 
business under a contract or contracts of service which do not 
contemplate that the individual's principal business activity will be 
the solicitation of life insurance or annuity contracts, or both, for 
one company, or any individual who devotes only part time to the 
solicitation of life insurance contracts, including annuity contracts, 
and is principally engaged in other endeavors, is not a full-time life 
insurance salesman.
    (iii) Home workers. This occupational group includes a worker who 
performs services off the premises of the person for whom the services 
are performed, according to specifications furnished by such person, on 
materials or goods furnished by such person which are required to be 
returned to such person or a person designated by him. For provisions 
relating to the determination of wages in the case of a home worker to 
whom this subdivision is applicable, see Sec. 31.3121(a)(10)-1.

[[Page 75]]

    (iv) Traveling or city salesman. (a) This occupational group 
includes a city or traveling salesman who is engaged upon a full-time 
basis in the solicitation on behalf of, and the transmission to, his 
principal (except for side-line sales activities on behalf of some other 
person or persons) of orders from wholesalers, retailers, contractors, 
or operators of hotels, restaurants, or other similar establishments for 
merchandise for resale or supplies for use in their business operations. 
An agent-driver or commission-driver is not within this occupational 
group. City or traveling salesmen who sell to retailers or to the others 
specified, operate off the premises of their principals, and are 
generally compensated on a commission basis, are within this 
occupational group. Such salesmen are generally not controlled as to the 
details of their services or the means by which they cover their 
territories, but in the ordinary case they are expected to call on 
regular customers with a fair degree of regularity.
    (b) In order for a city or traveling salesman to be included within 
this occupational group, his entire or principal business activity must 
be devoted to the solicitation of orders for one principal. Thus, the 
multiple-line salesman generally is not within this occupational group. 
However, if the salesman solicits orders primarily for one principal, he 
is not excluded from this occupational group solely because of side-line 
sales activities on behalf of one or more other persons. In such a case, 
the salesman is within this occupational group only with respect to the 
services performed for the person for whom he primarily solicits orders 
and not with respect to the services performed for such other persons. 
The following examples illustrate the application of the foregoing 
provisions:

    Example 1. Salesman A's principal business activity is the 
solicitation of orders from retail pharmacies on behalf of the X 
Wholesale Drug Company. A also occasionally solicits orders for drugs on 
behalf of the Y and Z Companies. A is within this occupational group 
with respect to his services for the X Company but not with respect to 
his services for either the Y Company or the Z Company.
    Example 2. Salesman B's principal business activity is the 
solicitation of orders from retail hardware stores on behalf of the R 
Tool Company and the S Cooking Utensil Company. B regularly solicits 
orders on behalf of both companies. B is not within this occupational 
group with respect to the services performed for either the R Company or 
the S Company.
    Example 3. Salesman C's principal business activity is the house-to-
house solicitation of orders on behalf of the T Brush Company. C 
occasionally solicits such orders from retail stores and restaurants. C 
is not within this occupational group.

    (4)(i) The fact that an individual falls within one of the 
enumerated occupational groups, however, does not make such individual 
an employee under this paragraph unless (a) the contract of service 
contemplates that substantially all the services to which the contract 
relates in the particular designated occupation are to be performed 
personally by such individual, (b) such individual has no substantial 
investment in the facilities used in connection with the performance of 
such services (other than in facilities for transportation) and (c) such 
services are part of a continuing relationship with the person for whom 
the services are performed and are not in the nature of a single 
transaction.
    (ii) The term ``contract of service'', as used in this paragraph, 
means an arrangement, formal or informal, under which the particular 
services are performed. The requirement that the contract of service 
shall contemplate that substantially all the services to which the 
contract relates in the particular designated occupation are to be 
performed personally by the individual means that it is not contemplated 
that any material part of the services to which the contract relates in 
such occupation will be delegated to any other person by the individual 
who undertakes under the contract to perform such services.
    (iii) The facilities to which reference is made in this paragraph 
include equipment and premises available for the work or enterprise as 
distinguished from education, training, and experience, but do not 
include such tools, instruments, equipment, or clothing, as are commonly 
or frequently provided by employees. An investment in an automobile by 
an individual which is

[[Page 76]]

used primarily for his own transportation in connection with the 
performance of services for another person has no significance under 
this paragraph, since such investment is comparable to outlays for 
transportation by an individual performing similar services who does not 
own an automobile. Moreover, the investment in facilities for the 
transportation of the goods or commodities to which the services relate 
is to be excluded in determining the investment in a particular case. If 
an individual has a substantial investment in facilities of the 
requisite character, he is not an employee within the meaning of this 
paragraph, since a substantial investment of the requisite character 
standing alone is sufficient to exclude the individual from the employee 
concept under this paragraph.
    (iv) If the services are not performed as part of a continuing 
relationship with the person for whom the services are performed, but 
are in the nature of a single transaction, the individual performing 
such services is not an employee of such person within the meaning of 
this paragraph. The fact that the services are not performed on 
consecutive workdays does not indicate that the services are not 
performed as part of a continuing relationship.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8314, July 2, 1964; T.D. 7691, 45 24129, Apr. 9, 1980]



Sec. 31.3121(d)-2  Who are employers.

    (a) Every person is an employer if he employs one or more employees. 
Neither the number of employees employed nor the period during which any 
such employee is employed is material for the purpose of determining 
whether the person for whom the services are performed is an employer.
    (b) An employer may be an individual, a corporation, a partnership, 
a trust, an estate, a joint-stock company, an association, or a 
syndicate, group, pool, joint venture, or other unincorporated 
organization, group, or entity. A trust or estate, rather than the 
fiduciary acting for on behalf of the trust or estate, is generally the 
employer.
    (c) Although a person may be an employer under this section, 
services performed in his employ may be of such a nature, or performed 
under such circumstances, as not to constitute employment (see Sec. 
31.3121(b)-3).



Sec. 31.3121(e)-1  State, United States, and citizen.

    (a) When used in the regulations in this subpart, the term ``State'' 
includes the District of Columbia, the Commonwealth of Puerto Rico, the 
Virgin Islands, the Territories of Alaska and Hawaii before their 
admission as States, and (when used with respect to services performed 
after 1960) Guam and American Samoa.
    (b) When used in the regulations in this subpart, the term ``United 
States'', when used in a geographical sense, means the several states 
(including the Territories of Alaska and Hawaii before their admission 
as States), the District of Columbia, the Commonwealth of Puerto Rico, 
and the Virgin Islands. When used in the regulations in this subpart 
with respect to services performed after 1960, the term ``United 
States'' also includes Guam and American Samoa when the term is used in 
a geographical sense. The term ``citizen of the United States'' includes 
a citizen of the Commonwealth of Puerto Rico or the Virgin Islands, and, 
effective January 1, 1961, a citizen of Guam or American Samoa.

[T.D. 6744, 29 FR 8314, July 2, 1964]



Sec. 31.3121(f)-1  American vessel and aircraft.

    (a) The term ``American vessel'' means any vessel which is 
documented (that is, registered, enrolled, or licensed) or numbered in 
conformity with the laws of the United States. It also includes any 
vessel which is neither documented nor numbered under the laws of the 
United States, nor documented under the laws of any foreign country, if 
the crew of such vessel is employed solely by one or more citizens or 
residents of the United States or corporations organized under the laws 
of the United States or of any State. (For provisions relating to the 
terms ``State'' and ``citizen'', see Sec. 31.3121 (e)-1.)
    (b) The term ``American aircraft'' means any aircraft registered 
under the laws of the United States.

[[Page 77]]

    (c) For provisions relating to services performed outside the United 
States on or in connection with an American vessel or American aircraft, 
see paragraph (c)(2) of Sec. 31.3121(b)-3.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8314, July 2, 1964]



Sec. 31.3121(g)-1  Agricultural labor.

    (a) In general. (1) The term ``agricultural labor'' as defined in 
section 3121(g) includes services of the character described in 
paragraph (b), (c), (d), (e), and (f) of this section. In general, 
however, the term does not include services performed in connection with 
forestry, lumbering, or landscaping.
    (2) The term ``farm'' as used in the regulations in this subpart 
includes stock, dairy, poultry, fruit, fur-bearing animal, and truck 
farms, plantations, ranches, nurseries, ranges, orchards, and such 
greenhouses and other similar structures as are used primarily for the 
raising of agricultural or horticultural commodities. Greenhouses and 
other similar structures used primarily for other purposes (for example, 
display, storage, and fabrication of wreaths, corsages, and bouquets) do 
not constitute ``farms''.
    (3) For provisions relating to the exception from employment 
provided with respect to services performed by certain foreign 
agricultural workers and to services performed before 1959 in connection 
with the production or harvesting of certain oleoresinous products, see 
Sec. 31.3121(b)(1)-1. For provisions relating to the exclusion from 
wages of remuneration paid in any medium other than cash for 
agricultural labor and to the test for determining whether cash 
remuneration paid for agricultural labor constitutes wages, see Sec. 
31.3121(a)(8)-1.
    (b) Services described in section 3121(g)(1). (1) Services performed 
on a farm by an employee of any person in connection with any of the 
following activities constitute agricultural labor:
    (i) The cultivation of the soil;
    (ii) The raising, shearing, feeding, caring for, training, or 
management of livestock, bees, poultry, fur-bearing animals, or 
wildlife; or
    (iii) The raising or harvesting of any other agricultural or 
horticultural commodity.
    (2) Services performed in connection with the production or 
harvesting of maple sap, or in connection with the raising or harvesting 
of mushrooms, or in connection with the hatching of poultry constitute 
agricultural labor only if such services are performed on a farm. Thus, 
services performed in connection with the operation of a hatchery, if 
not operated as part of a poultry or other farm, do not constitute 
agricultural labor.
    (c) Services described in section 3121(g)(2). (1) The following 
services performed by an employee in the employ of the owner or tenant 
or other operator of one or more farms constitute agricultural labor, 
provided the major part of such services is performed on a farm:
    (i) Services performed in connection with the operation, management, 
conservation, improvement, or maintenance of any of such farms or its 
tools or equipment; or
    (ii) Services performed in salvaging timber, or clearing land of 
brush and other debris, left by a hurricane.
    (2) The services described in paragraph (c)(1)(i) of this section 
may include, for example, services performed by carpenters, painters, 
mechanics, farm supervisors, irrigation engineers, bookkeepers, and 
other skilled or semiskilled workers, which contribute in any way to the 
conduct of the farm or farms, as such, operated by the person employing 
them, as distinguished from any other enterprise in which such person 
may be engaged.
    (3) Since the services described in this paragraph must be performed 
in the employ of the owner or tenant or other operator of the farm, the 
term ``agricultural labor'' does not include services performed by 
employees of a commercial painting concern, for example, which contracts 
with a farmer to renovate his farm properties.
    (d) Services described in section 3121(g)(3). Services performed by 
an employee in the employ of any person in connection with any of the 
following operations constitute agricultural labor without regard to the 
place where such services are performed:

[[Page 78]]

    (1) The ginning of cotton;
    (2) The operation or maintenance of ditches, canals, reservoirs, or 
waterways, not owned or operated for profit, used exclusively for 
supplying or storing water for farming purposes; or
    (3) The production or harvesting of crude gum (oleoresin) from a 
living tree or the processing of such crude gum into gum spirits of 
turpentine and gum rosin, provided such processing is carried on by the 
original producer of such crude gum.
    (e) Services described in section 3121(g)(4). (1) Services performed 
by an employee in the handling, planting, drying, packing, packaging, 
processing, freezing, grading, storing, or delivering to storage or to 
market or to a carrier for transportation to market, of any agricultural 
or horticultural commodity constitute agricultural labor if:
    (i) Such services are performed by the employee in the employ of an 
operator of a farm or in the employ of a group of operators of farms 
(other than a cooperative organization);
    (ii) Such services are performed with respect to the commodity in 
its unmanufactured state; and
    (iii) Such operator produced more than one-half of the commodity 
with respect to which such services are performed during the pay period, 
or such group of operators produced all of the commodity with respect to 
which such services are performed during the pay period.
    (2) The term ``operator of a farm'' as used in this paragraph means 
an owner, tenant, or other person, in possession of a farm and engaged 
in the operation of such farm.
    (3) The services described in this paragraph do not constitute 
agricultural labor if performed in the employ of a cooperative 
organization. The term ``organization'' includes corporations, joint-
stock companies, and associations which are treated as corporations 
pursuant to section 7701(a)(3) of the Internal Revenue Code. For 
purposes of this paragraph, any unincorporated group of operators shall 
be deemed a cooperative organization if the number of operators 
comprising such group is more than 20 at any time during the calendar 
quarter in which the services involved are performed.
    (4) Processing services which change the commodity from its raw or 
natural state do not constitute agricultural labor. For example the 
extraction of juices from fruits or vegetables is a processing operation 
which changes the character of the fruits or vegetables from their raw 
or natural state and, therefore, does not constitute agricultural labor. 
Likewise, services performed in the processing of maple sap into maple 
sirup or maple sugar do not constitute agricultural labor. On the other 
hand, services rendered in the cutting and drying of fruits or 
vegetables are processing operations which do not change the character 
of the fruits or vegetables and, therefore, constitute agricultural 
labor, if the other requisite conditions are met. Services performed 
with respect to a commodity after its character has been changed from 
its raw or natural state by a processing operation do not constitute 
agricultural labor.
    (5) The term ``commodity'' refers to a single agricultural or 
horticultural product, for example, all apples are to be treated as a 
single commodity, while apples and peaches are to be treated as two 
separate commodities. The services with respect to each such commodity 
are to be considered separately in determining whether the condition set 
forth in paragraph (e)(1)(iii) of this section has been satisfied. The 
portion of the commodity produced by an operator or group of operators 
with respect to which the services described in this paragraph are 
performed by a particular employee shall be determined on the basis of 
the pay period in which such services were performed by such employee.
    (6) The services described in this paragraph do not include services 
performed in connection with commercial canning or commercial freezing 
or in connection with any commodity after its delivery to a terminal 
market for distribution for consumption. Moreover, since the services 
described in this paragraph must be rendered in the actual handling, 
planting, drying, packing, packaging, processing, freezing, grading, 
storing, or delivering to storage or to market or to a carrier for

[[Page 79]]

transportation to market, of the commodity, such services do not, for 
example, include services performed as stenographers, bookkeepers, 
clerks, and other office employees, even though such services may be in 
connection with such activities. However, to the extent that the 
services of such individuals are performed in the employ of the owner or 
tenant or other operator of a farm and are rendered in major part on a 
farm, they may be within the provisions of paragraph (c) of this 
section.
    (f) Services described in section 3121(g)(5). (1) Service not in the 
course of the employer's trade or business (see paragraph (a)(1) of 
Sec. 31.3121(a)(7)-1) or domestic service in a private home of the 
employer (see paragraph (a)(2) of Sec. 31.3121(a)(7)-1) constitutes 
agricultural labor if such service is performed on a farm operated for 
profit. The determination whether remuneration for any such service 
performed on a farm operated for profit constitutes wages is to be made 
under Sec. 31.3121(a)(8)-1 rather than under Sec. 31.3121(a)(7)-1. For 
provisions relating to the exception from employment provided with 
respect to any such service performed after 1960 by a father or mother 
in the employ of his or her son or daughter, see Sec. 31.3121(b)(3)-1.
    (2) Generally, a farm is not operated for profit if it is occupied 
by the employer primarily for residential purposes, or is used primarily 
for the pleasure of the employer or his family such as for the 
entertainment of guests or as a hobby of the employer or his family.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8315, July 2, 1964]



Sec. 31.3121(h)-1  American employer.

    (a) The term ``American employer'' means an employer which is (1) 
the United States or any instrumentality thereof, (2) an individual who 
is a resident of the United States, (3) a partnership, if two-thirds or 
more of the partners are residents of the United States, (4) a trust, if 
all of the trustees are residents of the United States, or (5) a 
corporation organized under the laws of the United States or of any 
State. For provisions relating to the terms ``State'' and ``United 
States'', see Sec. 31.3121(e)-1.
    (b) For provisions relating to services performed outside the United 
States by a citizen of the United States as an employee for an American 
employer, see paragraph (c)(3) of Sec. 31.3121(b)-3 and paragraph (e) 
of Sec. 31.3121(b)(4)-1.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8315, July 2, 1964]



Sec. 31.3121(i)-1  Computation to nearest dollar of cash remuneration
for domestic service.

    (a) An employer may, for purposes of the act, elect to compute to 
the nearest dollar any payment of cash remuneration for domestic service 
described in section 3121(a)(7)(B) (see Sec. 31.3121(a)(7)-1) which is 
more or less than a whole-dollar amount. For the purpose of the 
computation to the nearest dollar, the payment of a fractional part of a 
dollar shall be disregarded unless it amounts to one-half dollar or 
more, in which case it shall be increased to one dollar. For example, 
any amount actually paid between $4.50 and $5.49, inclusive, may be 
treated as $5 for purposes of the taxes imposed by the act. If an 
employer elects this method of computation with respect to any payment 
of cash remuneration made in a calendar year for domestic service in his 
private home, he must use the same method in computing each payment of 
cash remuneration of more or less than a whole-dollar amount made to 
each of his employees in such calendar year for domestic service in his 
private home. Moreover, if an employer elects this method of computation 
with respect to payments of the prescribed character made in any 
calendar year, the amount of each payment of cash remuneration so 
computed to the nearest dollar shall, in lieu of the amount actually 
paid, be deemed to constitute the amount of cash remuneration for 
purposes of the act. Thus, the amount of cash payments so computed to 
the nearest dollar shall be used for purposes of determining whether 
such payments constitute wages; for purposes of applying the employee 
and employer tax rates to the wage payments; for purposes of any 
required record keeping; and for

[[Page 80]]

purposes of reporting and paying the employee tax and employer tax with 
respect to such wage payments.
    (b) The provisions of this section apply to any cash payment for 
domestic service in a private home of the employer made on or after 
January 1, 1994. For rules applicable to any cash payment for domestic 
service in a private home of the employer made prior to January 1, 1994, 
see Sec. 31.3121(i)-1 in effect at such time (see 26 CFR part 31 
contained in the edition of 26 CFR parts 30 to 39, revised as of April 
1, 2006).

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 9266, 71 FR 
35157, June 19, 2006]



Sec. 31.3121(i)-2  Computation of remuneration for service performed 
by an individual as a member of a uniformed service.

    In the case of an individual performing service after December 31, 
1956, as a member of a uniformed service (see section 31.3121(n)), to 
which the provisions of section 3121(m)(1) (see Sec. 31.3121(m)) are 
applicable, the term ``wages'' shall, subject to the provisions of 
section 3121(a)(1) (see Sec. 31.3121(a)-1), include as the individual's 
remuneration for such service only his basic pay as described in section 
102(10) of the Servicemen's and Veterans' Survivor Benefits Act (38 
U.S.C. 401(1), 403; 72 Stat. 1126).

[T.D. 6744, 29 FR 8315, July 2, 1964]



Sec. 31.3121(i)-3  Computation of remuneration for service performed 
by an individual as a volunteer or volunteer leader within the 

meaning of the Peace Corps 
          Act.

    In the case of an individual performing service in his capacity as a 
volunteer or volunteer leader within the meaning of the Peace Corps Act 
(see section 31.3121(p)), the term ``wages'' shall, subject to the 
provisions of section 3121(a)(1) (see Sec. 31.3121(a)-1), include as 
such individual's remuneration for such service only amounts paid 
pursuant to section 5(c) or section 6(1) of the Peace Corps Act (22 
U.S.C. 2501; 75 Stat. 612).

[T.D. 6744, 29 FR 8315, July 2, 1964]



Sec. 31.3121(i)-4  Computation of remuneration for service performed 
by certain members of religious orders.

    In any case where an individual is a member of a religious order (as 
defined in section 3121(r)(2) and paragraph (b) of Sec. 31.3121(r)-1) 
performing service in the exercise of duties required by such order, and 
an election of coverage under section 3121(r) and Sec. 31.3121(r)-1 is 
in effect with respect to such order or the autonomous subdivision 
thereof to which such member belongs, the term ``wages'' shall, subject 
to the provisions of section 3121(a)(1) (relating to definition of 
wages), include as such individual's remuneration for such service the 
fair market value of any board, lodging, clothing, and other perquisites 
furnished to such member by such order or subdivision or by any other 
person or organization pursuant to an agreement (whether written or 
oral) with such order or subdivision. Such other perquisites shall 
include any cash either paid by such order or subdivision or paid by 
another employer and not required by such order or subdivision to be 
remitted to it. For purposes of this section, perquisites shall be 
considered to be furnished over the period during which the member 
receives the benefit of them. (See example 4 of this section.) In no 
case shall the amount included as such individual's remuneration under 
this paragraph be less than $100 a month. All relevant facts and 
elements of value shall be considered in every case. Where the fair 
market value of any board, lodging, clothing, and other perquisites 
furnished to all members of an electing religious order or autonomous 
subdivision (or to all in a group of members) does not vary 
significantly, such order or subdivision may treat all of its members 
(or all in such group of members) as having a uniform wage. The 
provisions of this section may be illustrated by the following examples 
of the treatment of particular perquisites:

    Example 1. M is a religious order which requires its members to take 
a vow of poverty and which has made an election under section 3121(r). 
Under section 3121(i)(4), M must include in the wages of its members the 
fair market value of the clothing it provides for

[[Page 81]]

its members. M and several other religious orders using essentially the 
same type of religious habit purchase clothing for their members from 
either of two suppliers in arms-length transactions. The fair market 
value of such clothing (i.e., the price at which such items would change 
hands between a willing buyer and a willing seller, neither being under 
any compulsion to buy or to sell) is determined by reference to the 
actual sales price of these suppliers to the religious orders.
    Example 2. N is a religious order which requires its members to take 
a vow of poverty and which has made an election under section 3121(r). N 
operates a seminary adjacent to a university. Students at the university 
obtain lodging and board on campus from the university for its fair 
market value of $2,000 for the school year. Such lodging and board is 
essentially the same as that provided by N at its seminary to N's 
members subject to a vow of poverty. Accordingly, the amount to be 
included in the ``wages'' of such members with respect to lodging and 
board for the same period of time is $2,000.
    Example 3. O is a religious order which requires its members to take 
a vow of poverty and to observe silence, and which has made an election 
under section 3121(r). O operates a monastery in a remote rural area. 
Under section 3121(i)(4), O must include in the wages of its members 
assigned to this monastery the fair market value of the board and 
lodging furnished to them. In making a determination of the fair market 
value of such board and lodging, the remoteness of the monastery, as 
well as the smallness of the rooms and the simplicity of their 
furnishings, affect this determination. However, the facts that the 
facility is used by a religious order as a monastery and that the 
order's members maintain silence do not affect the fair market value of 
such items.
    Example 4. P is a religious order which requires its members to take 
a vow of poverty and which has made an election under section 3121(r). 
Several of P's members are attending a university on a full-time basis. 
The fair market value of the board and lodging of each of such members 
at the university is $1,000 per semester. P pays the university $1,000 
at the beginning of each semester for the board and lodging of each of 
such members. In addition, P gives each such member a $400 cash advance 
to cover his miscellaneous expenses during the semester. Under section 
3121(i)(4), P must prorate the fair market value of such members' board 
and lodging, as well as the miscellaneous items, over the semester and 
include such value in the determination of ``wages''.
    Example 5. Q is a religious order which is a corporation organized 
under the laws of Wisconsin, which requires its members to take a vow of 
poverty, and which has made an election under section 3121(r). Q has 
convents in rural South America and in suburbs and central city areas of 
the United States. Characteristically, in the United States its suburban 
convents provide somewhat larger and newer rooms for its members than do 
its convents in city areas. Moreover, its suburban convents have more 
extensive grounds and somewhat more elaborate facilities than do its 
older convents in city areas. However, both types of convents limit 
resident members to a single, plainly furnished room and provide them 
meals which are comparable. Q's members in South America live in 
extremely primitive dwellings and otherwise have extremely modest 
perquisites. Under section 3121(i)(4), Q may report a uniform wage for 
its members who live in suburban convents and city convents in the 
United States, as the board, lodging, and perquisites furnished these 
members do not vary significantly from one convent to the other. Q may 
report another uniform wage (but not less than $100 per month apiece) 
for its members who are citizens of the United States and who reside in 
South America based on the fair market value of the perquisites 
furnished these individuals, as the fair market value of the perquisites 
furnished these individuals varies significantly from that of those 
furnished its members who live in its domestic convents but does not 
vary significantly among members in South America whose wages are 
subject to tax.

[T.D. 7280, 38 FR 18369, July 10, 1973]



Sec. 31.3121(j)-1  Covered transportation service.

    (a) Transportation systems acquired in whole or in part after 1936 
and before 1951--(1) In general. Except as provided in subparagraph (2) 
of this paragraph, all service performed in the employ of a State or 
political subdivision thereof in connection with its operation of a 
public transportation system constitutes covered transportation service 
if any part of the transportation system was acquired from private 
ownership after 1936 and before 1951. For purposes of this subparagraph, 
it is immaterial whether any part of the transportation system was 
acquired before 1937 or after 1950, whether the employee was hired 
before, during, or after 1950, or whether the employee had been employed 
by the employer from whom the State or political subdivision acquired 
its transportation system or any part thereof.
    (2) General retirement system protected by State constitution. 
Except as provided in paragraph (a)(3) of this section, service 
performed in the employ of a State

[[Page 82]]

or political subdivision in connection with its operation of a public 
transportation system acquired in whole or in part from private 
ownership after 1936 and before 1951 does not constitute covered 
transportation service, if substantially all service in connection with 
the operation of the transportation system was, on December 31, 1950, 
covered under a general retirement system providing benefits which are 
protected from diminution or impairment under the State constitution by 
reason of an express provision, dealing specifically with retirement 
systems established by the State or political subdivisions of the State, 
which forbids such diminution or impairment.
    (3) Additions to certain transportation systems by acquisition after 
1950. This subparagraph is applicable only in case of an acquisition 
after 1950 from private ownership of an addition to an existing public 
transportation system which was acquired in whole or in part by a State 
or political subdivision thereof from private ownership after 1936 and 
before 1951 and then only in case service for such existing 
transportation system did not constitute covered transportation service 
by reason of the provisions of subparagraph (2) of this paragraph. 
Service in connection with the operation of such transportation system 
(including any additions acquired after 1950) constitutes covered 
transportation service commencing with the first day of the third 
calendar quarter following the calendar quarter in which the addition to 
the existing transportation system was acquired, if such service is 
performed by an employee who became an employee of the State or 
political subdivision in connection with and at the time of its 
acquisition from private ownership of such addition and who before the 
acquisition of such addition rendered service in employment in 
connection with the operation of the addition so acquired by such State 
or political subdivision. However, service performed by such employee in 
connection with the operation of the transportation system does not 
constitute covered transportation service if, on the first day of the 
third calendar quarter following the calendar quarter in which the 
addition was acquired, such service is covered by a general retirement 
system which does not, with respect to such employee, contain special 
provisions applicable only to employees who became employees of the 
State or political subdivision in connection with and at the time of its 
acquisition of such addition.
    (b) Transportation systems in operation on December 31, 1950, no 
part of which was acquired after 1936 and before 1951--(1) In general. 
Except as provided in paragraph (b)(2) of this section, no service 
performed in the employ of a State or a political subdivision thereof in 
connection with its operation of a public transportation system 
constitutes covered transportation service if no part of such 
transportation system operated by the State or political subdivision on 
December 31, 1950, was acquired from private ownership after 1936 and 
before 1951.
    (2) Additions acquired after 1950. This subparagraph is applicable 
only in case of an acquisition after 1950 from private ownership of an 
addition to an existing public transportation system which was operated 
by a State or political subdivision on December 31, 1950, but no part of 
which was acquired from private ownership after 1936 and before 1951. 
Service in connection with the operation of such transportation system 
(including any additions acquired after 1950) constitutes covered 
transportation service commencing with the first day of the third 
calendar quarter following the calendar quarter in which the addition to 
the existing transportation system was acquired, if such service is 
performed by an employee who became an employee of the State or 
political subdivision in connection with and at the time of its 
acquisition from private ownership of such addition and who before the 
acquisition of such addition rendered service in employment in 
connection with the operation of the addition so acquired by such State 
or political subdivision. However, service performed by such employee in 
connection with the operation of the transportation system does not 
constitute covered transportation service if, on the first day of the 
third calendar quarter following the calendar quarter in which the 
addition was acquired, such service is covered

[[Page 83]]

by a general retirement system which does not, with respect to such 
employee, contain special provisions applicable only to employees who 
became employees of the State or political subdivision in connection 
with and at the time of its acquisition of such addition.
    (c) Transportation systems acquired after 1950. All service 
performed in the employ of a State or political subdivision thereof in 
connection with its operation of a public transportation system 
constitutes covered transportation service if the transportation system 
was not operated by the State or political subdivision before 1951 and, 
at the time of its first acquisition after 1950 from private ownership 
of any part of its transportation system, the State or political 
subdivision did not have a general retirement system covering 
substantially all service performed in connection with the operation of 
the transportation system.
    (d) Definitions. For purposes of this section:
    (1) The term ``general retirement system'' means any pension, 
annuity, retirement, or similar fund or system established by a State or 
by a political subdivision thereof for employees of the State, political 
subdivision, or both; but such term does not include such a fund or 
system which covers only service performed in positions connected with 
the operation of its public transportation system.
    (2) A transportation system or a part thereof is considered to have 
been acquired by a State or political subdivision from private ownership 
if prior to the acquisition service performed by the employees in 
connection with the operation of the system or an acquired part thereof 
constituted employment under the act or under subchapter A of chapter 9 
of the Internal Revenue Code of 1939 or was covered by an agreement 
entered into pursuant to section 218 of the Social Security Act (42 
U.S.C. 418), and some of such employees became employees of the State or 
political subdivision in connection with and at the time of such 
acquisition.
    (3) The term ``political subdivision'' includes an instrumentality 
of a State, of one or more political subdivisions of a State, or of a 
State and one or more of its political subdivisions.
    (4) The term ``employment'' includes service covered by an agreement 
entered into pursuant to section 218 of the Social Security Act.



Sec. 31.3121(k)-1  Waiver of exemption from taxes.

    (a) Who may file a waiver certificate--(1) In general. If services 
performed in the employ of an organization are excepted from employment 
under section 3121(b)(8)(B), the organization may file a waiver 
certificate on Form SS-15, together with a list on Form SS-15a, 
certifying that it desires to have the Federal old-age, survivors, and 
disability insurance system established by title II of the Social 
Security Act extended to services performed by its employees. (For 
provisions relating to the exception under section 3121(b)(8)(B), see 
that section and Sec. 31.3121(b)(8)-2.) A certificate in effect under 
section 1426(1) of the Internal Revenue Code of 1939 on December 31, 
1954, remains in effect under, and is subject to the provisions of, 
section 3121(k). If the period covered by a certificate filed under 
section 3121(k), or under section 1426(l) of the Internal Revenue Code 
of 1939, is terminated by an organization, a certificate may not 
thereafter be filed by the organization under section 3121(k). For 
regulations relating to certificates filed under section 1426(l) of the 
Internal Revenue Code of 1939, see 26 CFR (1939) 408.216 (Regulations 
128).
    (2) Organizations having two separate groups of employees. If an 
organization is eligible to file a certificate under section 3121(k), 
and the organization employs both individuals who are in positions 
covered by a pension, annuity, retirement, or similar fund or system 
established by a State or by a political subdivision thereof and 
individuals who are not in such positions, the organization shall divide 
its employees into two separate groups for purposes of any certificate 
filed after August 28, 1958. One group shall consist of all employees 
who are in positions covered by such a fund or system and (i) are 
members of such fund or system, or (ii) are not members of such fund or 
system but are eligible to become members thereof. The other group shall 
consist

[[Page 84]]

of all remaining employees. An organization which has so divided its 
employees into two groups may file a certificate after August 28, 1958, 
with respect to the employees in either group, or may file a separate 
certificate after such date with respect to employees in each group.
    (3) Certificates filed before September 14, 1960. A certificate 
filed before September 14, 1960, is void unless at least two-thirds of 
the employees, determined on the basis of the facts which existed as of 
the date the certificate was filed, concurred in the filing of the 
certificate, and the organization certified to such concurrence in the 
certificate. All individuals who were employees of the organization 
within the meaning of section 3121(d) (see Sec. 31.3121(d)-1) shall be 
included in determining whether two-thirds of the employees of the 
organization concurred in the filing of the certificate; except that 
there shall not be included (i) those employees who at the time of the 
filing of the certificate were performing for the organization services 
only of the character specified in paragraphs (8)(A), (10)(B), and (13) 
of section 3121(b) (see Sec. Sec. 31.3121(b)(8)-1, 31.3121(b)(10)-2, 
and 31.3121(b)(13)-1, respectively), (ii) those alien employees who at 
the time of the filing of the certificate were performing services for 
such organization under an arrangement which provided for the 
performance only of services outside the United States not on or in 
connection with an American vessel or American aircraft, and (iii) in 
connection with certificates filed after August 28, 1958, those 
employees who at the time of the filing of the certificate were in a 
group to which such certificate was not applicable because of the 
provisions of section 3121(k)(1)(E). (See paragraph (a)(2) of this 
section.) As used in this subparagraph, the term ``alien employee'' does 
not include an employee who was a citizen of the Commonwealth of Puerto 
Rico or a citizen of the Virgin Islands, and the term ``United States'' 
includes Puerto Rico and the Virgin Islands.
    (b) Execution and amendment of certificate--(1) Use of prescribed 
forms. An organization filing a certificate pursuant to section 3121(k) 
shall use Form SS-15, in accordance with the regulations and 
instructions applicable thereto. The certificate may be filed only if it 
is accompanied by a list on Form SS-15a, containing the signature, 
address, and social security account number, if any, of each employee, 
if any, who concurs in the filing of the certificate. (For provisions 
relating to account numbers, see Sec. 31.6011(b)-2.) If no employee 
concurs in a certificate filed after September 13, 1960, that fact 
should be stated on the Form SS-15a. (For provisions relating to the 
concurrence of employees in certificates filed before September 14, 
1960, see paragraph (a)(3) of this section.)
    (2) Amendment of list on Form SS- 15a--(i) Certificate filed after 
August 28, 1958. The list on Form SS-15a accompanying a certificate 
filed after August 28, 1958, under section 3121(k), may be amended at 
any time before the expiration of the twenty-fourth month following the 
calendar quarter in which the certificate is filed, by filing a 
supplemental list or lists on Form SS-15a Supplement, containing the 
signature, address, and social security account number, if any, of each 
additional employee who concurs in the filing of the certificate.
    (ii) Certificate filed before August 29, 1958. The list on Form SS-
15a which accompanied a certificate filed before August 29, 1958, under 
section 3121(k) or under section 1426(l) of the Internal Revenue Code of 
1939, may be amended by filing a supplemental list or lists on Form SS-
15a Supplement at any time after August 31, 1954, and before the 
expiration of the twenty-fourth month following the first calendar 
quarter for which the certificate was in effect, or before January 1, 
1959, whichever is the later.
    (3) Where to file certificate or amendment. The certificate on Form 
SS-15 and accompanying list on Form SS-15a of an organization which is 
required to make a return on Form 941 pursuant to Sec. 31.6011(a)-1 or 
Sec. 31.6011(a)-4 shall be filed with the internal revenue officer 
designated in the instructions applicable to Form SS-15 and Form SS-15a. 
The Form SS-15 and Form SS-15a of any other organization shall be filed 
in accordance with the provisions of

[[Page 85]]

Sec. 31.6091-1 which are otherwise applicable to returns. Each Form SS-
15a Supplement shall be filed with the internal revenue officer with 
whom the related Forms SS-15 and SS-15a were filed.
    (c) Effect of waiver--(1) In general. The exception from employment 
under section 3121(b)(8)(B) does not apply to services with respect to 
which a certificate, filed pursuant to section 3121(k), or section 
1426(l) of the Internal Revenue Code of 1939, is in effect. (See 
Sec. Sec. 31.3121(b)(8) and 31.3121(b)(8)-2). If an organization has 
divided its employees into two groups, as set forth in paragraph (a)(2) 
of this section, a certificate filed with respect to either group shall 
have no effect with respect to services performed by an employee as a 
member of the other group; and the provisions of this subparagraph shall 
apply as if each group were separately employed by a different 
organization. A certificate is not terminated if the organization loses 
its exemption under section 501(a) as an organization of the character 
described in section 501(c)(3), but continues effective with respect to 
any subsequent periods during which the organization is so exempt. The 
certificate of an organization may be in effect without being applicable 
to services performed by every employee of the organization. 
Subparagraph (2) of this paragraph relates to the beginning of the 
period for which a certificate is in effect. Subparagraph (3) of this 
paragraph relates to the services with respect to which a certificate is 
in effect. Even though a certificate is in effect with respect to the 
services of an employee, such services may be excepted from employment 
under some provision of section 3121(b) other than paragraph (8)(B) 
thereof. For example, service performed in any calendar quarter in the 
employ of an organization described in section 501(c)(3) and exempt from 
income tax under section 501(a) is excepted from employment under 
section 3121(b)(10)(A) if the remuneration for such service is less than 
$50, regardless of whether the organization files a certificate.
    (2) Beginning of effective period of waiver--(i) Certificate filed 
after July 30, 1965. A certificate filed after July 30, 1965, by an 
organization pursuant to section 3121(k) shall be in effect for the 
period beginning with one of the following dates, which shall be 
designated by the organization on the certificate:
    (a) The first day of the calendar quarter in which the certificate 
is filed,
    (b) The first day of the calendar quarter immediately following the 
quarter in which the certificate is filed, or
    (c) The first day of any calendar quarter preceding the calendar 
quarter in which the certificate is filed, except that such date may not 
be earlier than the first day of the 20th calendar quarter preceding the 
quarter in which such certificate is filed. Thus, a certificate filed in 
December 1965 may be made effective, pursuant to this paragraph 
(c)(2)(i)(c), for the period beginning with the first day of the 
calendar quarter beginning October 1, 1960, or the first day of any 
other calendar quarter beginning after October 1, 1960, and before 
October 1, 1965.
    (ii) Certificate filed after August 28, 1958, and before July 31, 
1965. A certificate filed after August 28, 1958, and before July 31, 
1965, by an organization pursuant to section 3121(k) shall be in effect 
for the period beginning with one of the following dates, which shall be 
designated by the organization on the certificate:
    (a) The first day of the calendar quarter in which the certificate 
is filed,
    (b) The first day of the calendar quarter immediately following the 
quarter in which the certificate is filed, or
    (c) The first day of any calendar quarter preceding the calendar 
quarter in which the certificate is filed, except that, in the case of a 
certificate filed before 1960, such date may not be earlier than January 
1, 1956, and in the case of a certificate filed after 1959 (but before 
July 31, 1965), such date may not be earlier than the first day of the 
fourth calendar quarter preceding the quarter in which the certificate 
is filed. Thus, a certificate filed in December 1959 may be made 
effective for the calendar quarter beginning January 1, 1956; but a 
certificate filed in January 1960 may not be made effective for a 
calendar quarter beginning before January 1, 1959.
    (iii) Certificate filed after 1956 and before August 29, 1958. A 
certificate filed by an organization after 1956 and before August 29, 
1958 pursuant to section

[[Page 86]]

3121(k), became effective for the period beginning with one of the 
following dates, as designated by the organization on the certificate:
    (a) The first day of the calendar quarter in which the certificate 
was filed, or
    (b) The first day of the calendar quarter immediately following the 
quarter in which the certificate was filed.
    (iv) Certificate filed before 1957. A certificate filed before 1957 
pursuant to section 3121(k) became effective for the period beginning 
with the first day following the close of the calendar quarter in which 
the certificate was filed. In no case, however, shall a certificate 
filed under the provisions of section 3121(k) be in effect with respect 
to services performed before January 1, 1955. (For regulations relating 
to waiver certificates filed under section 1426(l) of the Internal 
Revenue Code of 1939, see 26 CFR (1939) 408.216 (Regulations 128).)
    (3) Services to which certificate applies--(i) In general. If an 
organization's certificate is in effect (see paragraph (c)(2) of this 
section), the certificate becomes effective with respect to services 
performed in its employ by each individual (a) who enters the employ of 
the organization after the calendar quarter in which the certificate is 
filed, as set forth in paragraph (c)(3)(ii) of this section, or (b) 
whose signature appears on the list on Form SS-15a, as set forth in 
paragraph (c)(3)(iii) of this section, or (c) whose signature appears on 
a Form SS-15a Supplement, as set forth in paragraph (c)(3)(iv) or (v) of 
this section. The first date on which such a certificate becomes 
effective with respect to an employee's services shall be the earliest 
date applicable under this subparagraph. An organization's certificate 
is not effective with respect to the services of an employee who is in 
its employ in the calendar quarter in which the certificate is filed and 
who does not sign Form SS-15a or Form SS-15a Supplement, so long as his 
employment relationship with the organization, at the close of the 
calendar quarter in which the certificate is filed and thereafter, 
continues without interruption.
    (ii) Employee hired after quarter in which certificate is filed. If 
an individual enters the employ of an organization on or after the first 
day following the close of the calendar quarter in which the 
organization files a certificate pursuant to section 3121(k), the 
certificate shall be in effect with respect to services performed by the 
individual in the employ of the organization on and after the day he 
enters the employ of the organization. A former employee of the 
organization who is rehired on or after the first day following the 
close of the calendar quarter in which such a certificate is filed shall 
be considered to have entered the employ of the organization after such 
calendar quarter, regardless of whether such individual concurred in the 
filing of the certificate.
    (iii) Employee who signs Form SS-15a. A certificate on Form SS-15 
filed by an organization pursuant to section 3121(k) shall be in effect 
with respect to services performed by an individual in the employ of the 
organization on and after the first day for which the certificate is in 
effect, if such individual's signature appears on the list on Form SS-
15a which accompanies such certificate.
    (iv) Employee who signs Form SS-15a Supplement to concur in 
certificate filed after August 28, 1958. If the list on Form SS-15a 
accompanying a certificate filed after August 28, 1958, by an 
organization pursuant to section 3121(k) is amended in accordance with 
paragraph (b)(2)(i) of this section by the filing of a supplemental list 
on Form SS-15a Supplement, the certificate shall be in effect with 
respect to the services of each individual whose signature appears on 
the supplemental list, performed in the employ of the organization--
    (a) On and after the first day for which the certificate is in 
effect, if the supplemental list is filed on or before the last day of 
the month following the calendar quarter in which the certificate is 
filed, or
    (b) On and after the first day of the calendar quarter in which the 
supplemental list is filed, if such list is filed after the close of the 
first month following the calendar quarter in which the certificate is 
filed.
    (v) Employee who signed Form SS-15a Supplement to concur in 
certificate filed before August 29, 1958. If the list on

[[Page 87]]

Form SS-15a which accompanied a certificate filed before August 29, 
1958, by an organization pursuant to section 3121(k), or pursuant to 
section 1426(l) of the Internal Revenue Code of 1939, was amended in 
accordance with paragraph (b)(2)(ii) of this section by the filing of a 
supplemental list on Form SS-15a Supplement, the certificate shall be in 
effect with respect to the services of each individual whose signature 
appears on the supplemental list, performed in the employ of the 
organization--
    (a) On and after the first day for which the certificate is in 
effect, if the supplemental list was filed on or before the last day of 
the month following the first calendar quarter for which the certificate 
was in effect, or
    (b) On and after the first day following the close of the calendar 
quarter in which the supplemental list was filed, but not before January 
1, 1955, if such list was filed after the close of the first month 
following the first calendar quarter for which the certificate is in 
effect.
    (4) Administrative provisions applicable when certificate has 
retroactive effect. For purposes of computing interest and for purposes 
of section 6651 (relating to addition to tax for failure to file tax 
return), in any case in which a certificate filed pursuant to section 
3121(k)(1) is effective pursuant to section 3121(k)(1)(B)(iii) (as 
originally enacted and as amended by section 316(a) of the Social 
Security Amendments of 1965) for one or more calendar quarters prior to 
the quarter in which the certificate is filed, the due date for the 
return and payment of the tax for such prior calendar quarters resulting 
from the filing of such certificate shall be the last day of the 
calendar month following the calendar quarter in which the certificate 
is filed. The statutory period for the assessment of the tax for such 
prior calendar quarters shall not expire before the expiration of 3 
years from such due date. A waiver certificate (as described in section 
3121(k)(1) and this section) furnished to the Internal Revenue Service 
after February 12, 1976, shall not be considered filed with the Internal 
Revenue Service unless interest paid to the organization (or credited to 
its account) in connection with a claim for credit or refund of taxes, 
which claim was based upon the exemption from taxes the organization is 
waiving by such certificate, is repaid. The interest so paid must be 
repaid only to the extent such interest relates to any taxes for which 
the organization or its employees would be liable by reason of the 
waiver certificate. Furthermore, when a waiver certificate has been 
filed prior to the payment of a refund of taxes based upon the exemption 
from taxes the organization in waiving, no credit or refund in respect 
of the taxes for which the exemption has been waived shall be allowed. 
If repayment of the interest is made as required by this subparagraph, 
on or before the last day of the calendar month following the calendar 
quarter in which the certificate is furnished to the Internal Revenue 
Service, such certificate shall be considered to have been filed on the 
date it was originally furnished. If repayment occurs after that day, 
such certificate shall be considered to have been filed on the date of 
the repayment. References in this subparagraph to a waiver certificate 
refer also to any supplement to such a certificate.
    (d) Termination of waiver by organization. (1) The period for which 
a certificate filed pursuant to section 3121(k), or pursuant to section 
1426(l) of the Internal Revenue Code of 1939, is in effect may be 
terminated by the organization upon giving to the district director with 
whom the organization is filing returns 2 years' advance notice in 
writing of its desire to terminate the effect of the certificate at the 
end of a specified calendar quarter, but only if, at the time of the 
receipt of such notice by the district director, the certificate has 
been in effect for a period of not less than 8 years. The notice of 
termination shall be signed by the president or other principal officer 
of the organization. Such notice shall be dated and shall show (i) the 
title of the officer signing the notice, (ii) the name, address, and 
identification number of the organization, (iii) the district director 
with whom the certificate was filed, (iv) the date on which the 
certificate became effective, and (v) the date on which the certificate 
is to be terminated. No particular form is prescribed for the notice of 
termination.

[[Page 88]]

    (2) In computing the effective period which must precede the date of 
receipt of the notice of termination, there shall be disregarded any 
period or periods as to which the organization was not exempt from 
income tax under section 501(a) as an organization of the character 
described in section 501(c)(3) or under section 101(6) of the Internal 
Revenue Code of 1939.
    (3) The notice of termination may be revoked by the organization by 
giving, prior to the close of the calendar quarter specified in the 
notice of termination, a written notice of such revocation. The notice 
of revocation shall be filed with the district director with whom the 
notice of termination was filed. The notice of revocation shall be 
signed by the president or other principal officer of the organization. 
Such notice shall be dated and shall show (i) the title of the officer 
signing the notice, (ii) the name, address, and identification number of 
the organization, and (iii) the date of the notice of termination to be 
revoked. No particular form is prescribed for the notice of revocation.
    (e) Termination of waiver by Commissioner. (1) The period for which 
a certificate filed pursuant to section 3121(k), or pursuant to section 
1426(l) of the Internal Revenue Code of 1939, is in effect may be 
terminated by the Commissioner, with the prior concurrence of the 
Secretary of Health, Education, and Welfare, upon a finding by the 
Commissioner that the organization has failed to comply substantially 
with the requirements applicable with respect to the taxes imposed by 
the act (or the corresponding provisions of prior law) or is no longer 
able to comply therewith. The Commissioner shall give the organization 
not less than 60 days' advance notice in writing that the period covered 
by the certificate will terminate at the end of the calendar quarter 
specified in the notice of termination.
    (2) The notice of termination may be revoked by the Commissioner, 
with the prior concurrence of the Secretary of Health, Education, and 
Welfare, by giving written notice of revocation to the organization 
before the close of the calendar quarter specified in the notice of 
termination.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6983, 33 FR 
18018, Dec. 4, 1968; T.D. 7012, 34 FR 7693, May 15, 1969; T.D. 7476, 42 
FR 17874, Apr. 4, 1977]



Sec. 31.3121(k)-2  Waivers of exemption; original effective date 
changed retroactively.

    (a) Certificates filed after 1955 and before August 29, 1958. (1) An 
organization which filed a certificate under section 3121(k) after 1955 
and before August 29, 1958, may file a request on Form SS-15b at any 
time before 1960 to have such certificate made effective, with respect 
to the services of individuals who concurred in the filing of such 
certificate (initially, or by signing a supplemental list on Form SS-15a 
Supplement which was filed before Aug. 29, 1958) and whose signatures 
also appeared on such request on Form SS-15b, for the period beginning 
with the first day of any calendar quarter after 1955 which preceded the 
first calendar quarter for which the certificate originally was 
effective.
    (2) For purposes of computing interest and for purposes of section 
6651 (relating to addition to tax for failure to file tax return), the 
due date for the return and payment of the tax for any calendar quarter 
resulting from the filing of a request referred to in paragraph (a)(1) 
of this section shall be the last day of the calendar month following 
the calendar quarter in which the request is filed. The statutory period 
for the assessment of such tax shall not expire before the expiration of 
3 years from such due date.
    (b) Certificate filed before 1966. (1) An organization which filed a 
certificate on Form SS-15 under section 3121(k)(1)(A) before January 1, 
1966, may amend such certificate during 1965 or 1966 to make the 
certificate effective beginning with the first day of a calendar quarter 
preceding the date designated by the organization on the certificate 
(see paragraph (c)(2) of Sec. 31.3121(k)-1). The amendment of the 
certificate shall be made by filing a Certificate For Retroactive 
Coverage on Form SS-15b. A certificate on Form SS-15 may be amended to 
be effective for the period beginning with the first

[[Page 89]]

day of any calendar quarter which precedes the calendar quarter for 
which the certificate was originally effective, except that such a 
certificate may not be made effective, through an amendment, for any 
calendar quarter which begins earlier than the 20th calendar quarter 
preceding the calendar quarter in which the organization files a 
Certificate For Retroactive Coverage on Form SS-15b. Thus, if a 
Certificate For Retroactive Coverage is filed in May 1966 in respect of 
a certificate on Form SS-15 filed in 1965, the certificate on Form SS-15 
may not be made effective for a calendar quarter preceding the quarter 
beginning April 1, 1961. A certificate on Form SS-15 which is amended by 
a Certificate For Retroactive Coverage on Form SS-15b will be effective 
for the period preceding the first calendar quarter for which the 
certificate originally was effective only with respect to the services 
of individuals who concurred in the filing of the certificate 
(initially, or by signing a supplemental list on Form SS-15a Supplement 
which was filed prior to the date on which the Certificate For 
Retroactive Coverage was filed) and whose signatures also appear on the 
Certificate For Retroactive Coverage on Form SS-15b. A Certificate For 
Retroactive Coverage shall be filed with the district director with whom 
the related Form SS-15 was filed.
    (2) For purposes of computing interest and for purposes of section 
6651 (relating to addition to tax for failure to file tax return), the 
due date for the return and payment of the tax for any calendar quarter 
resulting from the filing of an amendment referred to in paragraph 
(b)(1) of this section shall be the last day of the calendar month 
following the calendar quarter in which the amendment is filed. The 
statutory period for the assessment of such tax shall not expire before 
the expiration of 3 years from such due date.

[T.D. 6983, 33 FR 18018, Dec. 4, 1968]



Sec. 31.3121(k)-3  Request for coverage of individual employed by
exempt organization before August 1, 1956.

    (a) Application of this section. This section is applicable to 
requests made after July 31, 1956, and before September 14, 1960, under 
section 403 of the Social Security Amendments of 1954, as amended, 
except that nothing in this section shall render invalid any act 
performed pursuant to, and in accordance with, Revenue Ruling 57-11, 
Cumulative Bulletin 1957-1, page 344, or Revenue Ruling 58-514, 
Cumulative Bulletin 1958-2, page 733. (For regulations relating to 
requests made before August 1, 1956, under section 403 of the Social 
Security Amendments of 1954, see 26 CFR (1939) 408.216(c) and (d) 
(Regulations 128).)
    (b) Organization which did not have waiver certificate in effect--
(1) Coverage requested by employee before August 27, 1958. Pursuant to 
section 403(a) of the Social Security Amendments of 1954, as amended by 
section 401 of the Social Security Amendments of 1956, any individual 
who, as an employee, performed services after December 31, 1950, and 
before August 1, 1956, for an organization described in section 
501(c)(3) which was exempt from income tax under section 501(a), or 
which was exempt from income tax under section 101(6) of the Internal 
Revenue Code of 1939, but which failed to file, before August 1, 1956, a 
valid waiver certificate under section 3121(k), or under section 1426(l) 
of the Internal Revenue Code of 1939, may request after July 31, 1956, 
and before August 27, 1958, that such part of the remuneration received 
by him for services performed in the employ of the organization after 
1950 and before 1957 with respect to which employee and employer taxes 
were paid be deemed to constitute remuneration for employment, if:
    (i) Any of the services performed by the individual after December 
31, 1950, and before January 1, 1957, would have constituted employment 
if such a certificate on Form SS-15 filed by the organization had been 
in effect for the period during which the services were performed and 
the individual's signature had appeared on the accompanying list on Form 
SS-15a;
    (ii) The employee and employer taxes were paid with respect to any 
part of the remuneration received by the individual from the 
organization for such services;
    (iii) A part of such taxes was paid before August 1, 1956;

[[Page 90]]

    (iv) Such taxes as were paid before August 1, 1956, were paid by the 
organization in good faith and upon the assumption that it had filed a 
valid certificate under section 3121(k), or under section 1426(l) of the 
Internal Revenue Code of 1939; and
    (v) No refund (or credit) of such taxes had been obtained by either 
the employee or the employer, exclusive of any refund (or credit) which 
would have been allowable if the services performed by the individual 
had constituted employment.
    (2) Coverage requested by employee after August 26, 1958, and before 
September 14, 1960. Requests may be made after August 26, 1958, and 
before September 14, 1960, pursuant to section 403(a) of the Social 
Security Amendments of 1954, as amended by section 401 of the Social 
Security Amendments of 1956, by the Act of August 27, 1958 (Pub. L. 85-
785, 72 Stat. 938), and by section 105(b)(6) of the Social Security 
Amendments of 1960. Any individual who, as an employee, performed 
services after December 31, 1950, and before August 1, 1956, for an 
organization described in section 501(c)(3) which was exempt from income 
tax under section 501(a), or which was exempt from income tax under 
section 101(6) of the Internal Revenue Code of 1939, but which did not 
have in effect during the entire period in which the individual was so 
employed a valid waiver certificate under section 3121(k), or under 
section 1326(l) of the Internal Revenue Code of 1939, may request after 
August 26, 1958, and before September 14, 1960, that such part of the 
remuneration received by him for services performed in the employ of the 
organization after 1950 and before 1957 with respect to which employee 
and employer taxes were paid be deemed to constitute remuneration for 
employment, if:
    (i) Any of the services performed by the individual after December 
31, 1950, and before January 1, 1957, would have constituted employment 
if such a certificate on Form SS-15 filed by the organization had been 
in effect for the period during which the services were performed and 
the individual's signature had appeared on the accompanying list on Form 
SS-15a;
    (ii) The employee and employer taxes were paid with respect to any 
part of the remuneration received by the individual from the 
organization for such services performed during the period in which the 
organization did not have a valid waiver certificate in effect;
    (iii) A part of such taxes was paid before August 1, 1956;
    (iv) Such taxes as were paid before August 1, 1956, were paid by the 
organization in good faith, and either without knowledge that a waiver 
certificate was necessary or upon the assumption that it had filed a 
valid certificate under section 3121(k), or under section 1426(l) of the 
Internal Revenue Code of 1939; and
    (v) No refund (or credit) of such taxes has been obtained by either 
the employee or the employer, exclusive of any refund (or credit) which 
would be allowable if the services performed by the individual had 
constituted employment.
    (3) Execution and filing of request. (i) Except where the 
alternative procedure set forth in paragraph (b)(3)(ii) of this section 
is followed, the request of an individual under section 403(a) of the 
Social Security Amendments of 1954, as amended, is required to be made 
and filed as provided in this subdivision. The request shall be made in 
writing, be signed and dated by the individual, and include:
    (a) The name and address of the organization for which the services 
were performed;
    (b) The name, address, and social security account number of the 
individual;
    (c) A statement that the individual has not obtained refund or 
credit (other than a refund or credit which would have been allowable if 
the services had constituted employment) from the district director of 
any part of the employee tax paid with respect to remuneration received 
by him from the organization for services performed after 1950 and 
before 1957; and
    (d) A request that all remuneration received by him from the 
organization for such services with respect to which employee and 
employer taxes had been paid shall be deemed to constitute remuneration 
for employment to the extent authorized by section 403(a) of the

[[Page 91]]

Social Security Amendments of 1954, as amended.


The request of an individual shall be accompanied by a statement of the 
organization incorporating the substance of each of the five conditions 
listed in paragraph (b) (1) or (2), whichever is appropriate, of this 
section. The statement of the organization shall show also that the 
individual performed services for the organization after December 31, 
1950, and before August 1, 1956; that the organization was an 
organization described in section 501(c)(3) which was exempt from income 
tax under section 501(a) or was exempt from income tax under section 
101(6) of the Internal Revenue Code of 1939, and the district director 
with whom returns on Form 941 were filed. The organization's statement 
shall be signed by the president or other principal officer of the 
organization who shall certify that the statement is correct to the best 
of his knowledge and belief. If the statement of the organization is not 
submitted with the individual's request, the individual shall include in 
his request an explanation of his inability to submit the statement. 
Other information may be required, but should be submitted only upon 
receipt of a specific request therefore. No particular form is 
prescribed for the request of the individual or the statement of the 
organization required to be submitted with the request. The individual's 
request should be filed with the district director with whom the 
organization files returns on Form 941. If the individual is deceased or 
mentally incompetent and the request is made by the legal representative 
of the individual or other person authorized to act on his behalf, the 
request shall be accompanied by evidence showing such person's authority 
to make the request.
    (ii) An organization which has or had in its employ individuals with 
respect to whom section 403(a) of the Social Security Amendments of 
1954, as amended, is applicable may, if it so desires, prepare a form or 
forms for use by any such individual or individuals in making requests 
under such section. Any such form shall provide space for the signature 
of the individual or individuals and contain such information as 
required to be included in a request (see paragraph (b)(3)(i) of this 
section). Any such form used by more than one individual, and any such 
form used by one individual which is signed and returned to the 
organization, shall be submitted by the organization, together with its 
statement (as required in paragraph (b)(3)(i) of this section), to the 
district director with whom the organization files its returns on Form 
941. An individual is not required to use a form prepared by the 
organization but may, at his election, file his request in accordance 
with the provisions of paragraph (b)(3)(i) of this section.
    (4) Optional tax payments by organization. An organization which 
prior to August 1, 1956, reported and paid employee and employer taxes 
with respect to any portion of the remuneration paid to an individual, 
who is eligible to file a request under section 403(a) of the Social 
Security Amendments of 1954, as amended, for services performed by him 
after 1950 and before 1957, may report and pay such taxes before 
September 14, 1960, with respect to any remaining portion of such 
remuneration which would have constituted wages if a certificate had 
been in effect with respect to such services. Such taxes may be reported 
as an adjustment without interest in the manner prescribed in Subpart G 
of the regulations in this part.
    (5) Effect of request. If a request is made and filed under the 
conditions stated in this paragraph with respect to one or more 
individuals, remuneration for services performed by each such individual 
after 1950 and before 1957, with respect to which the employee and 
employer taxes are paid on or before the date on which the request was 
filed with the district director, will be deemed to constitute 
remuneration for employment to the extent that such services would have 
constituted employment as defined in section 3121(b), or in section 
1426(b) of the Internal Revenue Code of 1939, if a certificate had been 
in effect with respect to such services. However, the provisions of 
section 3121(a) and Sec. Sec. 31.3121(a)-1 to 31.3121(a)(10)-1, 
inclusive, of the regulations in this part or the provisions of section 
1426(a) of the Internal Revenue Code of 1939 and the regulations in 26

[[Page 92]]

CFR (1939) 408.226 and 408.227 (Regulations 128), as the case may be, 
are applicable in determining the extent to which such remuneration for 
employment constitutes wages for purposes of the employee and employer 
taxes.
    (c) Individual who failed to sign list of concurring employees--(1) 
In general. Pursuant to section 403(b) of the Social Security Amendments 
of 1954, as amended, any individual who, as an employee, performed 
services after December 31, 1950, and before August 1, 1956, for an 
organization which filed a valid certificate under section 3121(k), or 
under section 1426(l) of the Internal Revenue Code of 1939, but who 
failed to sign the list of employees concurring in the filing of such 
certificate, may request on or before January 1, 1959, that the 
remuneration received by him for such services be deemed to constitute 
remuneration for employment, if:
    (i) Any of the services performed by the individual after December 
31, 1950, and before August 1, 1956, would have constituted employment 
if the signature of such individual had appeared on the list of 
employees who concurred in the filing of the certificate;
    (ii) The employee and employer taxes were paid before August 1, 
1956, with respect to any part of the remuneration received by the 
individual from the organization for such services; and
    (iii) No refund (or credit) of such taxes has been obtained either 
by the employee or the employer, exclusive of any refund (or credit) 
which would be allowable if the services performed by the individual had 
constituted employment.
    (2) Execution and filing of request. (i) Except where the 
alternative procedure set forth in subdivision (ii) of this subparagraph 
is followed, the request of an individual under section 403(b) of the 
Social Security Amendments of 1954, as amended, shall be made and filed 
as provided in this subdivision. The request shall be filed on or before 
January 1, 1959, be made in writing, be signed and dated by the 
individual, and include:
    (a) The name and address of the organization for which the services 
were performed;
    (b) The name, address, and social security account number of the 
individual;
    (c) A statement that the individual has not obtained a refund or 
credit (other than a refund or credit which would be allowable if the 
services had constituted employment) from the district director of any 
part of the employee tax paid before August 1, 1956, with respect to 
remuneration received by him from the organization;
    (d) A request that all remuneration received by the individual from 
the organization for services performed after 1950 and before August 1, 
1956, with respect to which employee and employer taxes were paid before 
August 1, 1956, shall be deemed to constitute remuneration for 
employment to the extent authorized by section 403(b) of the Social 
Security Amendments of 1954, as amended; and
    (e) A statement that the individual understands that, upon the 
filing of such request with the district director, (1) he will be deemed 
to have concurred in the certificate which was previously filed by the 
organization, and (2) the employee and employer taxes will be applicable 
to all wages received, and to be received, by him for services performed 
for the organization on or after the effective date of such certificate 
to the extent that such taxes would have been applicable if he had 
signed the list on Form SS-15a submitted with the certificate.

The request of an individual shall be accompanied by a statement of the 
organization incorporating the substance of each of the three conditions 
listed in paragraph (c)(1) of this section. The statement of the 
organization should also show that the individual performed services for 
the organization after December 31, 1950, and before August 1, 1956; 
that the organization filed a valid certificate under section 3121(k), 
or under section 1426(l) of the Internal Revenue Code of 1939; and the 
district director with whom returns on Form 941 are filed. Such 
statement shall be signed by the president or other principal officer of 
the organization who shall certify that the statement is correct to the 
best of his knowledge and belief. If the statement of the organization 
is not submitted

[[Page 93]]

with the individual's request, the individual shall include in his 
request an explanation of his inability to submit such statement. Other 
information may be required, but should be submitted only upon receipt 
of a specific request therefor. No particular form is prescribed for the 
request of the individual or the statement of the organization required 
to be submitted with the request. The individual's request should be 
filed with the district director with whom the organization files 
returns on Form 941. If the individual is deceased or mentally 
incompetent and the request is made by the legal representative of the 
individual or other person authorized to act on his behalf, the request 
shall be accompanied by evidence showing such persons' authority to make 
the request.
    (ii) An organization which has or had in its employ individuals with 
respect to whom section 403(b) of the Social Security Amendments of 
1954, as amended, is applicable, may, if it so desires, prepare a form 
or forms for use by any such individual or individuals in making 
requests under such section. Any such form shall provide space for the 
signature of the individual or individuals and contain such information 
as is required by paragraph (c)(1)(i) of this section to be included in 
a request. Any such form used by more than one individual, and any such 
form used by one individual, and any such form used by one individual 
which is signed and returned to the organization, shall be submitted by 
the organization, together with its statement (as required in paragraph 
(c)(1)(i) of this section), to the district director with whom the 
organization files returns on Form 941. An individual is not required to 
use a form prepared by the organization but may, at his election, file 
his request in accordance with the provisions of subdivisions (i) of 
this subparagraph.
    (3) Effect of request. An individual who makes and files a request 
under the conditions stated in this paragraph with respect to services 
performed as an employee of an organization described in section 
501(c)(3) which was exempt from income tax under section 501(a), or 
which was exempt from income tax under section 101(6) of the Internal 
Revenue Code of 1939, will be deemed to have signed the list 
accompanying the certificate filed by the organization under section 
3121(k), or under section 1426(l) of the Internal Revenue Code of 1939. 
Accordingly, all services performed by the individual for the 
organization on and after the effective date of the certificate will 
constitute employment to the same extent as if he had, in fact, signed 
the list. The employee tax and employer tax are applicable with respect 
to any remuneration paid to the employee by the organization which 
constitutes wages. If less than the correct amount of such taxes has 
been paid, the additional amount due should be reported as an adjustment 
without interest within the time specified in subpart G of the 
regulations in this part.

[T.D. 6744, 29 FR 8318, July 2, 1964]



Sec. 31.3121(k)-4  Constructive filing of waivers of exemption from 
social security taxes by certain tax-exempt organizations.

    (a) Constructive filing of waiver certificate where no refund or 
credit has been allowed. (1) This paragraph applies (except as provided 
in subparagraph (3) of this paragraph) to an organization if all of the 
following four conditions are met.
    (i) The organization is one described in section 501(c)(3) of the 
Internal Revenue Code of 1954, which is exempt from income tax under 
section 501(a) of the Code.
    (ii) The organization did not file a valid waiver certificate under 
section 3121(k)(1) of the Internal Revenue Code of 1954 (or the 
corresponding provision of prior law) as of the later of October 19, 
1976, or the earliest date on which it satisfies paragraph (a)(1)(iii) 
of this section.
    (iii) The taxes imposed by sections 3101 and 3111 of the Code were 
paid with respect to remuneration paid by the organization to its 
employees, as though such certificate had been filed, during any period 
that includes all or part of at least three consecutive calendar 
quarters and that did not terminate before the end of the third calendar 
quarter of 1973.
    (iv) The Internal Revenue Service did not allow (or erroneously 
allowed) a refund or credit of any part of the taxes

[[Page 94]]

paid as described in subdivision (iii) of this subparagraph with respect 
to remuneration for services performed on or after April 1, 1973. For 
purposes of the previous sentence, a refund or credit which would have 
been allowed, even if a valid waiver certificate filed under section 
3121(k)(1) had been in effect, shall be disregarded. A refund or credit 
will be regarded as having been erroneously allowed if it was credited 
by the Internal Revenue Service to the taxpayer account of the 
organization or any of its employees on or after September 9, 1976, even 
though it was properly made under the law in effect when made.
    (2) (i) An organization to which this paragraph applies shall be 
deemed to have filed a valid waiver certificate under section 3121(k)(1) 
(or the corresponding provision of prior law) for purposes of section 
210(a)(8)(B) of the Social Security Act and section 3121(b)(8)(B). The 
waiver certificate shall be deemed to have been filed on the first day 
of the period described in paragraph (a)(1)(iii) of this section and 
shall be effective on the first day of the calendar quarter in which 
such period began. However, such waiver is effective only with respect 
to remuneration for services performed after 1950.
    (ii) The waiver certificate shall be deemed to have been accompanied 
by a list containing the signature, address, and social security number 
(if any) of each employee with respect to whom the taxes imposed by 
sections 3101 and 3111 were paid as described in paragraph (a)(1)(iii) 
of this section. Each such employee shall be deemed to have concurred in 
the filing of the certificate for purposes of section 210(a)(8)(B) of 
the Social Security Act and section 3121(b)(8)(B). A statement 
containing the name, address, and employer identification number of the 
organization, and the name, last known address, and social security 
number (if any) of each employee described in the preceding sentence 
shall be filed by the organization at the request of the Internal 
Revenue Service.
    (iii) The services of all employees entering or reentering the 
employ of an organization on or after the first day following the close 
of the calendar quarter in which the organization is deemed to have 
filed the waiver certificate, performed on or after the day of such 
entry or reentry, shall be covered by the certificate.
    (3) This paragraph (a) shall not apply to an organization if--
    (i) Prior to the end of the period referred to in paragraph 
(a)(1)(iii) (and, in addition, in the case of an organization organized 
on or before October 9, 1969, prior to October 19, 1976), the 
organization had applied for a ruling or determination letter 
acknowledging it to be exempt from income tax under section 501(c)(3);
    (ii) The organization subsequently received such ruling or 
determination letter;
    (iii) The organization did not pay any taxes under sections 3101 and 
3111 with respect to any employee for any calendar quarter ending after 
the twelfth month following the date of mailing of the ruling or 
determination letter; and
    (iv) The organization did not pay any taxes under sections 3101 and 
3111 with respect to any calendar quarter beginning after the later of 
December 31, 1975, or the date on which the ruling or determination 
letter was issued.
    (4) In the case of an organization which is deemed under this 
paragraph to have filed a valid waiver certificate under section 
3121(k)(1), if the period with respect to which the taxes imposed by 
sections 3101 and 3111 were paid by the organization (as described in 
paragraph (a)(1)(iii) of this section) terminated prior to October 1, 
1976, taxes under sections 3101 and 3111 with respect to remuneration 
paid by the organization after the termination of such period and prior 
to July 1, 1977, which remained unpaid on December 20, 1977 (or which 
were paid after October 19, 1976, but prior to December 20, 1977), shall 
not be due or payable (or, if paid, shall be refunded). Similarly, an 
organization that received a refund or credit of the taxes described in 
paragraph (a)(1)(iii) of this section after September 8, 1976, shall not 
be liable for the taxes imposed by sections 3101 and 3111 with respect 
to remuneration paid by it prior to July 1, 1977, for which the 
organization received the refund or credit. The waiver certificate, 
which an organization described in this subparagraph is deemed to have 
filed,

[[Page 95]]

shall not apply to any service with respect to the remuneration for 
which the taxes imposed by sections 3101 and 3111 are not due or payable 
(or are refunded) by reason of this subparagraph.
    (5) In the case of an organization which is deemed under this 
paragraph to have filed a valid waiver certificate under section 
3121(k)(1), if the taxes imposed by sections 3101 and 3111 were not paid 
during the period referred to in paragraph (a)(1)(iii) of this section 
(whether the period has terminated or not) with respect to remuneration 
paid by the organization to individuals who became its employees after 
the close of the calendar quarter in which such period began, taxes 
under sections 3101 and 3111 with respect to remuneration paid prior to 
July 1, 1977, to such employees, which remain unpaid on December 20, 
1977 (or which were paid after October 19, 1976, but prior to December 
20, 1977), shall not be due or payable (or, if paid, shall be refunded). 
The waiver certificate, which an organization described in this 
subparagraph is deemed to have filed, shall not apply to any service 
with respect to remuneration for which the taxes imposed by sections 
3101 and 3111 are not due or payable (or are refunded) by reason of this 
subparagraph.
    (6) This subparagraph allows certain employees to obtain social 
security coverage for service not covered by a deemed-filed waiver 
certificate by reason of section 3121(k)(4)(C) and paragraph (a)(4) or 
(5) of this section. To qualify under this subparagraph, all of the 
following conditions must be met.
    (i) An individual performed service as an employee of an 
organization which is deemed under this paragraph to have filed a waiver 
certificate under section 3121(k)(1), on or after the first day of the 
period described in paragraph (a)(1)(iii) of this section and before 
July 1, 1977.
    (ii) The service performed by the individual does not constitute 
employment (as defined in section 210 (a) of the Social Security Act and 
section 3121(b) of the Code) because the waiver certificate which the 
organization is deemed to have filed is inapplicable to such service by 
reason of section 3121(k)(4)(C), but would constitute employment (as so 
defined) in the absence of section 3121(k)(4)(C).
    (iii) The individual files a request on or before April 15, 1980, in 
the manner and form, and with such official, as may be prescribed by 
regulations under title II of the Social Security Act.
    (iv) That request is accompanied by full payment of the taxes, which 
would have been paid under section 3101 with respect to the remuneration 
for the service described in paragraph (a)(6)(ii) of this section but 
for the application of section 3121(k)(4)(C) (or by satisfactory 
evidence that appropriate arrangements have been made for the payment of 
such taxes in installments as provided in section 3121(k)(8) and 
paragraph (d) of this section).

If these conditions are satisfied, the remuneration paid for the service 
described in paragraph (a)(6)(i) of this section shall be deemed to 
constitute remuneration for employment. In any case where remuneration 
paid by an organization to an individual is deemed under this 
subparagraph to constitute remuneration for employment, such 
organization shall be liable (notwithstanding any other provision of the 
Code or regulations) for payment of the taxes it would have been 
required to pay under section 3111 with respect to such remuneration but 
for the application of section 3121(k)(4)(C). The due date for the 
return and payment by the organization of the taxes described in the 
preceding sentence shall be the last day of the calendar month following 
the calendar quarter in which the organization is notified in writing of 
the employee's request. However, see paragraph (d) of this section which 
permits the payment of these taxes in installments.
    (b) Constructive filing of waiver certificate where refund or credit 
has been allowed and new certificate is not filed. (1) This paragraph 
applies to an organization which meets two conditions. First, it must be 
an organization to which paragraph (a) of this section would apply but 
for its failure to satisfy the requirement of paragraph (a)(1)(iv) of 
this section because a refund or credit of taxes was allowed before 
September 9, 1976. Second, it must not have filed an actual valid waiver 
certificate under section 3121(k)(1) in accordance

[[Page 96]]

with the requirements of paragraph (c) of this section.
    (2) An organization to which this paragraph applies shall be deemed, 
for purposes of section 210(a)(8)(B) of the Social Security Act and 
section 3121(b)(8)(B), to have filed a valid waiver certificate under 
section 3121(k)(1) on April 1, 1978. Such certificate shall be effective 
for the period beginning on the first day of the first calendar quarter 
with respect to which the refund or credit referred to in paragraph 
(b)(1) of this section was allowed (or, if later, on July 1, 1973).
    (3) If an organization is deemed under this paragraph to have filed 
a waiver certificate on April 1, 1978, the provisions of paragraph 
(a)(2)(ii) and (iii) of this section (relating to employees covered by a 
deemed-filed waiver certificate) shall apply. Such certificate shall 
supersede any certificate which may have been actually filed by such 
organization prior to that date.
    (4) Where an organization is deemed under this paragraph to have 
filed a waiver certificate on April 1, 1978, the due date for the return 
and payment of the taxes imposed by sections 3101 and 3111 for wages 
paid prior to April 1, 1978, with respect to services constituting 
employment by reason of such certificate shall be August 1, 1978. 
However, see paragraph (d) of this section which permits the payment of 
these taxes in installments. Such taxes (along with the amount of any 
interest paid in connection with the refund or credit described in 
paragraph (b)(1) of this section) shall be a liability of such 
organization, payable from its own funds. No portion of such taxes (or 
interest) shall be deducted from the wages of (or otherwise collected 
from) the individuals who performed such services, and those individuals 
shall have no liability for the payment thereof.
    (5) This subparagraph allows certain employees of organizations 
covered under this paragraph to obtain social security coverage for 
periods prior to those covered by a deemed-filed waiver certificate. To 
qualify under this subparagraph, all of the following conditions must be 
met.
    (i) An individual performed service, as an employee of an 
organization deemed under this paragraph to have filed a waiver 
certificate under section 3121(k)(1), at any time prior to the period 
for which such certificate is effective.
    (ii) The taxes imposed by sections 3101 and 3111 were paid with 
respect to remuneration paid for such service, but such service (or any 
part thereof) does not constitute employment (as defined in section 
210(a) of the Social Security Act and section 3121(b)) because the 
applicable taxes so paid were refunded or credited (otherwise than 
through a refund or credit which would have been allowed if a valid 
waiver certificate filed under section 3121(k)(1) had been in effect) 
prior to September 9, 1976.
    (iii) Any portion of such service (with respect to which taxes were 
paid and refunded or credited as described in paragraph (b)(5)(ii) of 
this section) would constitute employment (as so defined) if the 
organization had actually filed under section 3121(k)(1) a valid waiver 
certificate effective as provided in paragraph (c)(2) of this section 
(with such individual's signature appearing on the accompanying list).

If this subparagraph applies, the remuneration paid for the portion of 
such service described in paragraph (b)(5)(iii) of this section shall be 
deemed to constitute remuneration for employment (as defined in section 
210(a) of the Social Security Act and section 3121(b)), where such 
individual filed a request on or before April 15, 1980 (in the manner 
and form, and with such official, as may be prescribed by regulations 
under title II of the Social Security Act), accompanied by full 
repayment of the taxes which were paid under section 3101 with respect 
to such remuneration and were refunded or credited (or by satisfactory 
evidence that arrangements have been made for the payment of such taxes 
in installments as provided in section 3121(k)(8) and paragraph (d) of 
this section). In any case where remuneration paid by an organization to 
an individual is deemed under this subparagraph to constitute 
remuneration for employment such organization shall be liable 
(notwithstanding any other provision of the Code or regulations) for 
repayment of any taxes which it paid under

[[Page 97]]

section 3111 with respect to such remuneration and which were refunded 
or credited to it. Any interest received by the organization or its 
employees in connection with a refund or credit with respect to such 
taxes shall be remitted with the repayment of taxes pursuant to this 
subparagraph.
    (c) Actual filing of waiver certificate by April 1, 1978, where 
refund or credit has been allowed. (1) An organization may file an 
actual waiver certificate in accordance with paragraphs (c)(2) and (3) 
of this section if it is an organization to which paragraph (a) of this 
section would apply but for its failure to meet the condition set forth 
in paragraph (a)(1)(iv) of this section.
    (2) An organization described in paragraph (c)(1) of this section 
was permitted to file an actual waiver certificate on or before April 1, 
1978. This certificate must be effective for the period beginning on or 
before the first day of the first calendar quarter with respect to which 
a refund or credit described in paragraph (b)(1) of this section was 
allowed (or, if later, with the first day of the earliest calendar 
quarter for which such certificate may be in effect under section 
3121(k)(1)(B)(iii)). Such waiver certificate must have been accompanied 
by a list described in section 3121(k)(1)(A), containing the signature, 
address, and social security number of each concurring employee (if 
any).
    (3) Such a waiver certificate shall be valid only if the 
organization complied with the following notification requirements and, 
on or before April 30, 1978, filed (with the service center of the 
Internal Revenue Service with which the waiver certificate was filed) a 
certification that it had complied with these notification requirements. 
However, these requirements shall be conclusively presumed to have been 
met with respect to any employees who concurred in the filing of the 
waiver certificate.
    (i) Written notification of the option to obtain social security 
coverage for the retroactive period covered by the waiver certificate is 
required to have been given to all current and former employees of the 
organization with respect to whose remuneration taxes imposed by 
sections 3101 and 3111 were paid for any part of the period covered by 
the waiver certificate. For purposes of the preceding sentence, in the 
case of a former employee a mailing of notification to his or her last 
known address shall constitute delivery to the former employee. This 
notification must have been given at least 30 days prior to the date by 
which the employee was required to inform the organization whether he or 
she elects the retroactive social security coverage.
    (ii) The notification required by this subparagraph must have stated 
the earliest date for which the waiver certificate is effective and the 
date by which the employee must have informed the organization of a 
decision to elect the retroactive coverage. In addition, the 
notification must have advised the employee how to obtain information as 
to the quarters of social security coverage to be obtained and any taxes 
or interest for which the employee would be liable if the election was 
made. The organization must have provided this information to any 
interested employee at least 14 days prior to the last day on which such 
employee was to have informed the organization of any election.
    (iii) If the notification resulted in any employee electing the 
retroactive coverage whose signature did not appear on the list of 
concurring employees which accompanied a previously filed waiver 
certificate, the certification that was supplied on or before April 30, 
1978, must have been accompanied by a special amendment to that list. 
Any employee whose name appears on this special amended list shall be 
treated as if his or her name appeared on the list of concurring 
employees filed with the waiver certificate. The preceding sentence 
shall only apply with respect to amended lists of concurring employees 
filed to comply with the requirements of this subparagraph.
    (4) Any interest received in connection with a refund or credit 
described in paragraph (b)(1) of this section must have been repaid on 
or before April 30, 1978, with respect to each employee who concurs in 
the filing of a waiver certificate pursuant to this paragraph. 
Notwithstanding the provisions of paragraph (c)(4) of Sec. 31.3121(k)-
1, if such interest was repaid on or before April 30, 1978, the waiver 
certificate shall be

[[Page 98]]

considered to have been filed on the date it was originally furnished to 
the Internal Revenue Service.
    (d) Installment payment of taxes for retroactive coverage. This 
paragraph applies if--
    (1) An organization is deemed under paragraph (a) of this section to 
have filed a valid waiver certificate, but the applicable period 
described in paragraph (a)(1)(iii) has terminated and all or part of the 
taxes imposed by sections 3101 and 3111, with respect to remuneration 
paid by such organization to its employees after the close of such 
period, remains payable notwithstanding section 3121(k)(4)(C) and 
paragraph (a)(4) of this section; or
    (2) An organization described in paragraph (c) files a valid waiver 
certificate by March 31, 1978, or, not having filed the certificate by 
that date, is seemed to have filed the certificate on April 1, 1978, 
under paragraph (b); or
    (3) An individual files a request under paragraph (a)(6) or (b)(5) 
to have service treated as constituting remuneration for employment (as 
defined in section 210(a) of the Social Security Act and section 
3121(b)).

If this paragraph applies, the taxes due under sections 3101 and 3111 
(together with any additions to tax or interest other than interest 
described in paragraph (c)(4)) with respect to service constituting 
employment by reason of the waiver certificate for any period prior to 
the first day of the calendar quarter in which the certificate is filed 
or deemed filed, or with respect to service constituting employment by 
reason of an employee request, may be paid in installments over an 
appropriate period of time, as determined by the district director. In 
determining the appropriate period of time, the district director shall 
exercise forbearance and, to the extent possible, grant the organization 
an installment agreement that will allow it sufficient funds to carry 
out its basic mission. If any installment is not paid on or before the 
date fixed for its payment, the total unpaid amount shall become payable 
immediately and shall be paid upon notice and demand.
    (e) Application of certain provisions to cases of constructive 
filing. (1) Except as provided in paragraphs (e)(2) and (3) of this 
section, all of the provisions of section 3121(k) (other than 
subparagraphs (B), (F), and (H) of section 3121(k)(1)) and the 
regulations thereunder (including the provisions requiring the payment 
of taxes under sections 3101 and 3111 with respect to the services 
involved), shall apply with respect to any certificate which is deemed 
to have been filed under paragraph (a) or (b) of this section, in the 
same way they would apply if the certificate had been actually filed on 
that day under section 3121(k)(1).
    (2) The provisions of section 3121(k)(1)(E) shall not apply unless 
the taxes described in paragraph (a)(1)(iii) of this section were paid 
by the organization as though a separate certificate had been filed with 
respect to one or both of the groups to which such provisions relate.
    (3) The action of the organization in obtaining the refund or credit 
described in paragraph (b)(1) of this section shall not be considered a 
termination of such organization's coverage period for purposes of 
section 3121(k)(3).
    (4) Any organization which is deemed to have filed a waiver 
certificate under paragraph (a) or (b) of this section shall be 
considered for purposes of section 3102(b) to have been required to 
deduct the taxes imposed by section 3101 with respect to the services 
involved.

[T.D. 7647, 44 FR 59524, Oct. 16, 1979]



Sec. 31.3121(l)-1  Agreements entered into by domestic corporations 
with respect to foreign subsidiaries.

    For provisions relating to the extension of the Federal old-age, 
survivors, and disability insurance system established by title II of 
the Social Security Act to certain services performed outside the United 
States by citizens of the United States in the employ of a foreign 
subsidiary of a domestic corporation, see the Regulations Relating to 
Contract Coverage of Employees of Foreign Subsidiaries (part 36 of this 
chapter).



Sec. 31.3121(o)-1  Crew leader.

    The term ``crew leader'' means an individual who furnishes 
individuals to perform agricultural labor for another person, if such 
individual pays (either on his own behalf or on behalf of such

[[Page 99]]

person) the individuals so furnished by him for the agricultural labor 
performed by them and if such individual has not entered into a written 
agreement with such person whereby such individual has been designated 
as an employee of such person. For purposes of this chapter a crew 
leader is deemed to be the employer of the individuals furnished by him 
to perform agricultural labor, after 1956, for another person, and the 
crew leader is deemed not to be an employee of such other person with 
respect to the performance of services by him after 1956 in furnishing 
such individuals or as a member of the crew. An individual is not a crew 
leader within the meaning of section 3121(o) and of this section if he 
does not pay the agricultural workers furnished by him to perform 
agricultural labor for another person, or if there is an agreement 
between such individual and the person for whom the agricultural labor 
is performed whereby such individual is designated as an employee of 
such person. Whether or not such individual is an employee will be 
determined under the usual common-law rules (see paragraph (c) of Sec. 
31.3121(d)-1).

[T.D. 6744, 29 FR 8320, July 2, 1964]



Sec. 31.3121(q)-1  Tips included for employee taxes.

    (a) In general. Except as otherwise provided in paragraph (b) of 
this section, tips received after 1965 by an employee in the course of 
his employment shall be considered remuneration for employment. (For 
definition of the term ``employee'' see 3121(d) and Sec. 31.3121(d)-1.) 
Tips reported by an employee to his employer in a written statement 
furnished to the employer pursuant to section 6053(a) (see Sec. 
31.6053-1) shall be deemed to be paid to the employee at the time the 
written statement is furnished to the employer. Tips received by an 
employee which are not reported to his employer in a written statement 
furnished pursuant to section 6053(a) shall be deemed to be paid to the 
employee at the time the tips are actually received by the employee. For 
provisions relating to the collection of employee tax in respect of tips 
from the employee, see Sec. 31.3102-3.
    (b) Tips not included for employer taxes. Tips received after 1965 
by an employee in the course of his employment do not constitute 
remuneration for employment for purposes of computing wages subject to 
the taxes imposed by subsections (a) and (b) of section 3111.
    (c) Tips received by an employee in course of his employment. Tips 
are considered to be received by an employee in the course of his 
employment for an employer regardless of whether the tips are received 
by the employee from a person other than his employer or are paid to the 
employee by the employer. However, only those tips which are received by 
an employee on his own behalf (as distinguished from tips received on 
behalf of another employee) shall be considered as remuneration paid to 
the employee. Thus, where employees practice tip splitting (for example, 
where waiters pay a portion of the tips received by them to the 
busboys), each employee who receives a portion of a tip left by a 
customer of the employer is considered to have received tips in the 
course of his employment.
    (d) Computation of annual wage limitation. In connection with the 
application of the annual wage limitation (see Sec. 31.3121(a)(1)-1), 
tips reported by an employee to his employer in a written statement 
furnished to the employer pursuant to section 6053(a) shall be taken 
into account for purposes of the tax imposed by section 3101. However, 
since tips received by an employee in the course of his employment do 
not constitute remuneration for employment for purposes of the tax 
imposed by section 3111, they are disregarded for purposes of the annual 
wage limitation in respect of such tax. Accordingly, separate 
computations for purposes of the annual wage limitation may be required 
in respect of an employee who receives tips. The provisions of this 
paragraph may be illustrated by the following example:

    Example. During 1966, A is employed as a waiter by X restaurant and 
is paid wages by X restaurant at the rate of $100 a week. At the end of 
October 1966, A has been paid weekly wages in the amount of $4,300 and 
has reported tips in the amount of $2,200. On November 6, 1966, A is 
paid an additional week's wages in the amount of $100 and on November 9, 
1966, A furnishes X restaurant a report

[[Page 100]]

of tips actually received by him during October. The annual wage 
limitation of $6,600 (weekly wages of $4,400 ($4,300 plus $100) and tips 
of $2,200) had been reached for purposes of the tax imposed by section 
3101 prior to November 9 and, accordingly, no portion of the tips 
included in the report furnished on that date constitutes wages. 
However, since tips do not constitute remuneration for employment for 
purposes of the tax imposed by section 3111, the weekly wages paid to A 
during the remainder of 1966 will be subject to the tax imposed by 
section 3111.

[T.D. 7001, 34 FR 1000, Jan. 23, 1969]



Sec. 31.3121(r)-1  Election of coverage by religious orders.

    (a) In general. A religious order whose members are required to take 
a vow of poverty, or any autonomous subdivision of such an order, may 
elect to have the Federal old-age, survivors, and disability insurance 
system established by title II of the Social Security Act extended to 
services performed by its members in the exercise of duties required by 
such order or subdivision. See section 3121(i)(4) and Sec. 31.3121(i)-4 
for provisions relating to the computation of the amount of remuneration 
of such members. For purposes of this section, a subdivision of a 
religious order is autonomous if it directs and governs its members, if 
it is responsible for its members' care and maintenance, if it is 
responsible for the members' support and maintenance in retirement, and 
if the members live under the authority of a religious superior who is 
elected by them or appointed by higher authority.
    (b) Definition of member--(1) In general. For purposes of section 
3121(r) and this section, a member of a religious order means any 
individual who is subject to a vow of poverty as a member of such order, 
who performs tasks usually required (and to the extent usually required) 
of an active member of such order, and who is not considered retired 
because of old age or total disability.
    (2) Retirement because of old age--(i) In general. For purposes of 
section 3121(r)(2) and this paragraph, an individual is considered 
retired because of old age if (A) in view of all the services performed 
by the individual and the surrounding circumstances it is reasonable to 
consider him to be retired, and (B) his retirement occurred by reason of 
old age. Even though an individual performs some services in the 
exercise of duties required by the religious order, the first test (the 
retirement test) is met where it is reasonable to consider the 
individual to be retired.
    (ii) Factors to be considered. In determining whether it is 
reasonable to consider an individual to be retired, consideration is 
first to be given to all of the following factors:
    (A) Nature of services. Consideration is given to the nature of the 
services performed by the individual in the exercise of duties required 
by his religious order. The more highly skilled and valuable such 
services are, the more likely the individual rendering such services is 
not reasonably considered retired. Also, whether such services are of a 
type performed principally by retired members of the individual's 
religious order may be significant.
    (B) Amount of time. Consideration is also given to the amount of 
time the individual devotes to the performance of services in the 
exercise of duties required by his religious order. This time includes 
all the time spent by him in any activity in connection with services 
that might appropriately be performed in the exercise of duties required 
of active members by the order. Normally, an individual who, solely by 
reason of his advanced age, performs services of less than 45 hours per 
month shall be considered retired. In no event shall an individual who, 
solely by reason of his advanced age, performs services of less than 15 
hours per month not be considered retired.
    (C) Comparison of services rendered before and after retirement. In 
addition, consideration is given to the nature and extent of the 
services rendered by the individual before he ``retired,'' as compared 
with the services performed thereafter. A large reduction in the 
importance or amount of services performed by the individual in the 
exercise of duties required by his religious order tends to show that 
the individual is retired; absence of such reduction tends to show that 
the individual is not retired. Normally, an individual who reduces by at 
least 75 percent the amount of services performed shall be considered 
retired.

[[Page 101]]


Where consideration of the factors described in paragraph (b)(2)(ii) of 
this section does not establish whether an individual is or is not 
reasonably considered retired, all other factors are considered.
    (iii) Examples. The rules of this subparagraph may be illustrated by 
the following examples:

    Example 1. A is a member of a religious order who is subject to a 
vow of poverty. A's religious order is principally engaged in providing 
nursing services, and A has been fully trained in the nursing 
profession. In accordance with the practices of her order, upon 
attaining the age of 65, A is relieved of her nursing duties by reason 
of her age, and is assigned to a mother house where she is required to 
perform only such duties as light housekeeping and ordinary gardening. A 
is reasonably considered retired since the services she is performing 
are simple in nature, are markedly less skilled than those professional 
services which she previously performed, are of a type performed 
principally by retired members of her order, and are performed at a 
location to which members frequently retire.
    Example 2. Assume the same facts as in example 1 except that A is 
not reassigned to a mother house. Instead, she is reassigned to full-
time duties in a hospital not utilizing her nursing skills. Whether A 
has met the retirement test requires consideration of the nature of her 
work. If A's new duties are almost entirely of a make-work nature 
primarily to occupy her body and mind, she is reasonably considered 
retired. However, if they are essential to the operation of the 
hospital, she is not reasonably considered retired.
    Example 3. B is a member of a religious order who is subject to a 
vow of poverty. As such, he provides supportive services to his order, 
such as housekeeping, cooking, and gardening. By reason of having 
attained the age of 62, he reduces the number of hours spent per day in 
these services from 8 hours to 2 hours. B is reasonably considered 
retired in view of the large reduction in the amount of time he devotes 
to his duties.
    Example 4. C is a member of a religious order who is subject to a 
vow of poverty. In his capacity as a member of the order, he performs 
duties as president of a university. Upon attaining the age of 65, C is 
relieved of his duties as president of the university and instead 
becomes a member of its faculty, teaching two courses whereas full-time 
members of the faculty normally teach four comparable courses. Although 
C's duties are no longer as demanding as those he previously performed, 
and although the amount of his time required for them is less than full 
time, he is nonetheless performing duties requiring a high degree of 
skill for a substantial amount of time. Accordingly, C is not reasonably 
considered retired.
    Example 5. Assume the same facts as in example 4, except that C 
teaches only one course upon being relieved of his position as president 
by reason of age. C is reasonably considered retired.
    Example 6. D is a member of a contemplative order who is subject to 
a vow of poverty. In accordance with the practices of his order, upon 
attaining the age of 70, D reduces by 50 percent the amount of time 
spent performing the normal duties of active members of his order. D is 
not reasonably considered retired.
    Example 7. Assume the same facts as in example 6, except that 
because of his age D no longer participates in the more rigorous 
liturgical services of the order and that the amount of time which he 
spends in all duties which might appropriately be performed by active 
members of his order is reduced by 75 percent. D is reasonably 
considered retired in view of the large reduction in his participation 
in the usual devotional routine of his order.

    (3) Retirement because of total disability. For purposes of section 
3121(r)(2) and this paragraph, an individual is considered retired 
because of total disability (i) if he is unable, by reason of a 
medically determinable physical or mental impairment, to perform the 
tasks usually required of an active member of his order to the extent 
necessary to maintain his status as an active member, and (ii) if such 
impairment is reasonably expected to prevent his resumption of the 
performance of such tasks to such extent. A physical or mental 
impairment is an impairment that results from anatomical, physiological, 
or psychological abnormalities which are demonstrable by medically 
acceptable clinical and laboratory diagnostic techniques. Statements of 
the individual, including his own description of his impairment 
(symptoms), are, alone, insufficient to establish the presence of a 
physical or mental impairment.
    (4) Evidentiary requirements with respect to retirement. There shall 
be attached to the return of taxes paid pursuant to an election under 
section 3121(r) a summary of the facts upon which any determination has 
been made by the religious order or autonomous subdivision that one or 
more of its members retired during the period covered by such return. 
Each summary

[[Page 102]]

shall contain the name and social security number of each such retired 
member as well as the date of his retirement. Such order or subdivision 
shall maintain records of the details relating to each such 
``retirement'' sufficient to show whether or not such member or members 
has in fact retired.
    (c) Certificates of election--(1) In general. A religious order or 
an autonomous subdivision of such an order desiring to make an election 
of coverage pursuant to section 3121(r) and this section shall file a 
certificate of election on Form SS-16 in accordance with the 
instructions thereto. However, in the case of an election made before 
August 9, 1973, a document other than Form SS-16 shall constitute a 
certificate of election if it purports to be a binding election of 
coverage and if it is filed with an appropriate official of the Internal 
Revenue Service. Such a document shall be given the effect it would have 
if it were a certificate of election containing the provisions required 
by paragraph (c)(2) of this section. However, it should subsequently be 
supplemented by a Form SS-16.
    (2) Provisions of certificates. Each certificate of election shall 
provide that--
    (i) Such election of coverage by such order or subdivision shall be 
irrevocable,
    (ii) Such election shall apply to all current and future members of 
such order, or in the case of a subdivision thereof to all current and 
future members of such order who belong to such subdivision,
    (iii) All services performed by a member of such order or 
subdivision in the exercise of duties required by such order or 
subdivision shall be deemed to have been performed by such member as an 
employee of such order or subdivision, and
    (iv) The wages of each member, upon which such order or subdivision 
shall pay the taxes imposed on employees and employers by sections 3101 
and 3111, will be determined as provided in section 3121(i)(4).
    (d) Effective date of election--(1) In general. Except as provided 
in paragraph (e) of this section, a certificate of election of coverage 
filed by a religious order or its subdivision pursuant to section 
3121(r) and this section shall be in effect, for purposes of section 
3121(b)(8)(A) and for purposes of section 210(a)(8)(A) of the Social 
Security Act, for the period beginning with whichever of the following 
may be designated by the electing religious order or subdivision:
    (i) The first day of the calendar quarter in which the certificate 
is filed,
    (ii) The first day of the calendar quarter immediately following the 
quarter in which the certificate is filed, or
    (iii) The first day of any calendar quarter preceding the calendar 
quarter in which the certificate is filed, except that such date may not 
be earlier than the first day of the 20th calendar quarter preceding the 
quarter in which such certificate is filed.
    (2) Retroactive elections. Whenever a date is designated as provided 
in paragraph (d)(1)(iii) of this section, the election shall apply to 
services performed before the quarter in which the certificate is filed 
only if the member performing such services was a member at the time 
such services were performed and is living on the first day of the 
quarter in which such certificate is filed. Thus, the election applies 
to an individual who is no longer a member of a religious order on the 
first day of such quarter if he performed services as a member at any 
time on or after the date so designated and is living on the first day 
of the quarter in which such certificate is filed. For purposes of 
computing interest and for purposes of section 6651 (relating to 
additions to tax for failure to file tax return or to pay tax), in any 
case in which such a date is designated the due date for the return and 
payment of the tax, for calendar quarters prior to the quarter in which 
the certificate is filed, resulting from the filing of such certificate 
shall be the last day of the calendar month following the calendar 
quarter in which the certificate is filed. The statutory period for the 
assessment of the tax for such prior calendar quarters shall not expire 
before the expiration of 3 years from such due date.
    (e) Coordination with coverage of lay employees. If at the time the 
certificate of election of coverage is filed by a religious order or 
autonomous subdivision, a certificate of waiver of exemption

[[Page 103]]

under section 3121(k) (extending coverage to any lay employees) is not 
in effect, the certificate of election shall not become effective unless 
the order or subdivision files a Form SS-15, and a Form SS-15a to 
accompany the certificate on Form SS-15, as provided by section 3121(k) 
and Sec. Sec. 31.3121(k)-1 through 31.3121(k)-3. The preceding sentence 
applies even though an order or subdivision has no lay employees at the 
time it files a certificate of election of coverage. The effective date 
of the certificate of waiver of exemption must be no later than the date 
on which the certificate of election becomes effective, and it must be 
specified on the certificate of waiver of exemption that such 
certificate is irrevocable. The certificate of waiver of exemption 
required under this paragraph shall be filed notwithstanding the 
provisions of section 3121(k)(3) (relating to no renewal of the waiver 
of exemption) which otherwise would prohibit the filing of a waiver of 
exemption if an earlier waiver of exemption had previously been 
terminated. If at the time the certificate of election of coverage is 
filed a certificate of waiver of exemption is in effect with respect to 
the electing religious order or autonomous subdivision, the filing of 
the certificate of election shall constitute an amendment of the 
certificate of waiver of exemption making the latter certificate 
irrevocable.

[T.D. 7280, 38 FR 18370, July 10, 1973]



Sec. 31.3121(s)-1  Concurrent employment by related corporations 
with common paymaster.

    (a) In general. For purposes of sections 3102, 3111, and 3121(a)(1), 
except as otherwise provided in paragraph (c) of this section, when two 
or more related corporations concurrently employ the same individual and 
compensate that individual through a common paymaster which is one of 
the related corporations that employs the individual, each of the 
corporations is considered to have paid only the remuneration it 
actually disburses to that individual. This rule applies whether the 
remuneration was paid with respect to the employment relationship of the 
individual with the disbursing corporation or was paid on behalf of 
another related corporation. Accordingly, if all of the remuneration to 
the individual from the related corporations is disbursed through the 
common paymaster, the total amount of taxes imposed with respect to the 
remuneration under sections 3102 and 3111 is determined as though the 
individual has only one employer (the common paymaster). The common 
paymaster is responsible for filing information and tax returns and 
issuing Forms W-2 with respect to wages it is considered to have paid 
under this section. Section 3121(s) and this section apply only to 
remuneration disbursed in the form of money, check or similar instrument 
by one of the related corporations or its agent.
    (b) Definitions. The definitions contained in this paragraph are 
applicable only for purposes of this section and Sec. 31.3306(p)-1.
    (1) Related corporations. Corporations shall be considered related 
corporations for an entire calendar quarter (as defined in Sec. 31.0-
2(a)(9)) if they satisfy any one of the following four tests at any time 
during that calendar quarter:
    (i) The corporations are members of a ``controlled group of 
corporations'', as defined in section 1563 of the Code, or would be 
members if section 1563(a)(4) and (b) did not apply and if the phrase 
``more than 50 percent'' were substituted for the phrase ``at least 80 
percent'' wherever it appears in section 1563(a).
    (ii) In the case of a corporation that does not issue stock, either 
fifty percent or more of the members of one corporation's board of 
directors (or other governing body) are members of the other 
corporation's board of directors (or other governing body), or the 
holders of fifty percent or more of the voting power to select such 
members are concurrently the holders of more than fifty percent of that 
power with respect to the other corporation.
    (iii) Fifty percent or more of one corporation's officers are 
concurrently officers of the other corporation.
    (iv) Thirty percent or more of one corporation's employees are 
concurrently employees of the other corporation.

The following examples illustrate the application of this paragraph:


[[Page 104]]


    Example 1. (a) X Corporation employs individuals A, B, D, E, F, G, 
and H. Y Corporation employs individuals A, B, and C. Z Corporation 
employs individuals A, C, I, J, K, L, and M. X Corporation is the 
paymaster for all thirteen individuals. The corporations have no 
officers or stockholders in common.
    (b) X and Y are related corporations because at least 30 percent of 
Y's employees are also employees of X. Y and Z are related corporations 
because at least 30 percent of Y's employees are also employees of Z. X 
and Z are not related corporations because neither corporation has 30 
percent of its employees concurrently employed by the other corporation.
    (c) For purposes of determining the amount of the tax liability 
under sections 3102 and 3111, individual B is treated as having one 
employer. Individual C has two employers for these purposes, although Y 
and Z are related corporations, because C is not employed by X 
Corporation, the common paymaster. Individual A also is treated as 
having two employers for the purposes of these sections because X and Y 
Corporations are treated as one employer, and Z Corporation is treated 
as a second employer (since it is not related to the paymaster, X 
Corporation). Of course, individuals D, E, F, G, H, I, J, K, L, and M 
are not concurrently employed by two or more corporations, and, 
accordingly, section 3121 (s) is inapplicable to them.
    Example 2. M and N Corporations are both related to Corporation O 
but are not related to each other. Individual A is concurrently employed 
by all three corporations and paid by O, their common paymaster. 
Although M and N are not related, O is treated as the employer for A's 
employment with M, N, and O.
    Example 3. Corporations X, Y, and Z meet the definition of related 
corporations for the first time on April 12, 1979, and cease to meet it 
on July 5, 1979. A is concurrently employed by X, Y, and Z throughout 
1979. In each of the four calendar quarters of 1979, A's remuneration 
from X, Y, and Z is $2,000, $10,000, and $30,000, respectively. All of 
the remuneration to A from X, Y, and Z for the year is disbursed by X, 
the common paymaster. Under these circumstances, the amount of wages 
subject to sections 3102 and 3111 is as follows:
    For the first calendar quarter

 
                X                          Y                   Z
 
             $2,000                     $10,000             $22,900
 
 
 

    For the second calendar quarter

 
                X                          Y                   Z
 
             $20,900                       0                   0
 
($22,900-$2,000)
 

    For the third calendar quarter

 
                X                          Y                   Z
 
                0                          0                   0
 
 
 

    For the fourth calendar quarter

 
                X                          Y                   Z
 
                0                       $10,000                0
 
 
 


Of course, if the corporations had been related throughout all of 1979, 
only $22,900 of X's first quarter disbursement would have constituted 
wages subject to sections 3102 and 3111.

    (2) Common paymaster--(i) In general. A common paymaster of a group 
of related corporations is any member thereof that disburses 
remuneration to employees of two or more of those corporations on their 
behalf and that is responsible for keeping books and records for the 
payroll with respect to those employees. The common paymaster is not 
required to disburse remuneration to all the employees of those two or 
more related corporations, but the provisions of this section do not 
apply to any remuneration to an employee that is not disbursed through a 
common paymaster. The common paymaster may pay concurrently employed 
individuals under this section by one combined paycheck, drawn on a 
single bank account, or by separate paychecks, drawn by the common 
paymaster on the accounts of one or more employing corporations.
    (ii) Multiple common paymasters. A group of related corporations may 
have more than one common paymaster. Some of the related corporations 
may use one common paymaster and others of the related corporations use 
another common paymaster with respect to a certain class of employees. A 
corporation that uses a common paymaster to disburse remuneration to 
certain of its employees may use a different common paymaster to 
disburse remuneration to other employees.
    (iii) Examples. The rules of this subparagraph are illustrated by 
the following examples:

    Example 1. S, T, U, and V are related corporations with 2,000 
employees collectively. Forty of these employees are concurrently

[[Page 105]]

employed by two or more of the corporations, during a calendar quarter. 
The four corporations arrange for S to disburse remuneration to thirty 
of these forty employees for their services. Under these facts, S is the 
common paymaster of S, T, U, and V with respect to the thirty employees. 
S is not a common paymaster with respect to the remaining employees.
    Example 2. (a) W, X, Y, and Z are related corporations. The 
corporations collectively have 20,000 employees. Two hundred of the 
employees are top-level executives and managers, sixty of whom are 
concurrently employed by two or more of the corporations during a 
calendar quarter. Six thousand of the employees are skilled artisans, 
all of whom are concurrently employed by two or more of the corporations 
during the calendar year. The four corporations arrange for Z to 
disburse remuneration to the sixty executives who are concurrently 
employed by two or more of the corporations. W and X arrange for X to 
disburse remuneration to the artisans who are concurrently employed by W 
and X.
    (b) A is an executive who is concurrently employed only by W, Y, and 
Z during the calendar year. Under these facts, Z is a common paymaster 
for W, Y, and Z with respect to A. Assuming that the other requirements 
of this section are met, the amount of the tax liability under sections 
3102 and 3111 is determined as if Z were A's only employer for the 
calendar quarter.
    (c) B is a skilled artisan who is concurrently employed only by W 
and X during the calendar year. Under these facts, X is a common 
paymaster for S and X with respect to B. Assuming that the other 
requirements of this section are met, the amount of the tax liability 
under sections 3102 and 3111 is determined as if X were B's only 
employer for the calendar quarter.

    (3) Concurrent employment. For purposes of this section, the term 
``concurrent employment'' means the contemporaneous existence of an 
employment relationship (within the meaning of section 3121(b)) between 
an individual and two or more corporations. Such a relationship 
contemplates the performance of services by the employee for the benefit 
of the employing corporation (not merely for the benefit of the group of 
corporations), in exchange for remuneration which, if deductible for the 
purposes of Federal income tax, would be deductible by the employing 
corporation. The contemporaneous existence of an employment relationship 
with each corporation is the decisive factor; if it exists, the fact 
that a particular employee is on leave or otherwise temporarily inactive 
is immaterial. However, employment is not concurrent with respect to one 
of the related corporations if the employee's employment relationship 
with that corporation is completely nonexistent during periods when the 
employee is not performing services for that corporation. An employment 
relationship is completely nonexistent if all rights and obligations of 
the employer and employee with respect to employment have terminated, 
other than those that customarily exist after employment relationships 
terminate. Examples of rights and obligations that customarily exist 
after employment relationships terminate include those with respect to 
remuneration not yet paid, employer's property used by the employee not 
yet returned to the employer, severance pay, and lump-sum termination 
payments from a deferred compensation plan. Circumstances that suggest 
that an employment relationship has become completely nonexistent 
include unconditional termination of participation in deferred 
compensation plans of the employer, forfeiture of seniority claims, and 
forfeiture of unused fringe benefits such as vacation or sick pay. Of 
course, the continued existence of an employment relationship between an 
individual and a corporation is not necessarily established by the 
individual's continued participation in a deferred compensation plan, 
retention of seniority rights, etc., since continuation of those 
benefits may be attributable to employment with a second corporation 
related to the first corporation if the corporations have common 
benefits plans or if the benefits are continued as a matter of corporate 
reciprocity. An individual who does not perform substantial services in 
exchange for remuneration from a corporation is presumed not employed by 
that corporation. Concurrent employment need not exist for any 
particular length of time to meet the requirements of this section, but 
this section only applies to remuneration disbursed by a common 
paymaster to an individual who is concurrently employed by the common 
paymaster and at least one other related corporation at the time the 
individual performs the services for which the remuneration is

[[Page 106]]

paid. If the employment relationship is nonexistent during a quarter, 
that employee may not be counted towards the 30-percent test set forth 
in paragraph (b)(1)(iv) of this section; however, even if the employment 
relationship is nonexistent, section 3121(s) of the Code would apply to 
remuneration paid to the former employee for services rendered while the 
employee was a common employee. The principles of this subparagraph are 
illustrated by the following examples.

    Example 1. M, N, and O are related corporations which use N as a 
common paymaster with respect to officers. Their respective headquarters 
are located in three separate cities several hundred miles apart. A is 
an officer of M, N, and O who performs substantial services for each 
corporation. A does not work a set length of time at each corporate 
headquarters, and when A leaves one corporate headquarters, it is not 
known when A will return, although it is expected that A will return. 
Under these facts, A is concurrently employed by the three corporations.
    Example 2. P, Q, and R are related corporations whose geographical 
zones of business activity do not overlap. P, Q, and R have a common 
pension plan and arrange for Q to be a common paymaster for managers and 
executives. All three corporations maintain cafeterias for the use of 
their employees. B is a cafeteria manager who has worked at P's 
headquarters for 3 years. On June 1, 1980, B is transferred from P to 
the position of cafeteria manager of R. There are no plans for B's 
return to P. B's accrued pension benefits, vacation and sick pay, do not 
change as a result of the transfer. The decision to transfer B was made 
by Q, the parent corporation. Under these facts, B is not concurrently 
employed by P and R, because B's employment relationship with P was 
completely nonexistent during B's employment with R. Furthermore, 
section 3121(s) is inapplicable since B also was not employed by Q, the 
common paymaster, because B never contracted to perform services for 
remuneration from Q, and Q did not have the right to control the day-to-
day duties of B's work.
    Example 3. C is employed by two related corporations, S and T. C was 
concurrently employed by these corporations between April 1, 1979, and 
June 30, 1979. The corporations used T as the common paymaster with 
respect to C's wages between May 1, 1979, and September 30, 1979. T pays 
C on May 15 for services performed between April 1 and April 30, on July 
15 for services performed between June 1 and June 30, and on August 15 
for services performed between July 1 and July 31. Section 3121 (s) 
applies to the first two payments but does not apply to the third 
payment (there was no concurrent employment). However, if the third 
payment was made by T for services performed for T, T counts the amounts 
previously disbursed to C in 1979 while C was concurrently employed by S 
and T towards the wage base (see section 3121 (a)(1)).

    (c) Allocation of employment taxes--(1) Responsibility to pay tax. 
If the requirements of this section are met, the common paymaster has 
the primary responsibility for remitting taxes pursuant to sections 3102 
and 3111 with respect to the remuneration it disburses as the common 
paymaster. The common paymaster computes these taxes as though it were 
the sole employer of the concurrently employed individuals. If the 
common paymaster fails to remit these taxes (in whole or in part), it 
remains liable for the full amount of the unpaid portion of these taxes. 
In addition, each of the other related corporations using the common 
paymaster is jointly and severally liable for its appropriate share of 
these taxes. That share is an amount equal to the lesser of:
    (i) The amount of the liability of the common paymaster under 
section 3121(s), after taking account of any tax payments made, or
    (ii) The amount of the liability under sections 3102 and 3111 which, 
but for section 3121(s), would have existed with respect to the 
remuneration from such other related corporation, reduced by an 
allocable portion of any taxes previously paid by the common paymaster 
with respect to that remuneration.

The portion of taxes previously paid by the common paymaster that is 
allocable to each related corporation is determined by multiplying the 
amount of taxes paid by a fraction, the numerator of which is the 
portion of the amount of employment tax liability of the common 
paymaster under section 3121(s) that is allocable to such related 
corporation under paragraph (c)(2) of this section, and the denominator 
of which is the total amount of the common paymaster's liability under 
section 3121(s), both determined without regard to any prior tax 
payments. These rules apply whether or not the tax on employees was 
withheld from the employees' wages.

[[Page 107]]

    (2) Allocation of tax--(i) In general. If the related corporations 
maintain a record of the remuneration disbursed to the employee for 
services performed for each corporation, the remuneration-based 
allocation rules of paragraph (c)(2)(ii) of this section apply. If the 
related corporations do not maintain this record of remuneration, the 
group-wide allocation rules of paragraph (c)(2)(iii) of this section 
apply. In all cases, allocations must be made with respect to each 
payment of wages. The allocation of employment tax liabilities pursuant 
to this subparagraph also determines which related corporation may be 
entitled to income tax deductions with respect to the payments of those 
taxes.
    (ii) Remuneration-based allocation rules. Under the remuneration-
based method of allocation, each related corporation that remunerates an 
employee through a common paymaster has allocated to it for each pay 
period an amount of tax determined according to the following formula:

Portion of wage payment constituting
 re-
 muneration to the employee for        ..  Tax on employees under
 services                                   section 3102 and
 performed for the corporation         ..   tax on employers under
                                            section 3111
-------------------------------------   x   that the common paymaster is
              ---------                     required
Total wage payment constituting remu-  ..   to remit with respect to the
                                            wage pay-
 neration to the employee for all      ..   ment
 services
 performed for the related
 corporations
 using the common paymaster
 


If the remuneration disbursed to an employee for services performed for 
a corporation is inappropriate, the district director may adjust the 
remuneration records of the related corporations to reflect appropriate 
remuneration. The district director may use the principles of Sec. 
1.482-2(b) in making the adjustments.

    Example. (i) X and Y are related corporations which use Y as common 
paymaster for their executives. A is a concurrently employed executive 
who performs services during the first quarter of 1979 for X and Y. Y 
remunerates $4,000 gross pay every week to A, calculated as follows:

----------------------------------------------------------------------------------------------------------------
                                            Remuneration                                 Tax on
                             ------------------------------------------    Tax on       employees
        Wage payments                                                     employers     withheld        Total
                                    X             Y           Total         under         under
                                                                        section 3111  section 3102
----------------------------------------------------------------------------------------------------------------
1...........................        $3,000        $1,000        $4,000       $245.20       $245.20       $490.40
2-3.........................  ............         8,000         8,000        490.40        490.40        980.80
4...........................         1,000         3,000         4,000        245.20        245.20        490.40
5...........................         4,000  ............         4,000        245.20        245.20        490.40
6...........................         2,000         2,000         4,000        177.77        177.77        355.54
7-13........................        10,000        18,000        28,000             0             0             0
                             -----------------------------------------------------------------------------------
    Total...................        20,000        32,000        52,000      1,403.77      1,403.77      2,807.54
----------------------------------------------------------------------------------------------------------------

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

[[Page 108]]

[GRAPHIC] [TIFF OMITTED] TC05OC91.016

    (ii) If Y remits none of the taxes to the Internal Revenue Service, 
X is liable for $2,452.00 (the entire amount due pursuant to sections 
3102 and 3111 with respect to the remuneration to A from X) (12.26% x 
$20,000). Any amount remitted by X to the Internal Revenue Service under 
these circumstances is also credited against the liability of the common 
paymaster, Y. However, only the portion of the employment taxes 
allocated to X under (i) above may be deducted by X as employment taxes 
paid by it in respect of wages paid by it to its employees.
    (iii) If Y remits $1,000.00 of the total $2,807.54 due, Y as common 
paymaster remains liable for $1,807.54 ($2,807.54 minus $1,000). X's 
liability is the lesser of $1,807.54 (the liability of the common 
paymaster), or X's total liability, in the absence of section 3121 (s), 
on wages paid through the common paymaster ($2,452.00) minus a credit 
for an allocable part of the amount remitted by Y. The part is $412.66
[GRAPHIC] [TIFF OMITTED] TC05OC91.017

    (iii) Group-wide allocation rules. Under the group-wide method of 
allocation, the Commissioner may allocate the taxes imposed by sections 
3102 and 3111 in an appropriate manner to a related corporation that 
remunerates an employee through a common paymaster if the common 
paymaster fails to remit the taxes to the Internal Revenue Service. 
Allocation in an appropriate manner varies according to the 
circumstances. It may be based on sales, property, corporate payroll, or 
any other basis that reflects the distribution of the services performed 
by the employee, or a combination of the foregoing bases. To the extent 
practicable, the Commissioner may use the principles of Sec. 1.482-2(b) 
of this chapter in making the allocations with respect to wages paid 
after December 31, 1978, and on or before July 31, 2009. To the extent 
practicable, the Commissioner may use the principles of Sec. 1.482-9 of 
this chapter in making the allocations with respect to wages paid after 
July 31, 2009.
    (d) Effective/applicability date--(1) In general. This section is 
applicable with respect to wages paid after December 31, 1978. The 
fourth sentence of paragraph (c)(2)(iii) of this section is applicable 
with respect to wages paid after December 31, 1978, and on or before 
July 31, 2009. The fifth sentence of paragraph (c)(2)(iii) of this 
section is applicable with respect to wages paid after July 31, 2009.
    (2) Election to apply regulation to earlier taxable years. A person 
may elect to apply the fifth sentence of paragraph (c)(2)(iii) of this 
section to earlier taxable years in accordance with the rules set forth 
in Sec. 1.482-9(n)(2) of this chapter.

[T.D. 7660, 44 FR 75139, Dec. 19, 1979; 45 FR 17986, Mar. 20, 1980, as 
amended by T.D. 9278, 71 FR 44519, Aug. 4, 2006; T.D. 9456, 74 FR 38876, 
Aug. 4, 2009]

[[Page 109]]



Sec. 31.3121(v)(2)-1  Treatment of amounts deferred under certain
nonqualified deferred compensation plans.

    (a) Timing of wage inclusion--(1) General timing rule for wages. 
Remuneration for employment that constitutes wages within the meaning of 
section 3121(a) generally is taken into account for purposes of the 
Federal Insurance Contributions Act (FICA) taxes imposed under sections 
3101 and 3111 at the time the remuneration is actually or constructively 
paid. See Sec. 31.3121(a)-2(a).
    (2) Special timing rule for an amount deferred under a nonqualified 
deferred compensation plan--(i) In general. To the extent that 
remuneration deferred under a nonqualified deferred compensation plan 
constitutes wages within the meaning of section 3121(a), the 
remuneration is subject to the special timing rule described in this 
paragraph (a)(2). Remuneration is considered deferred under a 
nonqualified deferred compensation plan within the meaning of section 
3121(v)(2) and this section only if it is provided pursuant to a plan 
described in paragraph (b) of this section. The amount deferred under a 
nonqualified deferred compensation plan is determined under paragraph 
(c) of this section.
    (ii) Special timing rule. Except as otherwise provided in this 
section, an amount deferred under a nonqualified deferred compensation 
plan is required to be taken into account as wages for FICA tax purposes 
as of the later of--
    (A) The date on which the services creating the right to that amount 
are performed (within the meaning of paragraph (e)(2) of this section); 
or
    (B) The date on which the right to that amount is no longer subject 
to a substantial risk of forfeiture (within the meaning of paragraph 
(e)(3) of this section).
    (iii) Inclusion in wages only once (nonduplication rule). Once an 
amount deferred under a nonqualified deferred compensation plan is taken 
into account (within the meaning of paragraph (d)(1) of this section), 
then neither the amount taken into account nor the income attributable 
to the amount taken into account (within the meaning of paragraph (d)(2) 
of this section) is treated as wages for FICA tax purposes at any time 
thereafter.
    (iv) Benefits that do not result from a deferral of compensation. If 
a nonqualified deferred compensation plan (within the meaning of 
paragraph (b)(1) of this section) provides both a benefit that results 
from the deferral of compensation (within the meaning of paragraph 
(b)(3) of this section) and a benefit that does not result from the 
deferral of compensation, the benefit that does not result from the 
deferral of compensation is not subject to the special timing rule 
described in this paragraph (a)(2). For example, if a nonqualified 
deferred compensation plan provides retirement benefits which result 
from the deferral of compensation and disability pay (within the meaning 
of paragraph (b)(4)(iv)(C) of this section) which does not result from 
the deferral of compensation, the retirement benefits provided under the 
plan are subject to the special timing rule in this paragraph (a)(2) and 
the disability pay is not.
    (v) Remuneration that does not constitute wages. If remuneration 
under a nonqualified deferred compensation plan does not constitute 
wages within the meaning of section 3121(a), then that remuneration is 
not taken into account as wages for FICA tax purposes under either the 
general timing rule described in paragraph (a)(1) of this section or the 
special timing rule described in this paragraph (a)(2). For example, 
benefits under a death benefit plan described in section 3121(a)(13) do 
not constitute wages for FICA tax purposes. Therefore, these benefits 
are not included as wages under the general timing rule described in 
paragraph (a)(1) of this section or the special timing rule described in 
this paragraph (a)(2), even if the death benefit plan would otherwise be 
considered a nonqualified deferred compensation plan within the meaning 
of paragraph (b)(1) of this section.
    (b) Nonqualified deferred compensation plan--(1) In general. For 
purposes of this section, the term nonqualified deferred compensation 
plan means any plan or other arrangement, other than a plan described in 
section 3121(a)(5), that is established (within the meaning of paragraph 
(b)(2) of this section) by

[[Page 110]]

an employer for one or more of its employees, and that provides for the 
deferral of compensation (within the meaning of paragraph (b)(3) of this 
section). A nonqualified deferred compensation plan may be adopted 
unilaterally by the employer or may be negotiated among or agreed to by 
the employer and one or more employees or employee representatives. A 
plan may constitute a nonqualified deferred compensation plan under this 
section without regard to whether the deferrals under the plan are made 
pursuant to an election by the employee or whether the amounts deferred 
are treated as deferred compensation for income tax purposes (e.g., 
whether the amounts are subject to the deduction rules of section 404). 
In addition, a plan may constitute a nonqualified deferred compensation 
plan under this section whether or not it is an employee benefit plan 
under section 3(3) of the Employee Retirement Income Security Act of 
1974 (ERISA), as amended (29 U.S.C. 1002(3)). For purposes of this 
section, except where the context indicates otherwise, the term plan 
includes a plan or other arrangement.
    (2) Plan establishment--(i) Date plan is established. For purposes 
of this section, a plan is established on the latest of the date on 
which it is adopted, the date on which it is effective, and the date on 
which the material terms of the plan are set forth in writing. For 
purposes of this section, a plan will be deemed to be set forth in 
writing if it is set forth in any other form that is approved by the 
Commissioner. The material terms of the plan include the amount (or the 
method or formula for determining the amount) of deferred compensation 
to be provided under the plan and the time when it may or will be 
provided.
    (ii) Plan amendments. In the case of an amendment that increases the 
amount deferred under a nonqualified deferred compensation plan, the 
plan is not considered established with respect to the additional amount 
deferred until the plan, as amended, is established in accordance with 
paragraph (b)(2)(i) of this section.
    (iii) Transition rule for written plan requirement. For purposes of 
this section, an unwritten plan that was adopted and effective before 
March 25, 1996, is treated as established under this section as of the 
later of the date on which it was adopted or became effective, provided 
that the material terms of the plan are set forth in writing before 
January 1, 2000.
    (3) Plan must provide for the deferral of compensation--(i) Deferral 
of compensation defined. A plan provides for the deferral of 
compensation with respect to an employee only if, under the terms of the 
plan and the relevant facts and circumstances, the employee has a 
legally binding right during a calendar year to compensation that has 
not been actually or constructively received and that, pursuant to the 
terms of the plan, is payable to (or on behalf of) the employee in a 
later year. An employee does not have a legally binding right to 
compensation if that compensation may be unilaterally reduced or 
eliminated by the employer after the services creating the right to the 
compensation have been performed. For this purpose, compensation is not 
considered subject to unilateral reduction or elimination merely because 
it may be reduced or eliminated by operation of the objective terms of 
the plan, such as the application of an objective provision creating a 
substantial risk of forfeiture (within the meaning of section 83). 
Similarly, an employee does not fail to have a legally binding right to 
compensation merely because the amount of compensation is determined 
under a formula that provides for benefits to be offset by benefits 
provided under a plan that is qualified under section 401(a), or because 
benefits are reduced due to investment losses or, in a final average pay 
plan, subsequent decreases in compensation.
    (ii) Compensation payable pursuant to the employer's customary 
payment timing arrangement. There is no deferral of compensation (within 
the meaning of this paragraph (b)(3)) merely because compensation is 
paid after the last day of a calendar year pursuant to the timing 
arrangement under which the employer ordinarily compensates employees 
for services performed during a payroll period described in section 
3401(b).
    (iii) Short-term deferrals. If, under a nonqualified deferred 
compensation

[[Page 111]]

plan, there is a deferral of compensation (within the meaning of this 
paragraph (b)(3)) that causes an amount to be deferred from a calendar 
year to a date that is not more than a brief period of time after the 
end of that calendar year, then, at the employer's option, that amount 
may be treated as if it were not subject to the special timing rule 
described in paragraph (a)(2) of this section. An employer may apply 
this option only if the employer does so for all employees covered by 
the plan and all substantially similar nonqualified deferred 
compensation plans. For purposes of this paragraph (b)(3)(iii), whether 
compensation is deferred to a date that is not more than a brief period 
of time after the end of a calendar year is determined in accordance 
with Sec. 1.404(b)-1T, Q&A-2, of this chapter.
    (4) Plans, arrangements, and benefits that do not provide for the 
deferral of compensation--(i) In general. Notwithstanding paragraph 
(b)(3)(i) of this section, an amount or benefit described in any of 
paragraphs (b)(4)(ii) through (viii) of this section is not treated as 
resulting from the deferral of compensation for purposes of section 
3121(v)(2) and this section and, thus, is not subject to the special 
timing rule of paragraph (a)(2) of this section.
    (ii) Stock options, stock appreciation rights, and other stock value 
rights. The grant of a stock option, stock appreciation right, or other 
stock value right does not constitute the deferral of compensation for 
purposes of section 3121(v)(2). In addition, amounts received as a 
result of the exercise of a stock option, stock appreciation right, or 
other stock value right do not result from the deferral of compensation 
for purposes of section 3121(v)(2) if such amounts are actually or 
constructively received in the calendar year of the exercise. For 
purposes of this paragraph (b)(4)(ii), a stock value right is a right 
granted to an employee with respect to one or more shares of employer 
stock that, to the extent exercised, entitles the employee to a payment 
for each share of stock equal to the excess, or a percentage of the 
excess, of the value of a share of the employer's stock on the date of 
exercise over a specified price (greater than zero).
    Thus, for example, the term stock value right does not include a 
phantom stock or other arrangement under which an employee is awarded 
the right to receive a fixed payment equal to the value of a specified 
number of shares of employer stock.
    (iii) Restricted property. If an employee receives property from, or 
pursuant to, a plan maintained by an employer, there is no deferral of 
compensation (within the meaning of section 3121(v)(2)) merely because 
the value of the property is not includible in income (under section 83) 
in the year of receipt by reason of the property being nontransferable 
and subject to a substantial risk of forfeiture. However, a plan under 
which an employee obtains a legally binding right to receive property 
(whether or not the property is restricted property) in a future year 
may provide for the deferral of compensation within the meaning of 
paragraph (b)(3) of this section and, accordingly, may constitute a 
nonqualified deferred compensation plan, even though benefits under the 
plan are or may be paid in the form of property.
    (iv) Certain welfare benefits--(A) In general. Vacation benefits, 
sick leave, compensatory time, disability pay, severance pay, and death 
benefits do not result from the deferral of compensation for purposes of 
section 3121(v)(2), even if those benefits constitute wages within the 
meaning of section 3121(a).
    (B) Severance pay. Benefits that are provided under a severance pay 
arrangement (within the meaning of section 3(2)(B)(i) of ERISA) that 
satisfies the conditions in 29 CFR 2510.3-2(b)(1)(i) through (iii) are 
considered severance pay for purposes of this paragraph (b)(4)(iv). If 
benefits are provided under a severance pay arrangement (within the 
meaning of section 3(2)(B)(i) of ERISA), but do not satisfy one or more 
of the conditions in 29 CFR 2510.3-2(b)(1)(i) through (iii), then 
whether those benefits are severance pay within the meaning of this 
paragraph (b)(4)(iv) depends upon the relevant facts and circumstances. 
For this purpose, relevant facts and circumstances include whether the 
benefits are provided over a short period of time commencing immediately 
after

[[Page 112]]

(or shortly after) termination of employment or for a substantial period 
of time following termination of employment and whether the benefits are 
provided after any termination or only after retirement (or another 
specified type of termination). Benefits provided under a severance pay 
arrangement (within the meaning of section 3(2)(B)(i) of ERISA) are in 
all cases severance pay within the meaning of this paragraph (b)(4)(iv) 
if the benefits payable under the plan upon an employee's termination of 
employment are payable only if that termination is involuntary.
    (C) Death benefits and disability pay--(1) General definition. 
Payments made under a nonqualified deferred compensation plan in the 
event of death are death benefits within the meaning of this paragraph 
(b)(4)(iv), but only to the extent the total benefits payable under the 
plan exceed the lifetime benefits payable under the plan. Similarly, 
payments made under a nonqualified deferred compensation plan in the 
event of disability are disability pay within the meaning of this 
paragraph (b)(4)(iv), but only to the extent the disability benefits 
payable under the plan exceed the lifetime benefits payable under the 
plan. Accordingly, any benefits that a nonqualified deferred 
compensation plan provides in the event of death or disability that are 
associated with an amount deferred under this section are disregarded in 
applying this section to the extent the benefits payable under the plan 
in the event of death or in the event of disability have a value in 
excess of the lifetime benefits payable under the plan.
    (2) Total benefits payable defined. For purposes of paragraph 
(b)(4)(iv)(C)(1) of this section, the term total benefits payable under 
a plan means the present value of the total benefits payable to or on 
behalf of the employee (including benefits payable in the event of the 
employee's death) under the plan, disregarding any benefits that are 
payable only in the event of disability and determined separately with 
respect to each form of distribution or other election that may apply 
with respect to the employee.
    (3) Disability benefits payable defined. For purposes of paragraph 
(b)(4)(iv)(C)(1) of this section, the term disability benefits payable 
under a plan means the present value of the benefits payable to or on 
behalf of the employee under the plan, including benefits payable in the 
event of the employee's disability but excluding death benefits within 
the meaning of this paragraph (b)(4)(iv).
    (4) Lifetime benefits payable defined. For purposes of paragraph 
(b)(4)(iv)(C)(1) of this section, the term lifetime benefits payable 
under a plan means the present value of the benefits that could be 
payable to the employee under the plan during the employee's lifetime, 
determined under the plan's optional form of distribution or other 
election that is or was available to the employee at any time with 
respect to the amount deferred and that provides the largest present 
value to the employee during the employee's lifetime of any such form or 
election so available.
    (5) Rules of application. For purposes of determining present value 
under this paragraph (b)(4)(iv)(C), present value is determined as of 
the time immediately preceding the time the amount deferred under a 
nonqualified deferred compensation plan is required to be taken into 
account under paragraph (e) of this section, using actuarial assumptions 
that are reasonable as of that date but taking into consideration only 
benefits that result from the deferral of compensation, as determined 
under this paragraph (b), and benefits payable in the event of death or 
disability. In addition, for purposes of paragraph (b)(4)(iv)(C)(4) of 
this section, present value must be determined without any discount for 
the probability that the employee may die before benefit payments 
commence and without regard to any benefits payable solely in the event 
of disability.
    (v) Certain benefits provided in connection with impending 
termination--(A) In general. Benefits provided in connection with 
impending termination of employment under paragraph (b)(4)(v)(B) or (C) 
of this section do not result from the deferral of compensation within 
the meaning of section 3121(v)(2).

[[Page 113]]

    (B) Window benefits--(1) In general. For purposes of this paragraph 
(b)(4)(v), except as provided in paragraph (b)(4)(v)(B)(3) of this 
section, a window benefit is provided in connection with impending 
termination of employment. For this purpose, a window benefit is an 
early retirement benefit, retirement-type subsidy, social security 
supplement, or other form of benefit made available by an employer for a 
limited period of time (no greater than one year) to employees who 
terminate employment during that period or to employees who terminate 
employment during that period under specified circumstances.
    (2) Special rule for recurring window benefits. A benefit will not 
be considered a window benefit if an employer establishes a pattern of 
repeatedly providing for similar benefits in similar situations for 
substantially consecutive, limited periods of time. Whether the 
recurrence of these benefits constitutes a pattern of amendments is 
determined based on the facts and circumstances. Although no one factor 
is determinative, relevant factors include whether the benefits are on 
account of a specific business event or condition, the degree to which 
the benefits relate to the event or condition, and whether the event or 
condition is temporary or discrete or is a permanent aspect of the 
employer's business.
    (3) Transition rule for window benefits. In the case of a window 
benefit that is made available for a period of time that begins before 
January 1, 2000, an employer may choose to treat the window benefit as a 
benefit that results from the deferral of compensation if the sole 
reason the window benefit would otherwise fail to be provided pursuant 
to a nonqualified deferred compensation plan is the application of 
paragraph (b)(4)(v)(B)(1) of this section.
    (C) Termination within 12 months of establishment of a benefit or 
plan. For purposes of this paragraph (b)(4)(v), a benefit is provided in 
connection with impending termination of employment, without regard to 
whether it constitutes a window benefit, if--
    (1) An employee's termination of employment occurs within 12 months 
of the establishment of the plan (or amendment) providing the benefit; 
and
    (2) The facts and circumstances indicate that the plan (or 
amendment) is established in contemplation of the employee's impending 
termination of employment.
    (vi) Benefits established after termination. Benefits established 
with respect to an employee after the employee's termination of 
employment do not result from a deferral of compensation within the 
meaning of section 3121(v)(2). However, cost-of-living adjustments on 
benefit payments under a nonqualified deferred compensation plan (within 
the meaning of paragraph (b) of this section) shall not be considered 
benefits established after the employee's termination of employment for 
purposes of this paragraph (b)(4)(vi) merely because the employee does 
not obtain the right to the adjustment until after the employee's 
termination of employment. For purposes of the preceding sentence, cost-
of-living adjustments are payments that satisfy conditions similar to 
those of 29 CFR 2510.3-2(g)(1)(ii) and (iii).
    (vii) Excess parachute payments. An excess parachute payment (as 
defined in section 280G(b)) under an agreement entered into or renewed 
after June 14, 1984, in taxable years ending after such date, does not 
result from the deferral of compensation within the meaning of section 
3121(v)(2). For this purpose, any contract entered into before June 15, 
1984, that is amended after June 14, 1984, in any relevant significant 
aspect, is treated as a contract entered into after June 14, 1984.
    (viii) Compensation for current services. A plan does not provide 
for the deferral of compensation within the meaning of section 
3121(v)(2) if, based on the relevant facts and circumstances, the 
compensation is paid for current services.
    (5) Examples. This paragraph (b) is illustrated by the following 
examples:

    Example 1: (i) In December of 2001, Employer L tells Employee A 
that, if specified goals are satisfied for 2002, Employee A will receive 
a bonus on July 1, 2003, equal to a specified percentage of 2002 
compensation. Because Employee A meets the specified goals, Employer L 
pays the bonus to Employee A on July 1, 2003, consistent with its oral 
commitment.

[[Page 114]]

    (ii) This arrangement is not a nonqualified deferred compensation 
plan under this section because its terms were not set forth in writing 
and, therefore, it was not established in accordance with paragraph 
(b)(2) of this section.
    Example 2: (i) In 2004, Employer M establishes a compensation 
arrangement for Employee B under which Employer M agrees to pay Employee 
B a specified amount based on a percentage of his salary for 2004. The 
amount due is to be paid out of the general assets of Employer M and is 
payable in 2008.
    (ii) Employee B has a legally binding right during 2004 to an amount 
of compensation that has not been actually or constructively received 
and that, pursuant to the terms of the arrangement, is payable in a 
later year. Therefore, the arrangement provides for the deferral of 
compensation.
    Example 3: (i) Employer N establishes a nonqualified deferred 
compensation plan (within the meaning of paragraph (b)(1) of this 
section) for Employee C in 1984. The plan is amended on January 1, 2001, 
to increase benefits, and the amendment provides that the increase in 
benefits is on account of Employee C's performance of services for 
Employer N from 1985 through 2000.
    (ii) The additional benefits that resulted from the plan amendment 
cannot be taken into account as amounts deferred for 1985 through 2000, 
even though the plan was established before then. Pursuant to paragraphs 
(b)(2)(ii) and (e)(1) of this section, the additional benefits cannot be 
taken into account before the latest of the date on which the amendment 
is adopted, the date on which the amendment is effective, or the date on 
which the material terms of the plan, as amended, are set forth in 
writing.
    Example 4: (i) In 2002, Employer O, a state or local government, 
establishes a plan for certain employees that provides for the deferral 
of compensation and that is subject to section 457(a).
    (ii) Paragraph (b)(1) of this section provides that nonqualified 
deferred compensation plan means any plan that is established by an 
employer and that provides for the deferral of compensation, other than 
a plan described in section 3121(a)(5). Section 3121(a)(5) lists, among 
other plans, an exempt governmental deferred compensation plan as 
defined in section 3121(v)(3). Under section 3121(v)(3)(A), this 
definition does not include any plan to which section 457(a) applies. 
Thus, the plan established by Employer O is not an exempt governmental 
deferred compensation plan described in section 3121(v)(3) and, 
consequently, is not a plan described in section 3121(a)(5). 
Accordingly, the plan is a nonqualified deferred compensation plan 
within the meaning of section 3121(v)(2) and paragraph (b)(1) of this 
section.
    (iii) However, the general timing rule of paragraph (a)(1) of this 
section and the special timing rule of paragraph (a)(2) of this section 
apply only to remuneration for employment that constitutes wages. Under 
section 3121(b)(7), certain service performed in the employ of a state, 
or any political subdivision of a state, is not employment. Thus, even 
though the plan is a nonqualified deferred compensation plan, the extent 
to which section 3121(v)(2) applies to a participating employee will 
depend on whether or not the service performed for Employer O is 
excluded from the definition of employment under section 3121(b)(7).
    Example 5: (i) In 2000, Employer P establishes a plan that provides 
for bonuses to be paid to employees based on an objective formula that 
takes into account the employees' performance for the year. Employer P 
does not have the discretion to reduce the amount of any employee's 
bonus after the end of the year. The bonus is not actually calculated 
until March 1 of the following year, and is paid on March 15 of that 
following year.
    (ii) The plan provides for the deferral of compensation because the 
employees have a legally binding right, as of the last day of a calendar 
year, to an amount of compensation that has not been actually or 
constructively received and, pursuant to the terms of the plan, that 
compensation is payable in a later year. However, because the bonuses 
under the plan are paid within a brief period of time after the end of 
the calendar year from which they are deferred, Employer P may choose, 
pursuant to paragraph (b)(3)(iii) of this section, to treat all the 
bonuses as if they are not subject to the special timing rule of 
paragraph (a)(2) of this section.
    (iii) If the employer uses the special timing rule, the amount 
deferred would be taken into account as wages on December 31, 2000. If 
the employer chooses not to use the special timing rule, the amount of 
the bonus is wages on the date it is actually or constructively paid, 
March 15, 2000.
    Example 6: (i) Employer Q establishes a plan under which bonuses 
based on performance in one year may be paid on February 1 of the 
following year at the discretion of the board of directors. The board of 
directors meets in January of each year to determine the amount, if any, 
of the bonuses to be paid based on performance in the prior year.
    (ii) Because an employee does not have a legally binding right to 
any bonus until January of the year in which the bonus is paid, any 
bonus paid under the plan in that year is not deferred from the 
preceding calendar year, and the plan does not provide for the deferral 
of compensation within the meaning of paragraph (b)(3)(i) of this 
section.
    Example 7: (i) Employer R maintains a plan for employees that 
provides nonqualified stock options described in Sec. 1.83-7(a) of this 
chapter. Under the plan, employees are granted in 2001 the option to 
acquire shares of employer stock at the fair market value of

[[Page 115]]

the shares on the date of grant ($50 per share). The options can be 
exercised at any time from the date of grant through 2010. The options 
do not have a readily ascertainable fair market value for purposes of 
section 83 at the date of grant, and shares are issued upon the exercise 
of the options without being subject to a substantial risk of forfeiture 
within the meaning of section 83. In 2005, when the fair market value of 
a share of employer stock is $80, Employee D exercises an option to 
acquire 1,000 shares.
    (ii) Under paragraph (b)(4)(ii) of this section, neither the grant 
of a stock option nor amounts received currently as a result of the 
exercise of a stock option result from the deferral of compensation for 
purposes of section 3121(v)(2). Thus, under the general timing rule of 
paragraph (a)(1) of this section, the $30,000 spread between the amount 
paid for the shares ($50,000) and the fair market value of the shares on 
the date of exercise ($80,000) is taken into account as wages for FICA 
tax purposes in the year of exercise.
    (iii) If the options had been granted at $45 per share, $5 per share 
below the fair market value on date of grant, the $35,000 spread between 
the amount paid for the shares ($45,000) and the fair market value of 
the shares on the date of exercise ($80,000) would similarly be taken 
into account as wages for FICA tax purposes in the year of exercise.
    Example 8: (i) Employer T establishes a phantom stock plan for 
certain employees. Under the plan, an employee is credited on the last 
day of each calendar year with a dollar amount equal to the fair market 
value of 1,000 shares of employer stock. Upon termination of employment 
for any reason, each employee is entitled to receive the value on the 
date of termination, in cash or employer stock, of the shares with which 
he or she has been credited.
    (ii) Because compensation to which the employee has a legally 
binding right as of the last day of one year is paid in a subsequent 
year, the phantom stock plan provides for the deferral of compensation. 
The phantom stock plan does not provide stock value rights within the 
meaning of paragraph (b)(4)(ii) of this section because it provides for 
awards equal in value to the full fair market value of a specified 
number of shares of Employer T stock, rather than the excess of that 
fair market value over a specified price.
    Example 9: (i) Employer U establishes a severance pay arrangement 
(within the meaning of section 3(2)(b)(i) of ERISA) which provides for 
payments solely upon an employee's death, disability, or dismissal from 
employment. The amount of the payments to an employee is based on the 
length of continuous active service with Employer U at the time of 
dismissal, and is paid in monthly installments over a period of three 
years.
    (ii) Because benefits payable under the plan upon termination of 
employment are payable only upon an employee's involuntary termination, 
the plan is a severance pay plan within the meaning of paragraph 
(b)(4)(iv)(B) of this section. Thus, the benefits are not treated as 
resulting from the deferral of compensation for purposes of section 
3121(v)(2).
    Example 10: (i) Employer V establishes a nonqualified deferred 
compensation plan under which employees will receive benefit payments 
commencing at age 65 as a life annuity or in one of several actuarially 
equivalent annuity forms. If an employee dies before benefit payments 
commence under the plan, a benefit is payable to the employee's 
designated beneficiary in a single lump sum payment equal to the present 
value of the employee's annuity benefit. This benefit (sometimes called 
a full reserve death benefit) is calculated using the applicable 
interest rate specified in section 417(e) and, for the period after age 
65, the applicable mortality table specified in section 417(e), both of 
which are reasonable actuarial assumptions. During 2002, Employee E 
obtains a legally binding right to an annuity benefit under the plan, 
payable at age 65. This annuity benefit has a present value of $10,000 
at the end of 2002, determined using the same assumptions as are used 
under the plan to calculate the full reserve death benefit.
    (ii) The present value, at the end of 2002, of the total benefits 
payable to or on behalf of Employee E (i.e., the sum of the present 
value of the annuity benefit commencing at age 65, and the present value 
of the full reserve death benefit, with both determined using the 
actuarial assumptions described in paragraph (i) of this Example 10, 
except also taking into account the probability of death prior to age 
65) is $10,000. This present value does not exceed the present value of 
the annuity benefits that could be payable to Employee E under the plan 
during Employee E's lifetime determined without a discount for the 
possibility that Employee E might die before age 65 (also $10,000). 
Thus, the benefit payable in the event of Employee E's death is not a 
death benefit for purposes of paragraph (b)(4)(iv) of this section.
    (iii) The same result would apply in the case of a plan that bases 
benefits on an interest bearing account balance and pays the account 
balance at termination of employment or death (because the sum of the 
deferred benefits payable in the future if the employee terminates 
employment before death with a discount for the probability of death 
before that date plus the present value of the benefit payable in the 
event of death necessarily equals the present value of the deferred 
benefits payable with no discount for the probability of death).
    Example 11: (i) The facts are the same as in Example 10, except 
that, in lieu of the full

[[Page 116]]

reserve death benefit, the plan provides a monthly life annuity benefit 
to an employee's spouse in the event of the employee's death before 
benefit payments commence equal to 100 percent of the monthly annuity 
that would be payable to the employee at age 65 under the life annuity 
form. Employee E is age 63 and has a spouse who is age 51. The sum of 
the present value of Employee E's annuity benefit commencing at age 65 
determined with a discount for the possibility that Employee E might die 
before age 65 and the present value of the 100 percent annuity death 
benefit for Employee E's spouse exceeds $10,000.
    (ii) The amount deferred for 2002 is $10,000 (because the 100 
percent annuity death benefit for Employee E's spouse is disregarded to 
the extent that the total benefits payable to or on behalf of Employee E 
exceeds the present value of the annuity benefits that could be payable 
to Employee E under the plan during Employee E's lifetime without a 
discount for the probability of Employee E's death before benefit 
payments commence).
    Example 12: (i) On January 1, 2001, Employer W establishes a plan 
that covers only Employee F, who owns a significant portion of the 
business and who has 30 years of service as of that date. The plan 
provides that, upon Employee F's termination of employment at any time, 
he will receive $200,000 per year for each of the immediately succeeding 
five years. Employee F terminates employment on March 1, 2001.
    (ii) Because Employee F terminates employment within 12 months of 
the establishment of the plan and the facts and circumstances set forth 
above indicate that the plan was established in contemplation of 
impending termination of employment, the plan is considered to be 
established in connection with impending termination within the meaning 
of paragraph (b)(4)(v) of this section. Therefore, the benefits provided 
under the plan are not treated as resulting from the deferral of 
compensation for purposes of section 3121(v)(2).
    Example 13: (i) Employer X establishes a plan on January 1, 2004, to 
supplement the qualified retirement benefits of recently hired 55-year 
old Employee G, who forfeited retirement benefits with her former 
employer in order to accept employment with Employer X. The plan 
provides that Employee G will receive $50,000 per year for life 
beginning at age 65, regardless of when she terminates employment. On 
April 15, 2004, Employee G unexpectedly terminates employment.
    (ii) The facts and circumstances indicate that the plan was not 
established in contemplation of impending termination. Thus, even though 
Employee G terminated employment within 12 months of the establishment 
of the plan, the plan is not considered to be established in connection 
with impending termination within the meaning of paragraph (b)(4)(v) of 
this section. Benefits provided under the plan are treated as resulting 
from the deferral of compensation for purposes of section 3121(v)(2).
    Example 14: (i) Employer Y establishes a plan to provide 
supplemental retirement benefits to a group of management employees who 
are at various stages of their careers. All employees covered by the 
plan are subject to the same benefit formula. Employee H is planning to 
(and actually does) retire within six months of the date on which the 
plan is established.
    (ii) Even though Employee H terminated employment within 12 months 
of the establishment of the plan, the plan is not considered to have 
been established in connection with Employee H's impending termination 
within the meaning of paragraph (b)(4)(v) of this section because the 
facts and circumstances indicate otherwise.
    Example 15: (i) Employee J owns 100 percent of Employer Z, a 
corporation that provides consulting services. Substantially all of 
Employer Z's revenue is derived as a result of the services performed by 
Employee J. In each of 2001, 2002, and 2003, Employer Z has gross 
receipts of $180,000 and expenses (other than salary) of $80,000. In 
each of 2001 and 2002, Employer Z pays Employee J a salary of $100,000 
for services performed in each of those years. On December 31, 2002, 
Employer Z establishes a plan to pay Employee J $80,000 in 2003. The 
plan recites that the payment is in recognition of prior services. In 
2003, Employer Z pays Employee J a salary of $20,000 and the $80,000 due 
under the plan.
    (ii) The facts and circumstances described above indicate that the 
$80,000 paid pursuant to the plan is based on services performed by 
Employee J in 2003 and, thus, is paid for current services within the 
meaning of paragraph (b)(4)(viii) of this section. Accordingly, the plan 
does not provide for the deferral of compensation within the meaning of 
section 3121(v)(2), and the $80,000 payment is included as wages in 2003 
under the general timing rule of paragraph (a)(1) of this section.

    (c) Determination of the amount deferred--(1) Account balance 
plans--(i) General rule. For purposes of this section, if benefits for 
an employee are provided under a nonqualified deferred compensation plan 
that is an account balance plan, the amount deferred for a period equals 
the principal amount credited to the employee's account for the period, 
increased or decreased by any income attributable to the principal 
amount through the date the principal amount is required to be taken 
into account as wages under paragraph (e) of this section.

[[Page 117]]

    (ii) Definitions--(A) Account balance plan. For purposes of this 
section, an account balance plan is a nonqualified deferred compensation 
plan under the terms of which a principal amount (or amounts) is 
credited to an individual account for an employee, the income 
attributable to each principal amount is credited (or debited) to the 
individual account, and the benefits payable to the employee are based 
solely on the balance credited to the individual account.
    (B) Income. For purposes of this section, income means any increase 
or decrease in the amount credited to an employee's account that is 
attributable to amounts previously credited to the employee's account, 
regardless of whether the plan denominates that increase or decrease as 
income.
    (iii) Additional rules--(A) Commingled accounts. A plan does not 
fail to be an account balance plan merely because, under the terms of 
the plan, benefits payable to an employee are based solely on a 
specified percentage of an account maintained for all (or a portion of) 
plan participants under which principal amounts and income are credited 
(or debited) to such account.
    (B) Bifurcation permitted. An employer may treat a portion of a 
nonqualified deferred compensation plan as a separate account balance 
plan if that portion satisfies the requirements of this paragraph (c)(1) 
and the amount payable to employees under that portion is determined 
independently of the amount payable under the other portion of the plan.
    (C) Actuarial equivalents. A plan does not fail to be an account 
balance plan merely because the plan permits employees to elect to 
receive their benefits under the plan in a form of benefit other than 
payment of the account balance, provided the amount of benefit payable 
in that other form is actuarially equivalent to payment of the account 
balance using actuarial assumptions that are reasonable. Conversely, a 
plan is not an account balance plan if it provides an optional form of 
benefit that is not actuarially equivalent to the account balance using 
actuarial assumptions that are reasonable. For this purpose, the 
determination of whether forms are actuarially equivalent using 
actuarial assumptions that are reasonable is determined under the rules 
applicable to nonaccount balance plans under paragraph (c)(2)(iii) of 
this section.
    (2) Nonaccount balance plans--(i) General rule. For purposes of this 
section, if benefits for an employee are provided under a nonqualified 
deferred compensation plan that is not an account balance plan (a 
nonaccount balance plan), the amount deferred for a period equals the 
present value of the additional future payment or payments to which the 
employee has obtained a legally binding right (as described in paragraph 
(b)(3)(i) of this section) under the plan during that period.
    (ii) Present value defined. For purposes of this section, present 
value means the value as of a specified date of an amount or series of 
amounts due thereafter, where each amount is multiplied by the 
probability that the condition or conditions on which payment of the 
amount is contingent will be satisfied, and is discounted according to 
an assumed rate of interest to reflect the time value of money. For 
purposes of this section, the present value must be determined as of the 
date the amount deferred is required to be taken into account as wages 
under paragraph (e) of this section using actuarial assumptions and 
methods that are reasonable as of that date. For this purpose, a 
discount for the probability that an employee will die before 
commencement of benefit payments is permitted, but only to the extent 
that benefits will be forfeited upon death. In addition, the present 
value cannot be discounted for the probability that payments will not be 
made (or will be reduced) because of the unfunded status of the plan, 
the risk associated with any deemed or actual investment of amounts 
deferred under the plan, the risk that the employer, the trustee, or 
another party will be unwilling or unable to pay, the possibility of 
future plan amendments, the possibility of a future change in the law, 
or similar risks or contingencies. Nor is the present value affected by 
the possibility that some of the payments due under the plan will be 
eligible for one of the exclusions from wages in section 3121(a).

[[Page 118]]

    (iii) Treatment of actuarially equivalent benefits--(A) In general. 
In the case of a nonaccount balance plan that permits employees to 
receive their benefits in more than one form or commencing at more than 
one date, the amount deferred is determined by assuming that payments 
are made in the normal form of benefit commencing at normal commencement 
date if the requirements of paragraph (c)(2)(iii)(B) of this section are 
satisfied. Accordingly, in the case of a nonaccount balance plan that 
permits employees to receive their benefits in more than one form or 
commencing at more than one date, unless the requirements of paragraph 
(c)(2)(iii)(B) of this section are satisfied, the amount deferred is 
treated as not reasonably ascertainable under the rules of paragraph 
(e)(4)(i)(B) of this section until a form of benefit and a time of 
commencement are selected.
    (B) Use of normal form commencing at normal commencement date. The 
requirements of this paragraph (c)(2)(iii)(B) are satisfied by a 
nonaccount balance plan if the plan has a single normal form of benefit 
commencing at normal commencement date for the amount deferred and each 
other optional form is actuarially equivalent to the normal form of 
benefit commencing at normal commencement date using actuarial 
assumptions that are reasonable. For this purpose, each form of benefit 
for payment of the amount deferred commencing at a date is a separate 
optional form. For purposes of this paragraph (c)(2)(iii)(B), each 
optional form is actuarially equivalent to the normal form of benefit 
commencing at normal commencement date only if the terms of the plan in 
effect when the amount is deferred provide for every optional form to be 
actuarially equivalent and further provide for actuarial assumptions to 
determine actuarial equivalency that will be reasonable at the time the 
optional form is selected, without regard to whether market interest 
rates are higher or lower at the time the optional form is selected than 
at the time the amount is deferred. Thus, a plan that provides for every 
optional form to be actuarially equivalent satisfies this paragraph 
(c)(2)(iii)(B) if it provides for actuarial equivalence to be 
determined--
    (1) When an optional form is selected or when benefit payments under 
the optional form commence, based on assumptions that are reasonable 
then;
    (2) Based on an index that reflects market rates of interest from 
time to time (for example, the plan specifies that all benefits will be 
actuarially equivalent using the applicable interest rate and applicable 
mortality table specified in section 417(e)); or
    (3) Based on actuarial assumptions specified in the plan and 
provides for those assumptions to be revised to be reasonable 
assumptions if they cease to be reasonable assumptions.
    (C) Fixed mortality assumptions permitted. A plan does not fail to 
satisfy paragraph (c)(2)(iii)(B) of this section merely because the plan 
specifies a fixed mortality assumption that is reasonable at the time 
the amount is deferred, even if that assumption is not reasonable at the 
time the optional form is selected. (But see paragraph (c)(2)(iii)(E) of 
this section for additional rules that apply if the mortality assumption 
is not reasonable at the time the optional form is selected.)
    (D) Normal form of benefit commencing at normal commencement date 
defined. For purposes of this paragraph (c)(2)(iii), the normal form of 
benefit commencing at normal commencement date under the plan is the 
form, and date of commencement, under which the payments due to the 
employee under the plan are expressed, prior to adjustments for form or 
timing of commencement of payments.
    (E) Rule applicable if actuarial assumptions cease to be reasonable. 
If the terms of the plan in effect when an amount is deferred provide 
for actuarial assumptions to determine actuarial equivalency that will 
be reasonable at the time the optional form is selected or payments 
commence as provided in paragraph (c)(2)(iii)(B) of this section, but, 
at that time, the actuarial assumptions used under the plan are not 
reasonable, the employee will be treated as obtaining a legally binding 
right at that time (or, if earlier, at the date on which the plan is 
amended to provide actuarial assumptions that are not reasonable) to any 
additional benefits that result from the use of an unreasonable 
actuarial assumption. This

[[Page 119]]

might occur, for example, if the plan specifies that the actuarial 
assumptions will be reasonable assumptions to be set at the time the 
optional form is selected and the assumptions used are in fact not 
reasonable at that time.
    (3) Separate determination for each period. The amount deferred 
under this paragraph (c) is determined separately for each period for 
which there is an amount deferred under the plan. In addition, 
paragraphs (d) and (e) of this section are applied separately with 
respect to the amount deferred for each such period. Thus, for example, 
the fraction described in paragraph (d)(1)(ii)(B) of this section and 
the amount of the true-up at the resolution date described in paragraph 
(e)(4)(ii)(B) of this section are determined separately with respect to 
each amount deferred. See paragraph (e)(4)(ii)(D) of this section for 
special rules for allocating amounts deferred over more than one year.
    (4) Examples. This paragraph (c) is illustrated by the following 
examples. (The examples illustrate the rules in this paragraph (c) and 
include various interest rate and mortality table assumptions, including 
the applicable section 417(e) mortality table, the GAM 83 (male) 
mortality table, and UP-84 mortality table. These tables can be obtained 
from the Society of Actuaries at its internet site at http://
www.soa.org.) The examples are as follows:

    Example 1: (i) Employer M establishes a nonqualified deferred 
compensation plan for Employee A. Under the plan, 10 percent of annual 
compensation is credited on behalf of Employee A on December 31 of each 
year. In addition, a reasonable rate of interest is credited quarterly 
on the balance credited to Employee A as of the last day of the 
preceding quarter. All amounts credited under the plan are 100 percent 
vested and the benefits payable to Employee A are based solely on the 
balance credited to Employee A's account.
    (ii) The plan is an account balance plan. Thus, pursuant to 
paragraph (c)(1) of this section, the amount deferred for a calendar 
year is equal to 10 percent of annual compensation.
    Example 2: (i) Employer N establishes a nonqualified deferred 
compensation plan for Employee B. Under the plan, 2.5 percent of annual 
compensation is credited quarterly on behalf of Employee B. In addition, 
a reasonable rate of interest is credited quarterly on the balance 
credited to Employee B's account as of the last day of the preceding 
quarter. All amounts credited under the plan are 100 percent vested, and 
the benefits payable to Employee B are based solely on the balance 
credited to Employee B's account. As permitted by paragraph (e)(5) of 
this section, any amount deferred under the plan for the calendar year 
is taken into account as wages on the last day of the year.
    (ii) The plan is an account balance plan. Thus, pursuant to 
paragraph (c)(1) of this section, the amount deferred for a calendar 
year equals 10 percent of annual compensation (i.e., the sum of the 
principal amounts credited to Employee B's account for the year) plus 
the interest credited with respect to that 10 percent principal amount 
through the last day of the calendar year. If Employer N had not chosen 
to apply paragraph (e)(5) of this section and, thus, had taken into 
account 2.5 percent of compensation quarterly, the interest credited 
with respect to those quarterly amounts would not have been treated as 
part of the amount deferred for the year.
    Example 3: (i) Employer O establishes a nonqualified deferred 
compensation plan for a group of five employees. Under the plan, a 
specified sum is credited to an account for the benefit of the group of 
employees on July 31 of each year. Income on the balance of the account 
is credited annually at a rate that is reasonable for each year. The 
benefit payable to an employee is equal to one-fifth of the account 
balance and is payable, at the employee's option, in a lump sum or in 10 
annual installments that reflect income on the balance.
    (ii) The plan is an account balance plan notwithstanding the fact 
that the employee's benefit is equal to a specified percentage of an 
account maintained for a group of employees.
    Example 4: (i) The facts are the same as in Example 3, except that 
the plan also permits an employee to elect a life annuity that is 
actuarially equivalent to the account balance based on the applicable 
interest rate and applicable mortality table specified in section 417(e) 
at the time the benefit is elected by the employee.
    (ii) Under paragraphs (c)(1)(iii)(C) and (c)(2)(iii) of this 
section, the plan does not fail to be an account balance plan merely 
because the plan permits employees to elect to receive their benefits 
under the plan in a form that is actuarially equivalent to payment of 
the account balance using actuarial assumptions that are reasonable at 
the time the form is selected.
    Example 5: (i) Employer P establishes a nonqualified deferred 
compensation plan for a group of employees. Under the plan, each 
participating employee has a fully vested right to receive a life 
annuity, payable

[[Page 120]]

monthly beginning at age 65, equal to the product of 2 percent for each 
year of service and the employee's highest average annual compensation 
for any 3-year period. The plan also provides that, if an employee dies 
before age 65, the present value of the future payments will be paid to 
his or her beneficiary. As permitted under paragraph (e)(5) of this 
section, any amount deferred under the plan for a calendar year is taken 
into account as FICA wages as of the last day of the year. As of 
December 31, 2002, Employee C is age 60, has 25 years of service, and 
high 3-year average compensation of $100,000 (the average for the years 
2000 through 2002). As of December 31, 2003, Employee C is age 61, has 
26 years of service, and has high 3-year average compensation of 
$104,000. As of December 31, 2004, Employee C is age 62, has 27 years of 
service, and has high 3-year average compensation of $105,000. The 
assumptions that Employer P uses to determine the amount deferred for 
2003 (a 7 percent interest rate and, for the period after commencement 
of benefit payments, the GAM 83 (male) mortality table) and for 2004 (a 
7.5 percent interest rate and, for the period after commencement of 
benefit payments, the GAM 83 (male) mortality table) are assumed, solely 
for purposes of this example, to be reasonable actuarial assumptions.
    (ii) As of December 31, 2002, Employee C has a legally binding right 
to receive lifetime payments of $50,000 (2 percent x 25 years x 
$100,000) per year. As of December 31, 2003, Employee C has a legally 
binding right to receive lifetime payments of $54,080 (2 percent x 26 
years x $104,000) per year. Thus, during 2003, Employee C has earned a 
legally binding right to additional lifetime payments of $4,080 
($54,080-$50,000) per year beginning at age 65. The amount deferred for 
2003 is the present value, as of December 31, 2003, of these additional 
payments, which is $28,767 ($4,080 x the present value factor for a 
deferred annuity payable at age 65, using the specified actuarial 
assumptions for 2003). Similarly, during 2004, Employee C has earned a 
legally binding right to additional lifetime payments of $2,620 (2 
percent x 27 years x $105,000, minus $54,080) per year beginning at age 
65. The amount deferred for 2004 is the present value, as of December 
31, 2004, of these additional payments, which is $18,845 ($2,620 x the 
present value factor for a deferred annuity payable at age 65, using the 
specified actuarial assumptions for 2004).
    Example 6: (i) Employer Q establishes a nonqualified deferred 
compensation plan for Employee D on January 1, 2001, when Employee D is 
age 63. During 2001, Employee D obtains a fully vested right to receive 
a life annuity under the nonqualified deferred compensation plan equal 
to the excess of $200,000 over the life annuity benefits payable to 
Employee D under a qualified defined benefit pension plan sponsored by 
Employer Q. The life annuity benefit payable annually under the 
qualified plan is the lesser of $200,000 and the section 415(b)(1)(A) 
limitation in effect for the year, where the section 415(b)(1)(A) 
limitation is automatically adjusted to reflect changes in the cost of 
living. Benefits under both the qualified and nonqualified plan are 
payable monthly beginning at age 65. For purposes of this example, the 
section 415(b)(1)(A) limit for 2001 is assumed to be $140,000. The 
nonqualified plan provides no benefits in the event Employee D dies 
prior to commencement of benefit payments. As permitted under paragraph 
(e)(5) of this section, any amount deferred under the plan for a 
calendar year is taken into account as FICA wages as of the last day of 
the year. The assumptions that Employer Q uses to determine the amount 
deferred for 2001 (a 7 percent interest rate, a 3 percent increase in 
the cost of living and the GAM 83 (male) mortality table) are assumed, 
solely for purposes of this example, to be reasonable actuarial 
assumptions. As of December 31, 2001, Employee D has a legally binding 
right to receive lifetime payments as set forth in the following table:

----------------------------------------------------------------------------------------------------------------
                                                                                      Assumed
                                                                                  qualified plan    Net annual
                              Year                                 Annual gross   annual payment   payment under
                                                                      amount      (based on cost   nonqualified
                                                                                    of  living)        plan
----------------------------------------------------------------------------------------------------------------
2003............................................................        $200,000        $145,000         $55,000
2004............................................................         200,000         150,000          50,000
2005............................................................         200,000         155,000          45,000
2006............................................................         200,000         160,000          40,000
2007............................................................         200,000         165,000          35,000
2008............................................................         200,000         170,000          30,000
2009............................................................         200,000         175,000          25,000
2010............................................................         200,000         180,000          20,000
2011............................................................         200,000         185,000          15,000
2012............................................................         200,000         190,000          10,000
2013............................................................         200,000         195,000           5,000
2014 and thereafter.............................................         200,000      205,000 or               0
                                                                                         greater
----------------------------------------------------------------------------------------------------------------


[[Page 121]]

    (ii) The amount deferred for 2001 is the present value, as of 
December 31, 2001, of the net lifetime payments under the nonqualified 
plan, or $223,753.

    (d) Amounts taken into account and income attributable thereto--(1) 
Amounts taken into account--(i) In general. For purposes of this 
section, an amount deferred under a nonqualified deferred compensation 
plan is taken into account as of the date it is included in computing 
the amount of wages as defined in section 3121(a), but only to the 
extent that any additional FICA tax that results from such inclusion 
(including any interest and penalties for late payment) is actually paid 
before the expiration of the applicable period of limitations for the 
period in which the amount deferred was required to be taken into 
account under paragraph (e) of this section. Because an amount deferred 
for a calendar year is combined with the employee's other wages for the 
year for purposes of computing FICA taxes with respect to the employee 
for the year, if the employee has other wages that equal or exceed the 
wage base limitations for the Old-Age, Survivors, and Disability 
Insurance (OASDI) portion (or, in the case of years before 1994, the 
Hospital Insurance (HI) portion) of FICA for the year, no portion of the 
amount deferred will actually result in additional OASDI (or HI) tax. 
However, because there is no wage base limitation for the HI portion of 
FICA for years after 1993, the entire amount deferred (in addition to 
all other wages) is subject to the HI tax for the year and, thus, will 
not be considered taken into account for purposes of this section unless 
the HI tax relating to the amount deferred is actually paid. In 
determining whether any additional FICA tax relating to the amount 
deferred is actually paid, any FICA tax paid in a year is treated as 
paid with respect to an amount deferred only after FICA tax is paid on 
all other wages for the year.
    (ii) Amounts not taken into account--(A) Failure to take an amount 
deferred into account under the special timing rule. If an amount 
deferred for a period (as determined under paragraph (c) of this 
section) is not taken into account, then the nonduplication rule of 
paragraph (a)(2)(iii) of this section does not apply, and benefit 
payments attributable to that amount deferred are included as wages in 
accordance with the general timing rule of paragraph (a)(1) of this 
section. For example, if an amount deferred is required to be taken into 
account in a particular year under paragraph (e) of this section, but 
the employer fails to pay the additional FICA tax resulting from that 
amount, then the amount deferred and the income attributable to that 
amount must be included as wages when actually or constructively paid.
    (B) Failure to take a portion of an amount deferred into account 
under the special timing rule. If, as of the date an amount deferred is 
required to be taken into account, only a portion of the amount deferred 
(as determined under paragraph (c) of this section) has been taken into 
account, then a portion of each subsequent benefit payment that is 
attributable to that amount is excluded from wages pursuant to the 
nonduplication rule of paragraph (a)(2)(iii) of this section and the 
balance is subject to the general timing rule of paragraph (a)(1) of 
this section. The portion that is excluded from wages is fixed 
immediately before the attributable benefit payments commence (or, if 
later, the date the amount deferred is required to be taken into 
account) and is determined by multiplying each such payment by a 
fraction, the numerator of which is the amount that was taken into 
account (plus income attributable to that amount determined under 
paragraph (d)(2) of this section through the date the portion is fixed) 
and the denominator of which is the present value of the future benefit 
payments attributable to the amount deferred, determined as of the date 
the portion is fixed. For this purpose, if the requirements of paragraph 
(c)(2)(iii)(B) of this section are satisfied, the present value is 
determined by assuming that payments are made in the normal form of 
benefit commencing at normal commencement date. In addition, if the 
employer demonstrates that the amount deferred was determined using 
reasonable actuarial assumptions as determined by the Commissioner, the

[[Page 122]]

present value of the future benefit payments attributable to the amount 
deferred is determined using those assumptions. In any other case, see 
paragraph (d)(2)(iii) of this section.
    (2) Income attributable to the amount taken into account--(i) 
Account balance plans--(A) In general. For purposes of the 
nonduplication rule of paragraph (a)(2)(iii) of this section, in the 
case of an account balance plan, the income attributable to the amount 
taken into account means any amount credited on behalf of an employee 
under the terms of the plan that is income (within the meaning of 
paragraph (c)(1)(ii)(B) of this section) attributable to an amount 
previously taken into account (within the meaning of paragraph (d)(1) of 
this section), but only if the income reflects a rate of return that 
does not exceed either the rate of return on a predetermined actual 
investment (as determined in accordance with paragraph (d)(2)(i)(B) of 
this section) or, if the income does not reflect the rate of return on a 
predetermined actual investment (as so determined), a reasonable rate of 
interest (as determined in accordance with paragraph (d)(2)(i)(C) of 
this section).
    (B) Rules relating to actual investment--(1) In general. For 
purposes of this paragraph (d)(2)(i), the rate of return on a 
predetermined actual investment for any period means the rate of total 
return (including increases or decreases in fair market value) that 
would apply if the account balance were, during the applicable period, 
actually invested in one or more investments that are identified in 
accordance with the plan before the beginning of the period. For this 
purpose, an account balance plan can determine income based on the rate 
of return of a predetermined actual investment regardless of whether 
assets associated with the plan or the employer are actually invested 
therein and regardless of whether that investment is generally available 
to the public. For example, an account balance plan could provide that 
income on the account balance is determined based on an employee's 
prospective election among various investment alternatives that are 
available under the employer's section 401(k) plan, even if one of those 
investment alternatives is not generally available to the public. In 
addition, an actual investment includes an investment identified by 
reference to any stock index with respect to which there are positions 
traded on a national securities exchange described in section 
1256(g)(7)(A).
    (2) Certain rates of return not based on predetermined actual 
investment. A rate of return will not be treated as the rate of return 
on a predetermined actual investment within the meaning of this 
paragraph (d)(2)(i)(B) if the rate of return (to any extent or under any 
conditions) is based on the greater of the rate of return of two or more 
actual investments, is based on the greater of the rate of return on an 
actual investment and a rate of interest (whether or not the rate of 
interest would otherwise be reasonable under paragraph (d)(2)(i)(C) of 
this section), or is based on the rate of return on an actual investment 
that is not predetermined. For example, if a plan bases the rate of 
return on the greater of the rate of return on a predetermined actual 
investment (such as the value of the employer's stock), and a 0 percent 
interest rate (i.e., without regard to decreases in the value of that 
investment), the plan is using a rate of return that is not a rate of 
return on a predetermined actual investment within the meaning of this 
paragraph (d)(2)(i)(B).
    (C) Rules relating to reasonable interest rates--(1) In general. If 
income for a period is credited to an account balance plan on a basis 
other than the rate of return on a predetermined actual investment (as 
determined in accordance with paragraph (d)(2)(i)(B) of this section), 
then, except as otherwise provided in this paragraph (d)(2)(i)(C), the 
determination of whether the income for the period is based on a 
reasonable rate of interest will be made at the time the amount deferred 
is required to be taken into account and annually thereafter.
    (2) Fixed rates permitted. If, with respect to an amount deferred 
for a period, an account balance plan provides for a fixed rate of 
interest to be credited, and the rate is to be reset under the plan at a 
specified future date that is not later than the end of the fifth

[[Page 123]]

calendar year that begins after the beginning of the period, the rate is 
reasonable at the beginning of the period, and the rate is not changed 
before the reset date, then the rate will be treated as reasonable in 
all future periods before the reset date.
    (ii) Nonaccount balance plans. For purposes of the nonduplication 
rule of paragraph (a)(2)(iii) of this section, in the case of a 
nonaccount balance plan, the income attributable to the amount taken 
into account means the increase, due solely to the passage of time, in 
the present value of the future payments to which the employee has 
obtained a legally binding right, the present value of which constituted 
the amount taken into account (determined as of the date such amount was 
taken into account), but only if the amount taken into account was 
determined using reasonable actuarial assumptions and methods. Thus, for 
each year, there will be an increase (determined using the same interest 
rate used to determine the amount taken into account) resulting from the 
shortening of the discount period before the future payments are made, 
plus, if applicable, an increase in the present value resulting from the 
employee's survivorship during the year. As a result, if the amount 
deferred for a period is determined using a reasonable interest rate and 
other reasonable actuarial assumptions and methods, and the amount is 
taken into account when required under paragraph (e) of this section, 
then, under the nonduplication rule of paragraph (a)(2)(iii) of this 
section, none of the future payments attributable to that amount will be 
subject to FICA tax when paid.
    (iii) Unreasonable rates of return--(A) Account balance plans. This 
paragraph (d)(2)(iii)(A) applies to an account balance plan under which 
the income credited is based on neither a predetermined actual 
investment, within the meaning of paragraph (d)(2)(i)(B) of this 
section, nor a rate of interest that is reasonable, within the meaning 
of paragraph (d)(2)(i)(C) of this section, as determined by the 
Commissioner. In that event, the employer must calculate the amount that 
would be credited as income under a reasonable rate of interest, 
determine the excess (if any) of the amount credited under the plan over 
the income that would be credited using the reasonable rate of interest, 
and take that excess into account as an additional amount deferred in 
the year the income is credited. If the employer fails to calculate the 
amount that would be credited as income under a reasonable rate of 
interest and to take the excess into account as an additional amount 
deferred in the year the income is credited, or the employer otherwise 
fails to take the full amount deferred into account, then the excess of 
the income credited under the plan over the income that would be 
credited using AFR will be treated as an amount deferred in the year the 
income is credited. For purposes of this section, AFR means the mid-term 
applicable federal rate (as defined pursuant to section 1274(d)) for 
January 1 of the calendar year, compounded annually. In addition, 
pursuant to paragraph (d)(1)(ii) of this section, the excess over the 
income that would result from the application of AFR and any income 
attributable to that excess are subject to the general timing rule of 
paragraph (a)(1) of this section.
    (B) Nonaccount balance plans. If any actuarial assumption or method 
used to determine the amount taken into account under a nonaccount 
balance plan is not reasonable, as determined by the Commissioner, then 
the income attributable to the amount taken into account is limited to 
the income that would result from the application of the AFR and, if 
applicable, the applicable mortality table under section 
417(e)(3)(A)(ii)(I) (the 417(e) mortality table), both determined as of 
the January 1 of the calendar year in which the amount was taken into 
account. In addition, paragraph (d)(1)(ii)(B) of this section applies 
and, in calculating the fraction described in paragraph (d)(1)(ii)(B) of 
this section (at the date specified in paragraph (d)(1)(ii)(B) of this 
section), the numerator is the amount taken into account plus income (as 
limited under this paragraph (d)(2)(iii)(B)), and the present value in 
the denominator is determined using the AFR, the 417(e) mortality table, 
and reasonable assumptions as to cost of living, each determined as of 
the

[[Page 124]]

time the amount deferred was required to be taken into account.
    (3) Examples. This paragraph (d) is illustrated by the following 
examples:

    Example 1: (i) In 2001, Employer M establishes a nonqualified 
deferred compensation plan for Employee A under which all benefits are 
100 percent vested. In 2002, Employee A has $200,000 of current annual 
compensation from Employer M that is subject to FICA tax. The amount 
deferred under the plan on behalf of Employee A for 2002 is $20,000. 
Thus, Employee A has total wages for FICA tax purposes of $220,000. 
Because Employee A has other wages that exceed the OASDI wage base for 
2002, no additional OASDI tax is due as a result of the $20,000 amount 
deferred. Because there is no wage base limitation for the HI portion of 
FICA, additional HI tax liability results from the $20,000 amount 
deferred. However, Employer M fails to pay the additional HI tax.
    (ii) Under paragraph (d)(1)(i) of this section, an amount deferred 
is considered taken into account as wages for FICA tax purposes as of 
the date it is included in computing FICA wages, but only if any 
additional FICA tax liability that results from inclusion of the amount 
deferred is actually paid. Because the HI tax resulting from the $20,000 
amount deferred was not paid, that amount deferred was not taken into 
account within the meaning of paragraph (d)(1) of this section. Thus, 
pursuant to paragraph (d)(1)(ii) of this section, benefit payments 
attributable to the $20,000 amount deferred will be included as wages in 
accordance with the general timing rule of paragraph (a)(1) of this 
section and will be subject to the HI portion of FICA tax when actually 
or constructively paid (and the OASDI portion of FICA tax to the extent 
Employee A's wages do not exceed the OASDI wage base limitation).
    Example 2: (i) The facts are the same as in Example 1, except that 
Employer M takes all actions necessary to correct its failure to pay the 
additional tax before the applicable period of limitations expires for 
2002 (including payment of any applicable interest and penalties).
    (ii) Because the HI tax resulting from the $20,000 amount deferred 
is paid, that amount deferred is considered taken into account for 2002. 
Thus, in accordance with paragraph (a)(2)(iii) of this section, neither 
the amount deferred nor the income attributable to the amount taken into 
account will be treated as wages for FICA tax purposes at any time 
thereafter.
    Example 3: (i) Employer N establishes a nonqualified deferred 
compensation plan under which all benefits are 100 percent vested. Under 
the plan, an employee's account is credited with a contribution equal to 
10 percent of salary on December 31 of each year. The employee's account 
balance also is increased each December 31 by interest on the total 
amounts credited to the employee's account as of the preceding December 
31. The interest rate specified in the plan results in income credits 
that are not based on the rate of return on a predetermined actual 
investment within the meaning of paragraph (d)(2)(i)(B) of this section, 
and that are greater than the income that would result from application 
of a reasonable rate of interest within the meaning of paragraph 
(d)(2)(i)(C) of this section. Employer N fails to take into account an 
additional amount for the excess of the income credited under the plan 
over a reasonable rate of interest.
    (ii) Pursuant to paragraph (d)(2)(iii)(A) of this section, the 
income credits in excess of the income that would be credited using the 
AFR are considered additional amounts deferred in the year credited.
    Example 4: (i) The facts are the same as in Example 3, except that 
the annual increase is based on Moody's Average Corporate Bond Yield.
    (ii) Because this index reflects a reasonable rate of interest, the 
income credited under the plan is considered income attributable to the 
amount taken into account within the meaning of paragraph (d)(2)(i) of 
this section.
    Example 5: (i) The facts are the same as in Example 3, except that 
the annual increase (or decrease) is based on the rate of total return 
on Employer N's publicly traded common stock.
    (ii) Because the income credited under the plan does not exceed the 
actual rate of return on a predetermined actual investment, the income 
credited is considered income attributable to the amount taken into 
account within the meaning of paragraph (d)(2)(i) of this section.
    Example 6: (i) The facts are the same as in Example 3, except that 
the annual rate of increase or decrease is equal to the greater of the 
rate of total return on a specified aggressive growth mutual fund or the 
rate of return on a specified income-oriented mutual fund. Employer N 
fails to take into account an additional amount for the excess of the 
income credited under the plan over a reasonable rate of interest.
    (ii) Because the rate of increase or decrease is based on the 
greater of two rates of returns, the increase is not based on the return 
on a predetermined actual investment within the meaning of paragraph 
(d)(2)(i)(B) of this section. Thus, if the rate of return credited under 
the plan (i.e., the greater of the rates of return of the two mutual 
funds) exceeds the income that would be credited using the AFR, the 
excess is not considered income attributable to the amount taken into 
account within the meaning of paragraph (d)(2)(i) of this section and, 
pursuant to paragraph (d)(2)(iii)(A) of this section, is considered an 
additional amount deferred.

[[Page 125]]

    Example 7: (i) The facts are the same as in Example 6, except that 
the annual increase or decrease with respect to 50 percent of the 
employee's account is equal to the rate of total return on the specified 
aggressive growth mutual fund and the annual increase or decrease with 
respect to the other 50 percent of the employee's account is equal to 
the increase or decrease in the Standard & Poor's 500 Index.
    (ii) Because the increase or decrease attributable to any portion of 
the employee's account is based on the return on a predetermined actual 
investment, the entire increase or decrease is considered income 
attributable to the amount taken into account within the meaning of 
paragraph (d)(2)(i) of this section.
    Example 8: (i) The facts are the same as in Example 3, except that, 
pursuant to the terms of the plan, before the beginning of each year, 
the board of directors of Employer N designates a specific investment on 
which the following year's annual increase or decrease will be based. 
The board is authorized to switch investments more frequently on a 
prospective basis. Before the beginning of 2004, the board designates 
Company A stock as the investment for 2004. Before the beginning of 
2005, the board designates Company B stock as the investment for 2005. 
At the end of 2005, the board determines that the return on Company B 
stock was lower than expected and changes its designation for 2005 to 
the rate of return on Company C stock, which had a higher return during 
2005. Employer N fails to take into account an additional amount for the 
excess of the income credited under the plan over a reasonable rate of 
interest.
    (ii) The annual increase or decrease for 2004 is based on the return 
of a predetermined actual investment. Although the annual increase or 
decrease for 2005 is based on an actual investment, the actual 
investment is not predetermined since it was not designated before the 
beginning of 2005. Pursuant to paragraph (d)(2)(iii)(A) of this section, 
the excess of the income credited under the plan over the income 
determined using AFR is an additional amount deferred for 2005.
    Example 9: (i) Employer O establishes a nonqualified deferred 
compensation plan for Employee B. Under the plan, if Employee B survives 
until age 65, he has a fully vested right to receive a lump sum payment 
at that age, equal to the product of 10 percent per year of service and 
Employee B's highest average annual compensation for any 3-year period, 
but no benefits are payable in the event Employee B dies prior to age 
65. As permitted under paragraph (e)(5) of this section, any amount 
deferred under the plan for the calendar year is taken into account as 
wages as of the last day of the year. As of December 31, 2002, Employee 
B has 25 years of service and Employee B's high 3-year average 
compensation is $100,000 (the average for the years 2000 through 2002). 
As of December 31, 2002, Employee B has a legally binding right to 
receive a payment at age 65 of $250,000 (10 percent x 25 years x 
$100,000). As of December 31, 2003, Employee B is age 63, has 26 years 
of service, and has high 3-year average compensation of $104,000. As of 
December 31, 2003, Employee B has a legally binding right to receive a 
payment at age 65 of $270,400 (10 percent x 26 years x $104,000). Thus, 
during 2003, Employee B has earned a legally binding right to an 
additional payment at age 65 of $20,400 ($270,400-$250,000). The 
assumptions that Employer O uses to determine the amount deferred for 
2003 are a 7 percent interest rate and the GAM 83 (male) mortality 
table, which, solely for purposes of this example, are assumed to be 
reasonable actuarial assumptions. The amount deferred for 2003 is the 
present value, as of December 31, 2003, of the $20,400 payment, which is 
$17,353. Employer O takes this amount into account by including it in 
Employee B's FICA wages for 2003 and paying the additional FICA tax.
    (ii) Under paragraph (d)(2)(ii) of this section, the income 
attributable to the amount that was taken into account is the increase 
in the present value of the future payment due solely to the passage of 
time, because the amount deferred was determined using reasonable 
actuarial assumptions and methods. As of the payment date at age 65, the 
present value of the future payment earned during 2003 is $20,400. The 
entire difference between the $20,400 and the $17,353 amount deferred 
($3,047) is the increase in the present value of the future payment due 
solely to the passage of time, and thus constitutes income attributable 
to the amount taken into account. Because the amount deferred was taken 
into account, the entire payment of $20,400 represents either an amount 
deferred that was previously taken into account ($17,353) or income 
attributable to that amount ($3,047). Accordingly, pursuant to the 
nonduplication rule of paragraph (a)(2)(iii) of this section, none of 
the payment is included in wages.
    Example 10: (i) The facts are the same as in Example 9, except that, 
instead of providing a lump sum equal to 10 percent of average 
compensation per year of service, the plan provides Employee B with a 
fully vested right to receive a life annuity, payable monthly beginning 
at age 65, equal to the product of 2 percent for each year of service 
and Employee B's highest average annual compensation for any 3-year 
period. The plan also provides that, if Employee B dies before age 65, 
the present value of the future payments will be paid to his or her 
beneficiary. As of December 31, 2002, Employee B has a legally binding 
right to receive lifetime payments of $50,000 (2 percent x 25 years x 
$100,000) per year. As of December 31, 2003,

[[Page 126]]

Employee B has a legally binding right to receive lifetime payments of 
$54,080 (2 percent x 26 years x $104,000) per year. Thus, during 2003, 
Employee B has earned a legally binding right to additional lifetime 
payments of $4,080 ($54,080-$50,000) per year beginning at age 65. The 
amount deferred for 2003 is $32,935, which is the present value, as of 
December 31, 2003, of these additional payments, determined using the 
same actuarial assumptions and methods used in Example 9, except that 
there is no discount for the probability of death prior to age 65. 
Employer O takes this amount into account by including it in Employee 
B's FICA wages for 2003 and paying the additional FICA tax.
    (ii) Under paragraph (d)(2)(ii) of this section, the income 
attributable to the amount that was taken into account is the increase 
in the present value of the future payments due solely to the passage of 
time, because the amount deferred was determined using reasonable 
actuarial assumptions and methods. Because the amount deferred was taken 
into account, each annual payment of $4,080 attributable to the amount 
deferred in 2003 represents either an amount deferred that was 
previously taken into account or income attributable to that amount. 
Accordingly, pursuant to the nonduplication rule of paragraph 
(a)(2)(iii) of this section, none of the payments are included in wages.
    Example 11: (i) The facts are the same as in Example 10, except that 
no amount is taken into account for 2003 because Employer O fails to pay 
the additional FICA tax.
    (ii) Under paragraph (d)(1)(ii)(A) of this section, if an amount 
deferred for a period is not taken into account, then the benefit 
payments attributable to that amount deferred are included as wages in 
accordance with the general timing rule of paragraph (a)(1) of this 
section. In this case, assuming that the amounts deferred in other 
periods were taken into account, $4,080 of each year's total benefit 
payments will be included in wages when actually or constructively paid, 
in accordance with the general timing rule.
    Example 12: (i) Employer P establishes an account balance plan on 
January 1, 2002, under which all benefits are 100 percent vested. The 
plan provides that amounts deferred will be credited annually with 
interest beginning in 2002 at a rate that is greater than a reasonable 
rate of interest. Employer P treats the excess over the applicable 
interest rate in section 417(e) as an additional amount deferred for 
2002 and in each year thereafter, and takes the additional amount into 
account by including it in FICA wages and paying the additional FICA tax 
for the year.
    (ii) Under the nonduplication rule in paragraph (a)(2)(iii) of this 
section, the benefits paid under the plan will be excluded from wages 
for FICA tax purposes.
    Example 13: (i) The facts are the same as in Example 9, except that, 
in determining the amount deferred, Employer O uses a 15 percent 
interest rate, which, solely for purposes of this example, is assumed 
not to be a reasonable interest rate. Employer O determines that the 
amount deferred for 2003 is the present value, as of December 31, 2003, 
of the $20,400 payment, which is $15,023. Employer O includes $15,023 in 
wages and pays any resulting FICA tax. Solely for purposes of this 
example, it is assumed that the AFR as of January 1, 2003, is 7 percent.
    (ii) Under paragraph (d)(2)(iii)(B) of this section, if any 
actuarial assumption or method is not reasonable, then the income 
attributable to the amount taken into account is limited to the income 
that would result from application of the AFR and, if applicable, the 
417(e) mortality table. Because the 15 percent interest rate is 
unreasonable, the income attributable to the amount taken into account 
is limited to the income that would result from using a 7 percent 
interest rate and, in this case, an increase for survivorship using the 
417(e) mortality table. Under these assumptions, the income attributable 
to the $15,023 amount taken into account for 2003 is $1,199 in 2004 and 
$1,313 in 2005. Under paragraph (d)(1)(ii) of this section, the sum of 
these amounts ($17,535) is excluded from Employee B's wages pursuant to 
the nonduplication rule of paragraph (a)(2)(iii) of this section, and 
the balance of the payment ($2,865) is subject to the general timing 
rule of paragraph (a)(1) of this section and, thus, is included in 
Employee B's wages when actually or constructively paid.
    (iii) The same result can be reached by multiplying the attributable 
benefit payments by a fraction, the numerator of which is the amount 
taken into account, and the denominator of which is the amount deferred 
that would have been taken into account at the same time had the amount 
deferred been calculated using the AFR and the 417(e) mortality table. 
These assumptions are determined as of January 1 of the calendar year in 
which the amount was taken into account. In this Example 13, the 
fraction would be $15,023 divided by $17,478, which equals .85954. The 
$20,400 payment is multiplied by this fraction to determine the amount 
of the payment that is excluded from wages pursuant to the 
nonduplication rule of paragraph (a)(2)(iii) of this section. Thus, 
$17,535 ($20,400x.85954) is excluded from wages and the balance ($2,865) 
is subject to FICA tax when actually or constructively paid.
    Example 14: (i) The facts are the same as Example 10, except that 
Employer O calculates the amount deferred for 2003 as $18,252 and takes 
that amount into account by including that amount in wages and paying 
any resulting FICA tax. The assumptions that Employer O uses to 
determine the amount deferred are a 15 percent interest

[[Page 127]]

rate and, for the period after commencement of benefit payments, the GAM 
83 (male) mortality table. The 15 percent interest rate is assumed, 
solely for purposes of this example, not to be a reasonable actuarial 
assumption. Solely for purposes of this example, it is assumed that the 
AFR as of January 1, 2003, is 7 percent.
    (ii) Under paragraph (d)(2)(iii)(B) of this section, if any 
actuarial assumption or method used is not reasonable, then the income 
attributable to the amount taken into account is limited to the income 
that would result from application of the AFR and, if applicable, the 
417(e) mortality table. Because the 15 percent interest rate is not 
reasonable, the income attributable to the amount taken into account is 
equal to the income that would result from using a 7 percent interest 
rate and the amount taken into account is treated as if it represented a 
portion of the amount deferred for purposes of applying paragraph 
(d)(1)(ii)(B) of this section. Under these assumptions, the income 
attributable to the $18,252 amount taken into account for 2003 is $1,278 
in 2004 and $1,367 in 2005. Under paragraph (d)(1)(ii)(B) of this 
section, the portion of each benefit payment attributable to the amount 
deferred that is excluded from wages pursuant to the nonduplication rule 
of paragraph (a)(2)(iii) of this section is determined at benefit 
commencement by multiplying each benefit payment by a fraction, the 
numerator of which is the amount taken into account (plus income 
attributable to that amount) and the denominator of which is the present 
value of future benefit payments attributable to the amount deferred. 
Because the interest rate assumption is not reasonable, not only is the 
income limited to the application of the AFR, but the present value in 
the denominator must be determined using the AFR and (if applicable) the 
417(e) mortality table. In this case, the present value is $40,283 and 
thus the fraction is $20,897 divided by $40,283, or .51875. Thus, $2,116 
(.51875 x $4,080) of each year's benefit payment is excluded from wages 
and the balance of each year's payment ($1,964) is subject to the 
general timing rule of paragraph (a)(1) of this section and is included 
in wages when actually or constructively paid.
    (iii) The same result can be reached by multiplying the attributable 
benefit payments by a fraction the numerator of which is the amount 
taken into account, and the denominator of which is the amount deferred 
that would have been taken into account at the same time had the amount 
deferred been calculated using the AFR and the 417(e) mortality table. 
These assumptions are determined as of January 1 of the calendar year in 
which the amount was taken into account. In this Example 14, the 
fraction would be $18,252 divided by $35,185, which equals .51875. The 
$4,080 annual payment is multiplied by this fraction to determine the 
amount of the payment that is excluded from wages pursuant to the 
nonduplication rule of paragraph (a)(2)(iii) of this section. Thus, 
$2,116 ($4,080 x .51875) is excluded from wages and the balance ($1,964) 
is subject to FICA tax when actually or constructively paid.

    (e) Time amounts deferred are required to be taken into account--(1) 
In general. Except as otherwise provided in this paragraph (e), an 
amount deferred under a nonqualified deferred compensation plan must be 
taken into account as wages for FICA tax purposes as of the later of the 
date on which services creating the right to the amount deferred are 
performed (within the meaning of paragraph (e)(2) of this section) or 
the date on which the right to the amount deferred is no longer subject 
to a substantial risk of forfeiture (within the meaning of paragraph 
(e)(3) of this section). However, in no event may any amount deferred 
under a nonqualified deferred compensation plan be taken into account as 
wages for FICA tax purposes prior to the establishment of the plan 
providing for the amount deferred (or, if later, the plan amendment 
providing for the amount deferred). Therefore, if an amount is deferred 
pursuant to the terms of a legally binding agreement that is not put in 
writing until after the amount would otherwise be taken into account 
under this paragraph (e)(1), the amount deferred (including any 
attributable income) must be taken into account as wages for FICA tax 
purposes as of the date the material terms of the plan are put in 
writing.
    (2) Services creating the right to an amount deferred. For purposes 
of this section, services creating the right to an amount deferred under 
a nonqualified deferred compensation plan are considered to be performed 
as of the date on which, under the terms of the plan and all the facts 
and circumstances, the employee has performed all of the services 
necessary to obtain a legally binding right (as described in paragraph 
(b)(3)(i) of this section) to the amount deferred.
    (3) Substantial risk of forfeiture. For purposes of this section, 
the determination of whether a substantial risk of

[[Page 128]]

forfeiture exists must be made in accordance with the principles of 
section 83 and the regulations thereunder.
    (4) Amount deferred that is not reasonably ascertainable under a 
nonaccount balance plan--(i) In general--(A) Date required to be taken 
into account. Notwithstanding any other provision of this paragraph (e), 
an amount deferred under a nonaccount balance plan is not required to be 
taken into account as wages under the special timing rule of paragraph 
(a)(2) of this section until the first date on which all of the amount 
deferred is reasonably ascertainable (the resolution date). In this 
case, the amount required to be taken into account as of the resolution 
date is determined in accordance with paragraph (c)(2) of this section.
    (B) Definition of reasonably ascertainable. For purposes of this 
paragraph (e)(4), an amount deferred is considered reasonably 
ascertainable on the first date on which the amount, form, and 
commencement date of the benefit payments attributable to the amount 
deferred are known, and the only actuarial or other assumptions 
regarding future events or circumstances needed to determine the amount 
deferred are interest and mortality. For this purpose, the form and 
commencement date of the benefit payments attributable to the amount 
deferred are treated as known if the requirements of paragraph 
(c)(2)(iii)(B) of this section (under which payments are treated as 
being made in the normal form of benefit commencing at normal 
commencement date) are satisfied. In addition, an amount deferred does 
not fail to be reasonably ascertainable on a date merely because the 
exact amount of the benefit payable cannot readily be calculated on that 
date or merely because the exact amount of the benefit payable depends 
on future changes in the cost of living. If the exact amount of the 
benefit payable depends on future changes in the cost of living, the 
amount deferred must be determined using a reasonable assumption as to 
the future changes in the cost of living. For example, the amount of a 
benefit is treated as known even if the exact amount of the benefit 
payable cannot be determined until future changes in the cost of living 
are reflected in the section 415 limitation on benefits payable under a 
qualified retirement plan.
    (ii) Earlier inclusion permitted--(A) In general. With respect to an 
amount deferred that is not reasonably ascertainable, an employer may 
choose to take an amount into account at any date or dates (an early 
inclusion date or dates) before the resolution date (but not before the 
date described in paragraph (e)(1) of this section with respect to the 
amount deferred). Thus, for example, with respect to an amount deferred 
under a nonaccount balance plan that is not reasonably ascertainable 
because the plan permits employees to receive their benefits in more 
than one form or commencing at more than one date (and the requirements 
of paragraph (c)(2)(iii) of this section are not satisfied), an employer 
may choose to take an amount into account on the date otherwise 
described in paragraph (e)(1) of this section before the form and 
commencement date are selected (based on assumptions as to the form and 
commencement date for the benefit payments) or may choose to wait until 
the form and commencement date of the benefit payments are selected. An 
employer that chooses to take an amount into account at an early 
inclusion date under this paragraph (e)(4)(ii) for an employee under a 
plan is not required until the resolution date to identify the period to 
which the amount taken into account relates.
    (B) True-up at resolution date. If, with respect to an amount 
deferred for a period, an employer chooses to take an amount into 
account as of an early inclusion date in accordance with this paragraph 
(e)(4)(ii) and the benefit payments attributable to the amount deferred 
exceed the benefit payments that are actuarially equivalent to the 
amount taken into account at the early inclusion date (payable in the 
same form and using the same commencement date as the benefit payments 
attributable to the amount deferred), then the present value of the 
difference in the benefits, determined in accordance with paragraph 
(c)(2) of this section, must be taken into account as of the resolution 
date.

[[Page 129]]

    (C) Actuarial assumptions. For purposes of determining the benefits 
that are actuarially equivalent to the amount taken into account as of 
an early inclusion date, the amount taken into account is converted to 
an actuarially equivalent benefit payable in the same form and 
commencing on the same date as the actual benefit payments attributable 
to the amount deferred using an interest rate, and, if applicable, 
mortality and cost-of-living assumptions, that were reasonable as of the 
early inclusion date. Thus, with respect to an amount deferred for a 
period, the amount required to be taken into account as of the 
resolution date is the present value (determined using an interest rate, 
and, if applicable, mortality and cost-of-living assumptions, that are 
reasonable as of the resolution date) of the excess, if any, of the 
future benefit payments attributable to the amount deferred over the 
future benefits payable in the same form and commencing on the same date 
that are actuarially equivalent to the portion of the amount deferred 
that was taken into account as of the early inclusion date (where 
actuarial equivalence is determined using an interest rate, and, if 
applicable, mortality and cost-of-living assumptions, that were 
reasonable as of the early inclusion date).
    (D) Allocation rules for amounts deferred over more than one 
period--(1) General rule. The rules of this paragraph (e)(4)(ii)(D) 
apply for purposes of determining whether an amount has been included 
under this paragraph (e)(4) before the earliest date permitted under 
paragraph (e)(1) of this section.
    (2) Future compensation increases. Increases in an employee's 
compensation after the early inclusion date must be disregarded.
    (3) Early retirement subsidies. An early retirement subsidy that the 
employee ultimately receives may be taken into account at an early 
inclusion date if the employee would have a legally binding right to the 
subsidy at the early inclusion date but for any condition that the 
employee continue to render services. Accordingly, an employer may take 
into account at an early inclusion date any early retirement subsidy 
that the employee ultimately receives to the extent that elimination or 
reduction of that subsidy would violate section 411(d)(6)(B)(i) if that 
section applied to the plan.
    (4) Allocation with respect to offsets. In any case in which a 
series of amounts are deferred over more than one period, the amounts 
deferred are not reasonably ascertainable until a single resolution date 
and the benefit payments attributable to the entire series are 
determined under a formula that provides a gross benefit that in the 
aggregate is subject to an objective reduction for future events under 
the terms of the plan, such as an offset for the aggregate benefits 
payable under a plan qualified under section 401(a), the attribution of 
benefit payments to the amount deferred in each period is determined 
under the rules of this paragraph (e)(4)(ii)(D)(4). In a case described 
in the preceding sentence, the benefit payments made as a result of the 
series of amounts deferred may be treated as attributable to the amount 
deferred as of the earliest period in which the employee obtained a 
legally binding right to a benefit under the plan equal to the excess, 
if any, of the amount of the gross benefit attributable to that period 
(determined at the resolution date), over the amount of the reduction 
determined as of the end of that period. Thus, for example, if an 
employee obtains a legally binding right in each of several years to 
benefit payments from a nonqualified deferred compensation plan that 
provides for a specified gross benefit for the years to be offset by the 
benefits payable under a qualified plan, the amount deferred in the 
first year may be treated as equal to the gross benefit for the year, 
reduced by the offset applicable at the end of the year (even if the 
offset increases after the end of the year).
    (E) Treatment of benefits paid before the resolution date. If a 
benefit payment is attributable to an amount deferred that is not 
reasonably ascertainable at the time of payment (or is paid before the 
date selected under paragraph (e)(5) of this section), and the employer 
has previously taken an amount into account with respect to the amount 
deferred under the early inclusion rule of

[[Page 130]]

this paragraph (e)(4), then, in lieu of the pro rata rule provided in 
paragraph (d)(1)(ii)(B) of this section, a first-in-first-out rule 
applies in determining the portion of the benefit payment attributable 
to the amount taken into account. Under this first-in-first-out rule, 
the benefit payment is compared to the sum of the amount taken into 
account at the early inclusion date and the income attributable to that 
amount. If the benefit payment equals or exceeds the amount taken into 
account at the early inclusion date and the income attributable to that 
amount as of the date of the benefit payment, the benefit payment is 
included as wages under the general timing rule of paragraph (a)(1) of 
this section to the extent of any excess, and the amount taken into 
account at the early inclusion date (and income attributable to that 
amount) is disregarded thereafter with respect to the amount deferred. 
If the amount taken into account at the early inclusion date and the 
income attributable to that amount as of the date of the benefit payment 
exceeds the benefit payment, the benefit payment is not included as 
wages under the general timing rule of paragraph (a)(1) of this section 
and, in determining the amount that must be taken into account 
thereafter with respect to the amount deferred, the amount taken into 
account at the early inclusion date, plus attributable income as of the 
date of the benefit payment, is reduced by the amount of the benefit 
payment, and only the excess plus future income attributable to the 
excess (credited using assumptions that were reasonable on the early 
inclusion date) is taken into consideration. If amounts have been taken 
into account at more than one early inclusion date, this paragraph 
(e)(4)(ii)(E) applies on a first-in-first-out basis, beginning with the 
amount taken into account at the earliest early inclusion date 
(including income attributable thereto).
    (5) Rule of administrative convenience. For purposes of this 
section, an employer may treat an amount deferred as required to be 
taken into account under this paragraph (e) on any date that is later 
than, but within the same calendar year as, the actual date on which the 
amount deferred is otherwise required to be taken into account under 
this paragraph (e). For example, if services creating the right to an 
amount deferred are considered performed under paragraph (e)(2) of this 
section periodically throughout a year, the employer may nevertheless 
treat the services creating the right to that amount deferred as 
performed on December 31 of that year. If an employer uses the rule of 
administrative convenience described in this paragraph (e)(5), any 
determination of whether the income attributable to an amount deferred 
under an account balance plan is based on a reasonable rate of interest 
or whether the actuarial assumptions used to determine the present value 
of an amount deferred in a nonaccount balance plan are reasonable will 
be made as of the date the employer selects to take the amount into 
account.
    (6) Portions of an amount deferred required to be taken into account 
on more than one date. If different portions of an amount deferred are 
required to be taken into account under paragraph (e)(1) of this section 
on more than one date (e.g., on account of a graded vesting schedule), 
then each such portion is considered a separate amount deferred for 
purposes of this section.
    (7) Examples. This paragraph (e) is illustrated by the following 
examples:

    Example 1: (i) Employer M establishes a nonqualified deferred 
compensation plan for Employee A on November 1, 2005. Under the plan, 
which is an account balance plan, Employee A obtains a legally binding 
right on the last day of each calendar year (if Employee A is employed 
on that date) to be credited with a principal amount equal to 5 percent 
of compensation for the year. In addition, a reasonable rate of interest 
is credited quarterly. Employee A's account balance is nonforfeitable 
and is payable upon Employee A's termination of employment. For 2006, 
the principal amount credited to Employee A under the plan (which, in 
this case, is also the amount deferred within the meaning of paragraph 
(c) of this section) is $25,000.
    (ii) Under paragraph (e)(2) of this section, the services creating 
the right to the $25,000 amount deferred are considered performed as of 
December 31, 2006, the date on which Employee A has performed all of the 
services necessary to obtain a legally binding right to the amount 
deferred. Thus, in accordance with paragraph (e)(1) of this section, the 
$25,000 amount deferred must be taken into

[[Page 131]]

account as of December 31, 2006, which is the later of the date on which 
services creating the right to the amount deferred are performed or the 
date on which the right to the amount deferred is no longer subject to a 
substantial risk of forfeiture.
    Example 2: (i) The facts are the same as in Example 1, except that 
the principal amount credited under the plan on the last day of each 
year (and attributable interest) is forfeited if the employee terminates 
employment within five years of that date.
    (ii) Under paragraph (e)(3) of this section, the determination of 
whether the right to an amount deferred is subject to a substantial risk 
of forfeiture is made in accordance with the principles of section 83. 
Under Sec. 1.83-3(c) of this chapter, a substantial risk of forfeiture 
generally exists where rights in property that are transferred are 
conditioned, directly or indirectly, upon the future performance of 
substantial services. Because Employee A's right to receive the $25,000 
principal amount (and attributable interest) is conditioned on the 
performance of services for five years, a substantial risk of forfeiture 
exists with respect to that amount deferred until December 31, 2011.
    (iii) December 31, 2011, is the later of the date on which services 
creating the right to the amount deferred are performed or the date on 
which the right to the amount deferred is no longer subject to a 
substantial risk of forfeiture. Thus, in accordance with paragraph 
(e)(1) of this section, the amount deferred (which, pursuant to 
paragraph (c)(1) of this section, is equal to the $25,000 principal 
amount credited to Employee A's account on December 31, 2006, plus the 
interest credited with respect to that principal amount through December 
31, 2011) must be taken into account as of December 31, 2011.
    Example 3: (i) The facts are the same as in Example 2, except that 
the principal amount credited under the plan on the last day of each 
year (and attributable interest) becomes nonforfeitable according to a 
graded vesting schedule under which 20 percent is vested as of December 
31, 2007; 40 percent is vested as of December 31, 2008; 60 percent is 
vested as of December 31, 2009; 80 percent is vested as of December 31, 
2010; and 100 percent is vested as of December 31, 2011. Because these 
dates are later than the date on which the services creating the right 
to the amount deferred are considered performed (December 31, 2006), the 
amount deferred is required to be taken into account as of these dates 
that fall in five different years.
    (ii) Paragraph (e)(6) of this section provides that, if different 
portions of an amount deferred are required to be taken into account 
under paragraph (e)(1) of this section on more than one date, then each 
such portion is considered a separate amount deferred for purposes of 
this section. Thus, $5,000 of the principal amount, plus interest 
credited through December 31, 2007, is taken into account as an amount 
deferred on December 31, 2007; $5,000 of the principal amount, plus 
interest credited through December 31, 2008, is taken into account as a 
separate amount deferred on December 31, 2008; etc.
    Example 4: (i) On November 21, 2001, Employer N establishes a 
nonqualified deferred compensation plan under which all benefits are 100 
percent vested. The plan provides for Employee B (who is age 45) to 
receive a lump sum benefit of $500,000 at age 65. This benefit will be 
forfeited if Employee B dies before age 65.
    (ii) Because the amount, form, and commencement date of the benefit 
are known, and the only assumptions needed to determine the amount 
deferred are interest and mortality, the amount deferred is reasonably 
ascertainable within the meaning of paragraph (e)(4)(i) of this section 
on November 21, 2001.
    Example 5: (i) The facts are the same as in Example 4, except that 
plan provides that the lump sum will be paid at the later of age 65 or 
termination of employment and provides that the $500,000 payable to 
Employee B is increased by 5 percent per year for each year that payment 
is deferred beyond age 65.
    (ii) Because the commencement date of the benefit payment is 
contingent on when Employee B terminates employment, the commencement 
date of the benefit payment is not known. Thus, the amount deferred is 
not reasonably ascertainable within the meaning of paragraph (e)(4)(i) 
of this section, unless the plan satisfies the requirements of paragraph 
(c)(2)(iii)(B) of this section. Because the fixed 5 percent factor may 
not be reasonable at the time benefit payments commence (i.e., 5 percent 
might be higher or lower than a reasonable interest rate when payments 
commence), the plan fails to satisfy paragraph (c)(2)(iii)(B) of this 
section and accordingly the amount deferred is not reasonably 
ascertainable until termination of employment.
    Example 6: (i) The facts are the same as in Example 4, except that 
the $500,000 is payable to Employee B at the later of age 55 or 
termination of employment.
    (ii) Because the commencement date of the benefit payment is 
contingent on when Employee B terminates employment, the commencement 
date of the benefit payment is not known. Thus, the amount deferred is 
not reasonably ascertainable until termination of employment.
    Example 7: (i) The facts are the same as in Example 4, except that 
Employee B may elect to take the benefit in the form of a life annuity 
of $50,000 per year (commencing at age 65).
    (ii) Because the plan permits employees to elect to receive benefits 
in more than one form and the alternative forms may not have

[[Page 132]]

the same value when Employee B makes his election, the plan fails to 
satisfy the requirements of paragraph (c)(2)(iii)(B) of this section 
until a form of benefit is selected. Thus, the amount deferred is not 
reasonably ascertainable until then.
    Example 8: (i) Employer O establishes a nonqualified deferred 
compensation plan. The plan is a supplemental executive retirement plan 
(SERP) that provides Employee C with a fully vested right to receive a 
pension, in the form of a life annuity payable monthly, beginning at age 
65, equal to the excess of 3 percent of Employee C's final 3-year 
average pay for each year of participation up to 15 years, over the 
amount payable to Employee C from Employer O's qualified pension plan. 
The amount payable under the qualified pension plan is a life annuity 
payable monthly, beginning at age 65, equal to 1.5 percent of final 3-
year average pay for each year of employment, excluding pay in excess of 
the section 401(a)(17) compensation limit. No benefits are payable under 
the SERP if Employee C dies before age 65. Employee C becomes a 
participant in the SERP on January 1, 2001, at age 44. The amount 
deferred under the SERP for any year is not reasonably ascertainable 
prior to termination of employment because the amount of the benefit is 
not known and the determination of the amount deferred requires 
assumptions other than interest and mortality (e.g., an assumption as to 
Employee C's average pay for the final three years of employment). As 
permitted by paragraph (e)(4)(i) of this section, Employer O chooses not 
to take any amount into account for any year before the resolution date. 
Employee C terminates employment on December 31, 2018 when he is age 62.
    (ii) As of the date Employee C terminates employment, the amount of 
the benefit is known and the only actuarial or other assumptions needed 
to determine the amount deferred are an interest rate assumption and a 
mortality assumption. At that time, the amount deferred in each past 
year becomes reasonably ascertainable, and Employer O is able to 
determine that during 2001 Employee C earned a legally binding right to 
a life annuity of $4,000 per year beginning in 2021 when Employee C is 
age 65. Employer O determines the present value of Employee C's future 
benefit payments under the SERP as of this resolution date (December 31, 
2018), using a 7 percent interest rate and the UP-84 mortality table, 
which, solely for purposes of this example, are assumed to be reasonable 
actuarial assumptions for December 31, 2018. The special timing rule 
will be satisfied if the resulting present value, $26,950, is taken into 
account on that date in accordance with paragraph (d)(1) of this 
section.
    Example 9: (i) The facts are the same as in Example 8, except that 
the plan provides that Employee C may choose to receive early retirement 
benefits on an unreduced basis at any time after age 60 if Employee C 
has completed 15 years of service by that date.
    (ii) As of the date Employee C terminates employment, the amount of 
the benefit is known and the only actuarial or other assumptions needed 
to determine the amount deferred are an interest rate assumption and a 
mortality assumption. At that time, the amount deferred in each past 
year becomes reasonably ascertainable, and Employer O is able to 
determine that during 2001 Employee C earned a legally binding right to 
a life annuity of $4,000 per year beginning on December 31, 2018 when 
Employee C is age 62. Employer O determines the present value of 
Employee C's future benefit payments under the SERP as of this 
resolution date (December 31, 2018), using a 7 percent interest rate and 
the UP-84 mortality table, which, solely for purposes of this example, 
are assumed to be reasonable actuarial assumptions for December 31, 
2018. The special timing rule will be satisfied if the resulting present 
value, $37,576, is taken into account on that date in accordance with 
paragraph (d)(1) of this section.
    Example 10: (i) The facts are the same as in Example 9, except that, 
as permitted under paragraph (e)(4)(ii) of this section, Employer O 
chooses to take an amount into account before the amount deferred for 
2001 is reasonably ascertainable. The amount that Employer O takes into 
account on December 31, 2001, is $13,043 (the present value of a life 
annuity of $4,000 per year, payable at age 62, using a 6 percent 
interest rate and the UP-84 mortality table). Employer O does not take 
any other amount into account before the resolution date.
    (ii) In accordance with paragraph (e)(4)(ii)(B) of this section, 
Employer O must determine any additional amount required to be taken 
into account in 2018. If the $4,000 payable in the form of a life 
annuity beginning at age 62 exceeds the life annuity which is 
actuarially equivalent to the $13,043 previously taken into account, the 
present value of the excess must be taken into account. In this Example 
10, the $13,043 previously taken into account is actuarially equivalent 
to a $4,000 annuity commencing at age 62 using a 6 percent interest rate 
and the UP-84 mortality table ( which, solely for purposes of this 
example, are assumed to be reasonable actuarial assumptions for December 
31, 2001). Accordingly, no additional amount need be taken into account 
in 2018, regardless of any changes in market rates of interest between 
2001 and 2018.
    Example 11: (i) The facts are the same as in Example 9, except that, 
as permitted under paragraph (e)(4)(ii) of this section, Employer O 
chooses to take an amount into account before the amount deferred for 
2001 is reasonably ascertainable. The amount that Employer O takes into 
account on December 31,

[[Page 133]]

2001, is $9,569 (the present value of a life annuity of $4,000 per year, 
payable at age 65, using a 6 percent interest rate and the UP-84 
mortality table). Employer O does not take any other amount into account 
before the resolution date.
    (ii) In accordance with paragraph (e)(4)(ii)(B) of this section, 
Employer O must determine any additional amount required to be taken 
into account in 2018. If the $4,000 payable in the form of a life 
annuity beginning in 2018 at age 62 exceeds the life annuity which is 
actuarially equivalent to the $9,569 previously taken into account, the 
present value of the excess must be taken into account. In this case, 
the $9,569 previously taken into account is actuarially equivalent to a 
$2,935 annuity commencing at age 62 using a 6 percent interest rate and 
the UP-84 mortality table (which, solely for purposes of this example, 
are assumed to be reasonable actuarial assumptions for December 31, 
2001). Accordingly, an additional amount needs to be taken into account 
in 2018 equal to the present value of the excess of the $4,000 annual 
stream of benefit payments to which Employee C obtained a legally 
binding right during 2001 over the $2,935 annual stream of benefit 
payments which is actuarially equivalent to the amount previously taken 
into account. This present value (i.e., the present value of a life 
annuity equal to $4,000 minus $2,935, or $1,065 annually) is determined 
by Employer O to be $10,005 as of the resolution date using a 7 percent 
interest rate and the UP-84 mortality table (which, solely for purposes 
of this example, are assumed to be reasonable actuarial assumptions for 
December 31, 2018).
    Example 12: (i) The facts are the same as in Example 9, except that 
the amount that Employer O takes into account on December 31, 2001, is 
$15,834 (the present value of $4,000, payable at age 60, using a 6 
percent interest rate and the UP-84 mortality table). Employer O does 
not take any other amount into account before the resolution date.
    (ii) In accordance with paragraph (e)(4)(ii)(B) of this section, 
Employer O must determine any additional amount required to be taken 
into account in 2018. If the $4,000 payable in the form of a life 
annuity beginning at age 62 exceeds the life annuity which is 
actuarially equivalent to the $15,834 previously taken into account, the 
present value of the excess must be taken into account. In this case, 
the $15,834 previously taken into account is actuarially equivalent to a 
$4,856 annuity commencing at age 62 using a 6 percent interest rate and 
the UP-84 mortality table (which, solely for purposes of this example, 
are assumed to be reasonable actuarial assumptions for December 31, 
2001). Because the life annuity of $4,856 per year (which is equivalent 
to the amount taken into account at the early inclusion date) exceeds 
the $4,000 annuity attributable to the amount deferred in 2001, no 
additional amount is required to be taken into account for that amount 
deferred as of the resolution date. Employer O may claim a refund or 
credit for the overpayment of FICA tax with respect to amounts taken 
into account prior to the resolution date to the extent permitted by 
sections 6402, 6413, and 6511.
    Example 13: (i) The facts are the same as in Example 12, except that 
Employee C became a participant in the SERP on January 1, 2000. In 
addition, Employer O determines in 2018 that during 2000 Employee C 
earned a legally binding right to a life annuity of $1,500 per year 
beginning on December 31, 2018.
    (ii) Employer O may allocate the $15,834 previously taken into 
account among any amounts deferred on or before the early inclusion 
date. At the resolution date, Employer O will have to take into account 
the present value of an annuity equal to the excess of the life annuity 
attributable to the amounts deferred for 2000 and 2001 over a life 
annuity of $4,856 per year.
    Example 14: (i) In 2003, Employer P establishes a nonqualified 
deferred compensation plan for Employee D. The plan provides that, in 
consideration of Employee D's services to be performed on Project X in 
2004, Employee D will have a nonforfeitable right to receive 1 percent 
per year of Employer P's net profits associated with Project X for each 
of the immediately succeeding three years. No services beyond 2004 are 
required. The 1 percent of net profits payable each year will be paid on 
March 31 of the immediately succeeding year. One percent of net profits 
associated with Project X is $750,000 in 2005, $400,000 in 2006, and 
$90,000 in 2007. Employee D receives $750,000 on March 31, 2006, 
$400,000 on March 31, 2007, and $90,000 on March 31, 2008.
    (ii) Because the services creating the right to all of the amount 
deferred are performed in 2004, the benefit payments based on the 2005, 
2006, and 2007 net profits are all attributable to the amount deferred 
in 2004. However, because the present value of Employee D's future 
benefit is contingent on future profits, the determination of the amount 
deferred requires the use of assumptions other than interest, mortality, 
and cost of living. Thus, all of the amount deferred in 2004 will not be 
reasonably ascertainable within the meaning of paragraph (e)(4)(i) of 
this section until December 31, 2007 (which is the resolution date). 
Employer P does not choose to take any amount into account prior to the 
amount deferred becoming reasonably ascertainable.
    (iii) However, paragraph (d)(1)(ii)(A) of this section provides that 
a benefit payment attributable to an amount deferred under a 
nonqualified deferred compensation plan must be included as wages when 
actually or constructively paid if the amount deferred has not been 
taken into account as wages

[[Page 134]]

under the special timing rule of paragraph (a)(2) of this section. Thus, 
the benefit payments in 2006 and 2007 must be included as wages when 
paid.
    (iv) As of December 31, 2007, all of the amount deferred under the 
plan becomes reasonably ascertainable because the amount of the benefit 
payable attributable to the amount deferred is treated as known under 
paragraph (e)(4)(i)(B) of this section, and the only assumption needed 
to determine the present value of the future benefits is interest. 
However, since Employer P was required to treat the payments in 2006 and 
2007 as wages when paid under the general timing rule of paragraph 
(a)(1) of this section, only the present value of the payment to be made 
in 2008 is required to be taken into account as of the resolution date 
(December 31, 2007) under the special timing rule of paragraph (a)(2) of 
this section. Using an interest rate of 10 percent per year (which, 
solely for purposes of this Example 14, is assumed to be reasonable), 
Employer P determines that on December 31, 2007, the present value of 
the future benefits is $87,881, and Employer P includes that additional 
amount in wages for 2007. (Note that Employer P can choose to use the 
lag method of withholding described in paragraph (f)(3) of this section, 
which allows the resolution date amount to be taken into account no 
later than March 31, 2008, provided that the amount deferred is 
increased by interest using the AFR for January of 2008.)
    Example 15: (i) The facts are the same as in Example 14, except that 
Employer P chooses the early inclusion option permitted by paragraph 
(e)(4)(ii) of this section to take $1,000,000 into account on December 
31, 2004, before the amount deferred for 2004 is reasonably 
ascertainable.
    (ii) Pursuant to paragraph (e)(4)(ii)(E) of this section, in 
applying the nonduplication rule of paragraph (a)(2)(iii) of this 
section, a first-in-first-out rule applies in determining the benefit 
payments that are attributable to amounts previously taken into account. 
Using the 10 percent interest rate, Employer P determines that the 
$750,000 benefit payment on March 31, 2006, and the March 31, 2007, 
benefit payment of $400,000 are less than the $1,000,000 taken into 
account at the early inclusion date, plus attributable income, and, 
therefore, are not included in wages when paid.
    (iii) Under paragraph (e)(4)(ii)(E) of this section, if an employer 
chooses to take an amount into account before the resolution date, the 
amount taken into account (plus income attributable to that amount) is 
disregarded to the extent the amount is attributed to benefit payments 
made before the resolution date. Thus, Employer P must reduce the 
$1,000,000 taken into account in 2004 (plus income attributable to that 
amount) based upon the two benefit payments ($750,000 and $400,000) that 
were excluded from wages. Using an interest rate of 10 percent, Employer 
P determines that the amount taken into account in 2004 plus interest to 
the resolution date and reduced based upon the two benefit payments is 
$15,228 and the additional amount that is required to be taken into 
account as of December 31, 2007, is $72,653 ($87,881-$15,228).
    Example 16: (i) Employee E obtains a fully vested, legally binding 
right during 2002, 2003, and 2004 to payments from a nonqualified 
deferred compensation plan of Employer Q under which the benefits are 
based on a formula that includes an actuarial offset by the account 
balance under a qualified defined contribution plan of Employer Q as of 
December 31, 2004. The payments from the nonqualified deferred 
compensation plan are to commence on December 31, 2005. At the 
resolution date for the amounts earned during 2002, 2003, and 2004, 
which is December 31, 2004, Employee E has a legally binding right to a 
net annual benefit of $100,000 payable for life to commence on December 
31, 2005. On the resolution date, Employer Q determines that on December 
31, 2002, Employee E had a legally binding right to receive $100,000 
annually for life beginning on December 31, 2005 (as a result of the 
gross benefit under the nonqualified plan being $120,000 annually for 
life, and the offset being $20,000 annually for life, as of December 31, 
2002). On December 31, 2003, Employee E had a legally binding right to 
receive $95,000 annually for life beginning on December 31, 2005 (as a 
result of the gross benefit under the nonqualified plan being $135,000 
annually for life, and the offset being $40,000 annually for life, as of 
December 31, 2003). On December 31, 2004, Employee E had a legally 
binding right to receive $100,000 annually for life beginning on 
December 31, 2005 (as a result of the gross benefit under the 
nonqualified plan being $145,000 annually for life, and the offset being 
$45,000 annually for life, as of December 31, 2004).
    (ii) In this case, pursuant to paragraph (e)(4)(ii)(D)(4) of this 
section, Employer Q can attribute the entire $100,000 life annuity to 
the amount deferred for 2002, even though Employee E's benefit under the 
nonqualified deferred compensation plan is reduced to $95,000 in 2003.
    Example 17: (i) In 2010, Employee F performs services for which she 
earns a right to 10 percent of the proceeds from the sale of a motion 
picture. In 2011, Employee F performs services for which she earns a 
right to 10 percent of the proceeds from the sale of another motion 
picture. These proceeds are calculated by subtracting the total 
advertising expenses for both movies. Payment is to be made in the year 
following the date on which both pictures have been sold, but not later 
than 2018. At the end of 2010, the advertising expenses for both 
pictures totaled

[[Page 135]]

$300,000. The first motion picture is sold for $10,000,000 in 2014. The 
second motion picture is sold for $17,000,000 in 2017. At the end of 
2017, the advertising expenses totaled $1,700,000. In 2018, Employee F 
is paid $2,530,000 (10 percent of the sum of $10,000,000 and $17,000,000 
minus $1,700,000).
    (ii) Pursuant to paragraph (e)(4)(ii)(D)(4) of this section, 
$970,000 (10 percent of the excess of the gross proceeds from the sale 
of the first motion picture at the resolution date in 2017 over the 
advertising expenses incurred at the end of 2010) of the payment made in 
2018 can be attributed to the amount deferred in 2010 (and with the 
remaining payment of $1,560,000 to be attributed to the amount deferred 
in 2011).

    (f) Withholding--(1) In general. Unless an employer applies an 
alternative method described in paragraph (f)(2) or (3) of this section, 
an amount deferred under a nonqualified deferred compensation plan for 
any employee is treated, for purposes of withholding and depositing FICA 
tax, as wages paid by the employer and received by the employee at the 
time it is taken into account in accordance with paragraph (e) of this 
section. However, paragraphs (f)(2) and (3) of this section provide 
alternative methods which may be used with respect to an amount deferred 
for an employee. An employer is not required to be consistent in 
applying the alternatives described in this paragraph (f) with respect 
to different employees or amounts deferred.
    (2) Estimated method--(i) In general. Under the alternative method 
provided in this paragraph (f)(2), the employer may make a reasonable 
estimate of the amount deferred on the date on which the amount is taken 
into account in accordance with paragraph (e) of this section and take 
that estimated amount into account as wages paid by the employer and 
received by the employee on that date (the estimate date), for purposes 
of withholding and depositing FICA tax.
    (ii) Underestimate of the amount deferred--(A) General rule. If the 
employer underestimates the amount deferred (as determined after 
calculating the actual amount deferred that should have been taken into 
account as of the date on which the amount was taken into account in 
accordance with paragraph (e) of this section, using an interest rate 
and other actuarial assumptions that are reasonable as of that date), 
the employer may treat the shortfall as wages paid as of the estimate 
date or as of any date that is no later than three months after the 
estimate date. In either case, the shortfall does not include the income 
credited to the amount deferred after the amount is taken into account 
in accordance with paragraph (e) of this section.
    (B) Shortfall is treated as wages paid on a date after the estimate 
date. If the employer chooses to treat the shortfall as wages paid on a 
date that is no later than three months after the estimate date, the 
employer must take that shortfall into account as wages paid by the 
employer and received by the employee on that date, for purposes of 
withholding and depositing FICA tax.
    (C) Shortfall is treated as wages paid on the estimate date. If the 
employer chooses to treat the shortfall as wages paid as of the estimate 
date, the shortfall is treated as an error for purposes of withholding 
and depositing FICA tax. Appropriate adjustments may be made in 
accordance with section 6205(a) and the regulations thereunder; however, 
for purposes of Sec. 31.6205-1(b), the error need not be treated as 
ascertained before the date that is three months after the estimate 
date.
    (D) Reporting. The employer must report the shortfall as wages on 
Form 941, Employer's Quarterly Federal Tax Return (and, if applicable, 
Form 941c, Supporting Statement to Correct Information) and Form W-2, 
Wage and Tax Statement (or, if applicable, Form W-2c, Corrected Wage and 
Tax Statement) in accordance with its treatment of the shortfall under 
paragraph (f)(2)(ii) (B) or (C) of this section.
    (iii) Overestimate of the amount deferred. If the employer 
overestimates the amount deferred (as determined after calculating the 
actual amount deferred that should have been taken into account as of 
the date on which the amount was taken into account in accordance with 
paragraph (e) of this section, using an interest rate and actuarial 
assumptions that are reasonable as of that date) and deposits more than 
the amount required, the employer may claim a refund or credit in 
accordance with sections 6402, 6413, and 6511. A Form 941c, or an 
equivalent statement, must accompany each claim for

[[Page 136]]

refund. In addition, Form W-2 or, if applicable, Form W-2c must also 
reflect the actual amount deferred that should have been taken into 
account.
    (3) Lag method. Under the alternative method provided in this 
paragraph (f)(3), an amount deferred, plus interest, may be treated as 
wages paid by the employer and received by the employee, for purposes of 
withholding and depositing FICA tax, on any date that is no later than 
three months after the date the amount is required to be taken into 
account in accordance with paragraph (e) of this section. For purposes 
of this paragraph (f)(3), the amount deferred must be increased by 
interest through the date on which the wages are treated as paid, at a 
rate that is not less than AFR. If the employer withholds and deposits 
FICA tax in accordance with this paragraph (f)(3), the employer will be 
treated as having taken into account the amount deferred plus income to 
the date on which the wages are treated as paid.
    (4) Examples. This paragraph (f) is illustrated by the following 
examples:

    Example 1: (i) Employer M maintains a nonqualified deferred 
compensation plan that is an account balance plan. The plan provides for 
annual bonuses based on current year profits to be deferred until 
termination of employment. Employer M's profits for 2003, and thus the 
amount deferred, is reasonably ascertainable, but Employer M calculates 
the amount deferred on March 3, 2004, when the relevant data is 
available.
    (ii) In accordance with the alternative method described in 
paragraph (f)(2) of this section, Employer M makes a reasonable estimate 
that the amount deferred that must be taken into account as of December 
31, 2003, for Employee A is $20,000, and withholds and deposits FICA tax 
on that amount as if it were wages paid by Employer M and received by 
Employee A on that date. In January of 2004, Employer M files and 
furnishes Form W-2 for Employee A including the $20,000 in FICA wages. 
On March 3, 2004, Employer M determines that the actual amount deferred 
that should have been taken into account on December 31, 2003, was 
$22,000.
    (iii) In accordance with the alternative method described in 
paragraph (f)(2)(ii) of this section, Employer M may treat the 
additional $2,000 as wages paid to and received by Employee A on 
December 31, 2003, the estimate date. Employer M may treat the $2,000 
shortfall as an error ascertained on March 3, 2004, and withhold and 
deposit FICA tax on that amount. Form W-2c for Employee A for 2003 must 
include the $2,000 shortfall in FICA wages. Employer M must also correct 
the information on Form 941 for the last quarter of 2003, reporting the 
adjustment on Form 941 for the first quarter of 2004, accompanied by 
Form 941c for the last quarter of 2003.
    (iv) Instead, Employer M may treat the $2,000 shortfall as wages 
paid on March 31, 2004, and withhold and deposit FICA tax on that amount 
as if it were wages paid by Employer M and received by Employee A on 
that date. Form W-2 for Employee A for 2004 and Form 941 for the first 
quarter of 2004 must include the $2,000 shortfall in FICA wages.
    Example 2: (i) The facts are the same as in Example 1, except that 
on March 3, 2004, Employer M determines that the actual amount deferred 
that should have been taken into account on December 31, 2003, was 
$19,000.
    (ii) Under paragraph (f)(2)(iii) of this section, Employer M may, in 
accordance with sections 6402, 6413, and 6511, claim a refund or credit 
for the overpayment of tax resulting from the overestimate. In addition, 
Employer M must file and furnish a Form W-2c for Employee A and must 
correct the information on Form 941 for the last quarter of 2003.
    Example 3: (i) The facts are the same as in Example 1, except that 
Employer M does not make a reasonable estimate of the amount deferred 
that must be taken into account as of December 31, 2003. Instead, 
Employer M withholds and deposits FICA tax on the amount deferred plus 
interest on that amount using AFR (for January 2004) as if it were wages 
paid by Employer M and received by Employee A on March 15, 2004.
    (ii) Under the alternative method described in paragraph (f)(3) of 
this section, the amount taken into account on March 15, 2004 (including 
the interest), will be treated as FICA wages paid to and received by 
Employee A on March 15, 2004.
    Example 4: (i) The facts are the same as in Example 1, except that 
an amount is also deferred for Employee B which is required to be taken 
into account on October 15, 2003, and Employer M chooses to use the lag 
method in paragraph (f)(3) of this section in order to provide time to 
calculate the amount deferred.
    (ii) Employer M may use any date not later than January 15, 2004, to 
take the amount deferred into account (provided that the amount deferred 
includes interest, at AFR for January 1, 2003, through December 31, 
2003, and at AFR for January 1, 2004, through January 15, 2004).

    (g) Effective date and transition rules--(1) General effective date. 
Except for paragraphs (g)(2) through (4) of this section, this section 
is applicable on and after January 1, 2000. Thus, paragraphs (a) through 
(f) of this section

[[Page 137]]

apply to amounts deferred on or after January 1, 2000; to amounts 
deferred before January 1, 2000, which cease to be subject to a 
substantial risk of forfeiture on or after January 1, 2000, or for which 
a resolution date occurs on or after January 1, 2000; and to benefits 
actually or constructively paid on or after January 1, 2000.
    (2) Reasonable, good faith interpretation for amounts deferred and 
benefits paid before January 1, 2000--(i) In general. For periods before 
January 1, 2000 (including amounts deferred before January 1, 2000, and 
any benefits actually or constructively paid before January 1, 2000, 
that are attributable to those amounts deferred), an employer may rely 
on a reasonable, good faith interpretation of section 3121(v)(2), taking 
into account pre-existing guidance. An employer will be deemed to have 
determined FICA tax liability and satisfied FICA withholding 
requirements in accordance with a reasonable, good faith interpretation 
of section 3121(v)(2) if the employer has complied with paragraphs (a) 
through (f) of this section. For purposes of paragraphs (g)(2) through 
(4) of this section, and subject to paragraphs (g)(2)(ii) and (iii) of 
this section, whether an employer that has not complied with paragraphs 
(a) through (f) of this section has determined FICA tax liability and 
satisfied FICA withholding requirements in accordance with a reasonable, 
good faith interpretation of section 3121(v)(2) will be determined based 
on the relevant facts and circumstances, including consistency of 
treatment by the employer and the extent to which the employer has 
resolved unclear issues in its favor.
    (ii) Plan must be established or adopted. If an amount is deferred 
under a plan before January 1, 2000, and benefit payments attributable 
to that amount are actually or constructively paid on or after January 
1, 2000, then in no event will an employer's treatment of the amount 
deferred be considered to be in accordance with a reasonable, good faith 
interpretation of section 3121(v)(2) if the employer treats that amount 
as taken into account as wages for FICA tax purposes prior to the 
establishment of the plan (within the meaning of paragraph (b)(2) of 
this section) providing for the deferred compensation (or, if later, the 
establishment of the plan as amended to provide for the deferred 
compensation, as provided in paragraph (b)(2)(ii) of this section). If 
an amount is deferred under a plan before January 1, 2000, and benefit 
payments attributable to that amount are actually or constructively paid 
before January 1, 2000, then in no event will the employer's treatment 
of that amount deferred be considered to be in accordance with a 
reasonable, good faith interpretation of section 3121(v)(2) if the 
employer treats that amount as taken into account as wages for FICA tax 
purposes prior to the adoption of the plan providing for the deferred 
compensation (or, if later, the adoption of the plan amendment providing 
the deferred compensation). For example, awards, bonuses, raises, 
incentive payments, and other similar amounts granted under a plan as 
compensation for past services may not be taken into account under 
section 3121(v)(2) prior to the establishment (or, if applicable, the 
adoption) of the plan.
    (iii) Certain changes in position for stock options, stock 
appreciation rights, and other stock value rights not reasonable, good 
faith interpretation. In the case of a stock option, stock appreciation 
right, or other stock value right (as defined in paragraph (b)(4)(ii) of 
this section) that is exercised before January 1, 2000, an employer that 
treats the exercise as not subject to FICA tax as a result of the 
nonduplication rule of section 3121(v)(2)(B) is not acting in accordance 
with a reasonable, good faith interpretation of section 3121(v)(2) if 
the employer has not treated that grant and all earlier grants as 
subject to section 3121(v)(2) by reporting the current value of such 
options and rights as FICA wages on Form 941 filed for the quarter 
during which each grant was made (or, if later, for the quarter during 
which each grant ceased to be subject to a substantial risk of 
forfeiture).
    (3) Optional adjustments to conform with this section for pre-
effective-date open periods--(i) General rule. If an employer determined 
FICA tax liability with respect to section 3121(v)(2) in any period 
ending before January 1, 2000, for which the applicable period of 
limitations has not expired on January 1,

[[Page 138]]

2000 (pre-effective-date open periods), in a manner that was not in 
accordance with this section, the employer may adjust its FICA tax 
determination for that period to conform to this section. Thus, if an 
amount deferred was taken into account in a pre-effective-date open 
period when it was not required to be taken into account (e.g., an 
amount taken into account before it became reasonably ascertainable), 
the employer may claim a refund or credit for any FICA tax paid on that 
amount to the extent permitted by sections 6402, 6413, and 6511.
    (ii) Consistency required. In the case of a plan that is not a 
nonqualified deferred compensation plan (within the meaning of paragraph 
(b)(1) of this section), if any payment was actually or constructively 
paid to an employee under the plan in a pre-effective-date open period 
and that payment was not included in FICA wages by reason of the 
employer's treatment of the plan as a nonqualified deferred compensation 
plan, then the employer may claim a refund or credit for FICA tax paid 
on amounts treated as amounts deferred under the plan (in accordance 
with the employer's treatment of the plan as a nonqualified deferred 
compensation plan) for that employee for pre-effective-date open periods 
only to the extent that the FICA tax paid on all amounts treated as 
amounts deferred for the employee in all pre-effective-date open periods 
under the plan exceeds the FICA tax that would have been due on the 
benefits actually or constructively paid to the employee in those 
periods under the plan if those benefits were included in FICA wages 
when paid. If any benefit payments attributable to amounts deferred 
after December 31, 1993, were actually or constructively paid to an 
employee under a nonqualified deferred compensation plan (within the 
meaning of paragraph (b)(1) of this section) in a pre-effective-date 
open period, but these payments were treated as subject to FICA tax 
because the employer treated the plan as not being a nonqualified 
deferred compensation plan, then the employer may claim a refund or 
credit for the FICA tax paid on those benefit payments only to the 
extent that the FICA tax paid on those benefit payments exceeds the FICA 
tax that would have been due on the amounts deferred to which those 
benefit payments are attributable if those amounts deferred had been 
taken into account when they would have been required to have been taken 
into account under this section (if this section had been in effect 
then).
    (iii) Reporting. Any employer that adjusts its FICA tax 
determination in accordance with paragraphs (g)(3)(i) and (ii) of this 
section must make appropriate adjustments on Form 941 and Form 941c for 
the affected periods, and, in addition, must file and furnish Form W-2, 
or, if applicable, Form W-2c, for any affected employee so that the 
Social Security Administration may correctly post the amount deferred to 
the employee's earnings record. The adjustments may be made in 
accordance with section 6205(a) and the regulations thereunder; however, 
for purposes of Sec. 31.6205-1(b), the error is not required to be 
treated as ascertained before March 31, 2000.
    (4) Application of reasonable, good faith standard--(i) Plans that 
are not subject to section 3121(v)(2). If a plan is not a nonqualified 
deferred compensation plan within the meaning of paragraph (b)(1) of 
this section, but, for a period ending prior to January 1, 2000, and, 
pursuant to a reasonable, good faith interpretation of section 
3121(v)(2), an amount under the plan was taken into account (within the 
meaning of paragraph (d)(1) of this section) as an amount deferred under 
a nonqualified deferred compensation plan, then, pursuant to paragraph 
(g)(2) of this section, the following rules shall apply--
    (A) With respect to benefit payments actually or constructively paid 
before January 1, 2000, that are attributable to amounts previously 
taken into account under the plan, no additional FICA tax will be due;
    (B) On or after January 1, 2000, benefit payments under the plan 
must be taken into account as wages when actually or constructively paid 
in accordance with paragraph (a)(1) of this section; and
    (C) To the extent permitted by paragraph (g)(3) of this section, the 
employer may claim a refund or credit for FICA tax actually paid on 
amounts

[[Page 139]]

taken into account prior to January 1, 2000.
    (ii) Plans that are subject to section 3121(v)(2) for which the 
amount deferred has not been fully taken into account--(A) In general. 
The rules of paragraphs (g)(4)(ii)(B) through (E) of this section apply 
if a plan is a nonqualified deferred compensation plan (within the 
meaning of paragraph (b)(1) of this section) and, with respect to an 
amount deferred under the plan for an employee prior to January 1, 2000, 
the employer, in accordance with a reasonable, good faith interpretation 
of section 3121(v)(2), either took into account an amount that is less 
than the amount that would have been required to be taken into account 
if paragraphs (a) through (f) of this section had been in effect for 
that period or took no amount into account. Thus, paragraphs 
(g)(4)(ii)(B) through (E) of this section apply both to an employer that 
treated the plan as if it were not a nonqualified deferred compensation 
plan within the meaning of section 3121(v)(2) (by withholding and paying 
FICA tax due on benefits actually or constructively paid under the plan 
during that period, if any) and to an employer that treated the plan as 
a nonqualified deferred compensation plan within the meaning of section 
3121(v)(2).
    (B) No additional tax required. Pursuant to paragraph (g)(2) of this 
section, no additional FICA tax will be due for any period ending prior 
to January 1, 2000.
    (C) General timing rule applicable. In accordance with paragraph 
(d)(1)(ii) of this section, except as provided in paragraphs (g)(4)(ii) 
(D) and (E), the general timing rule described in paragraph (a)(1) of 
this section applies to benefits actually or constructively paid on or 
after January 1, 2000, attributable to an amount deferred in a period 
before January 1, 2000, to the extent the amount taken into account was 
less than the amount that would have been required to be taken into 
account if paragraphs (a) through (f) of this section had been in effect 
before January 1, 2000.
    (D) Special rule for amounts deferred before 1994. The difference 
between the amount that was taken into account in any period ending 
prior to January 1, 1994, and the amount that would have been required 
or permitted to be taken into account in that period if paragraphs (a) 
through (f) of this section had been in effect is treated as if it had 
been taken into account within the meaning of paragraph (d)(1) of this 
section. For example, in the case of an amount deferred before 1994 that 
was not reasonably ascertainable (and which was not subject to a 
substantial risk of forfeiture), the employer is treated as if it had 
anticipated the actual amount, form, and commencement date for the 
benefit payments attributable to the amount deferred and had taken the 
amount deferred into account at an early inclusion date before 1994 
using a method permitted under this section. Thus, with respect to such 
an amount deferred, the employer is not required to take any additional 
amount into account when the amount deferred becomes reasonably 
ascertainable, and no additional FICA tax will be due when the benefit 
payments attributable to the amount deferred are actually or 
constructively paid.
    (E) Special rule for amounts required to be taken into account in 
1994 or 1995. In the case of an amount deferred that would have been 
required to be taken into account in 1994 or 1995 if paragraphs (a) 
through (f) of this section had been in effect, an employer will be 
treated as taking the amount deferred into account under paragraph 
(d)(1) of this section to the extent the employer takes the amount into 
account by treating it as wages paid by the employer and received by the 
employee as of any date prior to April 1, 2000.
    (iii) Plans that are subject to section 3121(v)(2) for which more 
than the amount deferred has been taken into account. If a plan is a 
nonqualified deferred compensation plan (within the meaning of paragraph 
(b)(1) of this section) and an amount was taken into account under the 
plan for an employee before January 1, 2000, in accordance with a 
reasonable, good faith interpretation of section 3121(v)(2), but that 
amount could not have been taken into account before January 1, 2000, if 
paragraphs (a) through (f) of this section had been in effect then, the 
following rules apply--

[[Page 140]]

    (A) The determination of the amount deferred for any period 
beginning on or after January 1, 2000, must be made in accordance with 
paragraph (c) of this section, and the time when amounts deferred under 
the plan are required to be taken into account must be determined in 
accordance with paragraph (e) of this section, without regard to any 
such amount that was taken into account for any period ending before 
January 1, 2000; and
    (B) To the extent permitted by sections 6402, 6413, and 6511, the 
employer may claim a refund or credit for an overpayment of tax caused 
by the overinclusion of wages that occurred before January 1, 2000.
    (5) Examples. This paragraph (g) is illustrated by the following 
examples:

    Example 1: (i) In 1996, Employer M establishes a nonqualified 
deferred compensation plan that is a nonaccount balance plan for 
Employee A. All benefits under the plan are 100 percent vested. In order 
to determine the amount deferred on behalf of Employee A under the plan 
for 1996 and 1997, Employer M must make assumptions as to the date on 
which Employee A will retire and the form of benefit Employee A will 
elect, in addition to interest, mortality, and cost-of-living 
assumptions. Based on assumptions made with respect to all of these 
contingencies, Employer M determines that the amount deferred for 1996 
is $50,000 and the amount deferred for 1997 is $55,000. In 1996 and 
1997, Employee A's total wages (without regard to the amounts deferred) 
exceed the OASDI wage bases. Employer M withholds and deposits HI tax on 
the $50,000 and $55,000 amounts. Employee A does not retire before 
January 1, 2000. Employer M chooses under paragraph (g)(3) of this 
section to apply this section to 1996 and 1997 before the January 1, 
2000, general effective date.
    (ii) Under this section, the amounts deferred in 1996 and 1997 are 
not reasonably ascertainable (within the meaning of paragraph (e)(4)(i) 
of this section) before January 1, 2000. Thus, as long as the applicable 
period of limitations has not expired for the periods in 1996 and 1997, 
Employer M may, to the extent permitted under paragraph (g)(3) of this 
section, apply for a refund or credit for the HI tax paid on the amounts 
deferred for 1996 and 1997 and, in accordance with paragraph (e)(4) of 
this section, take into account the amounts deferred when they become 
reasonably ascertainable.
    Example 2: (i) Employer N adopts a plan on January 1, 1994, that 
covers Employee B, who has 10 years of service as of that date. The plan 
provides that, in consideration of Employee B's outstanding services 
over the past 10 years, Employee B will be paid a $500,000 lump sum 
distribution upon termination of employment at any time. On January 15, 
1996, Employee B terminates employment with Employer N. Employer N 
determines, based on a reasonable, good faith interpretation of section 
3121(v)(2), that the plan is a nonqualified deferred compensation plan 
under that section. Employer N treats the $500,000 as having been taken 
into account as an amount deferred in 1993 and earlier years.
    (ii) Under paragraph (g)(2)(ii) of this section, if all amounts are 
deferred and all benefits are paid under a plan before January 1, 2000, 
then in no event will an employer's treatment of amounts deferred under 
the plan be considered to be in accordance with a reasonable, good faith 
interpretation of section 3121(v)(2) if the employer treats these 
amounts as taken into account as wages for FICA tax purposes prior to 
the adoption of the plan. Accordingly, Employer N's treatment is not in 
accordance with a reasonable, good faith interpretation of section 
3121(v)(2) because Employer N treated amounts as taken into account in 
years before the adoption of the plan. As a result, the payment made to 
Employee B in 1996 was subject to both the OASDI and HI portions of FICA 
tax when paid.
    Example 3: (i) Employer O adopts a bonus plan on December 1, 1993, 
that becomes effective and legally binding on January 1, 1994. Under the 
plan, which is not set forth in writing, a specified bonus amount (which 
is 100 percent vested) is credited to Employee C's account each December 
31. A reasonable rate of interest on Employee C's account balance is 
credited quarterly. Employee C's account balance will begin to be paid 
in equal annual installments over 10 years beginning on January 1, 2000. 
Employer O determines, based on a reasonable, good faith interpretation 
of section 3121(v)(2), that the bonus plan is a nonqualified deferred 
compensation plan under that section and, therefore, treats the amounts 
credited from January 1, 1994, through December 31, 1999, as amounts 
deferred and, in accordance with a reasonable, good faith interpretation 
of section 3121(v)(2), takes those amounts deferred into account as 
wages for FICA tax purposes as of those dates. The bonus plan is set 
forth in writing on May 1, 1999, and, thus, is treated as established as 
of January 1, 1994.
    (ii) Under paragraph (g)(2)(ii) of this section, if an amount is 
deferred before January 1, 2000, and the attributable benefit is paid on 
or after January 1, 2000, then in no event will an employer's treatment 
of the amount deferred under a plan be considered to be in accordance 
with a reasonable, good faith interpretation of section 3121(v)(2) if 
the employer treats the amount deferred as taken into account as wages 
for FICA tax purposes prior to the establishment of the plan (within the 
meaning of paragraph (b)(2) of this

[[Page 141]]

section). Because the bonus plan is treated as established on January 1, 
1994 (pursuant to the transition rule for unwritten plans in paragraph 
(b)(2)(iii) of this section), and because Employer O, in accordance with 
a reasonable, good faith interpretation of section 3121(v)(2), took 
amounts deferred into account in 1994 through 1999, the amounts paid to 
Employee C attributable to those amounts deferred will not be subject to 
FICA tax when paid.
    Example 4: (i) In 1985, Employer P establishes a compensation 
arrangement for Employee D that provides for a lump sum payment to be 
made after termination of employment but the arrangement is not a 
nonqualified deferred compensation plan (within the meaning of paragraph 
(b)(1) of this section). However, prior to January 1, 2000, and in 
accordance with a reasonable, good faith interpretation of section 
3121(v)(2), Employer P treats the arrangement as a nonqualified deferred 
compensation plan under section 3121(v)(2). Employer P determines that 
Employee D's total wages (without regard to the amount deferred) for 
each year from 1985 through 1993 exceed the applicable OASDI and HI wage 
bases for each of those years and, consequently, there is no FICA tax 
liability with respect to the amounts deferred for those years. In 1994, 
Employee D's total wages (without regard to the amount deferred) exceed 
the OASDI wage base. However, because there is no limit on the HI wage 
base, the amount deferred for 1994 results in additional HI tax 
liability of $290, which is timely paid by Employer P.
    (ii) Employee D terminates employment with Employer P in 1995 and 
receives a plan payment of $50,000. In that year, Employee D also 
receives wages of $60,000 from Employer P. In accordance with its 
treatment of the plan as a nonqualified deferred compensation plan under 
section 3121(v)(2), Employer P does not treat the $50,000 payment in 
1995 as wages for FICA tax purposes in that year.
    (iii) Because amounts under a plan were taken into account (within 
the meaning of paragraph (d)(1) of this section) as amounts deferred 
under a nonqualified deferred compensation plan pursuant to a 
reasonable, good faith interpretation of section 3121(v)(2)(A), but that 
plan is not a nonqualified deferred compensation plan within the meaning 
of paragraph (b)(1) of this section, the transition rules provided in 
paragraph (g)(4)(i) of this section apply. Thus, no additional FICA tax 
will be due on the benefits paid in 1995.
    (iv) Because $290 of HI tax was paid on the amount deferred in 1994, 
Employer P is entitled to a refund or credit for that amount to the 
extent permitted under sections 6402, 6413, and 6511--but only to the 
extent that $290 exceeds the FICA tax that would have been due on the 
$50,000 payment in 1995 if that payment had been subject to FICA tax 
when paid (i.e., if paragraphs (a) through (f) of this section had been 
effective for those years). In 1995, Employee D had other wages of 
$60,000. Thus, only $1,200 (the $61,200 OASDI wage base, less the 
$60,000 of other wages) of the $50,000 payment would have been subject 
to OASDI; the full $50,000 would have been subject to HI. This would 
have resulted in $148.80 of OASDI tax ($1,200 x 12.4 percent) and $1,450 
of HI tax ($50,000 x 2.9 percent). Employer P is not entitled to a 
refund or credit under the consistency rule of paragraph (g)(3)(ii) 
because the $290 of HI tax paid in 1994 is less than the total $1,598.80 
of FICA tax liability that would have resulted if this section had 
applied for 1995.
    (v) However, if the benefit payment is instead actually or 
constructively paid on or after January 1, 2000, the benefit payment 
must be taken into account as wages when actually or constructively paid 
in accordance with the general timing rule of paragraph (a)(1) of this 
section (and paragraph (g)(4)(i)(B) of this section).
    Example 5: (i) In 1985, Employer Q establishes a compensation 
arrangement for Employee E that is a nonqualified deferred compensation 
plan within the meaning of paragraph (b)(1) of this section. However, 
prior to January 1, 2000, Employer Q determines, based on a reasonable, 
good faith interpretation of section 3121(v)(2), that the arrangement is 
not a nonqualified deferred compensation plan within the meaning of that 
section. Thus, when Employee E retires at the end of 1996 and benefit 
payments under the arrangement begin in 1997, Employer Q withholds and 
deposits FICA tax on the amounts paid to Employee E. Payments under the 
arrangement continue on or after January 1, 2000. Employer Q does not 
choose (under paragraph (g)(3) of this section) to adjust its FICA tax 
determination for a pre-effective-date open period by treating this 
section as in effect for all amounts deferred and benefits actually or 
constructively paid for any such period. The periods in 1994 and 1995 
are not pre-effective-date open periods for Employer Q.
    (ii) Under paragraph (g)(4)(ii) of this section, for purposes of 
determining whether benefits actually or constructively paid on or after 
January 1, 2000, were previously taken into account for purposes of 
applying the nonduplication rule of section 3121(v)(2)(B), any amount 
that would have been required to have been taken into account before 
1994 will be treated as if it had been taken into account within the 
meaning of paragraph (d)(1) of this section. Under the nonduplication 
rule, benefit payments attributable to an amount that has been so 
treated as taken into account is not treated as wages for FICA tax 
purposes at any later time (such as upon payment).
    (iii) Because Employer Q does not adjust its FICA tax determination 
by treating this

[[Page 142]]

section as in effect for all amounts deferred for periods ending after 
December 31, 1993, any benefit payments attributable to amounts deferred 
in periods ending after December 31, 1993, will be included in wages 
when actually or constructively paid in accordance with the general 
timing rule of paragraph (a)(1) of this section.
    Example 6: (i) The facts are the same as in Example 5, except that 
Employer Q chooses (in accordance with paragraph (g)(3) of this section) 
to adjust its FICA tax determination for all pre-effective-date open 
periods by treating this section as in effect for all amounts deferred 
for those periods. In addition, Employer Q chooses (in accordance with 
paragraph (g)(4)(ii)(E) of this section) to take the amounts deferred 
for 1994 and 1995 into account by treating these amounts as FICA wages 
paid and received by Employee E on January 15, 2000.
    (ii) In accordance with the nonduplication rule of paragraph 
(a)(2)(iii) of this section, because all amounts deferred for Employee E 
under the plan were taken into account (or treated as taken into 
account), any benefit payments made to Employee E under the plan will 
not be included as FICA wages when actually or constructively paid.
    Example 7: (i) The facts are the same as in Example 5, except that 
Employer Q does not withhold and deposit the FICA tax due on benefits 
actually or constructively paid before January 1, 2000.
    (ii) Because Employer Q did not withhold and deposit the FICA tax 
due on benefits actually or constructively paid before January 1, 2000, 
Employer Q did not determine FICA tax liability and satisfy FICA tax 
withholding requirements in accordance with a reasonable, good faith 
interpretation of section 3121(v)(2). Thus, the transition rules 
provided in paragraphs (g)(3) and (4) of this section do not apply. As a 
result, any amount that would have been required to have been taken into 
account under this section before 1994 is not treated as if it had been 
so taken into account under paragraph (g)(4)(ii)(D) of this section, and 
benefit payments attributable to amounts deferred before January 1, 
2000, are treated as FICA wages when actually or constructively paid in 
accordance with the general timing rule of paragraph (a)(1) of this 
section.
    Example 8: (i) In 1993, Employer R establishes a nonqualified 
deferred compensation plan for Employee F under which Employee F will 
have a fully vested right to receive a lump sum payment in 2000 equal to 
50 percent of Employee F's highest rate of salary. On December 31, 1993, 
Employee F's highest salary is $1 million. In accordance with a 
reasonable, good faith interpretation of section 3121(v)(2), Employer R 
determines that, for 1993, there is an amount deferred that must be 
taken into account as wages for FICA tax purposes. Based on Employer R's 
estimate that Employee F's highest salary will be $3 million in 2000, 
Employer R determines that the amount deferred is equal to the present 
value in 1993 of $1.5 million payable in 2000. However, because Employee 
F has other wages in 1993 that exceed the applicable OASDI and HI wage 
bases for that year, no additional FICA tax is paid as a result of that 
amount deferred being taken into account for 1993. In addition, Employer 
R takes no amounts into account under the plan after 1993 for Employee 
F. Under paragraphs (e)(1) and (4)(ii)(D)(2) of this section, the 
largest amount that could have been taken into account in 1993 is the 
present value of a lump sum payment of $500,000, payable in 2000, 
because that is the maximum amount to which Employee F has a legally 
binding right as of December 31, 1993. Employee F's highest salary is, 
in fact, $3 million in 2000 and Employee F receives $1.5 million under 
the plan on December 31, 2000.
    (ii) In accordance with paragraphs (g)(1) and (4)(iii)(A) of this 
section, the determination of the amount deferred under the plan for any 
period beginning on or after January 1, 2000, and the time when that 
amount deferred is required to be taken into account must be determined 
in accordance with this section. In addition, these determinations must 
be made without regard to any amount deferred that was taken into 
account for any period ending before January 1, 2000, that could not be 
taken into account before January 1, 2000, if paragraphs (a) through (f) 
of this section had been in effect. Because no FICA tax was actually 
paid on that $1 million in 1993, no overpayment of tax was caused by the 
overinclusion of wages in 1993 and, thus, Employer R is not entitled to 
a refund or credit (even assuming that the period of limitations has 
been kept open for periods in 1993). In addition, because the difference 
between the present value of the $1.5 million payment and the present 
value of a $500,000 payment was not taken into account for periods 
beginning on or after January 1, 1994, $1 million must be included in 
FICA wages under the general timing rule when paid.

[64 FR 4547, Jan. 29, 1999; 64 FR 15687, Apr. 1, 1999]



Sec. 31.3121(v)(2)-2  Effective dates and transition rules.

    (a) General statutory effective date. Except as otherwise provided 
in paragraphs (b) through (e) of this section, section 3121(v)(2) and 
the amendments made to section 3121(a)(2), (a)(3), and (a)(13) by the 
Social Security Amendments of 1983 (Pub. L. 98-21, 97 Stat. 65), as 
amended by section 2662(f)(2) of the Deficit Reduction Act of 1984 (Pub. 
L. 98-369, 98 Stat. 494), apply to

[[Page 143]]

amounts deferred and benefits paid after December 31, 1983.
    (b) Definitions. For purposes of Sec. 31.3121(v)(2)-1 and this 
section, the following definitions apply:
    (1) FICA. FICA means the Federal Insurance Contributions Act (26 
U.S.C. 3101 et seq.).
    (2) 457(a) plan. A 457(a) plan means an eligible deferred 
compensation plan of a State or local government or of a tax-exempt 
organization to which section 457(a) applies.
    (3) Gap agreement. Gap agreement means an agreement adopted after 
March 24, 1983, and on or before December 31, 1983, between an 
individual and a nonqualified deferred compensation plan within the 
meaning of Sec. 31.3121(v)(2)-1(b). Such an agreement does not fail to 
be a gap agreement merely because the terms of the plan are changed 
after December 31, 1983.
    (4) Individual party to a gap agreement. Individual party to a gap 
agreement means an individual who was eligible to participate in a gap 
agreement on December 31, 1983, under the terms of the agreement on that 
date. An individual will be treated as an individual party to a gap 
agreement even if the individual has not accrued any benefits under the 
plan by December 31, 1983, and regardless of whether the individual has 
taken any specific action to become a party to the agreement. However, 
an individual who becomes eligible to participate in a gap agreement 
after December 31, 1983, is not an individual party to a gap agreement.
    (5) Individual party to a March 24, 1983 agreement. Individual party 
to a March 24, 1983 agreement means an individual who was eligible to 
participate in a March 24, 1983 agreement under the terms of the 
agreement on March 24, 1983. An individual will be treated as an 
individual party to a March 24, 1983 agreement even if the individual 
has not accrued any benefits under the plan by March 24, 1983, and 
regardless of whether the individual has taken any specific action to 
become a party to the agreement. However, an individual who becomes 
eligible to participate in a March 24, 1983 agreement after March 24, 
1983, is not an individual party to a March 24, 1983 agreement.
    (6) March 24, 1983 agreement. March 24, 1983 agreement means an 
agreement in existence on March 24, 1983, between an individual and a 
nonqualified deferred compensation plan within the meaning of Sec. 
31.3121(v)(2)-1(b). Such an agreement does not fail to be a March 24, 
1983 agreement merely because the terms of the plan are changed after 
March 24, 1983. In addition, for purposes of this paragraph (b)(6) only, 
any plan (or agreement) that provides for payments that qualify for one 
of the retirement payment exclusions is treated as a nonqualified 
deferred compensation plan. For example, Sec. 31.3121(v)(2)-1(b)(4)(v) 
provides that certain benefits established in connection with impending 
termination do not result from the deferral of compensation and thus are 
not considered deferred under a nonqualified deferred compensation plan. 
However, a plan that provides such benefits and that was in existence on 
March 24, 1983, is treated as a nonqualified deferred compensation plan 
for purposes of this paragraph (b) to the extent it provides benefits 
that would have satisfied one of the retirement payment exclusions.
    (7) Retirement payment exclusions. Retirement payment exclusions are 
the exclusions from wages (for FICA tax purposes) for retirement 
payments under section 3121(a)(2)(A), (a)(3), and (a)(13)(A)(iii), as in 
effect on April 19, 1983 (the day before enactment of the Social 
Security Amendments of 1983).
    (8) Transition benefits. Transition benefits are payments made after 
December 31, 1983, attributable to services rendered before January 1, 
1984. For this purpose, transition benefits are determined without 
regard to any changes made in the terms of the plan after March 24, 
1983, in the case of a March 24, 1983 agreement or after December 31, 
1983, in the case of a gap agreement.
    (c) Transition rules--(1) In general. Except as provided in 
paragraph (c)(2) or (3) of this section, the general statutory effective 
date described in paragraph (a) of this section applies to benefit 
payments after December 31, 1983. Thus, except as provided in paragraph 
(c)(2) or (3) of this section, section 3121(v)(2) applies, and the 
retirement payment exclusions do not apply, to benefit payments made 
after December

[[Page 144]]

31, 1983, even if the benefit payments are made under a March 24, 1983 
agreement or a gap agreement.
    (2) Transition benefits under a March 24, 1983 agreement. With 
respect to an individual party to a March 24, 1983 agreement, transition 
benefits paid under that March 24, 1983 agreement (except for those paid 
under a 457(a) plan) are not subject to the special timing rule of 
section 3121(v)(2) and are subject to section 3121(a) as in effect on 
April 19, 1983. Thus, transition benefits under a March 24, 1983 
agreement (except for those under a 457(a) plan) to an individual party 
to a March 24, 1983 agreement are excluded from wages (for FICA tax 
purposes) only if they qualify for any of the retirement payment 
exclusions (or any other exclusion provided under section 3121(a) as in 
effect on April 19, 1983).
    (3) Transition benefits under a gap agreement. With respect to an 
individual party to a gap agreement, the payor of transition benefits 
under the gap agreement must choose to either--
    (i) Take the transition benefits into account as wages when paid; or
    (ii) Take the amount deferred (within the meaning of Sec. 
31.3121(v)(2)-1(c)) with respect to the transition benefits into account 
as wages under section 3121(v)(2) (as if section 3121(v)(2) had applied 
before its general statutory effective date).
    (d) Determining transition benefit portion. For purposes of 
determining the portion of total benefits under a nonqualified deferred 
compensation plan that represents transition benefits, if, under the 
terms of the plan, benefit payments are not attributed to specific years 
of service, the employer may use any reasonable method. For example, if 
a plan provides that the employee will receive benefits equal to 2 
percent of high 3-year average compensation multiplied by years of 
service, and the employee retires after 25 years of service, 9 of which 
are before 1984, the employer may determine that 9/25 of the total 
benefit payments to be received beginning in 2000 are transition 
benefits attributable to services performed before 1984.
    (e) Order of payment. If an employer determines, in accordance with 
paragraph (d) of this section, that a portion of the total benefits 
under a nonqualified deferred compensation plan constitutes transition 
benefits, then, for purposes of determining the portion of each benefit 
payment that constitutes transition benefits, the employer must treat 
each benefit payment as consisting of transition benefits in the same 
proportion as the transition benefits that have not been paid (as of 
January 1, 2000) bear to total benefits that have not been paid (as of 
January 1, 2000), unless such allocation is inconsistent with the terms 
of the plan. However, for a benefit payment made before January 1, 2000, 
the employer may use any reasonable allocation method to determine the 
portion of a payment that consists of transition benefits, provided that 
the allocation method is consistent with the terms of the plan.

[64 FR 4567, Jan. 29, 1999]



Sec. 31.3123-1  Deductions by an employer from remuneration of an employee.

    Any amount deducted by an employer from the remuneration of an 
employee is considered to be part of the employee's remuneration and is 
considered to be paid to the employee as remuneration at the time that 
the deduction is made. It is immaterial that any act of Congress or the 
law of any State requires or permits such deductions and the payment of 
the amount thereof to the United States, a State, or any political 
subdivision thereof.



Subpart C_Railroad Retirement Tax Act (Chapter 22, Internal Revenue Code 
                                of 1954)

                            Tax on Employees



Sec. 31.3201-1  Measure of employee tax.

    The employee tax is measured by the amount of compensation received 
for services rendered as an employee. For provisions relating to 
compensation, see Sec. 31.3231(e)-1. For provisions relating to the 
circumstances under which certain compensation is to be disregarded for 
the purpose of determining the employee tax, see paragraphs (b)(1) and 
(2) of Sec. 31.3231(e)-1.

[T.D. 8582, 59 FR 66189, Dec. 23, 1994]

[[Page 145]]



Sec. 31.3201-2  Rates and computation of employee tax.

    (a) Rates--(1)(i) Tier 1 tax. The Tier 1 employee tax rate equals 
the sum of the tax rates in effect under section 3101(a), relating to 
old-age, survivors, and disability insurance, and section 3101(b), 
relating to hospital insurance. The Tier 1 employee tax rate is applied 
to compensation up to the contribution base described in section 
3231(e)(2)(B)(i). The contribution base is determined under section 230 
of the Social Security Act and is identical to the old-age, survivors, 
and disability insurance wage base and the hospital insurance wage base, 
respectively, under the Federal Insurance Contributions Act.
    (ii) Example. The rule in paragraph (a)(1)(i) of this section is 
illustrated by the following example.

    Example. A received compensation of $60,000 in 1992. The section 
3101(a) rate of 6.2 percent would be applied to A's compensation up to 
$55,500, the applicable contribution base for 1992. The section 3101(b) 
rate of 1.45 percent would be applied to the entire $60,000 of A's 
compensation because the applicable contribution base for 1992 is 
$130,200.

    (2)(i) Tier 2 tax. The Tier 2 employee tax rate equals the 
percentage set forth in section 3201(b) of the Code. This rate is 
applied to compensation up to the contribution base described in section 
3231(e)(2)(B)(ii).
    (ii) Example. The rule in paragraph (a)(2)(i) of this section is 
illustrated by the following example.

    Example. A received compensation of $60,000 in 1992. The section 
3201(b) rate of 4.90 percent would be applied to A's compensation up to 
$41,400, the applicable contribution base for 1992.

    (b)(1) Computation. The employee tax is computed by multiplying the 
amount of the employee's compensation with respect to which the employee 
tax is imposed by the rate applicable to such compensation, as 
determined under paragraph (a) of this section. The applicable rate is 
the rate in effect when the compensation is received by the employee. 
For rules relating to the time of receipt, see Sec. 31.3121(a)-2 (a) 
and (b).
    (2) Example. The rule in paragraph (b)(1) of this section is 
illustrated by the following example.

    Example. In 1990, employee A received compensation of $1,000 as 
remuneration for services performed for employer R in 1989. The employee 
tax is payable at the rate of 12.55 percent (7.65 percent plus 4.90 
percent) in effect for 1990 (the year the compensation was received), 
and not the 12.41 percent rate (7.51 percent plus 4.90 percent) in 
effect for 1989 (the year the services were performed).

[T.D. 8582, 59 FR 66189, Dec. 23, 1994]



Sec. 31.3202-1  Collection of, and liability for, employee tax.

    (a) Collection; general rule. The employer shall collect from each 
of his employees the employee tax imposed with respect to the 
compensation of the employee by deducting or causing to be deducted the 
amount of such tax from the compensation subject to the tax as and when 
such compensation is paid. As to the measure of the employee tax, see 
Sec. 31.3201-1.
    (b) Collection; payments by two or more employers in excess of 
annual compensation limitation. For rules relating to payments by two or 
more employers in excess of the annual compensation limitation see Sec. 
31.3121(a)(1)-1.
    (c) Undercollections or overcollections. Any undercollection or 
overcollection of employee tax resulting from the employer's inability 
to determine, at the time compensation is paid, the correct amount of 
compensation with respect to which the deduction should be made shall be 
corrected in accordance with the provisions of Subpart G of the 
regulations in this part relating to adjustments, credits, refunds, and 
abatements.
    (d) When fractional part of cent may be disregarded. In collecting 
the employee tax, the employer shall disregard any fractional part of a 
cent of such tax unless it amounts to one-half cent or more, in which 
case it shall be increased to one cent.
    (e) Employer's liability. The employer is liable for the employee 
tax with respect to compensation paid by him, whether or not collected 
from the employee. If the employer deducts less than the correct amount 
of employee tax or fails to deduct any part of the tax, he is 
nevertheless liable for the

[[Page 146]]

correct amount of the tax. Until collected from him, the employee is 
also liable for the employee tax. Any employee tax collected by or on 
behalf of an employer is a special fund in trust for the United States. 
See section 7501. An employer is not liable to any person for the amount 
of the employee tax deducted by him and paid to the district director.
    (f) Concurrent employment. If two or more related corporations who 
are rail employers concurrently employ the same individual and 
compensate that individual through a common paymaster, which is one of 
the related corporations employing the individual, see Sec. 31.3121(s)-
1.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6541, 26 FR 
553, Jan 20, 1961; T.D. 6727, 29 FR 5866, May 5, 1964; T.D. 8582, 59 FR 
66189, Dec. 23, 1994]

                     Tax on Employee Representatives



Sec. 31.3211-1  Measure of employee representative tax.

    The employee representative tax is measured by the amount of 
compensation received for services rendered as an employee 
representative. For provisions relating to compensation, see Sec. 
31.3231(e)-1.

[T.D. 8582, 59 FR 66190, Dec. 23, 1994]



Sec. 31.3211-2  Rates and computation of employee representative tax.

    (a) Rates--(1)(i) Tier 1 tax. The Tier 1 employee representative tax 
rate equals the sum of the tax rates in effect under sections 3101(a) 
and 3111(a), relating to the employee and the employer tax for old-age, 
survivors, and disability insurance, and sections 3101(b) and 3111(b), 
relating to the employee and the employer tax for hospital insurance. 
The Tier 1 employee representative tax rate is applied to compensation 
up to the contribution base described in section 3231(e)(2)(B)(i). The 
contribution base is determined under section 230 of the Social Security 
Act, and is identical to the old-age, survivors, and disability 
insurance wage base and the hospital insurance wage base, respectively, 
under the Federal Insurance Contributions Act.
    (ii) Example. The rule in paragraph (a)(1)(i) of this section is 
illustrated by the following example.

    Example. B, an employee representative, received compensation of 
$60,000 in 1992. The sections 3101(a) and 3111(a) rates of 12.4 percent 
(6.2 percent plus 6.2 percent) would be applied to B's compensation up 
to $55,500, the applicable contribution base for 1992. The sections 
3101(b) and 3111(b) rates of 2.9 percent (1.45 percent plus 1.45 
percent) would be applied to the entire $60,000 of B's compensation 
because the applicable contribution base for 1992 is $130,200.

    (2) (i) Tier 2 tax. The Tier 2 employee representative tax rate 
equals the percentage set forth in section 3211(a)(2) of the Code. This 
rate is applied up to the contribution base described in section 
3231(e)(2)(B)(ii).
    (ii) Example. The rule in paragraph (a)(2)(i) of this section is 
illustrated by the following example.

    Example. B received compensation of $60,000 in 1992. The section 
3211(a)(2) rate of 14.75 percent would be applied to B's compensation up 
to $41,400, the applicable contribution base for 1992.

    (3) Supplemental Annuity Tax. The supplemental annuity tax for each 
work-hour for which compensation is paid to an employee representative 
for services rendered as an employee representative is imposed at the 
same rate as the excise tax imposed on every employer under section 
3221(c). See also Sec. 31.3211-3.
    (b) (1) Computation. The employee representative tax is computed by 
multiplying the amount of the employee representative's compensation 
with respect to which the employee representative tax is imposed by the 
rate applicable to such compensation, as determined under paragraph (a) 
of this section. The applicable rate is the rate in effect when the 
compensation is received by the employee representative. For rules 
relating to the time of receipt, see Sec. 31.3121(a)-2 (a) and (b).
    (2) Example. The rule in paragraph (b)(1) of this section is 
illustrated by the following example.

    Example. In 1990, employee representative B received $1,000 as 
remuneration for services performed for employer R in 1989. The employee 
representative tax is payable at the rate of 30.05 percent (15.30 
percent plus 14.75 percent) in effect for 1990 (the year the

[[Page 147]]

compensation was received), and not the 29.77 percent rate (15.02 
percent plus 14.75 percent) in effect for 1989 (the year the services 
were performed).

    (c) (1) Rule where compensation is received both as an employee 
representative and employee. The following rule applies to an individual 
who renders service both as an employee representative and as an 
employee. The employee representative tax is imposed on compensation 
received as an employee representative under the rules described in 
Sec. 31.3211-2. The employee tax is imposed on compensation received as 
an employee under the rules described in Sec. 31.3201-2. However, if 
the total compensation received is greater than the applicable 
contribution base, the employee representative tax is imposed on the 
amount equal to the contribution base less the amount received for 
services rendered as an employee.
    (2) Example. The rule in paragraph (c)(1) of this section is 
illustrated by the following example.

    Example. C performed services both as an employee and an employee 
representative in 1992. C received compensation of $40,000 as an 
employee and $20,000 as an employee representative. C's entire 
compensation of $40,000 is subject to tax under the rules described in 
Sec. 31.3201-2. The amount of employee representative compensation 
subject to the section 3101(a) and the section 3111(a) rate is $15,500 
($55,500-$40,000). The entire $20,000 is subject to the sections 3101(b) 
and 3111(b) rates since the combined compensation is less than $130,200, 
the applicable contribution base for 1992. The amount of the employee 
representative compensation subject to the section 3211(a)(2) rate is 
$1,400 ($41,400-$40,000).

[T.D. 8582, 59 FR 66190, Dec. 23, 1994]



Sec. 31.3211-3  Employee representative supplemental tax.

    See paragraphs (a), (b), and (c) of Sec. 31.3221-3 for rules 
applicable to the supplemental tax for each work-hour for which 
compensation is paid to an employee representative for services rendered 
as an employee representative.

[T.D. 8525, 59 FR 9666, Mar. 1, 1994]



Sec. 31.3212-1  Determination of compensation.

    See Sec. 31.3231(e)-1 for regulations applicable to compensation.

                            Tax on Employers



Sec. 31.3221-1  Measure of employer tax.

    (a) General Rule--The employer tax is measured by the amount of 
compensation paid by an employer to its employees. For provisions 
relating to compensation, see Sec. 31.3231(e)-1. For provisions 
relating to the circumstances under which certain compensation is to be 
disregarded for purposes of determining the employer tax, see paragraphs 
(b) (1) and (2) of Sec. 31.3231(e)-1.
    (b) Payments by two or more employers in excess of annual 
compensation limitation. For rules relating to payments by two or more 
employers in excess of the annual compensation limitation, see Sec. 
31.3121(a)(1)-1.
    (c) Underpayments or overpayments. Any underpayment or overpayment 
of employer tax resulting from the employer's inability to determine, at 
the time such tax is paid, the correct amount of compensation with 
respect to which the tax should be paid shall be corrected in accordance 
with the provisions of Subpart G of the regulations in this part 
relating to adjustments, credits, refunds, and abatements.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6541, 26 FR 
555, Jan. 20, 1961; T.D. 8582, 59 FR 66190, Dec. 23, 1994]



Sec. 31.3221-2  Rates and computation of employer tax.

    (a) Rates--(1)(i) Tier 1 tax. The Tier 1 employer tax rate equals 
the sum of the tax rates in effect under section 3111(a), relating to 
old-age, survivors, and disability insurance, and section 3111(b), 
relating to hospital insurance. The Tier 1 employer tax rate is applied 
to compensation up to the contribution base described in section 
3231(e)(2)(B)(i). The contribution base is determined under section 230 
of the Social Security Act and is identical to the old-age, survivors, 
and disability insurance wage base and the hospital insurance wage base, 
respectively, under the Federal Insurance Contributions Act.
    (ii) Example. The rule in paragraph (a)(1)(i) of this section is 
illustrated by the following example.

    Example. R's employee, A, received compensation of $60,000 in 1992. 
The section 3111(a) rate of 6.2 percent would be applied to

[[Page 148]]

A's compensation up to $55,500, the applicable contribution base for 
1992. The section 3111(b) rate of 1.45 percent would be applied to the 
entire $60,000 of A's compensation because the applicable contribution 
base for 1992 is $130,200.

    (2)(i) Tier 2 tax. The Tier 2 employer tax rate equals the 
percentage set forth in section 3221(b) of the Internal Revenue Code. 
This rate is applied up to the contribution base described in section 
3231(e)(2)(B)(ii).
    (ii) Example. The rule in paragraph (a)(2)(i) of this section is 
illustrated by the following example.

    Example. R's employee, A, received compensation of $60,000 in 1992. 
The section 3221(b) rate of 16.10 percent would be applied to A's 
compensation up to $41,400, the applicable contribution base for 1992.

    (3) Supplemental Annuity Tax. The supplemental annuity tax for each 
work-hour for which compensation is paid by an employer for services 
rendered during any calendar quarter by employees is imposed at the tax 
rate determined each calendar quarter by the Railroad Retirement Board. 
See also Sec. 31.3221-3.
    (b)(1) Computation. The employer tax is computed by multiplying the 
amount of the compensation with respect to which the employer tax is 
imposed by the rate applicable to such compensation, as determined under 
paragraph (a) of this section. The applicable rate is the rate in effect 
at the time the compensation is paid. For rules relating to the time of 
payment, see Sec. 31.3121(a)-2(a) and (b).
    (2) Example. The rule in paragraph (b)(1) of this section is 
illustrated by the following example.

    Example. In 1990, R's employee A received $1,000 as remuneration for 
services performed for R in 1989. The employer tax is payable at the 
rate of 23.75 percent (7.65 percent plus 16.10 percent) in effect for 
1990 (the year the compensation was received) and not the 23.61 percent 
rate (7.51 percent plus 16.10 percent) in effect for 1989 (the year the 
services were performed).

[T.D. 8582, 59 FR 66190, Dec. 23, 1994]



Sec. 31.3221-3  Supplemental tax.

    (a) Introduction--(1) In general. Section 3221(c) imposes an excise 
tax on every employer, as defined in section 3231(a) and Sec. 
31.3231(a)-1, with respect to individuals employed by the employer. The 
tax is imposed for each work-hour for which the employer pays 
compensation, as defined in section 3231(e) and Sec. 31.3231(e)-1, for 
services rendered to the employer during a calendar quarter. This Sec. 
31.3221-3 provides rules for determining the number of taxable work-
hours.
    (2) Overview. Paragraph (b) of this section defines work-hours. 
Paragraph (c) of this section demonstrates the calculation of work-
hours. Paragraph (d) of this section offers a safe harbor calculation of 
work-hours for use by any employer in lieu of calculating the number of 
work-hours for each employee.
    (b) Definition of work-hours--(1) In general. For purposes of 
section 3221(c) and this section, work-hours are hours for which the 
employee is compensated, whether or not the employee performs services.
    (i) Payments included in work-hours. Work-hours include regular time 
worked; overtime; time paid for vacations and holidays; time allowed for 
meals; away-from-home terminal time; called and not used, runaround, and 
deadheading time; time for attending court, participating in 
investigations, and attending claim and safety meetings; and guaranteed 
time not worked. Work-hours also include conversion hours, that is, 
compensation converted into work-hours. Conversion hours may be derived 
from payment by the mile or by the piece. Work-hours also include time 
for which the employee is paid for periods of absence not due to 
sickness or accident disability, such as for routine medical and dental 
examinations or for time lost.
    (ii) Payments excluded from work-hours. Certain kinds of payments 
are not subject to conversion into work-hours. These include those 
payments that are specifically excluded from compensation within the 
meaning of section 3231(e), such as certain sick pay payments (section 
3231(e)(1)(i)); tips (section 3231(e)(1)(ii)); and amounts paid 
specifically (either as an advance, as reimbursement, or allowance) for 
traveling expenses (section 3231(e)(1)(iii)). Traveling expenses paid 
under a nonaccountable plan are excluded from work-hours even though

[[Page 149]]

they are includible in compensation. See Sec. 31.3231(e)-1(a)(5). Also 
excluded from work-hours are amounts representing bonuses, amounts 
received pursuant to the exercise of an employee stock option, and all 
separation payments or severance allowances.
    (2) Hourly compensation. Because the tax under section 3221(c) is 
calculated on the basis of work-hours, the number of hours for which an 
employee receives compensation is the figure used to determine work-
hours. In the case of an hourly-rated employee, each hour for which the 
employee receives compensation is one work-hour.
    (3) Daily, weekly, monthly compensation. (i) If an employee is paid 
by the day, week, month, or other period of time, the tax is imposed on 
the number of hours comprehended in the rate and, if any, the number of 
overtime hours for which additional compensation is paid. Thus, in the 
case of an office worker who receives an annual salary based on an 8-
hour, 5-day-a-week work schedule that includes paid holidays, vacations, 
and sick time, the number of work-hours for one month is 174 (2088 
hours/year /12 months).
    (ii) The rule in paragraph (b)(3)(i) of this section is illustrated 
by the following examples.

    Example 1. A, an office worker, receives an annual salary that is 
paid monthly. The salary is based on an 8-hour, Monday through Friday 
work schedule. A is not paid for overtime hours. A is not expected to 
work on holidays, during A's annual vacation, or during periods that A 
is ill. The number of work-hours for one month is 174 (2088 hours/year /
12 months). This figure remains constant, even though some months have 
more workdays than others.
    Example 2. B is paid a stated amount for each day B works, 
regardless of the number of hours worked. However, if B works more than 
8 hours during any day, B is paid overtime for each additional hour 
worked that day. B is not paid for holidays, vacations, or sick time. 
During May, B worked 6 hours on 4 days, 7 hours on 6 days, 8 hours on 6 
days, and 9 hours on 5 days. Because B is paid a daily rate for up to 8 
hours, 8 hours are comprehended in the daily rate. Therefore, the number 
of work-hours for May is 173 (21 daysx8 hours/day+5 overtime hours), 
even though B actually worked 159 hours.

    (4) Conversion hours--(i) Compensation not based on time (hour, day, 
month, etc.), such as compensation paid by the mile or by the piece, 
must be converted into the number of hours represented by the 
compensation paid. Thus, if an employee is paid by the mile, 1 work-hour 
equals the number of miles constituting a workday, divided by 8 hours. 
However, in the case of a collective bargaining agreement that specifies 
a number of hours as constituting a workday, the number of hours 
specified under the agreement may be used instead of 8.
    (ii) The rule in paragraph (b)(4)(i) of this section is illustrated 
by the following example.

    Example. C's normal workday consists of 2 150-mile round trips that 
together take 6 hours. C is paid by the mile. The collective bargaining 
agreement does not specify the number of hours in a workday. Thus, the 
number of work-hours for each day C works is 8, or 1 work-hour for each 
37.5 miles (300 miles/day / 8 hours/day). If the applicable collective 
bargaining agreement specifies that 6 hours constitute a workday, the 
number of work-hours for each day C works would be 6.

    (c) Calculation of work-hours--(1) An employer may calculate the 
work-hours separately for each employee, as described in the examples in 
this paragraph. If the employer chooses to calculate work-hours 
separately for each employee, the employer must calculate the number of 
regular hours, overtime hours, and conversion hours for each employee 
for each month. In lieu of separate calculations, the employer may 
calculate the work-hours for all the employer's employees using the safe 
harbor formula described in paragraph (d) of this section.
    (2) The rules in paragraph (c) of this section are illustrated by 
the following examples.

    Example 1. D worked 8 hours a day, Monday through Friday, during the 
months of February and March 1992. D did not work on President's Day, 
but was paid for the holiday. D's work-hours for February were 160 (19 
days x 8 hours a day + 8 holiday hours). D's work-hours for March were 
176 (22 days x 8 hours a day).
    Example 2. E worked 7-hour shifts every Tuesday through Saturday 
during the months of February and March 1992. E also worked 7 overtime 
hours during February and 21 overtime hours during March. Also, E was 
paid for 7 hours on President's Day, even though E did not work on that 
day. The number of work-hours for February was 161

[[Page 150]]

(21 days x 7 hours a day + 7 overtime hours + 7 holiday hours). The 
number of work-hours for March was 168 (21 days x 7 hours a day + 21 
overtime hours). Because E receives an hourly wage and was paid for the 
President's Day holiday, the number of hours (7) for which E was paid 
are added to the hours E actually worked. If E had worked on President's 
Day and had received extra pay for working on a holiday and holiday pay 
for 7 hours, the employer would include 14 hours in E's work-hours for 
that day, the 7 hours E actually worked and the 7 holiday hours for 
which E was paid.
    Example 3. Employment beginning during month. F began employment on 
March 16, a Monday, and worked 8 hours a day, Monday through Friday. The 
employer calculates that F's hours for the month were 96, because F 
worked 12 8-hour days during the month. If March 16 were on a Friday, 
the employer would calculate 11 days, or 88 hours.
    Example 4. Employment ending during month. G's last day of 
employment was Friday, March 13. G worked 8 hours a day, Monday through 
Friday, except for March 3, when G was ill. G was paid for 8 hours for 
March 3. The employer calculates that G's work-hours for March were 80, 
because G worked 9 8-hour days and was paid for an additional 8 hours.

    (d) Safe harbor--(1) In general. In lieu of calculating work-hours 
separately for each employee, an employer may use the safe harbor for 
all employees. If the employer elects to use the safe harbor for a 
calendar year, the employer must use the safe harbor for all employees 
for the entire calendar year. If an employer uses the safe harbor for a 
calendar year, the employer need not elect the safe harbor for the 
following calendar year. An employer that elects the safe harbor for a 
calendar year may not subsequently elect to separately calculate 
employee work-hours for that calendar year.
    (2) Method of calculation. The safe harbor treats each employee of 
the employer as receiving monthly compensation for a number of hours 
equal to the safe harbor number. To determine the number of work-hours 
for a month, the employer multiplies the safe harbor number by the 
number that equals the total number of employees to whom the employer 
paid compensation during the month.
    (i) Safe harbor number defined. The safe harbor number is the number 
established in guidance of general applicability promulgated by the 
Commissioner.
    (ii) Employee defined. Solely for purposes of this paragraph, an 
employee is any individual who is paid compensation, within the meaning 
of Sec. 31.3231(e)-1, regardless of the amount, during the month. Thus, 
for example, a part-time, temporary, or seasonal employee is counted as 
an employee. A terminated employee is counted in the month of 
termination (provided the terminated employee received compensation in 
the month of termination), but not in any subsequent month in which the 
employee does not perform service for the employer as an employee, even 
if the terminated employee is paid compensation in a subsequent month. 
Thus, for example, an employee who terminates employment during the 
month, receives compensation during the month of termination, and 
receives a final paycheck the following month is counted as an employee 
of the employer for the month of termination but not for the following 
month.
    (3) Method of election. An employer makes the safe harbor election 
for a calendar year on the employment tax return filed for the previous 
calendar year.
    (4) Additional rules. The Commissioner may, in revenue procedures, 
revenue rulings, notices, or other guidance of general applicability, 
revise the safe harbor number or provide additional safe harbors that 
satisfy section 3221(c).
    (e) Effective dates. This Sec. 31.3221-3 is effective for calendar 
years beginning after December 31, 1992, except that paragraph (d) is 
effective for calendar years beginning after December 31, 1993. 
Taxpayers may apply the rules in paragraphs (a), (b), and (c) of this 
section before January 1, 1993.

[T.D. 8525, 59 FR 9666, Mar. 1, 1994]



Sec. 31.3221-4  Exception from supplemental tax.

    (a) General rule. Section 3221(d) provides an exception from the 
excise tax imposed by section 3221(c). Under this exception, the excise 
tax imposed by section 3221(c) does not apply to an employer with 
respect to employees who are covered by a supplemental pension plan, as 
defined in paragraph (b) of this

[[Page 151]]

section, that is established pursuant to an agreement reached through 
collective bargaining between the employer and employees, within the 
meaning of paragraph (c) of this section.
    (b) Definition of supplemental pension plan--(1) In general. A plan 
is a supplemental pension plan covered by the section 3221(d) exception 
described in paragraph (a) of this section only if it meets the 
requirements of paragraphs (b)(2) through (b)(4) of this section.
    (2) Pension benefit requirement. A plan is a supplemental pension 
plan within the meaning of this section only if the plan is a pension 
plan within the meaning of Sec. 1.401-1(b)(1)(i) of this chapter. Thus, 
a plan is a supplemental pension plan only if the plan provides for the 
payment of definitely determinable benefits to employees over a period 
of years, usually for life, after retirement. A plan need not be funded 
through a qualified trust that meets the requirements of section 401(a) 
or an annuity contract that meets the requirements of section 403(a) in 
order to meet the requirements of this paragraph (b)(2). A plan that is 
a profit-sharing plan within the meaning of Sec. 1.401-1(b)(1)(ii) of 
this chapter or a stock bonus plan within the meaning of Sec. 1.401-
1(b)(1)(iii) of this chapter is not a supplemental pension plan within 
the meaning of this paragraph (b).
    (3) Railroad Retirement Board determination with respect to the 
plan. A plan is a supplemental pension plan within the meaning of this 
paragraph (b) with respect to an employee only during any period for 
which the Railroad Retirement Board has made a determination under 20 
CFR 216.42(d) that the plan is a private pension, the payments from 
which will result in a reduction in the employee's supplemental annuity 
payable under 45 U.S.C. 231a(b). A plan is not a supplemental pension 
plan for any time period before the Railroad Retirement Board has made 
such a determination, or after that determination is no longer in force.
    (4) Other requirements. [Reserved]
    (c) Collective bargaining agreement. A plan is established pursuant 
to a collective bargaining agreement with respect to an employee only 
if, in accordance with the rules of Sec. 1.410(b)-6(d)(2) of this 
chapter, the employee is included in a unit of employees covered by an 
agreement that the Secretary of Labor finds to be a collective 
bargaining agreement between employee representatives and one or more 
employers, provided that there is evidence that retirement benefits were 
the subject of good faith bargaining between employee representatives 
and the employer or employers.
    (d) Substitute section 3221(d) excise tax. Section 3221(d) imposes 
an excise tax on any employer who has been excepted from the excise tax 
imposed under section 3221(c) by the application of section 3221(d) and 
paragraph (a) of this section with respect to an employee. The excise 
tax is equal to the amount of the supplemental annuity paid to that 
employee under 45 U.S.C. 231a(b), plus a percentage thereof determined 
by the Railroad Retirement Board to be sufficient to cover the 
administrative costs attributable to such payments under 45 U.S.C. 
231a(b).
    (e) Effective date--(1) In general. Except as provided in paragraph 
(e)(2) of this section, this section applies beginning on October 1, 
1998.
    (2) Delayed effective date for collective bargaining agreement 
provisions. Paragraph (c) of this section applies beginning on January 
1, 2000.

[T.D. 8832, 64 FR 42833, Aug. 6, 1999]

                           General Provisions



Sec. 31.3231(a)-1  Who are employers.

    (a) Each of the following persons is an employer within the meaning 
of the act:
    (1) Any carrier, that is, any express carrier, sleeping car carrier, 
or rail carrier providing transportation subject to subchapter I of 
chapter 105 of title 49;
    (2) Any company--
    (i) Which is directly or indirectly owned or controlled by one or 
more employers as defined in paragraph (a)(1) of this section, or under 
common control therewith, and
    (ii) Which operates any equipment or facility or performs any 
service (except trucking service, casual service, and the casual 
operation of equipment or facilities) in connection with--
    (a) The transportation of passengers or property by railroad, or

[[Page 152]]

    (b) The receipt, delivery, elevation, transfer in transit, 
refrigeration or icing, storage, or handling of property transported by 
railroad;
    (3) Any receiver, trustee, or other individual or body, judicial or 
otherwise, when in the possession of the property or operating all or 
any part of the business of any employer as defined in paragraph (a)(1) 
or (2) of this section;
    (4) Any railroad association, traffic association, tariff bureau, 
demurrage bureau, weighing and inspection bureau, collection agency, and 
any other association, bureau, agency, or organization controlled and 
maintained wholly or principally by two or more employers as defined in 
paragraph (a)(1), (2) or (3) of this section and engaged in the 
performance of services in connection with or incidental to railroad 
transportation;
    (5) Any railway labor organization, national in scope, which has 
been or may be organized in accordance with the provisions of the 
Railway Labor Act; and
    (6) Any subordinate unit of a national railway-labor-organization 
employer, that is, any State or National legislative committee, general 
committee, insurance department, or local lodge or division, of an 
employer as defined in paragraph (a)(5) of this section, established 
pursuant to the constitution and bylaws of such employer.
    (b) As used in paragraph (a)(2) of this section, the term 
``controlled'' includes direct or indirect control, whether legally 
enforceable and however exercisable or exercised. The control may be by 
means of stock ownership, or by agreements, licenses, or any other 
devices which insure that the operation of the company is in the 
interest of one or more carriers. It is the reality of the control, 
however, which is decisive, not its form nor the mode of its exercise.
    (c) As used in paragraph (a)(2) of this section, the term casual 
applies when the service rendered or the operation of equipment or 
facilities by a controlled company or person in connection with the 
transportation of passengers or property by railroad is so irregular or 
infrequent as to afford no substantial basis for an inference that such 
service or operation will be repeated, or whenever such service or 
operation is insubstantial.
    (d) The term ``employer'' does not include any street, interurban, 
or suburban electric railway, unless such railway is operating as a part 
of a general steam-railroad system of transportation, but shall not 
exclude any part of the general steam-railroad system of transportation 
which is operated by any other motive power.
    (e) The term ``employer'' does not include any company by reason of 
its being engaged in the mining of coal, the supplying of coal to an 
employer where delivery is not beyond the mine tipple and the operation 
of equipment or facilities for such mining or supplying of coal, or in 
any of such activities.
    (f) Any company that is described in paragraph (a)(2) of this 
section is an employer under section 3231. In certain cases, based on 
all the facts and circumstances, it may be appropriate to segregate 
those businesses engaged in rail services and therefore subject to the 
Railroad Retirement Tax Act from those businesses engaged exclusively in 
nonrail services and therefore not subject to the Railroad Retirement 
Tax Act. The factors considered are set forth in guidance published by 
the Internal Revenue Service.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960; T.D. 
8582, 59 FR 66191, Dec. 23, 1994]



Sec. 31.3231(b)-1  Who are employees.

    (a) In general. (1) An individual who is in the service of one or 
more employers for compensation is an employee within the meaning of the 
act. (For definitions of the terms ``employer'', ``service'', and 
``compensation'', see subsections (a), (d), and (e), respectively, of 
section 3231.) An individual is in the service of an employer, with 
respect to services rendered for compensation, if--
    (i) He is subject to the continuing authority of the employer to 
supervise and direct the manner in which he renders such services; or
    (ii) He is rendering professional or technical services and is 
integrated into the staff of the employer; or
    (iii) He is rendering, on the property used in the employer's 
operations,

[[Page 153]]

other personal services the rendition of which is integrated into the 
employer's operations.
    (2) In order that an individual may be in the service of an employer 
within the meaning of paragraph (a)(1)(i) of this section, it is not 
necessary that the employer actually direct or control the manner in 
which the services are rendered; it is sufficient if the employer has 
the right to do so. The right of an employer to discharge an individual 
is also an important factor indicating that the individual is subject to 
the continuing authority of the employer to supervise and direct the 
manner of rendition of the services. Other factors indicating that an 
individual is subject to the continuing authority of the employer to 
supervise and direct the manner of rendition of the services are the 
furnishing of tools and the furnishing of a place to work by the 
employer to the individual who renders the services.
    (3) In general, if an individual is subject to the control or 
direction of an employer merely as to the result to be accomplished by 
the work and not as to the means and methods for accomplishing the 
result, he is an independent contractor. On individual performing 
services as an independent contractor is not, as to such services, in 
the service of an employer within the meaning of paragraph (a)(1)(i) of 
this section. However, an individual performing services as an 
independent contractor may be, as to such services, in the service of an 
employer within the meaning of paragraph (a)(1) (ii) or (iii) of this 
section.
    (4) Whether or not an individual is an employee will be determined 
upon an examination of the particular facts of the case.
    (5) If an individual is an employee, it is of no consequence that he 
is designated as a partner, coadventurer, agent, independent contractor, 
or otherwise, or that he performs services on a part-time basis.
    (6) No distinction is made between classes or grades of employees. 
Thus, superintendents, managers, and other supervisory personnel are 
employees within the meaning of the act. An officer of an employer is an 
employee, but a director as such is not.
    (7) In determining whether an individual is an employee with respect 
to services rendered within the United States, the citizenship or 
residence of the individual, or the place where the contract of service 
was entered into is immaterial.
    (8) If an individual performs services for an employer (other than a 
local lodge or division or a general committee of a railway-labor-
organization employer) which does not conduct the principal part of its 
business within the United States, such individual shall be deemed to be 
in the service of such employer only to the extent that he performs 
services for it in the United States. Thus, with respect to services 
rendered for such employer outside the United States, such individual is 
not in the service of an employer.
    (9) If an individual performs services for an employer (other than a 
local lodge or division or a general committee of a railway-labor-
organization employer) which conducts the principal part of its business 
within the United States, he is in the service of such employer whether 
his services are rendered within or without the United States. In the 
case of an individual, not a citizen or resident of the United States, 
rendering services in a place outside the United States to an employer 
which is required under the laws applicable in such place to employ, in 
whole or in part, citizens or residents thereof, such individual shall 
not be deemed to be in the service of an employer with respect to 
services so rendered.
    (10) The term ``employee'' does not include any individual while he 
is engaged in the physical operations consisting of the mining of coal, 
the preparation of coal, the handling (other than movement by rail with 
standard railroad locomotives) of coal not beyond the mine tipple, or 
the loading of coal at the tipple.
    (b) Employees of local lodges or divisions of railway-labor-
organization employers. (1) An individual is in the service of a local 
lodge or division of a railway-labor-organization employer (see 
paragraph (a)(6) of Sec. 31.3231(a)-1) only if--
    (i) All, or substantially all, the individuals constituting the 
membership of

[[Page 154]]

such local lodge or division are employees of an employer conducting the 
principal part of its business in the United States; or
    (ii) The headquarters of such local lodge or division is located in 
the United States.
    (2) (i) An individual in the service of a local lodge or division is 
not an employee within the meaning of the act unless he was, on or after 
August 29, 1935, in the service of a carrier (see Sec. 31.3231(g) for 
definition of carrier) or he was, on August 29, 1935, in the 
``employment relation'' to a carrier.
    (ii) An individual shall be deemed to have been in the employment 
relation to a carrier on August 29, 1935, if (a) he was on that date on 
leave of absence from his employment expressly granted to him by the 
carrier by whom he was employed, or by a duly authorized representative 
or such carrier, and the grant of such leave of absence was established 
to the satisfaction of the Railroad Retirement Board before July 1947; 
or (b) he was in the service of a carrier after August 29, 1935, and 
before January 1946 in each of six calendar months whether or not 
consecutive; or (c) before August 29, 1935, he did not retire and was 
not retired or discharged from the service of the last carrier by whom 
he was employed or its corporate or operating successor, but (1) solely 
by reason of his physical or mental disability he ceased before August 
29, 1935, to be in the service of such carrier and thereafter remained 
continuously disabled until he attained age sixty-five or until August 
1945, or (2) solely for such last stated reason a carrier by whom he was 
employed before August 29, 1935, or a carrier who is its successor did 
not on or after August 29, 1935, and before August 1945 call him to 
return to service, or (3) if he was so called he was solely for such 
reason unable to render service in six calendar months as provided in 
(b) of this subdivision; or (d) he was on August 29, 1935, absent from 
the service of a carrier by reason of a discharge which, within one year 
after the effective date thereof, was protested, to an appropriate labor 
representative or to the carrier, as wrongful, and which was followed 
within 10 years of the effective date thereof by his reinstatement in 
good faith to his former service with all his seniority rights. However, 
an individual shall not be deemed to have been in the employment 
relation to a carrier on August 29, 1935, if before that date he was 
granted a pension or gratuity on the basis of which a pension was 
awarded to him pursuant to section 6 of the Railroad Retirement Act of 
1937 (45 U.S.C. 228f), or if during the last payroll period before 
August 29, 1935, in which he rendered service to a carrier he was not, 
with respect to any service in such payroll period, in the service of an 
employer (see paragraph (a) of this section).
    (c) Employees of general committees of railway-labor-organization 
employers. An individual is in the service of a general committee of a 
railway-labor-organization employer (see paragraph (a)(6) of Sec. 
31.3231(a)-1) only if--
    (1) He is representing a local lodge or division described in 
paragraph (b)(1) of this section; or
    (2) All, or substantially all, the individuals represented by such 
general committee are employees of an employer conducting the principal 
part of its business in the United States; or
    (3) He acts in the capacity of a general chairman or an assistant 
general chairman of a general committee which represents individuals 
rendering service in the United States to an employer. In such case, if 
his office or headquarters is not located in the United States and the 
individuals represented by such general committee are employees of an 
employer not conducting the principal part of its business in the United 
States, only a part of his remuneration for such service shall be 
regarded as compensation. The part of his remuneration regarded as 
compensation shall be in the same proportion to his total remuneration 
as the mileage in the United States under the jurisdiction of such 
general committee bears to the total mileage under its jurisdiction, 
unless such mileage formula is inapplicable, in which case such other 
formula as the Railroad Retirement Board may have prescribed pursuant to 
section 1(c) of the Railroad Retirement Act of 1937 (45 U.S.C. 228a) 
shall be applicable. However, no part of his remuneration for such 
service shall

[[Page 155]]

be regarded as compensation if the application of such mileage formula, 
or such other formula as the Railroad Retirement Board may have 
prescribed, would result in his compensation for the service being less 
than 10 percent of his remuneration for such service.



Sec. 31.3231(c)-1  Who are employee representatives.

    (a) An employee representative within the meaning of the act is--
    (1) Any officer or official representative of a railway labor 
organization which is not included as an employer under section 3231(a) 
who--
    (i) Was in the service of an employer either before or after June 
29, 1937, and
    (ii) Is duly authorized and designated to represent employees in 
accordance with the Railway Labor Act.

For railway labor organizations which are employers under section 
3231(a), see paragraph (a) (5) and (6) of Sec. 31.3231(a)-1.
    (2) Any individual who is regularly assigned to or regularly 
employed by an employee representative, as defined in paragraph (a)(1) 
of this section, in connection with the duties of such employee 
representative's office.
    (b) In determining whether an individual is an employee 
representative, his citizenship or residence is material only insofar as 
those factors may affect the determination of whether he was ``in the 
service of an employer'' (see paragraph (a) of Sec. 31.3231(b)-1).



Sec. 31.3231(d)-1  Service.

    See Sec. 31.3231(b)-1 for regulations relating to the term ``in the 
service of an employer.''



Sec. 31.3231(e)-1  Compensation.

    (a) Definition--(1) The term compensation has the same meaning as 
the term wages in section 3121(a), determined without regard to section 
3121(b)(9), except as specifically limited by the Railroad Retirement 
Tax Act (chapter 22 of the Internal Revenue Code) or regulation. The 
Commissioner may provide any additional guidance that may be necessary 
or appropriate in applying the definitions of sections 3121(a) and 
3231(e).
    (2) A payment made by an employer to an individual through the 
employer's payroll is presumed, in the absence of evidence to the 
contrary, to be compensation for services rendered as an employee of the 
employer. Likewise, a payment made by an employee organization to an 
employee representative through the organization's payroll is presumed, 
in the absence of evidence to the contrary, to be compensation for 
services rendered by the employee representative as such. For rules 
regarding the treatment of deductions by an employer from remuneration 
of an employee, see Sec. 31.3123-1.
    (3) The term compensation is not confined to amounts paid for active 
service, but includes amounts paid for an identifiable period during 
which the employee is absent from the active service of the employer 
and, in the case of an employee representative, amounts paid for an 
identifiable period during which the employee representative is absent 
from the active service of the employee organization.
    (4) Compensation includes amounts paid to an employee for loss of 
earnings during an identifiable period as the result of the displacement 
of the employee to a less remunerative position or occupation as well as 
pay for time lost.
    (5) For rules regarding the treatment of reimbursement and other 
expense allowance amounts, see Sec. 31.3121(a)-3. For rules regarding 
the inclusion of fringe benefits in compensation, see Sec. 31.3121(a)-
1T.
    (6) Split-dollar life insurance arrangements. See Sec. Sec. 1.61-22 
and 1.7872-15 of this chapter for rules relating to the treatment of 
split-dollar life insurance arrangements.
    (b) Special Rules. (1) If the amount of compensation earned in any 
calendar month by an individual as an employee in the service of a local 
lodge or division of a railway-labor-organization employer is less than 
$25, the amount is disregarded for purposes of determining the employee 
tax under section 3201 and the employer tax under section 3221.
    (2) Compensation for service as a delegate to a national or 
international convention of a railway-labor-organization employer is 
disregarded for purposes of determining the employee tax under section 
3201 and the employer

[[Page 156]]

tax under section 3221 if the individual rendering the service has not 
previously rendered service, other than as a delegate, which may be 
included in the individual's years of service for purposes of the 
Railroad Retirement Act.
    (3) For special provisions relating to the compensation of certain 
general chairs or assistant general chairs of a general committee of a 
railway-labor-organization employer, see paragraph (c)(3) of Sec. 
31.3231(b)-1.

[T.D. 8582, 59 FR 66191, Dec. 23, 1994, as amended by T.D. 9092, 68 FR 
54361, Sept. 17, 2003]



Sec. 31.3231(e)-2  Contribution base.

    The term compensation does not include any remuneration paid during 
any calendar year by an employer to an employee for services rendered in 
excess of the applicable contribution base. For rules applying this 
provision, see Sec. 31.3121(a)(1)-1.

[T.D. 8582, 59 FR 66191, Dec. 23, 1994]



  Subpart D_Federal Unemployment Tax Act (Chapter 23, Internal Revenue 
                              Code of 1954)



Sec. 31.3301-1  Persons liable for tax.

    Every person who is an employer as defined in section 3306(a) (see 
Sec. 31.3306(a)-1) is liable for the tax. Even if an employer is not 
subject to any State unemployment compensation law, he is nevertheless 
liable for the tax. However, if he is subject to such a State law, he 
may be entitled to certain credits against the tax (see Sec. Sec. 
31.3302(a)1 to 31.3302(c)-1, inclusive). For provisions relating to 
payment of the tax, see Subpart G of the regulations in this part.



Sec. 31.3301-2  Measure of tax.

    The tax for any calendar year is measured by the amount of wages 
paid by the employer during such year with respect to employment after 
December 31, 1938. (See Sec. 31.3306(b)-1, relating to wages, and 
Sec. Sec. 31.3306(c)-1 to 31.3306(c)-3, inclusive, relating to 
employment.)

[T.D. 6658, 28 FR 6632, June 27, 1963]



Sec. 31.3301-3  Rate and computation of tax.

    (a) The rates of tax with respect to wages paid in calendar years 
after 1954 are as follows:

 
                                                                Percent
 
In the calendar years 1955 to 1960, both inclusive...........          3
In the calendar year 1961....................................        3.1
In the calendar year 1962....................................        3.5
In the calendar year 1963....................................       3.35
In the calendar year 1964 and subsequent calendar years......        3.1
 

    (b) The tax is computed by applying to the wages paid in a calendar 
year, with respect to employment after December 31, 1938, the rate in 
effect at the time the wages are paid.

[T.D. 6658, 28 FR 6632, June 27, 1963]



Sec. 31.3301-4  When wages are paid.

    Wages are paid when actually or constructively paid. Wages are 
constructively paid when they are credited to the account of or set 
apart for an employee so that they may be drawn upon by him at any time 
although not then actually reduced to possession. To constitute payment 
in such a case the wages must be credited to or set apart for the 
employee without any substantial limitation or restriction as to the 
time or manner of payment or condition upon which payment is to be made, 
and must be made available to him so that they may be drawn upon at any 
time, and their payment brought within his own control and disposition. 
See Sec. 31.6011(a)-3, relating to the return on which wages are to be 
reported.



Sec. 31.3302(a)-1  Credit against tax for contributions paid.

    (a) In general. Subject to the provision of paragraphs (b) and (c) 
of this section and to the provisions of Sec. 31.3302(c)-1, the 
taxpayer may credit against the tax for any taxable year the total 
amount of contributions paid by him into an unemployment fund maintained 
during such year under a State law which has been found by the Secretary 
of Labor to contain the provisions specified in section 3304(a); 
Provided, however, That no credit may be taken for contributions under a 
State

[[Page 157]]

law if such State has not been duly certified for the calendar year to 
the Secretary of the Treasury by the Secretary of Labor. The 
contributions may be credited against the tax whether or not they are 
paid with respect to employment as defined in section 3306(c). For 
provisions relating to additional credit against the tax, see Sec. 
31.3302(b)-1.
    (b) Limitation on the taxable year with respect to which 
contributions are allowable. In order to be allowable as credit against 
the tax for any taxable year, the contributions must have been paid with 
respect to such year.

    Example 1. Under the unemployment compensation law of State X, 
employer M is required to report in his contribution return for the 
quarter ending December 31, 1955, all remuneration payable for services 
rendered in such quarter. A portion of such remuneration is not paid to 
his employees until February 1, 1956. On January 20, 1956, M pays to the 
State the total amount of contributions due with respect to all 
remuneration so required to be reported. Such contributions, including 
those with respect to the remuneration paid on February 1, 1956, may be 
included in computing the credit against the tax for the calendar year 
1955. This is true even though the remuneration paid on February 1, 1956 
(if it constitutes ``wages'') is required to be reported in the Federal 
return for 1956 and not in the Federal return for 1955.
    Example 2. Under the unemployment compensation law of State Y, 
employer N is required to include in his contribution return for the 
quarter ending December 31, 1955, certain remuneration paid on December 
30, to 1955, to an employee for services to be rendered after December 
31. On January 20, 1956, N pays to the State the total amount of 
contributions due with respect to all remuneration required to be 
reported on the contribution return. Such contributions, including those 
with respect to the remuneration paid on December 30, 1955, may be 
included in computing the credit against the tax for the calendar year 
1955.

    (c) Limitation on amount of credit allowable based on time when 
contributions are paid--(1) In general. The amount of credit allowable 
for contributions paid into a State unemployment fund depends in part on 
the time of payment of such contributions. Although contributions paid 
at any time may be credited against the tax (subject to the limitations 
referred to in paragraphs (c)(2) and (3) of this section), no refund or 
credit of the tax based on credit for contributions paid will be allowed 
unless the contributions are paid prior to the expiration of the period 
of limitations applicable to refund or credit of the tax. For general 
provisions relating to the limitation period and to refunds, credits and 
abatements of the tax, see respectively Sec. Sec. 301.6511(a)-1, 
301.6402-2 and 301.6404-1 of this chapter (Regulations on Procedure and 
Administration).
    (2) Amount of credit allowable when contributions are paid on or 
before last day for filing return. Contributions paid into a State 
unemployment fund on or before the last day upon which the Federal 
return for the taxable year is required to be filed may be credited 
against the tax in an amount equal to such contributions, but not, 
however, to exceed the total credits, determined pursuant to Sec. 
31.3302(c)-1. For provisions relating to the time for filing the return, 
see Sec. 31.6071(a)-1 in Subpart G of this part.
    (3) Amount of credit allowable when contributions are paid after 
last day for filing return. Contributions paid into a State unemployment 
fund after the last day upon which the Federal return for the taxable 
year is required to be filed may be credited against the tax in an 
amount not to exceed 90 percent of the amount which would have been 
allowable as credit on account of such contributions had they been paid 
into a State unemployment fund on or before such last day. However, see 
paragraph (c)(4) of this section relating to the payment of 
contributions to the wrong State. For general provisions relating to 
refunds, credits, and abatements of the tax, see Sec. Sec. 301.6402-2 
and 301.6404-1 of this chapter (Regulations on Procedure and 
Administration).

    Example 1. The Federal return of the M Company for the calendar year 
1961 discloses total wages of $400,000. The Federal tax, imposed at the 
rate of 3.1 percent, is $12,400. The company is liable for total State 
contributions of $8,000 for 1961. The due date of the Federal return is 
January 31, 1962, no extension of time for filing the return having been 
granted. The contributions are not paid until February 1, 1962. If the 
contributions had been paid on or before January 31, 1962, the entire 
amount of $8,000 could have been credited against the tax. (Credits 
could not exceed 2.7 percent of the wages, or $10,800. See Sec. 
31.3302(c)-1.) Since the contributions

[[Page 158]]

were paid after January 31, 1962, the M Company is entitled to a credit 
of 90 percent of the amount which would have been allowable as credit 
had the contributions been paid on time (90 percent of $8,000, or 
$7,200), the net liability for Federal tax being $5,200 ($12,400 minus 
$7,200).
    Example 2. The facts are the same as in example 1, except that the M 
Company is liable for and pays total State contributions of $12,000, 
instead of $8,000. If the contributions had been paid on or before 
January 31, 1962, the amount allowable as credit would have been $10,800 
(2.7 percent of wages of $400,000). Since the contributions were paid 
after January 31, 1962, the M Company is entitled to a credit of 90 
percent of $10,800, or $9,720, the net liability for Federal tax being 
$2,680 ($12,400 minus $9,720).
    Example 3. The Federal return of the R Company for the calendar year 
1961 discloses a total tax of $3,100. The company is liable for total 
State contributions of $2,700 for such year. The due date of the Federal 
return is January 31, 1962, no extension of time for filing the return 
having been granted. The R Company pays $1,700 of the total State 
contributions on or before such date, and the remaining $1,000 on 
February 1, 1962. If the $1,000 had been paid on or before January 31, 
1962, that amount could have been credited against the tax (such amount 
plus the $1,700 paid on or before January 31, 1962, not exceeding the 
aggregate credit allowable). Since the $1,000 was paid after January 31, 
1962, the R Company is entitled to a credit of 90 percent of this amount 
or $900, plus the credit of $1,700 allowable for the contributions paid 
on or before January 31, 1962. The net liability for Federal tax is thus 
$500 ($3,100 minus $2,600).

    (4) Amount of credit allowable when contributions are paid to wrong 
State. Contributions for the taxable year paid into a State unemployment 
fund which are required under the unemployment compensation law of that 
State, but which are paid with respect to remuneration on the basis of 
which the taxpayer had, prior to such payment, erroneously paid an 
amount as contributions under another unemployment compensation law, 
shall be deemed for purposes of the credit to have been paid at the time 
of the erroneous payment. If, by reason of such other law, the taxpayer 
was entitled to cease paying contributions for such taxable year with 
respect to services subject to such other law, the payment into the 
proper fund shall be deemed for purposes of credit to have been made on 
the date the Federal return for such year was actually filed by the 
taxpayer under Sec. 31.6011(a)-3.

    Example. Employee N, whose Federal return for the calendar year 1961 
discloses a total tax of $3,100, employs individuals in State X and 
State Y during the calendar year 1961. N assumes in good faith that the 
services of his employees are covered by the unemployment compensation 
law of State Y, and pays as contributions to State Y the amount of 
$2,700 based upon the remuneration of the employees. All of the services 
were in fact covered by the unemployment compensation law of State X, 
and none by the law of State Y. The payment to State Y was made on 
January 31, 1962. When the error was discovered thereafter, N paid to 
State X contributions in the amount of $2,700 based upon such 
remuneration. Since the contributions were paid to State Y on January 
31, 1962, the contributions to State X are, for purposes of the credit, 
deemed to have been paid on such date. N is entitled to a credit of 
$2,700 against the Federal tax of $3,100, the net liability for Federal 
tax being $400 ($3,100 minus $2,700).

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR 
6632, June 27, 1963]



Sec. 31.3302(a)-2  Refund of State contributions.

    If, subsequent to the filing of the return, a refund is made by a 
State to the taxpayer of any part of his contribution credited against 
the tax, the taxpayer is required to advise the district director of the 
date and amount of such refund and the reason therefor, and to pay the 
tax, if any, due as a result of such refund, together with interest from 
the date when the tax was due.



Sec. 31.3302(a)-3  Proof of credit under section 3302(a).

    Credit against the tax for any calendar year for contributions paid 
into State unemployment funds shall not be allowed unless there is 
submitted to the district director:
    (a) A certificate of the proper officer of each State (the laws of 
which required the contributions to be paid) showing, for the taxpayer:
    (1) The total amount of contributions required to be paid under the 
State law with respect to such calendar year (exclusive of penalties and 
interest) which was actually paid on or before the date the Federal 
return is required to be filed; and

[[Page 159]]

    (2) The amounts and dates of such required payments (exclusive of 
penalties and interest) actually paid after the date the Federal return 
is required to be filed.
    (b) A statement by the taxpayer that no part of any payment made by 
him into a State unemployment fund for such calendar year, which is 
claimed as a credit against the tax, was deducted or is to be deducted 
from the remuneration of individuals in his employ. Such statement shall 
contain or be verified by a written declaration that it is made under 
the penalties of perjury.
    (c) Such other or additional proof as the Commissioner or the 
district director may deem necessary to establish the right to the 
credit provided for under section 3302(a).



Sec. 31.3302(b)-1  Additional credit against tax.

    (a) In general. In addition to the credit against the tax allowable 
for contributions actually paid to State unemployment funds (see Sec. 
31.3302(a)-1), the taxpayer may be entitled to a credit under section 
3302(b). This additional credit is allowable to the taxpayer with 
respect to the amount of contributions which he is relieved from paying 
to an unemployment fund under the provisions of a State law which have 
been certified for the taxable year as provided in section 3303. 
Generally, an additional credit is available to an employer, if under 
the provisions of a State law which have been so certified he is 
permitted to pay contributions to such State for the taxable year, or 
portion thereof, at a rate which is both lower than the highest rate 
applied under such law in such year and lower than 2.7 percent. No 
additional credit is allowable except with respect to a State law 
certified by the Secretary of Labor for the taxable year as provided in 
section 3303 (or with respect to any provisions thereof so certified).
    (b) Method of computing amount of additional credit allowable with 
respect to a State law--(1) Certification of a State law as a whole. In 
ascertaining the additional credit for any taxable year with respect to 
a particular State law which the Secretary of Labor certifies as a whole 
to the Secretary of the Treasury in accordance with the provisions of 
section 3303, the taxpayer must first compute the following amounts:
    (i) The amount of contributions (whether or not with respect to 
employment as defined in section 3306(c)) which the taxpayer would have 
been required to pay under the State law for such year if throughout the 
year he had been subject to the highest rate applied under such law in 
such year, or to a rate of 2.7 percent, whichever rate is lower.
    (ii) The amount of contributions (whether or not with respect to 
employment as defined in section 3306 (c)) he was required to pay under 
the State law with respect to such year, whether or not paid.

The amount computed under paragraph (b)(1)(ii) of this section should 
then be subtracted from the amount computed under paragraph (b)(1)(i) of 
this section and the result will be the additional credit for the 
taxable year with respect to the law of that State.

    Example. A employs individuals only in State X during the calendar 
year 1955. The unemployment compensation law of State X has been 
certified in its entirety to the Secretary of the Treasury by the 
Secretary of Labor for such year. The highest rate applied in such year 
under such State law to any taxpayer is 3 percent. However, A has 
obtained a rate of 1 percent under the law of such State and is required 
to pay his entire year's contribution at that rate. The amount of 
remuneration of A's employees subject to contributions under such State 
law is $25,000. A's additional credit under section 3302(b) is $425, 
computed as follows:

Remuneration subject to contributions.........................   $25,000
                                                               =========
Contributions at 2.7 percent rate.............................       675
Less:
  Contributions required to be paid at 1 percent rate.........       250
                                                               ---------
Additional credit to A........................................       425
 


Since the 2.7 percent rate is less than the highest rate applied (3 
percent), the 2.7 percent rate is used in computing the amount ($675) 
from which the amount of contributions required to be paid at the 1 
percent rate ($250) is deducted in order to ascertain the additional 
credit ($425).

    (2) Certification with respect to particular provisions of a State 
law. If the Secretary of Labor makes a certification to the Secretary of 
the Treasury with respect to particular provisions of

[[Page 160]]

a State law for any taxable year pursuant to section 3303, the 
additional credit of the taxpayer for such year with respect to such law 
shall be computed in such manner as the Commissioner shall determine.
    (c) Amount of additional credit allowable to taxpayer with respect 
to more than one State law. If the taxpayer is entitled to additional 
credit with respect to more than one State law in any taxable year, the 
additional credit allowable with respect to each State law shall be 
computed separately (in accordance with paragraph (b) of this section) 
and the total additional credit allowable against the tax for such year 
shall be the aggregate of the additional credits allowable with respect 
to such State laws. For limitation on total credits, see Sec. 
31.3302(c)-1.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR 
6632, June 27, 1963]



Sec. 31.3302(b)-2  Proof of additional credit under section 3302(b).

    Additional credit under section 3302(b) shall not be allowed against 
the tax for any calendar year unless there is submitted--
    (a) To the Commissioner a certificate of the proper officer of each 
State (with respect to the law of which the additional credit is 
claimed) showing the highest rate of contributions applied under the 
State law in such calendar year to any person having individuals in his 
employ; and
    (b) To the district director a certificate of the proper officer of 
each State (with respect to the law of which the additional credit is 
claimed) showing for the taxpayer--
    (1) The total remuneration with respect to which contributions were 
required to be paid by the taxpayer under the State law with respect to 
such calendar year; and
    (2) The rate of contributions applied to the taxpayer under the 
State law with respect to such calendar year.

If under the law of such State different rates of contributions were 
applied to the taxpayer during particular periods of such calendar year, 
the certificate shall set forth the information called for in paragraphs 
(b)(1) and (2) of this section with respect to each such period.
    (c) Such other or additional proof as the Commissioner or the 
district director may deem necessary to establish the right to the 
additional credit provided for under section 3302(b).



Sec. 31.3302(c)-1  Limit on total credits.

    (a) In general. Paragraph (b) of this section relates to the 
limitation on the aggregate of the credits allowable under section 3302 
(a) and (b). Paragraph (c) of this section relates to reductions, under 
certain circumstances, of the total credits allowable after applying 
section 3302 (a), (b), and (c)(1). In paragraphs (c)(1), (2), and (3) of 
this section, relate, respectively, to reductions of credits in respect 
of advances under title XII of the Social Security Act before September 
13, 1960, advances under title XII of the Social Security Act after 
September 12, 1960, and payments under the Temporary Unemployment 
Compensation Act of 1958. A reduction of credit under paragraph (c)(1), 
(2), or (3) of this section applies separately from, and in addition to, 
a reduction under any other such subparagraph. See section 3302(d) and 
Sec. 31.3302(d)-1 for definitions and special rules relating to section 
3302(c), and for a provision that, in applying section 3302(c), the 
Federal tax shall be computed at the rate of 3 percent.
    (b) Limitation on aggregate credit. The aggregate of the credit 
under section 3302(a) and the additional credit under section 3302(b) 
shall not exceed 90 percent of the tax against which credit is taken, 
computed as if the tax were imposed at the rate of 3 percent. Thus, the 
aggregate of the credit which is allowable to an employer for any 
taxable year shall not exceed 2.7 percent of the wages paid by the 
employer during the year.
    (c) Reductions of amount of credit otherwise allowable--(1) Advances 
before September 13, 1960, under title XII of Social Security Act--(i) 
Credit reductions for 1961 and 1962. Pursuant to section 3302(c)(2), as 
applicable to credit allowable for any year ended before 1963, the total 
credits otherwise allowable under section 3302 to a taxpayer subject to 
the unemployment compensation law of the State of--

[[Page 161]]

    (a) Alaska shall be reduced for the taxable year 1961 by an amount 
equal to 0.15 percent of the wages paid by the taxpayer during 1961 
which are attributable to Alaska, and shall be reduced for the taxable 
year 1962 by an amount equal to 0.3 percent of the wages paid by the 
taxpayer during 1962 which are attributable to Alaska; or
    (b) Michigan shall be reduced for the taxable year 1962 by an amount 
equal to 0.15 percent of the wages paid by the taxpayer during 1962 
which are attributable to Michigan.
    (ii) Credit reductions for 1963 and subsequent years. If any balance 
of an advance or advances under title XII of the Social Security Act, 
made before September 13, 1960, to the unemployment account of a State, 
remains unpaid on January 1, 1963, or on January 1 of any succeeding 
taxable year, the total credits otherwise allowable under section 3302 
to a taxpayer subject to the unemployment compensation law of the State 
shall be reduced for the taxable year unless--
    (a) No balance of such advance or advances exists as of the 
beginning of November 10 of the taxable year, or
    (b) The State pays into the Federal unemployment account, before 
November 10 of the taxable year, the amount certified by the Secretary 
of Labor pursuant to section 3302(c)(2), and designates such payment as 
being made for purposes of the last sentence of section 3302(c)(2).

The credit reduction for a taxable year shall be a percentage of the 
wages paid by the taxpayer during that taxable year which are 
attributable to the State. The percentage for the taxable year 1963, or 
for any succeeding taxable year beginning before January 1, 1968, is 
0.15 percent (that is, 5 percent of the Federal tax, computed as if 
imposed at the rate of 3 percent of the wages). The percentage for any 
taxable year beginning on or after January 1, 1968, is the percentage 
reduction for the immediately preceding taxable year plus 0.15 percent. 
Thus, for 1968 the percentage is 0.3 percent, for 1969 the percentage is 
0.45 percent, and for 1970 the percentage is 0.6 percent.
    (2) Advances after September 12, 1960, under title XII of Social 
Security Act--(i) In general. If any balance of an advance or advances 
under title XII of the Social Security Act, made after September 12, 
1960, to the unemployment account of a State, remains unpaid on January 
1 of two consecutive taxable years, the total credits otherwise 
allowable under section 3302 to a taxpayer subject to the unemployment 
compensation law of the State shall be reduced for the taxable year 
beginning with the second consecutive January 1, unless prior to 
November 10 of that taxable year the total amount of any such advance or 
advances made to the account of the State has been fully repaid. The 
reduction made pursuant to this subdivision in the total credits 
otherwise allowable for the taxable year beginning with the second 
consecutive January 1 shall be 0.3 percent of the wages paid by the 
taxpayer during the taxable year which are attributable to the State 
(that is, 10 percent of the Federal tax, computed as if imposed at the 
rate of 3 percent of the wages). In the case of any succeeding taxable 
year beginning with a consecutive January 1 on which there exists such a 
balance of an unreturned advance or advances made after September 12, 
1960, the total credits otherwise allowable shall be further reduced 
unless prior to November 10 of that succeeding taxable year the total 
amount of any such advance or advances made to the account of the State 
has been fully repaid. The reduction for each such succeeding taxable 
year beginning with a consecutive January 1 on which such a balance 
exists shall be a percentage of the wages paid by the taxpayer during 
that succeeding taxable year which are attributable to the State. The 
percentage reduction for any such succeeding taxable year shall be the 
aggregate of (a) the percentage reduction (without regard to paragraph 
(c)(2)(ii) or (iii) of this section) for the immediately preceding 
taxable year, (b) 0.3 percent of the wages paid by the taxpayer during 
the taxable year which are attributable to the State, and (c) the 
percentage, if any, described in paragraph (c)(2)(ii) or (iii) of this 
section.
    (ii) Additional reduction if a balance of advances exists after 
third or fourth consecutive January 1. If the credit reduction described 
in subdivision (i) of this

[[Page 162]]

subparagraph is made for the third or fourth consecutive taxable year, 
the total credits otherwise allowable under section 3302 to a taxpayer 
subject to the unemployment compensation law of the State shall be 
further reduced for the taxable year unless the average employer 
contribution rate (see section 3302(d)(4)) for such State for the 
calendar year preceding such taxable year is at least 2.7 percent. The 
percentage of reduction, if any, under this subdivision shall be the 
percentage referred to in section 3302(c)(3)(B) which is certified by 
the Secretary of Labor pursuant to section 3302(d)(7).
    (iii) Additional reduction if a balance of advances exists after 
fifth or any succeeding consecutive January 1. If the credit reduction 
described in subdivision (i) of this subparagraph is made for the fifth 
or any succeeding taxable year, the total credits otherwise allowable 
under section 3302 to a taxpayer subject to the unemployment 
compensation law of the State shall be further reduced for the taxable 
year unless the average employer contribution rate (see section 
3302(d)(4)) for the State for the calendar year preceding such taxable 
year equals or exceeds the 5-year benefit cost rate (see section 
3302(d)(5)) applicable to the State for the taxable year or 2.7 percent, 
whichever is higher. The percentage of reduction, if any, under this 
subdivision for a taxable year shall be the percentage referred to in 
section 3302(c)(3)(C) which is certified by the Secretary of Labor 
pursuant to section 3302(d)(7).
    (3) Payments under the Temporary Unemployment Compensation Act of 
1958. If any amount of temporary unemployment compensation was paid in a 
State under the Temporary Unemployment Compensation Act of 1958, the 
total credits otherwise allowable under section 3302 to a taxpayer with 
respect to wages attributable to the State for the taxable year 
beginning January 1, 1963, and for each taxable year thereafter, shall 
be reduced unless prior to November 10 of the taxable year--
    (i) There have been restored to the Treasury the amounts of 
temporary unemployment compensation paid in the State (except amounts 
paid to individuals who exhausted their unemployment compensation under 
title XV of the Social Security Act and title IV of the Veterans' 
Readjustment Assistance Act of 1952 prior to their making their first 
claims under the Temporary Unemployment Compensation Act of 1958), the 
amount of costs incurred in the administration of the Temporary 
Unemployment Compensation Act of 1958); with respect to the State, and 
the amount estimated by the Secretary of Labor as the State's 
proportionate share of other costs incurred in the administration of 
such Act, or
    (ii) The State restores to the general fund of the Treasury the 
amount certified by the Secretary of Labor pursuant to section 104 of 
the Temporary Unemployment Compensation Act of 1958, and designates such 
restoration as being made for purposes of the last sentence of such 
section.

The credit reduction for a taxable year shall be a percentage of the 
wages paid by the taxpayer during that year which are attributable to 
the State. The percentage for the taxable year 1963 is 0.15 percent 
(that is, 5 percent of the Federal tax, computed as if imposed at the 
rate of 3 percent). The percentage for any succeeding year is 0.3 
percent (that is, 10 percent of the Federal tax, computed as if imposed 
at the rate of 3 percent).
    (4) Example. The cumulative effect of the credit reductions 
described in this paragraph may be illustrated by the following example:

    Example. Advances to the unemployment account of State X were made 
in 1957 and in 1961 under title XII of the Social Security Act. Payments 
under the Temporary Unemployment Compensation Act of 1958 were made in 
State X in 1958. No portion of the advances or payments is returned 
before November 10, 1964. As a consequence:
    (a) The credit reduction applicable under subparagraph (1) of this 
paragraph is made for 1964 at the rate of 0.15 percent;
    (b) The credit reduction described in subparagraph (2) of this 
paragraph has been made for 1963 (the second successive year after 1961) 
at the rate of 0.3 percent. The rate of credit reduction under 
subparagraph (2) for 1964 is 1 percent (the aggregate of 0.6 percent 
under section 3302(c)(3)(A) and 0.4 percent (assumed for purposes of 
this example to be the percentage referred to in section 3302(c)(3)(B) 
which is certified by the Secretary of Labor), and
    (c) The credit reduction described in subparagraph (3) of this 
paragraph has been

[[Page 163]]

made for 1963 at the rate of 0.15 percent. The rate of credit reduction 
for 1964 is 0.3 percent.

The cumulative rate of credit reduction applicable for 1964 to wages 
attributable to State X is 1.45 percent, representing the aggregate of 
the percentage reductions applicable under subparagraphs (1), (2), and 
(3) of this paragraph (0.15 percent, 1 percent, and 0.3 percent, 
respectively). In 1964 Employer A paid wages of $100,000, all of which 
are subject to the unemployment compensation law of State X. The credit 
which would be allowable (under section 3302 (a), (b), and (c)(1)) if 
there were no credit reduction is $2,700. Employer A's tax is computed 
as follows for 1964:

Total taxable wages (attributable to State X)...    $100,000
                                                 =============
Gross Federal tax (3.1 percent of wages)........       3,100
Less credit:
  Gross credit..................................      $2,700
  Credit reduction (1.45 percent of wages)......       1,450
  Net credit....................................       1,250
                                                 -------------
Amount of Federal tax due.......................       1,850
 


[T.D. 6658, 28 FR 6633, June 27, 1963, as amended by T.D. 6708, 29 FR 
3198, Mar. 10, 1964]



Sec. 31.3302(d)-1  Definitions and special rules relating to 
limit on total credits.

    (a) Rate of tax deemed to be 3 percent. In applying the provisions 
of section 3302(c) relating to the limitation on total credits, and to 
reductions of credits otherwise allowable, the tax imposed by section 
3301 shall be computed at the rate of 3 percent in lieu of any other 
rate prescribed in section 3301 (see Sec. 31.3301-3).
    (b) Wages attributable to a particular State. For purposes of 
section 3302(c) (2) or (3), wages are attributable to a particular State 
if they are subject to the unemployment compensation law of the State. 
If wages are not subject to the unemployment compensation law of any 
State, the determination as to whether such wages, or any portion 
thereof, are attributable to the particular State with respect to which 
the reduction in total credits is imposed shall be made in accordance 
with rules prescribed by the Commissioner.
    (c) Employment Security Act of 1960. The Employment Security Act of 
1960, referred to in section 3302(c)(2), means title V of the Social 
Security Amendments of 1960.

[T.D. 6658, 28 FR 6635, June 27, 1963]



Sec. 31.3302(e)-1  Successor employer.

    (a) In general. In addition to the credits against the tax allowable 
under section 3302(a) and (b) for any taxable year after 1960, the 
taxpayer may be entitled to an amount of credit under section 3302(e). 
Credit under section 3302(e) is provided in the case of a taxpayer who 
(1) acquires substantially all of the property used in a trade or 
business, or in a separate unit of a trade or business, of another 
person (referred to in this section as a predecessor) who is not an 
employer (see Sec. 31.3306(a)-1) for the calendar year in which the 
acquisition takes place, and (2) immediately after the acquisition 
employs in his trade or business one or more individuals who immediately 
prior to the acquisition were employed in the trade or business of the 
predecessor.
    (b) Method of computing credit under section 3302(e). (1) Except as 
provided in paragraph (b)(2) of this section, the amount of credit to 
which the taxpayer may be entitled under section 3302(e) is the amount 
of credit to which the predecessor would be entitled under section 3302 
(a), (b), and (e), without regard to the limits in section 3302(c), if 
the predecessor were an employer.
    (2) If, during the calendar year in which the acquisition takes 
place, the predecessor pays remuneration, subject to contributions under 
the unemployment compensation law of a State, to any employee other than 
the individuals referred to in paragraph (a) of this section, the 
taxpayer will be entitled only to a portion of the amount of credit 
described in paragraph (b)(1) of this section. The portion is determined 
by multiplying such amount by a fraction. The numerator of the fraction 
is the total amount of remuneration, subject to such contributions, paid 
by the predecessor during such year to the individuals referred to in 
paragraph (a) of this section. The denominator of the fraction is the 
total amount of remuneration, subject to such contributions, paid by the 
predecessor during such year to all employees for services

[[Page 164]]

performed by them in the trade or business, or unit thereof, acquired by 
the taxpayer.

    Example. In April 1961 the X Partnership terminated after selling 
all of its property to the Y Corporation. During 1961, the X Partnership 
paid its employees and former employees a total of $1,000,000 as 
remuneration subject to contributions under the employment compensation 
law of a State. (Note that the X Partnership did not qualify as an 
employer for 1961 for purposes of the Federal unemployment tax, because 
it had employees during less than 20 weeks in 1961.) When the Y 
Corporation acquired the property it concurrently employed all 
individuals who were then in the employ of the X Partnership. Assume 
that the X Partnership, if it had qualified as an employer for 1961, 
would have been entitled to a total credit against the Federal tax of 
$30,000 under section 3302 (a) and (b), without regard to the limits in 
section 3302(c). Of the $1,000,000 remuneration paid by the X 
Partnership in 1961, one-fifth (or $200,000) was paid to individuals who 
were employed by the Y Corporation at the time it acquired the property 
of the X Partnership. Under section 3302(e), therefore, the Y 
Corporation is entitled to credit of $6,000, which is one-fifth of the 
credit ($30,000) which would have been available to the X Partnership.

    (3) The aggregate amount of credit allowable to the taxpayer under 
section 3302 (a), (b), and (e) is subject to the limits in section 
3302(c).
    (c) Proof of credit under section 3302(e). Credit under section 
3302(e) shall not be allowed against the tax for any taxable year unless 
there is submitted to the district director (1) such information or 
proof as may be called for in the return on which the credit is 
reported, or in the instructions relating to the return, and (2) such 
other or additional proof as the Commissioner or the district director 
may deem necessary to establish the right to the credit provided for 
under section 3302(e).
    (d) Cross-references. See paragraph (b) of Sec. 31.3306(b)(1)-1 for 
examples of the acquisition of property used in a trade or business, or 
in a separate unit thereof.

[T.D. 6658, 28 FR 6635, June 27, 1963]



Sec. 31.3306(a)-1  Who are employers.

    (a) Definition--(1) For calendar years 1956 through 1969, inclusive. 
Every person who employs 4 or more employees in employment (within the 
meaning of section 3306 (c) and (d)) on a total of 20 or more calendar 
days during any calendar year after 1955 and before 1970, each such day 
being in a different calendar week, is with respect to such year an 
employer subject to the tax.
    (1a) For 1970 and subsequent calendar years. Every person who 
employs 4 or more employees in employment (within the meaning of section 
3306 (c) and (d)) on a total of 20 or more calendar days during a 
calendar year after 1969, or during the calendar year immediately 
preceding such a calendar year, each such day being in a different 
calendar week, is with respect to such year an employer subject to the 
tax.
    (2) For calendar year 1955. Every person who employs 8 or more 
employees in employment (within the meaning of section 3306 (c) and (d)) 
on a total of 20 or more calendar days during the calendar year 1955, 
each such day being in a different calendar week, is with respect to 
such year an employer subject to the tax.
    (3) General agents of the Secretary of Commerce. For provisions 
relating to the circumstances under which an employee who performs 
services as an officer or member of the crew of an American vessel (i) 
which is owned by or bareboat chartered to the United States and (ii) 
whose business is conducted by a general agent of the Secretary of 
Commerce shall be deemed to be performing services for such general 
agent rather than for the United States, see Sec. 31.3306 (N)-1.
    (b) The several weeks in each of which occurs a day on which the 
prescribed number of employees are employed need not be consecutive 
weeks. It is not necessary that the employees so employed be the same 
individuals; they may be different individuals on each day. Neither is 
it necessary that the prescribed number of employees be employed at the 
same moment of time or for any particular length of time or on any 
particular basis of compensation. It is sufficient if the total number 
of employees employed during the 24 hours of a calendar day is 4 or more 
(8 or more for the calendar year 1955).
    (c) In determining whether a person employs a sufficient number of 
employees to be an employer subject to the

[[Page 165]]

tax, each employee is counted with respect to services which constitute 
employment as defined in section 3306(c) (see Sec. 31.3306(c)-2). No 
employee is counted with respect to services which do not constitute 
employment as so defined. See, however, paragraph (d) of this section.
    (d) The provisions of paragraph (c) of this section are subject to 
the provisions of section 3306(d), relating to services which do not 
constitute employment but which are deemed to be employment, and 
relating to services which constitute employment but which are deemed 
not to be employment (see Sec. 31.3306(d)-1). For example, if the 
services of an employee during a pay period are deemed to be employment 
under section 3306(d), even though a portion thereof does not constitute 
employment under section 3306(c), the employee is counted with respect 
to all services during the pay period. On the other hand, if the 
services of an employee during a pay period are deemed not to be 
employment, even though a portion thereof constitutes employment, the 
employee is not counted with respect to any services during the pay 
period.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 7037, 35 FR 
6709, Apr. 28, 1970]



Sec. 31.3306(b)-1  Wages.

    (a) Applicable law and regulations--(1) Remuneration paid after 
1954. Whether remuneration paid after 1954 for employment performed 
after 1938 constitutes wages is determined under section 3306(b). 
Accordingly, only remuneration paid after 1954 for employment performed 
after 1938 is covered by this section of the regulations and by the 
sections relating to the statutory exclusions from wages (Sec. Sec. 
31.3306(b)(1)-1 to 31.3306(b)(10)-1).
    (2) Remuneration paid after 1939 and before 1955. Whether 
remuneration paid after 1939 and before 1955 for employment performed 
after 1938 constitutes wages shall be determined in accordance with the 
applicable provisions of law and of 26 CFR (1939) Part 403 (Regulations 
107).
    (3) Remuneration paid in 1939. Whether remuneration paid in 1939 for 
employment performed after 1938 constitutes wages shall be determined in 
accordance with the applicable provisions of law and of 26 CFR (1939) 
Part 400 (Regulations 90).
    (b) The term ``wages'' means all remuneration for employment unless 
specifically excepted under section 3306(b) (see Sec. Sec. 
31.3306(b)(1)-1 to 31.3306(b)(10)-1, inclusive) or paragraph (j) of this 
section.
    (c) The name by which the remuneration for employment is designated 
is immaterial. Thus, salaries, fees, bonuses, and commissions are wages 
if paid as compensation for employment.
    (d) The basis upon which the remuneration is paid is immaterial in 
determining whether the remuneration constitutes wages. Thus, it may be 
paid on the basis of piecework or a percentage of profits; and it may be 
paid hourly, daily, weekly, monthly, or annually.
    (e) Except in the case of remuneration paid for services not in the 
course of the employer's trade or business (see Sec. 31.3306(b)(7)-1), 
the medium in which the remuneration is paid is also immaterial. It may 
be paid in cash or in something other than cash, as for example, goods, 
lodging, food, or clothing. Remuneration paid in items other than cash 
shall be computed on the basis of the fair value of such items at the 
time of payments.
    (f) Ordinarily, facilities or privileges (such as entertainment, 
medical services, or so-called ``courtesy'' discounts on purchases), 
furnished or offered by an employer to his employees generally, are not 
considered as remuneration for employment if such facilities or 
privileges are of relatively small value and are offered or furnished by 
the employer merely as a means of promoting the health, good will, 
contentment, or efficiency of his employees. The term ``facilities or 
privileges'', however, does not ordinarily include the value of meals or 
lodging furnished, for example, to restaurant or hotel employees, or to 
seamen or other employees aboard vessels, since generally these items 
constitute an appreciable part of the total remuneration of such 
employees.
    (g) Amounts of so-called ``vacation allowances'' paid to an employee 
constitute wages. Thus, the salary of an

[[Page 166]]

employee on vacation, paid notwithstanding his absence from work, 
constitutes wages.
    (h) Amounts paid specifically--either as advances or 
reimbursements--for traveling or other bona fide ordinary and necessary 
expenses incurred or reasonably expected to be incurred in the business 
of the employer are not wages. Traveling and other reimbursed expenses 
must be identified either by making a separate payment or by 
specifically indicating the separate amounts where both wages and 
expense allowances are combined in a single payment. For amounts that 
are received by an employee on or after July 1, 1990, with respect to 
expenses paid or incurred on or after July 1, 1990, see Sec. 
31.3306(b)-2.
    (i) Remuneration paid by an employer to an individual for 
employment, unless such remuneration is specifically excepted under 
section 3306(b), constitutes wages even though at the time paid the 
individual is no longer an employee.

    Example. A is employed by B, an employer, during the month of June 
1955 in employment and is entitled to receive remuneration of $100 for 
the services performed for B during the month. A leaves the employ of B 
at the close of business on June 30, 1955. On July 15, 1955 (when A is 
no longer an employee of B), B pays A the remuneration of $100 which was 
earned for the services performed in June. The $100 is wages, and the 
tax is payable with respect thereto.

    (j) In addition to the exclusions specified in Sec. Sec. 
31.3306(b)(1)-1 to 31.3306(b)(10)-1, inclusive, the following types of 
payments are excluded from wages:
    (1) Remuneration for services which do not constitute employment 
under section 3306(c).
    (2) Remuneration for services which are deemed not to be employment 
under section 3306(d) (Sec. 31.3306(d)-1).
    (3) Tips or gratuities paid directly to an employee by a customer of 
an employer, and not accounted for by the employee to the employer.
    (k) For provisions relating to the treatment of deductions from 
remuneration as payments of remuneration, see Sec. 31.3307-1.
    (l) Split-dollar life insurance arrangements. Except as otherwise 
provided under section 3306(r), see Sec. Sec. 1.61-22 and 1.7872-15 of 
this chapter for rules relating to the treatment of split-dollar life 
insurance arrangements.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR 
6636, June 27, 1963; T.D. 7375, 40 FR 42350, Sept. 12, 1975; T.D. 8276, 
54 FR 51028, Dec. 12, 1989; T.D. 8324, 55 FR 51697, Dec. 17, 1990; T.D. 
9092, 68 FR 54361, Sept. 17, 2003]



Sec. 31.3306(b)-1T  Question and answer relating to the definition of
wages in section 3306(b) (Temporary).

    The following question and answer relates to the definition of wages 
in section 3306(b) of the Internal Revenue Code of 1954, as amended by 
section 531(d)(3) of the Tax Reform Act of 1984 (98 Stat. 885):
    Q-1: Are fringe benefits included in the definition of wages under 
section 3306(b)?
    A-1: Yes, unless specifically excluded from the definition of 
``wages'' pursuant to section 3306(b) (1) through (16). For example, a 
fringe benefit provided to or on behalf of an employee is excluded from 
the definition of ``wages'' if at the time such benefit is provided it 
is reasonable to believe that the employee will be able to exclude such 
benefit from income under section 117 or 132.

[T.D. 8004, 50 FR 755, Jan. 7, 1985]



Sec. 31.3306(b)-2  Reimbursement and other expense allowance amounts.

    (a) When excluded from wages. If a reimbursement or other expense 
allowance arrangement meets the requirements of section 62(c) of the 
Code and Sec. 1.62-2 and the expenses are substantiated within a 
reasonable period of time, payments made under the arrangement that do 
not exceed the substantiated expenses are treated as paid under an 
accountable plan and are not wages. In addition, if both wages and the 
reimbursement or other expense allowance are combined in a single 
payment, the reimbursement or other expense allowance must be identified 
either by making a separate payment or by specifically identifying the 
amount of the reimbursement or other expense allowance.
    (b) When included in wages--(1) Accountable plans--(i) General rule. 
Except as provided in paragraph (b)(1)(ii) of

[[Page 167]]

this section, if a reimbursement or other expense allowance arrangement 
satisfied the requirements of section 62(c) and Sec. 1.62-2, but the 
expenses are not substantiated within a reasonable period of time or 
amounts in excess of the substantiated expenses are not returned within 
a reasonable period of time, the amount paid under the arrangement in 
excess of the substantiated expenses is treated as paid under a 
nonaccountable plan, is included in wages, and is subject to withholding 
and payment of employment taxes no later than the first payroll period 
following the end of the reasonable period.
    (ii) Per diem or mileage allowances. If a reimbursement or other 
expense allowance arrangement providing a per diem or mileage allowance 
satisfies the requirements of section 62(c) and Sec. 1.62-2, but the 
allowance is paid at a rate for each day or mile of travel that exceeds 
the amount of the employee's expenses deemed substantiated for a day or 
mile of travel, the excess portion is treated as paid under a 
nonaccountable plan and is included in wages. In the case of a per diem 
or mileage allowance paid as a reimbursement, the excess portion is 
subject to withholding and payment of employment taxes when paid. In the 
case of a per diem or mileage allowance paid as an advance, the excess 
portion is subject to withholding and payment of employment taxes no 
later than the first payroll period following the payroll period in 
which the expenses with respect to which the advance was paid (i.e., the 
days or miles of travel) are substantiated. The Commissioner may, in his 
discretion, prescribe special rules in pronouncements of general 
applicability regarding the timing of withholding and payment of 
employment taxes on per diem and mileage allowances.
    (2) Nonaccountable plans. If a reimbursement or other expense 
allowance arrangement does not satisfy the requirements of section 62(c) 
and Sec. 1.62-2 (e.g., the arrangement does not require expenses to be 
substantiated or require amounts in excess of the substantiated expenses 
to be returned), all amounts paid under the arrangement are treated as 
paid under a nonaccountable plan, are included in wages, and are subject 
to withholding and payment of employment taxes when paid.
    (c) Effective dates. This section generally applies to payments made 
under reimbursement or other expense allowance arrangements received by 
an employee on or after July 1, 1990, with respect to expenses paid or 
incurred on or after July 1, 1990. Paragraph (b)(1)(ii) of this section 
applies to payments made under reimbursement or other expense allowance 
arrangements received by an employee on or after January 1, 1991, with 
respect to expenses paid or incurred on or after January 1, 1991.

[T.D. 8324, 55 FR 51697, Dec. 17, 1990]



Sec. 31.3306(b)(1)-1  $3,000 limitation.

    (a) In general. (1) the term ``wages'' does not include that part of 
the remuneration paid within any calendar year by an employer to an 
employee which exceeds the first $3,000 of remuneration (exclusive of 
remuneration excepted from wages in accordance with paragraph (j) of 
Sec. 31.3306(b)-1 or Sec. Sec. 31.3306(b)(2)-1 to 31.3306(b)(8)-1, 
inclusive), paid within such calendar year by such employer to such 
employee for employment performed for him at any time after 1938.
    (2) The $3,000 limitation applies only if the remuneration paid 
during any one calendar year by an employer to the same employee for 
employment performed after 1938 exceeds $3,000. The limitation in such 
case relates to the amount of remuneration paid during any one calendar 
year for employment after 1938 and not to the amount of remuneration for 
employment performed in any one calendar year.

    Example. Employer B, in 1955, pays employee A $2,500 on account of 
$3,000 due him for employment performed in 1955. In 1956 employer B pays 
employee A the balance of $500 due him for employment performed in the 
prior year (1955), and thereafter in 1956 also pays A $3,000 for 
employment performed in 1956. The $2,500 paid in 1955 is subject to tax 
in 1955. The balance of $500 paid in 1956 for employment during 1955 is 
subject to tax in 1956, as is also the first $2,500 paid of the $3,000 
for employment during 1956 (this $500 for 1955 employment added to the 
first $2,500 paid for 1956 employment constitutes the maximum wages 
subject to the tax which could be paid in 1956 by B to A). The final 
$500 paid by B to A in 1956 is not included as wages and is not subject 
to the tax.


[[Page 168]]


    (3) If during a calendar year an employee is paid remuneration by 
more than one employer, the limitation of wages to the first $3,000 of 
remuneration paid applies, not to the aggregate remuneration paid by all 
employers with respect to employment performed after 1938, but instead 
to the remuneration paid during such calendar year by each employer with 
respect to employment performed after 1938. In such case the first 
$3,000 paid during the calendar year by each employer constitutes wages 
and is subject to the tax. In connection with the application of the 
$3,000 limitation, see also paragraph (b) of this section relating to 
the circumstances under which wages paid by a predecessor employer are 
deemed to be paid by his successor. In connection with the annual wage 
limitation in the case of remuneration after December 31, 1978 from two 
or more related corporations that compensate an employee through a 
common paymaster, see Sec. 31.3306(p)-1.

    Example 1. During 1955 employer D pays to employee C a salary of 
$600 a month for employment performed for D during the first seven 
months of 1955, or total remuneration of $4,200. At the end of the fifth 
month C has been paid $3,000 by employer D, and only that part of his 
total remuneration from D constitutes wages subject to the tax. The $600 
paid to employee C by employer D in the sixth month, and the like amount 
paid in the seventh month, are not included as wages and are not subject 
to the tax. At the end of the seventh month C leaves the employ of D and 
enters the employ of E. Employer E pays to C remuneration of $600 a 
month in each of the remaining five months of 1955, or total 
remuneration of $3,000. The entire $3,000 paid by E to employee C 
constitutes wages and is subject to the tax. Thus, the first $3,000 paid 
by employer D and the entire $3,000 paid by employer E constitute wages.
    Example 2. During the calendar year 1955 F is simultaneously an 
officer (an employee) of the X Corporation, the Y Corporation, and the Z 
Corporation, each such corporation being an employer for such year. 
During such year F is paid a salary of $3,000 by each Corporation. Each 
$3,000 paid to F by each of the corporations, X, Y, and Z (whether or 
not such corporations are related), constitutes wages and is subject to 
the tax.

    (b) Wages paid by predecessor attributed to successor. (1) If an 
employer (hereinafter referred to as a successor) during any calendar 
year acquires substantially all the property used in a trade or business 
of another employer (hereinafter referred to as a predecessor), or used 
in a separate unit of a trade or business of a predecessor, and if 
immediately after the acquisition the successor employs in his trade or 
business an individual who immediately prior to the acquisition was 
employed in the trade or business of such predecessor, then, for 
purposes of the application of the $3,000 limitation set forth in 
paragraph (a) of this section, any remuneration (exclusive of 
remuneration excepted from wages in accordance with paragraph (j) of 
Sec. 31.3306(b)-1 or Sec. Sec. 31.3306(b)(2)-1 to 31.3306(b)(8)-1, 
inclusive), with respect to employment paid (or considered under this 
provision as having been paid to such individual by such predecessor 
during such calendar year and prior to such acquisition shall be 
considered as having been paid by such successor. Wages paid by a 
predecessor shall not be considered as having been paid by the successor 
unless both the predecessor and the successor are employers as defined 
in section 3306(a) for the calendar year in which the acquisition occurs 
(see Sec. 31.3306(a)-1, relating to who are employers).
    (2) The wages paid, or considered as having been paid, by a 
predecessor to an employee shall, for purposes of the $3,000 limitation, 
be treated as having been paid to such employee by a successor, if:
    (i) The successor during a calendar year acquired substantially all 
the property used in a trade or business, or used in a separate unit of 
a trade or business, of the predecessor;
    (ii) Such employee was employed in the trade or business of the 
predecessor immediately prior to the acquisition and is employed by the 
successor in his trade or business immediately after the acquisition; 
and
    (iii) Such wages were paid during the calendar year in which the 
acquisition occurred and prior to such acquisition.
    (3) The method of acquisition by an employer of the property of 
another employer is immaterial. The acquisition may occur as a 
consequence of the incorporation of a business by a sole proprietor of a 
partnership, the continuance without interruption of the

[[Page 169]]

business of a previously existing partnership by a new partnership or by 
a sole proprietor, or a purchase or any other transaction whereby 
substantially all the property used in a trade or business, or used in a 
separate unit of a trade or business, of one employer is acquired by 
another employer.
    (4) Substantially all the property used in a separate unit of a 
trade or business may consist of substantially all the property used in 
the performance of an essential operation of the trade or business, or 
it may consist of substantially all the property used in a relatively 
self-sustaining entity which forms a part of the trade or business.

    Example 1. The M Corporation which is engaged in the manufacture of 
automobiles, including the manufacture of automobile engines, 
discontinues the manufacture of the engines and transfers all the 
property used in such manufacturing operations to the N Company. The N 
Company is considered to have acquired a separate unit of the trade or 
business of the M Corporation, namely, its engine manufacturing unit.
    Example 2. The R Corporation which is engaged in the operation of a 
chain of grocery stores transfers one of such stores to the S Company. 
The S Company is considered to have acquired a separate unit of the 
trade or business of the R Corporation.

    (5) A successor may receive credit for wages paid to an employee by 
a predecessor only if immediately prior to the acquisition the employee 
was employed by the predecessor in his trade or business which was 
acquired by the successor and if immediately after the acquisition such 
employee is employed by the successor in his trade or business (whether 
or not in the same trade or business in which the acquired property is 
used). If the acquisition involves only a separate unit of a trade or 
business of the predecessor, the employee need not have been employed by 
the predecessor in that unit provided he was employed in the trade or 
business of which the acquired unit was a part.

    Example. The Y Corporation in 1955 acquires all the property of the 
X Manufacturing Company and immediately after the acquisition employs in 
its trade or business employee A, who, immediately prior to the 
acquisition, was employed by the X Company. Both the Y Corporation and 
the X Company are employers, as defined in the Act, for the calendar 
year 1955. The X Company has in 1955 (the calendar year in which the 
acquisition occurs) and prior to the acquisition paid $2,000 of wages to 
A. The Y Corporation in 1955 pays to A remuneration with respect to 
employment of $2,000. Only $1,000 of such remuneration is considered to 
be wages. For purposes of the $3,000 limitation, the Y Corporation is 
credited with the $2,000 paid to A by the X Company. If, in the same 
calendar year, the property is acquired from the Y Corporation by the Z 
Company, an employer for such year, and A immediately after the 
acquisition is employed by the Z Company in its trade or business, no 
part of the remuneration paid to A by the Z Company in the year of the 
acquisition will be considered to be wages. The Z Company will be 
credited with the remuneration paid to A by the Y Corporation and also 
with the wages paid to A by the X Company (considered for purposes of 
the application of the $3,000 limitation as having also been paid by the 
Y Corporation).

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR 
6636, June 27, 1963; T.D. 7660, 44 FR 75142, Dec. 19, 1979]



Sec. 31.3306(b)(2)-1  Payments under employers' plans on account of 
retirement, sickness or accident disability, medical or hospitalization

expenses, or death.

    (a) The term ``wages'' does not include the amount of any payment 
(including any amount paid by an employer for insurance or annuities, or 
into a fund, to provide for any such payment) made to, or on behalf of, 
an employee or any of his dependents under a plan or system established 
by an employer which makes provision for his employees generally (or for 
his employees generally and their dependents) or for a class or classes 
of his employees (or for a class or classes of his employees and their 
dependents), on account of:
    (1) An employee's retirement,
    (2) Sickness or accident disability of an employee or any of his 
dependents,
    (3) Medical or hospitalization expenses in connection with sickness 
or accident disability of an employee or any of his dependents, or
    (4) Death of an employee or any of his dependents.
    (b) The plan or system established by an employer need not provide 
for payments on account of all of the specified items, but such plan or 
system may provide for any one or more of such

[[Page 170]]

items. Payments for any one or more of such items under a plan or system 
established by an employer solely for the dependents of his employees 
are not within this exclusion from wages.
    (c) Dependents of an employee include the employee's husband or 
wife, children, and any other members of the employee's immediate 
family.
    (d) It is immaterial for purposes of this exclusion whether the 
amount or possibility of such benefit payments is taken into 
consideration in fixing the amount of an employee's remuneration or 
whether such payments are required, expressly or impliedly, by the 
contract of service.



Sec. 31.3306(b)(3)-1  Retirement payments.

    The term ``wages'' does not include any payment made by an employer 
to an employee (including any amount paid by an employer for insurance 
or annuities, or into a fund, to provide for any such payment) on 
account of the employee's retirement. Thus payments made to an employee 
on account of his retirement are excluded from wages under this 
exception even though not made under a plan or system.



Sec. 31.3306(b)(4)-1  Payments on account of sickness or accident
disability, or medical or hospitalization expenses.

    The term ``wages'' does not include any payment made by an employer 
to, or on behalf of, an employee on account of the employee's sickness 
or accident disability or the medical or hospitalization expenses in 
connection with the employee's sickness or accident disability, if such 
payment is made after the expiration of 6 calendar months following the 
last calendar month in which such employee worked for such employer. 
Such payments are excluded from wages under this exception even though 
not made under a plan or system. If the employee does not actually 
perform services for the employer during the requisite period, the 
existence of the employer-employee relationship during that period is 
immaterial.



Sec. 31.3306(b)(5)-1  Payments from or to certain tax-exempt trusts,
or under or to certain annuity plans or bond purchase plans.

    (a) Payments from or to certain tax-exempt trusts. The term 
``wages'' does not include any payment made--
    (1) By an employer, on behalf of an employee or his beneficiary, 
into a trust, or
    (2) To, or on behalf of an employee or his beneficiary from a trust,

if at the time of such payment the trust is exempt from tax under 
section 501(a) as an organization described in section 401(a). A payment 
made to an employee of such a trust for services rendered as an employee 
of the trust and not as a beneficiary thereof is not within this 
exclusion from wages.
    (b) Payments under or to certain annuity plans. (1) The term 
``wages'' does not include any payment made after December 31, 1962--
    (i) By an employer, on behalf of an employee or his beneficiary, 
into an annuity plan, or
    (ii) To, or on behalf of, an employee or his beneficiary under an 
annuity plan, if at the time of such payment the annuity plan is a plan 
described in section 403(a).
    (2) The term ``wages'' does not include any payment made before 
January 1, 1963--
    (i) By an employer, on behalf of an employee or his beneficiary, 
into an annuity plan, or
    (ii) To, or on behalf of, an employee or his beneficiary under an 
annuity plan, if at the time of such payment the annuity plan meets the 
requirements of section 401(a) (3), (4), (5), and (6).
    (c) Payments under or to certain bond purchase plans. The term 
``wages'' does not include any payment made after December 31, 1962--
    (1) By an employer, on behalf of an employee or his beneficiary, 
into a bond purchase plan, or
    (2) To, or on behalf of, an employee or his beneficiary under a bond 
purchase plan,

if at the time of such payment the plan is a qualified bond purchase 
plan described in section 405(a).

[T.D. 6658, 28 FR 6636, June 27, 1963]

[[Page 171]]



Sec. 31.3306(b)(6)-1  Payment by an employer of employee tax under
section 3101 or employee contributions under a State law.

    The term ``wages'' does not include any payment by an employer 
(without deduction from the remuneration of, or other reimbursement 
from, the employee) of either (a) the employee tax imposed by section 
3101 or the corresponding section of prior law, or (b) any payment 
required from an employee under a State unemployment compensation law.



Sec. 31.3306(b)(7)-1  Payments other than in cash for service not in
the course of employer's trade or business.

    The term ``wages'' does not include remuneration paid in any medium 
other than cash for service not in the course of the employer's trade or 
business. Cash remuneration includes checks and other monetary media of 
exchange. Remuneration paid in any medium other than cash, such as 
lodging, food, or other goods or commodities, for service not in the 
course of the employer's trade or business does not constitute wages. 
Remuneration paid in any medium other than cash for other types of 
services does not come within this exclusion from wages. For provisions 
relating to the circumstances under which service not in the course of 
the employer's trade or business does not constitute employment, see 
Sec. 31.3306(c)(3)-1.



Sec. 31.3306(b)(8)-1  Payments to employees for non-work periods.

    The term ``wages'' does not include any payment (other than vacation 
or sick pay) made by an employer to an employee after the calendar month 
in which the employee attains age 65, if--
    (a) Such employee does no work (other than being subject to call for 
the performance of work) for such employer in the period for which such 
payment is made; and
    (b) The employer-employee relationship exists between the employer 
and employee throughout the period for which such payment is made.

Vacation or sick pay is not within this exclusion from wages. If the 
employee does any work for the employer in the period for which the 
payment is made, no remuneration paid by such employer to such employee 
with respect to such period is within this exclusion from wages. For 
example, if employee A, who attained the age of 65 in January 1955, is 
employed by the X Company on a stand-by basis and is paid $200 by the X 
Company for being subject to call during the month of February 1955 and 
an additional $25 for work performed for the X Company on one day in 
February 1955, then none of the $225 is excluded from wages under this 
exception.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6708, 29 FR 
3199, Mar. 10, 1964]



Sec. 31.3306(b)(9)-1  Moving expenses.

    (a) The term ``wages'' does not include remuneration paid on or 
after November 1, 1964, to or on behalf of an employee, either as an 
advance or a reimbursement, specifically for moving expenses incurred or 
expected to be incurred, if (and to the extent that) at the time of 
payment it is reasonable to believe that a corresponding deduction is or 
will be allowable to the employee under section 217. The reasonable 
belief contemplated by the statute may be based upon any evidence 
reasonably sufficient to induce such belief, even though such evidence 
may be insufficient upon closer examination by the district director or 
the courts finally to establish that a deduction is allowable under 
section 217. The reasonable belief shall be based upon the application 
of section 217 and the regulations thereunder in Part 1 of this chapter 
(Income Tax Regulations). When used in this section, the term ``moving 
expenses'' has the same meaning as when used in section 217 and the 
regulations thereunder.
    (b) Except as otherwise provided in paragraph (a) of this section, 
or in a numbered paragraph of section 3306(b), amounts paid to or on 
behalf of an employee for moving expenses are wages for purposes of 
section 3306(b).

[T.D. 7375, 40 FR 42351, Sept. 12, 1975]

[[Page 172]]



Sec. 31.3306(b)(10)-1  Payments under certain employers' plans after
retirement, disability, or death.

    (a) In general. The term ``wages'' does not include the amount of 
any payment or series of payments made after January 2, 1968, by an 
employer to, or on behalf of, an employee or any of his dependents under 
a plan established by the employer which makes provisions for his 
employees generally (or for his employees generally and their 
dependents) or for a class or classes of his employees (or for a class 
or classes of his employees and their dependents), which is paid or 
commences to be paid upon or within a reasonable time after the 
termination of an employee's employment relationship because of the 
employee's--
    (1) Death,
    (2) Retirement for disability, or
    (3) Retirement after attaining an age specified in the plan 
established by the employer or in a pension plan of the employer as the 
age at which a person in the employee's circumstances is eligible for 
retirement.

A payment or series of payments made under the circumstances described 
in the preceding sentence is excluded from ``wages'' even if made 
pursuant to an incentive compensation plan which also provides for the 
making of other types of payments. However, any payment or series of 
payments which would have been paid if the employee's relationship had 
not been terminated is not excluded from ``wages'' under this section 
and section 3306(b)(10). For example, lump-sum payments for unused 
vacation time or a final paycheck received after retirement are payments 
which the employee would have received whether or not he retired and 
therefore are not excluded from ``wages.'' Further, if any payment is 
made upon or after termination of employment for any reason other than 
those set out in paragraphs (a)(1), (2), and (3) of this section such 
payment is not excludable from ``wages'' by this section. For example, 
if a pension plan provides for retirement upon disability, completion of 
30 years of service, or attainment of age 65, and if an employee who is 
not disabled retires at age 61 after 30 years of service, none of the 
retirement payments made to the employee under the pension plan 
(including any made after he is 65) is excludable from ``wages'' under 
this section. However, if the pension plan had conditioned retirement 
after 30 years of service upon attainment of age 60, all of the 
retirement payments would have been excludable.
    (b) Plan. The plan or system established by an employer need not 
provide for payments because of termination of employment for all the 
reasons set out in paragraphs (a)(1), (2), and (3) of this section, but 
such plan or system may provide for payments because of termination for 
any one or more of such reasons. Payments because of termination of 
employment for any one or more of such reasons under a plan or system 
established by an employer solely for the dependents of his employees 
are not within this exclusion from wages.
    (c) Dependents. Dependents of an employee include the employee's 
husband or wife, children, and any other members of the employee's 
immediate family.
    (d) Benefit payments. It is immaterial for purposes of this 
exclusion whether the amount or possibility of such benefit payments is 
paid on account of services rendered or taken into consideration in 
fixing the amount of an employee's remuneration or whether such payments 
are required expressly or impliedly, by the contract of service.
    (e) Example. The application of this section may be illustrated by 
the following example:

    Example. A, an employee, receives a salary of $1,500 a month, 
payable on the 5th day of the month following the month for which the 
salary is earned. A's employer has established an incentive compensation 
plan for a class of his employees, including A, providing for the 
payment of deferred compensation on termination of employment, including 
termination upon an employee's death, retirement at age 65 (the 
retirement age specified in the plan), or retirement for disability. On 
March 1, 1973, A attains the age of 65 and retires. On March 5, 1973, A 
receives $5,500 from his employer of which $1,500 represents A's salary 
for services he performed in February 1973, and $4,000 represents 
incentive compensation paid under the employer's plan. The amount of 
$4,000 is excluded from ``wages'' under this section. The amount of 
$1,500 is not excluded from ``wages'' under this section.

[T.D. 7374, 40 FR 30951, July 24, 1975]

[[Page 173]]



Sec. 31.3306(b)(13)-1  Payments or benefits under a qualified
educational assistance program.

    The term ``wages'' does not include any payment made, or benefit 
furnished, to or for the benefit of an employee in a taxable year 
beginning after December 31, 1978, if at the time of such payment or 
furnishing it is reasonable to believe that the employee will be able to 
exclude such payment or benefit from income under section 127.

[T.D. 7898, 48 FR 31019, July 6, 1983]



Sec. 31.3306(c)-1  Employment; services performed before 1955.

    (a) Services performed after 1938 and before 1955 constitute 
employment under section 3306(c) if such services were employment under 
the law applicable to the period in which they were performed.
    (b) The tax applies with respect to remuneration paid by an employer 
after 1954 for services performed after 1938 and before 1955, as well as 
for services performed after 1954, to the extent that the remuneration 
and services constitute wages and employment. See Sec. Sec. 31.3306(b)-
1 to 31.3306(b)(8)-1, inclusive, relating to wages.
    (c) Determination of whether services performed after 1938 and 
before 1955 constitute employment shall be made in accordance with the 
provisions of law applicable to the period in which they were performed 
and of the regulations thereunder. The regulations applicable in 
determining whether services performed after 1938 and before 1955 
constitute employment are as follows:
    (1) Services performed in 1939--26 CFR (1939) Part 400 (Regulations 
90).
    (2) Services performed after 1939 and before 1955--26 CFR (1939) 
Part 403 (Regulations 107).



Sec. 31.3306(c)-2  Employment; services performed after 1954.

    (a) In general. Whether services performed after 1954 constitute 
employment is determined under subsections (c) and (n) of section 3306.
    (b) Services performed within the United States. Services performed 
after 1954 within the United States (see Sec. 31.3306(j)-1) by an 
employee for the person employing him, unless specifically excepted 
under section 3306(c), constitute employment. With respect to services 
performed within the United States, the place where the contract of 
service is entered into is immaterial. The citizenship or residence of 
the employee or of the person employing him also is immaterial except to 
the extent provided in any specific exception from employment. Thus, the 
employee and the person employing him may be citizens and residents of a 
foreign country and the contract of service may be entered into in a 
foreign country, and yet, if the employee under such contract performs 
services within the United States, there may be to that extent 
employment.
    (c) Services performed outside the United States--(1) In general. 
Except as provided in subparagraph (2) of this paragraph, services 
performed outside the United States (see Sec. 31.3306(j)-1) do not 
constitute employment.
    (2) On or in connection with an American vessel or American 
aircraft. (i) This subparagraph relates to services performed after 1954 
``on or in connection with'' an American vessel, and to services 
performed after 1961 ``on or in connection with'' an American aircraft 
to the extent that the remuneration for the latter services is paid 
after 1961. Such services performed outside the United States by an 
employee for the person employing him constitute employment if:
    (a) The employee is also employed ``on and in connection with'' such 
vessel or aircraft when outside the United States; and
    (b) The services are performed under a contract of service, between 
the employee and the person employing him, which is entered into within 
the United States, or during the performance of the contract under which 
the services are performed and while the employee is employed on the 
vessel or aircraft it touches at a port within the United States; and
    (c) The services are not excepted under section 3306(c). (See 
particularly Sec. 31.3306(c)(17)-1, relating to fishing.)
    (ii) An employee performs services on and in connection with the 
vessel or aircraft if he performs services on the vessel or aircraft 
which are also in connection with the vessel or aircraft.

[[Page 174]]

Services performed on the vessel by employees as officers or members of 
the crew, or as employees of concessionaires, of the vessel, for 
example, are performed under such circumstances, since the services are 
also connected with the vessel. Similarly, services performed on the 
aircraft by employees as officers or members of the crew of the aircraft 
are performed on and in connection with such aircraft. Services may be 
performed on the vessel or aircraft, however, which have no connection 
with it, as in the case of services performed by an employee while on 
the vessel or aircraft merely as a passenger in the general sense. For 
example, the services of a buyer in the employ of a department store 
while he is a passenger on a vessel are not in connection with the 
vessel.
    (iii) If services are performed by an employee ``on and in 
connection with'' an American vessel or American aircraft when outside 
the United States and the conditions in (b) and (c) of paragraph 
(c)(2)(i) of this section are met, then the services of that employee 
performed on or in connection with the vessel or aircraft constitute 
employment. The expression ``on or in connection with'' refers not only 
to services performed on the vessel or aircraft but also to services 
connected with the vessel or aircraft which are not actually performed 
on it (for example, shore services performed as officers or members of 
the crew, or as employees of concessionaires, of the vessel).
    (iv) Services performed by a member of the crew or other employee 
whose contract of service is not entered into within the United States, 
and during the performance of which and while the employee is employed 
on the vessel or aircraft it does not touch at a port within the United 
States, do not constitute employment, notwithstanding that service 
performed by other members of the crew or other employees on or in 
connection with the vessel or aircraft may constitute employment.
    (v) A vessel includes every description of watercraft, or other 
contrivance, used as a means of transportation on water. An aircraft 
includes every description of craft, or other contrivance, used as a 
means of transportation through the air. In the case of an aircraft, the 
term ``port'' means an airport. An airport means an area on land or 
water used regularly by aircraft for receiving or discharging passengers 
or cargo. For definitions of ``American vessel'' and ``American 
aircraft'', see Sec. 31.3306(m)-1.
    (vi) With respect to services performed outside the United States on 
or in connection with an American vessel or American aircraft, the 
citizenship or residence of the employee is immaterial, and the 
citizenship or residence of the employer is material only in case it has 
a bearing in determining whether a vessel is an American vessel.

[T.D. 6658, 28 FR 6636, June 27, 1963]



Sec. 31.3306(c)-3  Employment; excepted services in general.

    (a) Services performed by an employee for the person employing him 
do not constitute employment for purposes of the tax if they are 
specifically excepted from employment under any of the numbered 
paragraphs of section 3306(c). Services so excepted do not constitute 
employment for purposes of the tax even though they are performed within 
the United States, or are performed outside the United States on or in 
connection with an American vessel or American aircraft. If not 
otherwise provided in the regulations relating to the numbered 
paragraphs of section 3306(c), such regulations apply with respect to 
services performed after 1954.
    (b) The exception attaches to the services performed by the employee 
and not to the employee as an individual; that is, the exception applies 
only to the services rendered by the employee in an excepted class.

    Example. A is an individual who is employed part time by B to 
perform services which constitutes ``agricultural labor'' (see Sec. 
31.3306 (k)-1). A is also employed by C part time to perform services as 
a grocery clerk in a store owned by him. While A's services which 
constitute ``agricultural labor'' are expected, the exception does not 
embrace the services performed by A as a grocery clerk in the employ of 
C and the latter services are not excepted from employment.

    (c) For provisions relating to the circumstances under which 
services which are excepted are nevertheless deemed

[[Page 175]]

to be employment, and relating to the circumstances under which services 
which are not excepted are nevertheless deemed not to be employment, see 
Sec. 31.3306(d)-1.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR 
6637, June 27, 1963]



Sec. 31.3306(c)(1)-1  Agricultural labor.

    Services performed by an employee for the person employing him which 
constitute ``agricultural labor'' as defined in section 3306(k) are 
excepted from employment. For provisions relating to the definition of 
the term ``agricultural labor'', see Sec. 31.3306(k)-1.



Sec. 31.3306(c)(2)-1  Domestic service.

    (a) In a private home. (1) Services of a household nature performed 
by an employee in or about a private home of the person by whom he is 
employed are excepted from employment. A private home is a fixed place 
of abode of an individual or family. A separate and distinct dwelling 
unit maintained by an individual in an apartment house, hotel, or other 
similar establishment may constitute a private home. If a dwelling house 
is used primarily as a boarding or lodging house for the purpose of 
supplying board or lodging to the public as a business enterprise, it is 
not a private home and the services performed therein are not excepted.
    (2) In general, services of a household nature in or about a private 
home include services performed by cooks, waiters, butlers, 
housekeepers, governesses, maids, valets, baby sitters, janitors, 
laundresses, furnacemen, caretakers, handymen, gardeners, footmen, 
grooms, and chauffeurs of automobile for family use.
    (b) In a local college club or local chapter of a college fraternity 
or sorority. (1) Services of a household nature performed by an employee 
in or about the club rooms or house of a local college club or of a 
local chapter of a college fraternity or sorority by which he is 
employed are excepted from employment. A local college club or local 
chapter of a college fraternity or sorority does not include an alumni 
club or chapter. If the club rooms or house of a local college club or 
local chapter of a college fraternity or sorority is used primarily for 
the purpose of supplying board or lodging to students or the public as a 
business enterprise, the services performed therein are not within the 
exception.
    (2) In general, services of a household nature in or about the club 
rooms or house of a local college club or local chapter of a college 
fraternity or sorority include services rendered by cooks, waiters, 
butlers, maids, janitors, laundresses, furnacemen, handymen, gardeners, 
housekeepers, and housemothers.
    (c) Services not excepted. Services not of a household nature, such 
as services performed as a private secretary, tutor, or librarian, even 
though performed in the employer's private home or in a local college 
club or local chapter of a college fraternity or sorority, are not 
within the exception. Services of a household nature are not within the 
exception if performed in or about rooming or lodging houses, boarding 
houses, clubs (except local college clubs), hotels, hospitals, 
eleemosynary institutions, or commercial offices or establishments.



Sec. 31.3306(c)(3)-1  Services not in the course of employer's trade
or business.

    (a) Services not in the course of the employer's trade or business 
performed by an employe for an employer in a calendar quarter are 
excepted from employment unless--
    (1) The cash remuneration paid for such services performed by the 
employee for the employer in the calendar quarter is $50 or more; and
    (2) Such employee is regularly employed in the calendar quarter by 
such employer to perform such services.

Unless the tests set forth in both paragraphs (a)(1) and (2) of this 
section are met, the services are excepted from employment.
    (b) The term ``services not in the course of the employer's trade or 
business'' includes services that do not promote or advance the trade or 
business of the employer. Services performed for a corporation do not 
come within the exception.
    (c) The test relating to cash remuneration of $50 or more is based 
on the remuneration earned during a calendar

[[Page 176]]

quarter rather than on the remuneration paid in a calendar quarter. 
However, for purposes of determining whether the test is met, it is also 
required that the remuneration be paid, although it is immaterial when 
the remuneration is paid. Furthermore, in determining whether $50 or 
more has been paid for services not in the course of the employer's 
trade or business, only cash remuneration for such services shall be 
taken into account. The term ``cash remuneration'' includes checks and 
other monetary media of exchange. Remuneration paid in any other medium, 
such as lodging, food, or other goods or commodities, is disregarded in 
determining whether the cash-remuneration test is met.
    (d) For purposes of this exception, an individual is deemed to be 
regularly employed by an employer during a calendar quarter only if--
    (1) Such individual performs services not in the course of the 
employer's trade or business for such employer for some portion of the 
day on at least 24 days (whether or not consecutive) during such 
calendar quarter; or
    (2) Such individual was regularly employed (as determined under 
paragraph (d)(1) of this section) by such employer in the performance of 
services not in the course of the employer's trade or business during 
the preceding calender quarter (including the last calendar quarter of 
1954).
    (e) In determining whether an employee has performed services not in 
the course of the employer's trade or business on at least 24 days 
during a calendar quarter, there shall be counted as one day--
    (1) Any day or portion thereof on which the employee actually 
performs such services; and
    (2) Any day or portion thereof on which the employee does not 
perform services of the prescribed character but with respect to which 
cash remuneration is paid or payable to the employee for such services, 
such as a day on which the employee is sick or on vacation.

An employee who on a particular day reports for work and, at the 
direction of his employer, holds himself in readiness to perform 
services not in the course of the employer's trade or business shall be 
considered to be engaged in the actual performance of such services on 
that day. For purposes of this exception, a day is a period of 24 hours 
commencing at midnight and ending at midnight.
    (f) For provisions relating to the exclusion from wages of 
remuneration paid in any medium other than cash for services not in the 
course of the employer's trade or business, see Sec. 31.3306(b) (7)-1.



Sec. 31.3306(c)(4)-1  Services on or in connection with a non-American
vessel or aircraft.

    (a) Services performed within the United States by an employee for 
an employer ``on or in connection with'' a vessel not an American 
vessel, or ``on or in connection with'' an aircraft not an American 
aircraft, are excepted from employment if the employee is employed by 
the employer ``on and in connection with'' the vessel or aircraft when 
outside the United States.
    (b) An employee performs services on and in connection with the 
vessel or aircraft if he performs services on the vessel or aircraft 
when outside the United States which are also in connection with the 
vessel or aircraft. Services performed on the vessel outside the United 
States by employees as officers or members of the crew, or by employees 
of concessionaires, of the vessel, for example, are performed under such 
circumstances, since such services are also connected with the vessel. 
Similarly, services performed on the aircraft outside the United States 
by employees as officers or members of the crew of the aircraft are 
performed on and in connection with such aircraft. Services may be 
performed on the vessel or aircraft, however, which have no connection 
with it, as in the case of services performed by an employee while on 
the vessel or aircraft merely as a passenger in the general sense. For 
example, the services of a buyer in the employ of a department store 
while he is a passenger on a vessel are not in connection with the 
vessel.
    (c) The expression ``on or in connection with'' refers not only to 
services performed on the vessel or aircraft but

[[Page 177]]

also to services connected with the vessel or aircraft which are not 
actually performed on it (for example, shore services performed as 
officers or members of the crew, or as employees of concessionaires, of 
the vessel).
    (d) The citizenship or residence of the employee and the place where 
the contract of service is entered into are immaterial for purposes of 
this exception, and the citizenship or residence of the person employing 
him is material only in case it has a bearing in determining whether the 
vessel is an American vessel. For definitions of the terms ``vessel'' 
and ``aircraft'', see paragraph (c)(2)(v) of Sec. 31.3306(c)-2. For 
definitions of the terms ``American vessel'' and ``American aircraft'', 
see Sec. 31.3306(m)-1.
    (e) Since the only services performed outside the United States 
which constitute employment are those described in section 3306(c) and 
paragraph (c) of Sec. 31.3306(c)-2 (relating to services performed 
outside the United States on or in connection with an American vessel or 
American aircraft), services performed outside the United States on or 
in connection with a vessel not an American vessel, or an aircraft not 
an American aircraft, do not constitute employment in any event.
    (f) The provisions of section 3306(c) (4) and of this section, 
insofar as they relate to services performed on or in connection with an 
aircraft not an American aircraft, apply only to services performed 
after 1961 for which remuneration is paid after 1961.

[T.D. 6658, 28 FR 6637, June 27, 1963]



Sec. 31.3306(c)(5)-1  Family employment.

    (a) Certain services are excepted from employment because of the 
existence of a family relationship between the employee and the 
individual employing him. The exceptions are as follows:
    (1) Services performed by an individual in the employ of his or her 
spouse;
    (2) Services performed by a father or mother in the employ of his or 
her son or daughter; and
    (3) Services performed by a son or daughter under the age of 21 in 
the employ of his or her father or mother.
    (b) Under paragraph (a) (1) and (2) of this section, the exception 
is conditioned solely upon the family relationship between the employee 
and the individual employing him. Under paragraph (a)(3) of this 
section, in addition to the family relationship, there is a further 
requirement that the son or daughter shall be under the age of 21, and 
the exception continues only during the time that such son or daughter 
is under the age of 21.
    (c) Services performed in the employ of a corporation are not within 
the exception. Services performed in the employ of a partnership are not 
within the exception unless the requisite family relationship exists 
between the employee and each of the partners comprising the 
partnership.



Sec. 31.3306(c)(6)-1  Services in employ of United States or 
instrumentality thereof.

    (a) Services in employ of United States or wholly-owned 
instrumentality thereof. Services performed in the employ of the United 
States Government, except as provided in section 3306(n) (see Sec. 
31.3306(n)-1), are excepted from employment. Services performed in the 
employ of an instrumentality of the United States which is wholly owned 
by the United States also are excepted from employment.
    (b) Services in employ of instrumentality not wholly owned by United 
States--(1) Services performed after 1961. Services performed after 1961 
in the employ of an instrumentality of the United States which is 
partially owned by the United States are excepted from employment, if 
the remuneration for such service is paid after 1961. Services performed 
after 1961 in the employ of an instrumentality of the United States 
which is neither wholly owned nor partially owned by the United States 
are excepted from employment if (i) the instrumentality is exempt from 
the tax imposed by section 3301 by virtue of any provision of law which 
specifically refers to section 3301 or the corresponding section of 
prior law in granting exemption from such tax, and (ii) the remuneration 
for such service is paid after 1961. For provisions which make general 
exemptions from Federal taxation ineffectual as to the tax imposed by 
section 3301, see Sec. 31.3308-1.

[[Page 178]]

    (2) Services performed before 1962. Services performed in the employ 
of an instrumentality of the United States which is not wholly owned by 
the United States are excepted from employment if the instrumentality is 
exempt from the tax imposed by section 3301 by virtue of any other 
provision of law, and (i) the services are performed before 1962 or (ii) 
remuneration for the services is paid before 1962.

[T.D. 6658, 28 FR 6638, June 27, 1963]



Sec. 31.3306(c)(7)-1  Services in employ of States or their political
subdivisions or instrumentalities.

    (a) Services performed in the employ of any State, or of any 
political subdivision thereof, are excepted from employment. Services 
performed in the employ of an instrumentality of one or more States or 
political subdivisions thereof are excepted if the instrumentality is 
wholly owned by one or more of the foregoing. Services performed in the 
employ of an instrumentality of one or more of the several States or 
political subdivisions thereof which is not wholly owned by one or more 
of the foregoing are excepted only to the extent that the 
instrumentality is with respect to such services immune under the 
Constitution of the United States from the tax imposed by section 3301.
    (b) For provisions relating to the term ``State'' see Sec. 
31.3306(j)-1.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR 
6638, June 27, 1963]



Sec. 31.3306(c)(8)-1  Services in employ of religious, charitable, 
educational, or certain other organizations exempt from income tax.

    (a) Services performed after 1961. Services performed by an employee 
after 1961 in the employ of a religious, charitable, educational, or 
other organization described in section 501(c)(3) which is exempt from 
income tax under section 501(a) are excepted from employment, if the 
remuneration for such service is paid after 1961. For provisions 
relating to exemption from income tax of an organization described in 
section 501(c) (3), see Part 1 of this chapter (Income Tax Regulations).
    (b) Services performed before 1962. (1) Services performed by an 
employee in the employ of an organization described in section 
3306(c)(8) as in effect before 1962, that is, a corporation, community 
chest, fund, or foundation, organized and operated exclusively for 
religious, charitable, scientific, testing for public safety, literary, 
or educational purposes, or for the prevention of cruelty to children or 
animals, no part of the net earnings of which inures to the benefit of 
any private shareholder or individual, and no substantial part of the 
activities of which is carrying on propaganda, or otherwise attempting, 
to influence legislation, are excepted from employment if (i) the 
services are performed before 1962, or (ii) remuneration for the 
services is paid before 1962.
    (2) Any organization which is an organization of a type described in 
section 501(c)(3) and which--
    (i) Is exempt from income tax under section 501(a), or
    (ii) Has been denied exemption from income tax under section 501(a) 
by reason of the provisions of section 503 or 504, relating to 
prohibited transactions and to accumulations out of income, 
respectively,

is an organization of a type described in section 3306(c)(8) as in 
effect before 1962. An organization which would be an organization of a 
type described in section 501(c)(3) except for those provisions of 
section 501(c)(3) which are not contained in section 3306(c)(8) as in 
effect before 1962 (provisions relating to participation or intervention 
in a political campaign on behalf of a candidate for public office) is 
also an organization of a type described in section 3306(c)(8) as in 
effect before 1962.

[T.D. 6658, 28 FR 6638, June 27, 1963]



Sec. 31.3306(c)(9)-1  Railroad industry; services performed by an 
employee or an employee representative under the Railroad 

Unemployment Insurance Act.

    (a) Services performed by an individual as an ``employee'' or as an 
``employee representative'', as those terms are defined in section 1 of 
the Railroad Unemployment Insurance Act, as amended, are excepted from 
employment.
    (b) Section 1 of the Railroad Unemployment Insurance Act (45 U.S.C. 
351),

[[Page 179]]

as amended, provides, in part, as follows:

    For the purposes of this Act, except when used in amending the 
provisions of other Acts--
    (a) The term ``employer'' means any carrier (as defined in 
subsection (b) of this section), and any company which is directly or 
indirectly owned or controlled by one or more such carriers or under 
common control therewith, and which operates any equipment or facility 
or performs any service (except trucking service, casual service, and 
the casual operation of equipment or facilities) in connection with the 
transportation of passengers or property by railroad, or the receipt, 
delivery elevation, transfer in transit, refrigeration or icing, 
storage, or handling of property transported by railroad, and any 
receiver, trustee, or other individual or body, judicial or otherwise, 
when in the possession of the property or operating all or any part of 
the business of any such employer: Provided, however, That the term 
``employer'' shall not include any street, interurban, or suburban 
electric railway, unless such railway is operating as a part of a 
general steam-railroad system of transportation, but shall not exclude 
any part of the general steam-railroad system of transportation now or 
hereafter operated by any other motive power. The Interstate Commerce 
Commission is hereby authorized and directed upon request of the Board, 
or upon complaint of any party interested, to determine after hearing 
whether any line operated by electric power falls within the terms of 
this proviso. The term ``employer'' shall also include railroad 
associations, traffic associations, tariff bureaus, demurrage bureaus, 
weighing and inspection bureaus, collection agencies, and other 
associations, bureaus, agencies, or organizations controlled and 
maintained wholly or principally by two or more employers as 
hereinbefore defined and engaged in the performance of services in 
connection with or incidental to railroad transportation and railway 
labor organizations, national in scope, which have been or may be 
organized in accordance with the provisions of the Railway Labor Act, 
and their State and National legislative committees and their general 
committees and their insurance departments and their local lodges and 
divisions, established pursuant to the constitution and bylaws of such 
organizations. The term ``employer'' shall not include any company by 
reason of its being engaged in the mining of coal, the supplying of coal 
to an employer where delivery is not beyond the mine tipple, and the 
operation of equipment or facilities therefor, or in any of such 
activities.
    (b) The term ``carrier'' means an express company, sleeping-car 
company, or carrier by railroad, subject to part I of the Interstate 
Commerce Act.
    (c) The term ``company'' includes corporations, associations, and 
joint-stock companies.
    (d) The term ``employee'' (except when used in phrases establishing 
a different meaning) means any individual who is or has been (i) in the 
service of one or more employers for compensation, or (ii) an employee 
representative. The term ``employee'' shall include an employee of a 
local lodge or division defined as an employer in section 1 (a) only if 
he was in the service of a carrier on or after August 29, 1935. The term 
``employee'' includes an officer of an employer.
    The term ``employee'' shall not include any individual while such 
individual is engaged in the physical operations consisting of the 
mining of coal, the preparation of coal, the handling (other than 
movement by rail with standard railroad locomotives) of coal not beyond 
the mine tipple, or the loading of coal at the tipple.
    (e) An individual is in the service of an employer whether his 
service is rendered within or without the United States if (i) he is 
subject to the continuing authority of the employer to supervise and 
direct the manner of rendition of his service, or he is rendering 
professional or technical services and is integrated into the staff of 
the employer, or he is rendering, on the property used in the employer's 
operations, other personal services the rendition of which is integrated 
into the employer's operations, and (ii) he renders such service for 
compensation: Provided, however, That an individual shall be deemed to 
be in the service of an employer, other than a local lodge or division 
or a general committee of a railway-labor-organization employer, not 
conducting the principal part of its business in the United States only 
when he is rendering service to it in the United States; and an 
individual shall be deemed to be in the service of such a local lodge or 
division only if (1) all, or substantially all, the individuals 
constituting its membership are employees of an employer conducting the 
principal part of its business in the United States; or (2) the 
headquarters of such local lodge or division is located in the United 
States; and an individual shall be deemed to be in the service of such a 
general committee only if (1) he is representing a local lodge or 
division described in clauses (1) or (2) immediately above; or (2) all, 
or substantially all, the individuals represented by it are employees of 
an employer conducting the principal part of its business in the United 
States; or (3) he acts in the capacity of a general chairman or an 
assistant general chairman of a general committee which represents 
individuals rendering service in the United States to an employer, but 
in such case if his office or headquarters is not located in the United 
States and the individuals represented by such general committee are 
employees of an employer not

[[Page 180]]

conducting the principal part of its business in the United States, only 
such proportion of the remuneration for such service shall be regarded 
as compensation as the proportion which the mileage in the United States 
under the jurisdiction of such general committee bears to the total 
mileage under its jurisdiction, unless such mileage formula is 
inapplicable, in which case the Board may prescribe such other formula 
as it finds to be equitable, and if the application of such mileage 
formula, or such other formula as the Board may prescribe, would result 
in the compensation of the individual being less than 10 per centum of 
his remuneration for such service no part of such remuneration shall be 
regarded as compensation: Provided further, That an individual not a 
citizen or resident of the United States shall not be deemed to be in 
the service of an employer when rendering service outside the United 
States to an employer who is required under the laws applicable in the 
place where the service is rendered to employ therein, in whole or in 
part, citizens or residents thereof.
    (f) The term ``employee representative'' means any officer or 
official representative of a railway labor organization other than a 
labor organization included in the term employer as defined in section 
1(a) who before or after August 29, 1935, was in the service of an 
employer as defined in section 1(a) and who is duly authorized and 
designated to represent employees in accordance with the Railway Labor 
Act, and any individual who is regularly assigned to or regularly 
employed by such officer or official representative in connection with 
the duties of his office.

                                * * * * *

    (i) The term ``compensation'' means any form of money remuneration, 
including pay for time lost but excluding tips, paid for services 
rendered as an employee to one or more employers, or as an employee 
representative: Provided, however, That in computing the compensation 
paid to any employee, no part of any month's compensation in excess of 
$300 for any month before July 1, 1954, or in excess of $350 for any 
month after June 30, 1954, and before the calendar month next following 
the month [May] in which this Act was amended in 1959, or in excess of 
$400 for any month after the month [May] in which this Act was so 
amended, shall be recognized. A payment made by an employer to an 
individual through the employer's pay roll shall be presumed, in the 
absence of evidence to the contrary, to be compensation for service 
rendered by such individual as an employee of the employer in the period 
with respect to which the payment is made. An employee shall be deemed 
to be paid, ``for time lost'' the amount he is paid by an employer with 
respect to an identifiable period of absence from the active service of 
the employer, including absence on account of personal injury, and the 
amount he is paid by the employer for loss of earnings resulting from 
his displacement to a less remunerative position or occupation. If a 
payment is made by an employer with respect to a personal injury and 
includes pay for time lost, the total payment shall be deemed to be paid 
for time lost unless, at the time of payment, a part of such payment is 
specifically apportioned to factors other than time lost, in which event 
only such part of the payment as is not so apportioned shall be deemed 
to be paid for time lost. Compensation earned in any calendar month 
before 1947 shall be deemed paid in such month regardless of whether or 
when payment will have been in fact made, and compensation earned in any 
calendar year after 1946 but paid after the end of such calendar year 
shall be deemed to be compensation paid in the calendar year in which it 
will have been earned if it is so reported by the employer before 
February 1 of the next succeeding calendar year or, if the employee 
establishes, subject to the provisions of section 8, the period during 
which such compensation will have been earned.

                                * * * * *

    (r) The term ``Board'' means the Railroad Retirement Board.
    (s) The term ``United States'', when used in a geographical sense, 
means the States, Alaska, Hawaii, and the District of Columbia.

                                * * * * *

(Sec. 1, Railroad Unemployment Insurance Act, as amended by secs. 1 and 
2, Act of June 20, 1939, 53 Stat. 845; secs. 1 and 3, Act of Aug. 13, 
1940, 54 Stat. 785, 786; sec. 15, Act of Apr. 8, 1942, 56 Stat. 210; 
secs. 1 and 2, Act of July 31, 1946, 60 Stat. 722; sec. 302, Act of Aug. 
31, 1954, 68 Stat. 1040; sec. 301, Act of May 19, 1959, Pub. L. 86-28, 
73 Stat. 30)

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR 
6638, June 27, 1963]



Sec. 31.3306(c)(10)-1  Services in the employ of certain organizations
exempt from income tax.

    (a) In general. (1) This section deals with the exception from 
employment of certain services performed in the employ of any 
organization exempt from income tax under section 501(a) (other than an 
organization described in section 401(a)) or under section 521. (See the 
provisions of Sec. Sec. 1.401-1,

[[Page 181]]

1.501(a)-1, and 1.521-1 of this chapter (Income Tax Regulations).) If 
the services meet the tests set forth in paragraphs (b), (c), (d), or 
(e) of this section, the services are excepted.
    (2) See also Sec. 31.3306(c)(8)-1 for provisions relating to the 
exception of services performed in the employ of religious, charitable, 
educational, or certain other organizations exempt from income tax; 
Sec. 31.3306(c)(10)-2 for provisions relating to the exception of 
services performed by certain students in the employ of a school, 
college, or university; and Sec. 31.3306(c)(10)-3 for provisions 
relating to the exception of services performed before 1962 in the 
employ of certain employees' beneficiary associations.
    (b) Remuneration less than $50 for calendar quarter. Services 
performed by an employee in a calendar quarter in the employ of an 
organization exempt from income tax under section 501(a) (other than an 
organization described in section 401(a)) or under section 521 are 
excepted from employment, if the remuneration for the service is less 
than $50. The test relating to remuneration of $50 is based on the 
remuneration earned during a calendar quarter rather than on the 
remuneration paid in a calendar quarter. The exception applies 
separately with respect to each organization for which the employee 
renders services in a calendar quarter. The type of services performed 
by the employee and the place where the services are performed are 
immaterial; the statutory tests are the character of the organization in 
the employ of which the services are performed and the amount of the 
remuneration for services performed by the employee in the calendar 
quarter.

    Example 1. X is a local lodge of a fraternal organization and is 
exempt from income tax under section 501(a) as an organization of the 
character described in section 501 (c)(8). X has a number of paid 
employees, among them being A who serves exclusively as recording 
secretary for the lodge, and B who performs services for the lodge as 
janitor of its clubhouse. For services performed during the first 
calendar quarter of 1955 (that is, January 1, 1955, through March 31, 
1955, both dates inclusive) A earns a total of $30. For services 
performed during the same calendar quarter B earns $180. Since the 
remuneration for the services performed by A during such quarter is less 
than $50, all of such services are excepted. Thus, A is not counted as 
an employee in employment on any of the days during such quarter for 
purposes of determining whether the X organization is an employer (see 
Sec. 31.3306(a)-1). Even though it is subsequently determined that X is 
an employer, A's remuneration of $30 for services performed during the 
first calendar quarter of such year is not subject to tax. B's services, 
however, are not excepted during such quarter since the remuneration 
therefor is not less than $50. Thus, B is counted as an employee in 
employment during all of such quarter for purposes of determining 
whether the X organization is an employer. If it is determined that the 
X organization is an employer, B's remuneration of $180 for services 
performed during the first calendar quarter is included in computing the 
tax.
    Example 2. The facts are the same as in example 1, above, except 
that on April 1, 1955, A's salary is increased and, for services 
performed during the calendar quarter beginning on that date (that is, 
April 1, 1955, through June 30, 1955, both dates inclusive), A earns 
$60. Although all of the services performed by A during the first 
quarter were excepted, none of A's services performed during the second 
quarter are excepted since the remuneration for such services is not 
less than $50. A, therefore, is counted as an employee in employment 
during all of the second quarter for the purpose of determining whether 
the X organization is an employer. If it is determined that the X 
organization is an employer, A's remuneration of $60 for services 
performed during the second calendar quarter is included in computing 
the tax.
    Example 3. The facts are the same as in example 1, above, except 
that A earns $120 for services performed during the year 1955, and such 
amount is paid to him in a lump sum at the end of the year. The services 
performed by A in any calendar quarter during the year are excepted if 
the portion of the $120 attributable to services performed in that 
quarter is less than $50. In such case, A is not counted as an employee 
in employment on any of the days during such quarter for purposes of 
determining whether the X organization is an employer. If, however, the 
portion of the $120 attributable to services performed in any calendar 
quarter during the year is not less than $50, the services during that 
quarter are not excepted. In the latter case, A is counted as an 
employee in employment during all of such quarter and, if it is 
determined that the X organization is an employer, that portion of the 
$120 attributable to services performed in such quarter is included in 
computing the tax.

    (c) Collection of dues or premiums for fraternal beneficiary 
societies, and ritualistic services in connection with such societies, 
before 1962. The following services

[[Page 182]]

performed by an employee in the employ of a fraternal beneficiary 
society, order, or association exempt from income tax under section 
501(a) are excepted from employment if the services are performed before 
1962 or if remuneration for the services is paid before 1962:
    (1) Services performed away from the home office of such a society, 
order, or association in connection with the collection of dues or 
premiums for such society, order, or association; and
    (2) Ritualistic services (wherever performed) in connection with 
such a society, order, or association.

For purposes of the paragraph the amount of the remuneration for 
services performed by the employee in the calendar quarter is 
immaterial; the tests are the character of the organization in whose 
employ the services are performed, the type of services, and, in the 
case of collection of dues or premiums, the place where the services are 
performed.
    (d) Students employed before 1962. (1) Services performed in the 
employ of an organization exempt from income tax under section 501(a) 
(other than an organization described in section 401(a)) or under 
section 521 by a student who is enrolled and is regularly attending 
classes at a school, college, or university, are excepted from 
employment if the services are performed before 1962 or if remuneration 
for the services is paid before 1962. For purposes of this paragraph, 
the amount of remuneration for services performed by the employee in the 
calendar quarter, the type of services, and the place where the services 
are performed are immaterial; the tests are the character of the 
organization in whose employ the services are performed and the status 
of the employee as a student enrolled and regularly attending classes at 
a school, college, or university.
    (2) The term ``school, college, or university'' as used in this 
paragraph is to be taken in its commonly or generally accepted sense. 
For provisions relating to services performed before 1962 by a student 
enrolled and regularly attending classes at a school, college, or 
university not exempt from income tax in the employ of such school, 
college, or university, see paragraph (b) of Sec. 31.3306(c)(10)-2. For 
provisions relating to services performed after 1961 by a student 
enrolled and regularly attending classes at a school, college, or 
university in the employ of such school, college, or university, see 
paragraph (a) or Sec. 31.3306(c)(10)-2.
    (e) Services performed before 1962 in employ of agricultural or 
horticultural organization exempt from income tax. (1) Services 
performed by an employee in the employ of an agricultural or 
horticultural organization which is described in section 501(c)(5) and 
the regulations thereunder and which is exempt from income tax under 
section 501(a) are excepted from employment if the services are 
performed before 1962 or if remuneration for the services is paid before 
1962.
    (2) For purposes of this paragraph, the type of services performed 
by the employee, the amount of remuneration for the services, and the 
place where the services are performed are immaterial; the test is the 
character of the organization in whose employ the services are 
performed.

[T.D. 6658, 28 FR 6639, June 27, 1963]



Sec. 31.3306(c)(10)-2  Services of student in employ of school, 
college, or university.

    (a) Services performed after 1961. Services performed after 1961 in 
the employ of a school, college, or university, by a student who is 
enrolled and is regularly attending classes at the school, college, or 
university, are excepted from employment (whether or not the school, 
college, or university is exempt from income tax), if remuneration for 
the services is paid after 1961.
    (b) Services performed before 1962. Services performed in the employ 
of a school, college, or university not exempt from income tax under 
section 501(a), by a student who is enrolled and is regularly attending 
classes at the school, college, or university, are excepted from 
employment if the services are performed before 1962 or if remuneration 
for the services is paid before 1962.
    (c) General rule. (1) For purposes of this section, the tests are 
the character of the organization in the employ of which the services 
are performed and the status of the employee as a student

[[Page 183]]

enrolled and regularly attending classes at the school, college, or 
university described in paragraph (c)(2) of this section, in the employ 
of which the employee performs the services. If an employee has the 
status of a student within the meaning of paragraph (d) of this section, 
the type of services performed by the employee, the place where the 
services are performed, and the amount of remuneration for services 
performed by the employee are not material.
    (2) School, college, or university. An organization is a school, 
college, or university within the meaning of section 3306(c)(10)(B) if 
its primary function is the presentation of formal instruction, it 
normally maintains a regular faculty and curriculum, and it normally has 
a regularly enrolled body of students in attendance at the place where 
its educational activities are regularly carried on. See section 
170(b)(1)(A)(ii) and the regulations thereunder.
    (d) Student Status--general rule. Whether an employee has the status 
of a student within the meaning of section 3306(c)(10)(B) performing the 
services shall be determined based on the relationship of the employee 
with the organization for which the services are performed. In order to 
have the status of a student within the meaning of section 
3306(c)(10)(B), the employee must perform services in the employ of a 
school, college, or university described in paragraph (c)(2) of this 
section at which the employee is enrolled and regularly attending 
classes in pursuit of a course of study within the meaning of paragraphs 
(d)(1) and (2) of this section. In addition, the employee's services 
must be incident to and for the purpose of pursuing a course of study at 
such school, college, or university within the meaning of paragraph 
(d)(3) of this section.
    (1) Enrolled and regularly attending classes. An employee must be 
enrolled and regularly attending classes at a school, college, or 
university within the meaning of paragraph (c)(2) of this section at 
which the employee is employed to have the status of a student within 
the meaning of section 3306(c)(10)(B). An employee is enrolled within 
the meaning of section 3306(c)(10)(B) if the employee is registered for 
a course or courses creditable toward an educational credential 
described in paragraph (d)(2) of this section. In addition, the employee 
must be regularly attending classes to have the status of a student. For 
purposes of this paragraph (d)(1), a class is an instructional activity 
led by a faculty member or other qualified individual hired by the 
school, college, or university within the meaning of paragraph (c)(2) of 
this section for identified students following an established 
curriculum. The frequency of these and similar activities determines 
whether an employee may be considered to be regularly attending classes.
    (2) Course of study. An employee must be pursuing a course of study 
in order to have the status of a student within the meaning of section 
3306(c)(10)(B). A course of study is one or more courses the completion 
of which fulfills the requirements necessary to receive an educational 
credential granted by a school, college, or university within the 
meaning of paragraph (c)(2) of this section. For purposes of this 
paragraph, an educational credential is a degree, certificate, or other 
recognized educational credential granted by an organization described 
in paragraph (c)(2) of this section. In addition, a course of study is 
one or more courses at a school, college or university within the 
meaning of paragraph (c)(2) of this section the completion of which 
fulfills the requirements necessary for the employee to sit for an 
examination required to receive certification by a recognized 
organization in a field.
    (3) Incident to and for the purpose of pursuing a course of study. 
(i) General rule. An employee's services must be incident to and for the 
purpose of pursuing a course of study in order for the employee to have 
the status of a student. Whether an employee's services are incident to 
and for the purpose of pursuing a course of study shall be determined on 
the basis of the relationship of the employee with the organization for 
which such services are performed as an employee. The educational aspect 
of the relationship between the employer and the employee, as compared 
to the service aspect of the relationship, must be predominant in order 
for the employee's services to be incident to and for the purpose of

[[Page 184]]

pursuing a course of study. The educational aspect of the relationship 
is evaluated based on all the relevant facts and circumstances related 
to the educational aspect of the relationship. The service aspect of the 
relationship is evaluated based on all the relevant facts and 
circumstances related to the employee's employment. The evaluation of 
the service aspect of the relationship is not affected by the fact that 
the services performed by the employee may have an educational, 
instructional, or training aspect. Except as provided in paragraph 
(d)(3)(iii) of this section, whether the educational aspect or the 
service aspect of an employee's relationship with the employer is 
predominant is determined by considering all the relevant facts and 
circumstances. Relevant factors in evaluating the educational and 
service aspects of an employee's relationship with the employer are 
described in paragraphs (d)(3)(iv) and (v) of this section respectively. 
There may be facts and circumstances that are relevant in evaluating the 
educational and service aspects of the relationship in addition to those 
described in paragraphs (d)(3)(iv) and (v) of this section.
    (ii) Student status determined with respect to each academic term. 
Whether an employee's services are incident to and for the purpose of 
pursuing a course of study is determined separately with respect to each 
academic term. If the relevant facts and circumstances with respect to 
an employee's relationship with the employer change significantly during 
an academic term, whether the employee's services are incident to and 
for the purpose of pursuing a course of study is reevaluated with 
respect to services performed during the remainder of the academic term.
    (iii) Full-time employee. The services of a full-time employee are 
not incident to and for the purpose of pursuing a course of study. The 
determination of whether an employee is a full-time employee is based on 
the employer's standards and practices, except regardless of the 
employer's classification of the employee, an employee whose normal work 
schedule is 40 hours or more per week is considered a full-time 
employee. An employee's normal work schedule is not affected by 
increases in hours worked caused by work demands unforeseen at the start 
of an academic term. However, whether an employee is a full-time 
employee is reevaluated for the remainder of the academic term if the 
employee changes employment positions with the employer. An employee's 
work schedule during academic breaks is not considered in determining 
whether the employee's normal work schedule is 40 hours or more per 
week. The determination of the employee's normal work schedule is not 
affected by the fact that the services performed by the individual may 
have an educational, instructional, or training aspect.
    (iv) Evaluating educational aspect. The educational aspect of an 
employee's relationship with the employer is evaluated based on all the 
relevant facts and circumstances related to the educational aspect of 
the relationship. The educational aspect of an employee's relationship 
with the employer is generally evaluated based on the employee's course 
workload. Whether an employee's course workload is sufficient in order 
for the employee's employment to be incident to and for the purpose of 
pursuing a course of study depends on the particular facts and 
circumstances. A relevant factor in evaluating an employee's course 
workload is the employee's course workload relative to a full-time 
course workload at the school, college or university within the meaning 
of paragraph (c)(2) of this section at which the employee is enrolled 
and regularly attending classes.
    (v) Evaluating service aspect. The service aspect of an employee's 
relationship with the employer is evaluated based on the facts and 
circumstances related to the employee's employment. Services of an 
employee with the status of a full-time employee within the meaning of 
paragraph (d)(3)(iii) of this section are not incident to and for the 
purpose of pursuing a course of study. Relevant factors in evaluating 
the service aspect of an employee's relationship with the employer are 
described in paragraphs (d)(3)(v)(A), (B), and (C) of this section.
    (A) Normal work schedule and hours worked. If an employee is not a 
full-time employee within the meaning of paragraph (d)(3)(iii) of this 
section,

[[Page 185]]

then the employee's normal work schedule and number of hours worked per 
week are relevant factors in evaluating the service aspect of the 
employee's relationship with the employer. As an employee's normal work 
schedule or actual number of hours worked approaches 40 hours per week, 
it is more likely that the service aspect of the employee's relationship 
with the employer is predominant. The determination of the employee's 
normal work schedule and actual number of hours worked is not affected 
by the fact that some of the services performed by the individual may 
have an educational, instructional, or training aspect.
    (B) Professional employee. (1) If an employee has the status of a 
professional employee, then that suggests that the service aspect of the 
employee's relationship with the employer is predominant. A professional 
employee is an employee--
    (i) Whose primary duty consists of the performance of work requiring 
knowledge of an advanced type in a field of science or learning 
customarily acquired by a prolonged course of specialized intellectual 
instruction and study, as distinguished from a general academic 
education, from an apprenticeship, and from training in the performance 
of routine mental, manual, or physical processes;
    (ii) Whose work requires the consistent exercise of discretion and 
judgment in its performance; and
    (iii) Whose work is predominantly intellectual and varied in 
character (as opposed to routine mental, manual, mechanical, or physical 
work) and is of such character that the output produced or the result 
accomplished cannot be standardized in relation to a given period of 
time.
    (2) Licensed, professional employee. If an employee is a licensed, 
professional employee, then that further suggests the service aspect of 
the employee's relationship with the employer is predominant. An 
employee is a licensed, professional employee if the employee is 
required to be licensed under state or local law to work in the field in 
which the employee performs services and the employee is a professional 
employee within the meaning of paragraph (d)(3)(v)(B)(1) of this 
section.
    (C) Employment Benefits. Whether an employee is eligible to receive 
employment benefits is a relevant factor in evaluating the service 
aspect of an employee's relationship with the employer. For example, 
eligibility to receive vacation, paid holiday, and paid sick leave 
benefits; eligibility to participate in a retirement plan described in 
section 401(a); or eligibility to receive employment benefits such as 
reduced tuition, or benefits under section 79 (life insurance), 127 
(qualified educational assistance), 129 (dependent care assistance 
programs), or 137 (adoption assistance) suggest that the service aspect 
of an employee's relationship with the employer is predominant. 
Eligibility to receive health insurance employment benefits is not 
considered in determining whether the service aspect of an employee's 
relationship with the employer is predominant. The weight to be given 
the fact that an employee is eligible for a particular benefit may vary 
depending on the type of employment benefit. For example, eligibility to 
participate in a retirement plan is generally more significant than 
eligibility to receive a dependent care employment benefit. Additional 
weight is given to the fact that an employee is eligible to receive an 
employment benefit if the benefit is generally provided by the employer 
to employees in positions generally held by non-students.
    (e) Effective date. Paragraphs (c) and (d) of this section apply to 
services performed on or after April 1, 2005.

[T.D. 6658, 28 FR 6640, June 27, 1963, as amended by T.D. 9167, 69 FR 
76410, Dec. 21, 2004]



Sec. 31.3306(c)(10)-3  Services before 1962 in employ of certain 
employees' beneficiary associations.

    (a) Voluntary employees' beneficiary associations. Services 
performed by an employee in the employ of a voluntary employees' 
beneficiary association providing for the payment of life, sick, 
accident, or other benefits to the members of such association or their 
dependents are excepted from employment if--
    (1) No part of its net earnings inures (other than through such 
payments) to the benefit of any private shareholder or individual,

[[Page 186]]

    (2) 85 percent or more of the income consists of amounts collected 
from members for the sole purpose of making such payments and meeting 
expenses, and
    (3) The services are performed before 1962, or remuneration for the 
services is paid before 1962.
    (b) Federal employees' beneficiary associations. Services performed 
by an employee in the employ of a voluntary employees' beneficiary 
association providing for the payment of life, sick, accident, or other 
benefits to the members of such association or their dependents or their 
designated beneficiaries are excepted from employment if--
    (1) Admission to membership in the association is limited to 
individuals who are officers or employees of the United States 
Government,
    (2) No part of the net earnings of the association inures (other 
than through such payments) to the benefit of any private shareholder or 
individual, and
    (3) The services are performed before 1962, or remuneration for the 
services is paid before 1962.
    (c) Application of tests. For purposes of this section, the type of 
services performed by the employee, the amount of remuneration for the 
services, and the place where the services are performed are immaterial; 
the test is the character of the organization in whose employ the 
services are performed.

[T.D. 6658, 28 FR 6640, June 27, 1963]



Sec. 31.3306(c)(11)-1  Services in employ of foreign government.

    (a) Services performed by an employee in the employ of a foreign 
government are excepted from employment. The exception includes not only 
services performed by ambassadors, ministers, and other diplomatic 
officers and employees but also services performed as a consular or 
other officer or employee of a foreign government, or as a nondiplomatic 
representative thereof.
    (b) For purposes of this exception, the citizenship or residence of 
the employee is immaterial. It is also immaterial whether the foreign 
government grants an equivalent exemption with respect to similar 
services performed in the foreign country by citizens of the United 
States.



Sec. 31.3306(c)(12)-1  Services in employ of wholly owned instrumentality
of foreign government.

    (a) Services performed by an employee in the employ of certain 
instrumentalities of a foreign government are excepted from employment. 
The exception includes all services performed in the employ of an 
instrumentality of the government of a foreign country, if--
    (1) The instrumentality is wholly owned by the foreign government;
    (2) The services are of a character similar to those performed in 
foreign countries by employees of the United States Government or of an 
instrumentality thereof; and
    (3) The Secretary of State certifies to the Secretary of the 
Treasury that the foreign government, with respect to whose 
instrumentality exemption is claimed, grants an equivalent exemption 
with respect to services performed in the foreign country by employees 
of the United States Government and of instrumentalities thereof.
    (b) For purposes of this exception, the citizenship or residence of 
the employee is immaterial.



Sec. 31.3306(c)(13)-1  Services of student nurse or hospital intern.

    (a) Services performed as a student nurse in the employ of a 
hospital or a nurses' training school are excepted from employment, if 
the student nurse is enrolled and regularly attending classes in a 
nurses' training school and such nurses' training school is chartered or 
approved pursuant to State law.
    (b) Services performed as an intern (as distinguished from a 
resident doctor) in the employ of a hospital are excepted from 
employment, if the intern has completed a 4 years' course in a medical 
school chartered or approved pursuant to State law.



Sec. 31.3306(c)(14)-1  Services of insurance agent or solicitor.

    (a) Services performed for a person by an employee as an insurance 
agent or insurance solicitor are excepted from employment, if all such 
services

[[Page 187]]

performed for such person by such individual are performed for 
remuneration solely by way of commission.
    (b) If all or any part of the remuneration of an employee for 
services performed as an insurance agent or insurance solicitor for a 
person is a salary, none of his services performed as an insurance agent 
or insurance solicitor for such person are excepted from employment, and 
his total remuneration (for example, salary, or salary and commissions) 
for such services is included for purposes of computing the tax.



Sec. 31.3306(c)(15)-1  Services in delivery or distribution of 
newspapers, shopping news, or magazines.

    (a) Services of individuals under age 18. Services performed by an 
employee under the age of 18 in the delivery or distribution of 
newspapers or shopping news, not including delivery or distribution (as, 
for example, by a regional distributor) to any point for subsequent 
delivery or distribution, are excepted from employment. Thus, the 
services performed by an employee under the age of 18 in making house-
to-house delivery or sale of newspapers or shopping news, including 
handbills and other similar types of advertising material, are excepted. 
The services are excepted irrespective of the form or method of 
compensation. Incidental services by the employee who makes the house-
to-house delivery, such as services in assembling newspapers, are 
considered to be within the exception. The exception continues only 
during the time that the employee is under the age of 18.
    (b) Services of individuals of any age. Services performed by an 
employee in, and at the time of, the sale of newspapers or magazines to 
ultimate consumers under an arrangement under which the newspapers or 
magazines are to be sold by him at a fixed price, his compensation being 
based on the retention of the excess of such price over the amount at 
which the newspapers or magazines are charged to him, are excepted from 
employment. The services are excepted whether or not the employee is 
guaranteed a minimum amount of compensation for such services, or is 
entitled to be credited with the unsold newspapers or magazines turned 
back. Moreover, the services are excepted without regard to the age of 
the employee. Services performed other than at the time of sale to the 
ultimate consumer are not within the exception. Thus, the services of a 
regional distributor which are antecedent to but not immediately part of 
the sale to the ultimate consumer are not within the exception. However, 
incidental services by the employee who makes the sale to the ultimate 
consumer, such as services in assembling newspapers or in taking 
newspapers or magazines to the place of sale, are considered to be 
within the exception.



Sec. 31.3306(c)(16)-1  Services in employ of international organization.

    (a) Subject to the provisions of section 1 of the International 
Organizations Immunities Act (22 U.S.C. 228), services performed in the 
employ of an international organization as defined in section 
7701(a)(18) are excepted from employment.
    (b) (1) Section 701(a)(18) provides as follows:

    Sec. 7701. Definitions. (a) When used in this title, where not 
otherwise distinctly expressed or manifestly incompatible with the 
intent thereof--

                                * * * * *

    (18) International organization. The term ``international 
organization'' means a public international organization entitled to 
enjoy privileges, exemptions, and immunities as an international 
organization under the International Organizations Immunities Act (22 
U.S.C. 288-288f).

    (2) Section 1 of the International Organizations Immunities Act 
provides as follows:

    Sec. 1. [International Organizations Immunities Act.] For the 
purposes of this title [International Organizations Immunities Act], the 
term ``international organization'' means a public international 
organization in which the United States participates pursuant to any 
treaty or under the authority of any Act of Congress authorizing such 
participation or making an appropriation for such participation, and 
which shall have been designated by the President through appropriate 
Executive order as being entitled to enjoy the privileges, exemptions, 
and immunities herein provided. The President shall be authorized, in 
the light of the functions performed by any such international 
organization, by

[[Page 188]]

appropriate Executive order to withhold or withdraw from any such 
organization or its officers or employees any of the privileges, 
exemptions, and immunities provided for in this title (including the 
amendments made by this title) or to condition or limit the enjoyment by 
any such organization or its officers or employees of any such 
privilege, exemption, or immunity. The President shall be authorized, if 
in his judgment such action should be justified by reason of the abuse 
by an international organization or its officers and employees of the 
privileges, exemptions, and immunities herein provided or for any other 
reason, at any time to revoke the designation of any international 
organization under this section, whereupon the international 
organization in question shall cease to be classed as an international 
organization for the purposes of this title.



Sec. 31.3306(c)(17)-1  Fishing services.

    (a) In general. Subject to the limitations prescribed in paragraphs 
(b) and (c) of this section, services described in this paragraph are 
excepted from employment. Services performed by an individual in the 
catching, taking, harvesting, cultivating, or farming of any kind of 
fish, shell-fish (for example, oysters, clams, and mussels), crustacea 
(for example, lobsters, crabs, and shrimps), sponges, seaweeds, or other 
aquatic forms of animal and vegetable life are excepted. The exception 
extends to services performed as an officer or member of the crew of a 
vessel while the vessel is engaged in any such activity whether or not 
the officer or member of the crew is himself so engaged. In the case of 
an individual who is engaged in any such activity in the employ of any 
person, the services performed, by such individual in the employ of such 
person, as an ordinary incident to any such activity are also excepted. 
Similarly, for example, the shore services of an officer or member of 
the crew of a vessel engaged in any such activity are excepted if such 
services are an ordinary incident to any such activity. Services 
performed as an ordinary incident to any such activity may include, for 
example, services performed in such cleaning, icing, and packing of fish 
as are necessary for the immediate preservation of the catch.
    (b) Salmon and halibut fishing. Services performed in connection 
with the catching or taking of salmon or halibut, for commercial 
purposes, are not within the exception. Thus, neither the services of an 
officer or member of the crew of a vessel (irrespective of its tonnage) 
which is engaged in the catching or taking of salmon or halibut, for 
commercial purposes, nor the services of any other individual in 
connection with such activity, are within the exception.
    (c) Vessels of more than 10 net tons. Services described in 
paragraph (a) of this section performed on or in connection with a 
vessel of more than 10 net tons are not within the exception. For 
purposes of the exception, the tonnage of the vessel shall be determined 
in the manner provided for determining the register tonnage of merchant 
vessels under the laws of the United States.



Sec. 31.3306(c)(18)-1  Services of certain nonresident aliens.

    (a) (1) Services performed after 1961 by a nonresident alien 
individual who is temporarily present in the United States as a 
nonimmigrant under subparagraph (F) or (J) of section 101(a) (15) of the 
Immigration and Nationality Act (8 U.S.C. 1101), as amended, are 
excepted from employment if the services are performed to carry out a 
purpose for which the individual was admitted. For purposes of this 
section an alien individual who is temporarily present in the United 
States as a nonimmigrant under such subparagraph (F) or (J) is deemed to 
be a nonresident alien individual. The preceding sentence does not apply 
to the extent it is inconsistent with section 7701(b) and the 
regulations under that section. A nonresident alien individual who is 
temporarily present in the United States as a nonimmigrant under such 
subparagraph (J) includes an alien individual admitted to the United 
States as an ``exchange visitor'' under section 201 of the United States 
Information and Educational Exchange Act of 1948 (22 U.S.C. 1446).
    (2) If services are performed by a nonresident alien individual's 
alien spouse or minor child, who is temporarily present in the United 
States as a nonimmigrant under subparagraph (F) or (J) of section 
101(a)(15) of the Immigration and Nationality Act, as amended, the 
services are not deemed for purposes of this section to be performed to

[[Page 189]]

carry out a purpose for which such individual was admitted. The services 
of such spouse or child are excepted from employment under this section 
only if the spouse or child was admitted for a purpose specified in such 
subparagraph (F) or (J) and if the services are performed to carry out 
such purpose.
    (b) Section 101 of the Immigration and Nationality Act (8 U.S.C. 
1101), as amended, provides, in part, as follows:

    Sec. 101. Definitions. [Immigration and Nationality Act (66 Stat. 
166)]
    (a) As used in this chapter--* * *
    (15) The term immigrant means every alien except an alien who is 
within one of the following classes of nonimmigrant aliens--

                                * * * * *

    (F) (i) An alien having a residence in a foreign country which he 
has no intention of abandoning, who is a bona fide student qualified to 
pursue a full course of study and who seeks to enter the United States 
temporarily and solely for the purpose of pursuing such a course of 
study at an established institution of learning or other recognized 
place of study in the United States, particularly designated by him and 
approved by the Attorney General after consultation with the Office of 
Education of the United States, which institution or place of study 
shall have agreed to report to the Attorney General the termination of 
attendance of each nonimmigrant student, and if any such institution of 
learning or place of study fails to make reports promptly the approval 
shall be withdrawn, and (ii) the alien spouse and minor children of any 
such alien if accompanying him or following to join him;

                                * * * * *

    (J) An alien having a residence in a foreign country which he has no 
intention of abandoning who is a bona fide student, scholar, trainee, 
teacher, professor, research assistant, specialist, or leader in a field 
of specialized knowledge or skill, or other person of similar 
description, who is coming temporarily to the United States as a 
participant in a program designated by the Secretary of State, for the 
purpose of teaching, instructing or lecturing, studying, observing, 
conducting research, consulting, demonstrating special skills, or 
receiving training, and the alien spouse and minor children of any such 
alien if accompanying him or following to join him.

                                * * * * *

(Sec. 101, Immigration and Nationality Act, as amended by sec. 101, Act 
of June 27, 1952, 66 Stat. 166; sec. 109, Act of Sept. 21, 1961, 75 
Stat. 534)

[T.D. 6658, 28 FR 6640, June 27, 1963, as amended by T.D. 8411, 57 FR 
15241, Apr. 27, 1992]



Sec. 31.3306(d)-1  Included and excluded service.

    (a) If a portion of the services performed by an employee for the 
person employing him during a pay period constitutes employment, and the 
remainder does not constitute employment, all the services of the 
employee during the period shall for purposes of the tax be treated 
alike, that is, either all as included or all as excluded. The time 
during which the employee performs services which under section 3306(c) 
constitute employment, and the time during which he performs services 
which under such section do not constitute employment, within the pay 
period, determine whether all the services during the pay period shall 
be deemed to be included or excluded.
    (b) If one-half or more of the employee's time in the employ of a 
particular person in a pay period is spent in performing services which 
constitute employment, then all the services of that employee for that 
person in that pay period shall be deemed to be employment.
    (c) If less than one-half of the employee's time in the employ of a 
particular person in a pay period is spent in performing services which 
constitute employment, then none of the services of that employee for 
that person in that pay period shall be deemed to be employment.
    (d) The application of the provisions of paragraphs (a), (b), and 
(c) of this section may be illustrated by the following examples:

    Example 1. Employer B, who operates a farm and a store, employs A to 
perform services in connection with both operations. A's services on the 
farm are such that they are excepted as agricultural labor and do not 
constitute employment, and his services in the store constitute 
employment. He is paid

[[Page 190]]

at the end of each month. During a particular month A works 120 hours on 
the farm and 80 hours in the store. None of A's services during the 
month are deemed to be employment, since less than one-half of his 
services during the month constitutes employment. During another month A 
works 75 hours on the farm and 120 hours in the store. All of A's 
services during the month are deemed to be employment, since one-half or 
more of his services during the month constitutes employment.
    Example 2. Employee C is employed as a maid by D, a medical doctor, 
whose home and office are located in the same building. C's services in 
the home are excepted as domestic service and do not constitute 
employment, and her services in the office constitute employment. She is 
paid each week. During a particular week C works 20 hours in the home 
and 20 hours in the office. All of C's services during that week are 
deemed to be employment, since one-half or more of her services during 
the week constitutes employment. During another week C works 22 hours in 
the home and 15 hours in the office. None of C's services during that 
week are deemed to be employment, since less than one-half of her 
services during the week constitutes employment.

    (e) For purposes of this section, a ``pay period'' is the period (of 
not more than 31 consecutive calendar days) for which a payment of 
remuneration is ordinarily made to the employee by the person employing 
him. Thus, if the periods for which payments of remuneration are made to 
the employee by such person are of uniform duration, each such period 
constitutes a ``pay period''. If, however, the periods occasionally vary 
in duration, the ``pay period'' is the period for which a payment of 
remuneration is ordinarily made to the employee by such person, even 
though that period does not coincide with the actual period for which a 
particular payment of remuneration is made. For example, if a person 
ordinarily pays a particular employee for each calendar week at the end 
of the week, but the employee receives a payment in the middle of the 
week for the portion of the week already elapsed and receives the 
remainder at the end of the week, the ``pay period'' is still the 
calendar week; or if, instead, that employee is sent on a trip by such 
person and receives at the end of the third week a single remuneration 
payment for 3 weeks' services, the ``pay period'' is still the calendar 
week.
    (f) If there is only one period (and such period does not exceed 31 
consecutive calendar days) for which a payment of remuneration is made 
to the employee by the person employing him, such period is deemed to be 
a ``pay period'' for purposes of this section.
    (g) The rules set forth in this section do not apply (1) with 
respect to any services performed by the employee for the person 
employing him if the periods for which such person makes payments of 
remuneration to the employee vary to the extent that there is no period 
``for which a payment of remuneration is ordinarily made to the 
employee,'' or (2) with respect to any services performed by the 
employee for the person employing him if the period for which a payment 
of remuneration is ordinarily made to the employee by such person 
exceeds 31 consecutive calendar days, or (3) with respect to any service 
performed by the employee for the person employing him during a pay 
period if any of such service is excepted by section 3306(c) (9) (see 
Sec. 31.3306(c) (9)-1).
    (h) If during any period for which a person makes a payment of 
remuneration to an employee only a portion of the employee's services 
constitutes employment, but the rules prescribed in this section are not 
applicable, the tax attaches with respect to such services as constitute 
employment as defined in section 3306(c) (provided such person is an 
employer as defined in section 3306(a) and Sec. 31.3306(a)-1).



Sec. 31.3306(i)-1  Who are employees.

    (a) Every individual is an employee if the relationship between him 
and the person for whom he performs services is the legal relationship 
of employer and employee. (The word ``employer'' as used in this section 
only, notwithstanding the provisions of Sec. 31.3306(a)-1, includes a 
person who employs one or more employees.)
    (b) Generally such relationship exists when the person for whom 
services are performed has the right to control and direct the 
individual who performs the services, not only as to the result to be 
accomplished by the work but also as to the details and means by which 
that

[[Page 191]]

result is accomplished. That is, an employee is subject to the will and 
control of the employer not only as to what shall be done but how it 
shall be done. In this connection, it is not necessary that the employer 
actually direct or control the manner in which the services are 
performed; it is sufficient if he has the right to do so. The right to 
discharge is also an important factor indicating that the person 
possessing that right is an employer. Other factors characteristic of an 
employer, but not necessarily present in every case, are the furnishing 
of tools and the furnishing of a place to work, to the individual who 
performs the services. In general, if an individual is subject to the 
control or direction of another merely as to the result to be 
accomplished by the work and not as to the means and methods for 
accomplishing the result, he is an independent contractor. An individual 
performing services as an independent contractor is not as to such 
services an employee. Individuals such as physicians, lawyers, dentists, 
veterinarians, construction contractors, public stenographers, and 
auctioneers, engaged in the pursuit of an independent trade, business, 
or profession, in which they offer their services to the public, are 
independent contractors and not employees.
    (c) Whether the relationship of employer and employee exists will in 
doubtful cases be determined upon an examination of the particular facts 
of each case.
    (d) If the relationship of employer and employee exists, the 
designation or description of the relationship by the parties as 
anything other than that of employer and employee is immaterial. Thus, 
if such relationship exists, it is of no consequence that the employee 
is designated as a partner, coadventurer, agent, independent contractor, 
or the like.
    (e) All classes or grades of employees are included within the 
relationship of employer and employee. Thus, superintendents, managers, 
and other supervisory personnel are employees. Generally, an officer of 
a corporation is an employee of the corporation. However, an officer of 
a corporation who as such does not perform any services or performs only 
minor services and who neither receives nor is entitled to receive, 
directly or indirectly, any remuneration is considered not to be an 
employee of the corporation. A director of a corporation in his capacity 
as such is not an employee of the corporation.
    (f) Although an individual may be an employee under this section, 
his services may be of such a nature, or performed under such 
circumstances, as not to constitute employment (see Sec. 31.3306(c)-2).



Sec. 31.3306(j)-1  State, United States, and citizen.

    (a) When used in the regulations in this subpart, the term ``State'' 
includes the District of Columbia, the Territories of Alaska and Hawaii 
before their admission as States, and (when used with respect to 
remuneration paid after 1960 for services performed after 1960) the 
Commonwealth of Puerto Rico.
    (b) When used in the regulations in this subpart, the term ``United 
States'', when used in a geographical sense, means the several States 
(including the Territories of Alaska and Hawaii before their admission 
as States), and the District of Columbia. When used in the regulations 
in this subpart with respect to remuneration paid after 1960 for 
services performed after 1960, the term ``United States'' also includes 
the Commonwealth of Puerto Rico when the term is used in a geographical 
sense, and the term ``citizen of the United States'' includes a citizen 
of the Commonwealth of Puerto Rico.

[T.D. 6658, 28 FR 6641, June 27, 1963]



Sec. 31.3306(k)-1  Agricultural labor.

    (a) In general. (1) Services performed by an employee for the person 
employing him which constitute ``agricultural labor'' as defined in 
section 3306(k) are excepted from employment by reason of section 
3306(c)(1). See Sec. 31.3306(c)(1)-1. The term ``agricultural labor'' 
as defined in section 3306(k) includes services of the character 
described in paragraphs (b), (c), (d), and (e) of this section. In 
general, however, the term does not include services performed in 
connection with forestry, lumbering, or landscaping.

[[Page 192]]

    (2) The term ``farm'' as used in this subpart includes stock, dairy, 
poultry, fruit, fur-bearing animal, and truck farms, plantations, 
ranches, nurseries, ranges, orchards, and such greenhouses and other 
similar structures as are used primarily for the raising of agricultural 
or horticultural commodities. Greenhouses and other similar structures 
used primarily for other purposes (for example, display, storage, and 
fabrication of wreaths, corsages, and bouquets) do not constitute 
``farms''.
    (b) Services described in section 3306(k)(1). Services performed on 
a farm by an employee of any person in connection with any of the 
following activities constitute agricultural labor:
    (1) The cultivation of the soil;
    (2) The raising, shearing, feeding, caring for, training, or 
management of livestock, bees, poultry, fur-bearing animals, or 
wildlife; or
    (3) The raising or harvesting of any other agricultural or 
horticultural commodity.
    (c) Services described in section 3306(k)(2). (1) The following 
services performed by an employee in the employ of the owner or tenant 
or other operator of one or more farms constitute agricultural labor, if 
the major part of such services is performed on a farm:
    (i) Services performed in connection with the operation, management, 
conservation, improvement, or maintenance of any such farms or its tools 
or equipment; or
    (ii) Services performed in salvaging timber, or clearing land of 
brush and other debris, left by a hurricane.
    (2) The services described in paragraph (c)(1)(i) of this section 
may include, for example, services performed by carpenters, painters, 
mechanics, farm supervisors, irrigation engineers, bookkeepers, and 
other skilled or semiskilled workers, which contribute in any way to the 
conduct of the farm or farms, as such, operated by the person employing 
them, as distinguished from any other enterprise in which such person 
may be engaged.
    (3) Since the services described in this paragraph must be performed 
in the employ of the owner or tenant or other operator of the farm, 
services performed by employees of a commercial painting concern, for 
example, which contracts with a farmer to renovate his farm properties, 
do not constitute agricultural labor.
    (d) Services described in section 3306(k)(3). Services performed by 
an employee in the employ of any person in connection with any of the 
following operations constitute agricultural labor without regard to the 
place where such services are performed:
    (1) The ginning of cotton;
    (2) The hatching of poultry;
    (3) The raising or harvesting of mushrooms;
    (4) The operation or maintenance of ditches, canals, reservoirs, or 
waterways used exclusively for supplying or storing water for farming 
purposes;
    (5) The production or harvesting of maple sap or the processing of 
maple sap into maple sirup or maple sugar (but not the subsequent 
blending or other processing of such sirup or sugar with other 
products); or
    (6) The production or harvesting of crude gum (oleoresin) from a 
living tree or the processing of such crude gum into gum spirits of 
turpentine and gum rosin provided such processing is carried on by the 
original producer of such crude gum.
    (e) Services described in section 3306(k)(4). (1)(i) Services 
performed by an employee in the employ of a farmer or a farmers' 
cooperative organization or group in the handling, planting, drying, 
packing, packaging, processing, freezing, grading, storing, or 
delivering to storage or to market or to a carrier for transportation to 
market, of any agricultural or horticultural commodity, other than 
fruits and vegetables (see paragraph (e)(2) of this section), produced 
by such farmer or farmer-members of such organization or group of 
farmers constitute agricultural labor, if such services are performed as 
an incident to ordinary farming operations.
    (ii) Generally services are performed ``as an incident to ordinary 
farming operations'' within the meaning of this paragraph if they are 
services of the character ordinarily performed by the employees of a 
farmer or of a farmers' cooperative organization or group as a 
prerequisite to the marketing, in its

[[Page 193]]

unmanufactured state, of any agricultural or horticultural commodity 
produced by such farmer or by the members of such farmers' organization 
or group. Services performed by employees of such farmer or farmers' 
organization or group in the handling, planting, drying, packing, 
packaging, processing, freezing, grading, storing, or delivering to 
storage or to market or to a carrier for transportation to market, of 
commodities produced by persons other than such farmer or members of 
such farmers' organization or group are not performed ``as an incident 
to ordinary farming operations''.
    (2) Services performed by an employee in the employ of any person in 
the handling, planting, drying, packing, packaging, processing, 
freezing, grading, storing, or delivering to storage or to market or to 
a carrier for transportation to market, of fruits and vegetables, 
whether or not of a perishable nature, constitute agricultural labor, if 
such services are performed as an incident to the preparation of such 
fruits and vegetables for market. For example, if services in the 
sorting, grading, or storing of fruits, or in the cleaning of beans, are 
performed as an incident to their preparation for market, such services 
may constitute agricultural labor, whether performed in the employ of a 
farmer, a farmers' cooperative, or a commercial handler of such 
commodities.
    (3) The services described in paragraphs (e)(1) and (2) of this 
section do not include services performed in connection with commercial 
canning or commercial freezing or in connection with any commodity after 
its delivery to a terminal market for distribution for consumption. 
Moreover, since the services described in such subparagraphs must be 
rendered in the actual handling, planting, drying, packing, packaging, 
processing, freezing, grading, storing, or delivering to storage or to 
market or to a carrier for transportation to market, of the commodity, 
such services do not, for example, include services performed as 
stenographers, bookkeepers, clerks, and other office employees, even 
though such services may be in connection with such activities. However, 
to the extent that the services of such individuals are performed in the 
employ of the owner or tenant or other operator of a farm and are 
rendered in major part on a farm, they may be within the provisions of 
paragraph (c) of this section.



Sec. 31.3306(m)-1  American vessel and aircraft.

    (a) The term ``American vessel'' means any vessel which is 
documented (that is, registered, enrolled, or licensed) or numbered in 
conformity with the laws of the United States. It also includes any 
vessel which is neither documented nor numbered under the laws of the 
United States, nor documented under the laws of any foreign country, if 
the crew of such vessel is employed solely by one or more citizens or 
residents of the United States or corporations organized under the laws 
of the United States or of any State. (For provisions relating to the 
terms ``State'' and ``citizen'', see Sec. 31.3306(j)-1.)
    (b) The term ``American aircraft'' means any aircraft registered 
under the laws of the United States.
    (c) For provisions relating to services performed outside the United 
States on or in connection with an American vessel or American aircraft, 
see paragraph (c) of Sec. 31.3306(c)-2.

[T.D. 6658, 28 FR 6641, June 27, 1963]



Sec. 31.3306(n)-1  Services on American vessel whose business is 
conducted by general agent of Secretary of Commerce.

    (a) Section 3306(n) and this section of the regulations apply with 
respect only to services performed by an officer or member of the crew 
of an American vessel (1) which is owned by or bareboat chartered to the 
United States, and (2) whose business is conducted by a general agent of 
the Secretary of Commerce. Whether services performed by such an officer 
or member of a crew under the above conditions constitute employment is 
determined under section 3306(c) and (n), but without regard to section 
3306(c)(6). See Sec. 31.3306(c)(6)-1, relating to services performed in 
the employ of the United States and instrumentalities thereof. If, 
without regard to section 3306(c)(6), such services constitute 
employment,

[[Page 194]]

they are not excepted from employment by reason of the fact that they 
are performed on or in connection with an American vessel which is owned 
by or bareboat chartered to the United States and whose business is 
conducted by a general agent of the Secretary of Commerce, that is, such 
services are not excepted from employment by section 3306(c)(6). For 
provisions relating to services performed within the United States and 
services performed outside the United States which constitute 
employment, see Sec. 31.3306(c)-2.
    (b) The expression ``officer or member of the crew'' includes the 
master or officer in charge of the vessel, however designated, and every 
individual, subject to his authority, serving on board and contributing 
in any way to the operation and welfare of the vessel. Thus, the 
expression includes, for example, the master, mates, pilots, pursers, 
surgeons, stewards, engineers, firemen, cooks, clerks, carpenters, and 
deck hands.
    (c) An employee of the United States who performs services as an 
officer or member of the crew of an American vessel which is owned by or 
bareboat chartered to the United States and whose business is conducted 
by a general agent of the Secretary of Commerce shall be deemed, under 
section 3306(n), to be performing services for such general agent rather 
than for the United States. Any such general agent of the Secretary of 
Commerce is considered a legal entity in his capacity as such general 
agent, separate and distinct from his identity as a person employing 
individuals on his own account. Each such general agent who in his 
capacity as such qualifies as an employer under section 3306(a) is with 
respect to each calendar year for which he so qualifies subject to the 
tax imposed by section 3301, and to all the requirements imposed upon an 
employer as defined in section 3306(a) by the regulations in this part, 
with respect to services which constitute employment by reason of 
section 3306(n) and this section of the regulations.



Sec. 31.3306(p)-1  Employees of related corporations.

    (a) In general. For purposes of sections 3301, 3302, and 3306(b)(1), 
when two or more related corporations concurrently employ the same 
individual and compensate that individual through a common paymaster 
which is one of the related corporations for which the individual 
performs services, each of the corporations is considered to have paid 
only the remuneration it actually disburses to that individual (unless 
the disbursing corporation fails to remit the taxes due). Paragraphs (b) 
and (c) of Sec. 31.3121(s)-1 contain rules defining related 
corporations, common paymasters, and concurrent employment, and rules 
for determining the liability of the other related corporations for 
employment taxes if the common paymaster fails to remit the taxes 
pursuant to sections 3102 and 3111, and for allocating these taxes among 
the related corporations. Those rules also apply to the tax under 
section 3301. For purposes of applying those rules to this section, 
references in those rules to section 3111 are considered references to 
sections 3301 and 3302, and references to section 3121 are considered 
references to section 3306.
    (b) Allocation of credit for contributions to State unemployment 
funds. A special rule for applying the rules of Sec. 31.3121(s)-1 to 
this section applies if it is necessary to determine the ultimate 
liability of each related corporation for which services are performed 
in the event the common paymaster fails to remit the tax to the Internal 
Revenue Service. In determining the ultimate liability of a corporation, 
the credit for contributions to State unemployment funds that the 
corporation may claim under section 3302 is calculated as if each 
corporation were a separate employer.
    (c) Effective date. This section is effective with respect to wages 
paid after December 31, 1978.

[T.D. 7660, 44 FR 75142, Dec. 19, 1979]



Sec. 31.3306(r)(2)-1  Treatment of amounts deferred under certain 
nonqualified deferred compensation plans.

    (a) In general. Section 3306(r)(2) provides a special timing rule 
for the tax imposed by section 3301 with respect to any amount deferred 
under a nonqualified deferred compensation plan. Section 31.3121(v)(2)-1 
contains rules relating to when amounts deferred under

[[Page 195]]

certain nonqualified deferred compensation plans are wages for purposes 
of sections 3121(v)(2), 3101, and 3111. The rules in Sec. 
31.3121(v)(2)-1 also apply to the special timing rule of section 
3306(r)(2). For purposes of applying the rules in Sec. 31.3121(v)(2)-1 
to section 3306(r)(2) and this paragraph (a), references to the Federal 
Insurance Contributions Act are considered references to the Federal 
Unemployment Tax Act (26 U.S.C. 3301 et seq.), references to FICA are 
considered references to FUTA, references to section 3101 or 3111 are 
considered references to section 3301, references to section 3121(v)(2) 
are considered references to section 3306(r)(2), references to section 
3121(a), (a)(5), and (a)(13) are considered references to section 
3306(b), (b)(5), and (b)(10), respectively, and references to Sec. 
31.3121(a)-2(a) are considered references to Sec. 31.3301-4.
    (b) Effective dates and transition rules. Except as otherwise 
provided, section 3306(r)(2) applies to remuneration paid after December 
31, 1984. Section 31.3121(v)(2)-2 contains effective date rules for 
certain remuneration paid after December 31, 1983, for purposes of 
section 3121(v)(2). The rules in Sec. 31.3121(v)(2)-2 also apply to 
section 3306(r)(2). For purposes of applying the rules in Sec. 
31.3121(v)(2)-2 to section 3306(r)(2) and this paragraph (b), references 
to section 3121(v)(2) are considered references to section 3306(r)(2), 
and references to section 3121(a)(2), (a)(3), or (a)(13) are considered 
references to section 3306(b)(2), (b)(3), or (b)(10), respectively. In 
addition, references to Sec. 31.3121(v)(2)-1 are considered references 
to paragraph (a) of this section. For purposes of applying the rules of 
Sec. 31.3121(v)(2)-2 to this paragraph (b)--
    (1) References to ``December 31, 1983'' are considered references to 
``December 31, 1984'';
    (2) References to ``before 1984'' are considered references to 
``before 1985'';
    (3) References to ``Federal Insurance Contributions Act'' are 
considered references to ``Federal Unemployment Tax Act''; and
    (4) References to ``FICA'' are considered references to ``FUTA''.

[64 FR 4541, Jan. 29, 1999]



Sec. 31.3307-1  Deductions by an employer from remuneration of an employee.

    Any amount deducted by an employer from the remuneration of an 
employee is considered to be a part of the employee's remuneration and 
is considered to be paid to the employee as remuneration at the time 
that the deduction is made. It is immaterial that any act of Congress or 
the law of any State requires or permits such deductions and the payment 
of the amount thereof to the United States, a State, or any political 
subdivision thereof.



Sec. 31.3308-1  Instrumentalities of the United States specifically 
exempted from tax imposed by section 3301.

    Section 3308 makes ineffectual as to the tax imposed by section 3301 
(with respect to remuneration paid after 1961 for services performed 
after 1961) those provisions of law which grant to an instrumentality of 
the United States an exemption from taxation, unless such provisions 
grant a specific exemption from the tax imposed by section 3301 by an 
express reference to such section or the corresponding section of prior 
law. Thus, the general exceptions from Federal taxation granted by 
various statutes to certain instrumentalities of the United States 
without specific reference to the tax imposed by section 3301 or the 
corresponding section of prior law are rendered inoperative insofar as 
such exemptions relate to the tax imposed by section 3301. For 
provisions relating to the exception from employment of services 
performed in the employ of an instrumentality of the United States 
specifically exempted from the tax imposed by section 3301, see Sec. 
31.3306(c)(6)-1.

[T.D. 6658, 28 FR 6641, June 27, 1963]



              Subpart E_Collection of Income Tax at Source



Sec. 31.3401(a)-1  Wages.

    (a) In general. (1) The term ``wages'' means all remuneration for 
services performed by an employee for his employer unless specifically 
excepted under section 3401(a) or excepted under section 3402(e).

[[Page 196]]

    (2) The name by which the remuneration for services is designated is 
immaterial. Thus, salaries, fees, bonuses, commissions on sales or on 
insurance premiums, pensions, and retired pay are wages within the 
meaning of the statute if paid as compensation for services performed by 
the employee for his employer.
    (3) The basis upon which the remuneration is paid is immaterial in 
determining whether the remuneration constitutes wages. Thus, it may be 
paid on the basis of piecework, or a percentage of profits; and may be 
paid hourly, daily, weekly, monthly, or annually.
    (4) Generally the medium in which remuneration is paid is also 
immaterial. It may be paid in cash or in something other than cash, as 
for example, stocks, bonds, or other forms of property. (See, however, 
Sec. 31.3401(a)(11)-1, relating to the exclusion from wages of 
remuneration paid in any medium other than cash for services not in the 
course of the employer's trade or business, and Sec. 31.3401(a)(16)-1, 
relating to the exclusion from wages of tips paid in any medium other 
than cash.) If services are paid for in a medium other than cash, the 
fair market value of the thing taken in payment is the amount to be 
included as wages. If the services were rendered at a stipulated price, 
in the absence of evidence to the contrary, such price will be presumed 
to be the fair value of the remuneration received. If a corporation 
transfers to its employees its own stock as remuneration for services 
rendered by the employee, the amount of such remuneration is the fair 
market value of the stock at the time of the transfer.
    (5) Remuneration for services, unless such remuneration is 
specifically excepted by the statute, constitutes wages even though at 
the time paid the relationship of employer and employee no longer exists 
between the person in whose employ the services were performed and the 
individual who performed them.

    Example. A is employed by R during the month of January 1955 and is 
entitled to receive remuneration of $100 for the services performed for 
R, the employer, during the month. A leaves the employ of R at the close 
of business on January 31, 1955. On February 15, 1955 (when A is no 
longer an employee of R), R pays A the remuneration of $100 which was 
earned for the services performed in January. The $100 is wages within 
the meaning of the statute.

    (b) Certain specific items--(1) Pensions and retirement pay. (i) In 
general, pensions and retired pay are wages subject to withholding. 
However, no withholding is required with respect to amounts paid to an 
employee upon retirement which are taxable as annuities under the 
provisions of section 72 or 403. So-called pensions awarded by one to 
whom no services have been rendered are mere gifts or gratuities and do 
not constitute wages. Those payments of pensions or other benefits by 
the Federal Government under Title 38 of the United States Code which 
are excluded from gross income are not wages subject to withholding.
    (ii) Amounts received as retirement pay for service in the Armed 
Forces of the United States, the Coast and Geodetic Survey, or the 
Public Health Service or as a disability annuity paid under the 
provisions of section 831 of the Foreign Service Act of 1946, as amended 
(22) U.S.C. 1081; 60 Stat. 1021), are subject to withholding unless such 
pay or disability annuity is excluded from gross income under section 
104(a)(4), or is taxable as an annuity under the provisions of section 
72. Where such retirement pay or disability annuity (not excluded from 
gross income under section 104(a)(4) and not taxable as an annuity under 
the provisions of section 72) is paid to a nonresident alien individual, 
withholding is required only in the case of such amounts paid to a 
nonresident alien individual who is a resident of Puerto Rico.
    (2) Traveling and other expenses. Amounts paid specifically--either 
as advances or reimbursements--for traveling or other bona fide ordinary 
and necessary expenses incurred or reasonably expected to be incurred in 
the business of the employer are not wages and are not subject to 
withholding. Traveling and other reimbursed expenses must be identified 
either by making a separate payment or by specifically indicating the 
separate amounts where both wages and expense allowances are combined in 
a single payment. For amounts that are received by an employee on or 
after July

[[Page 197]]

1, 1990, with respect to expenses paid or incurred on or after July 1, 
1990, see Sec. 31.3401 (a)-4.
    (3) Vacation allowances. Amounts of so-called ``vacation 
allowances'' paid to an employee constitute wages. Thus, the salary of 
an employee on vacation, paid notwithstanding his absence from work, 
constitutes wages.
    (4) Dismissal payments. Any payments made by an employer to an 
employee on account of dismissal, that is, involuntary separation from 
the service of the employer, constitute wages regardless of whether the 
employer is legally bound by contract, statute, or otherwise to make 
such payments.
    (5) Deductions by employer from remuneration of an employee. Any 
amount deducted by an employer from the remuneration of an employee is 
considered to be a part of the employee's remuneration and is considered 
to be paid to the employee as remuneration at the time that the 
deduction is made. It is immaterial that any act of Congress, or the law 
of any State or of Puerto Rico, requires or permits such deductions and 
the payment of the amounts thereof to the United States, a State, a 
Territory, Puerto Rico, or the District of Columbia, or any political 
subdivision of any one or more of the foregoing.
    (6) Payment by an employer of employee's tax, or employee's 
contributions under a State law. The term ``wages'' includes the amount 
paid by an employer on behalf of an employee (without deduction from the 
remuneration of, or other reimbursement from, the employee) on account 
of any payment required from an employee under a State unemployment 
compensation law, or on account of any tax imposed upon the employee by 
any taxing authority, including the taxes imposed by sections 3101 and 
3201.
    (7) Remuneration for services as employee of nonresident alien 
individual or foreign entity. The term ``wages'' includes remuneration 
for services performed by a citizen or resident (including, in regard to 
wages paid after February 28, 1979, an individual treated as a resident 
under section 6013 (g) or (h)) of the United States as an employee of a 
nonresident alien individual, foreign partnership, or foreign 
corporation whether or not such alien individual or foreign entity is 
engaged in trade or business within the United States. Any person paying 
wages on behalf of a nonresident alien individual, foreign partnership, 
or foreign corporation, not engaged in trade or business within the 
United States (including Puerto Rico as if a part of the United States), 
is subject to all the provisions of law and regulations applicable with 
respect to an employer. See Sec. 31.3401(d)-1, relating to the term 
``employer'', and Sec. 31.3401(a)(8)(C)-1, relating to remuneration 
paid for services performed by a citizen of the United States in Puerto 
Rico.
    (8) Amounts paid under accident or health plans--(i) Amounts paid in 
taxable years beginning on or after January 1, 1977--(a) In general. 
Withholding is required on all payments of amounts includible in gross 
income under section 105(a) and Sec. 1.105-1 (relating to amounts 
attributable to employer contributions), made in taxable years beginning 
on or after January 1, 1977, to an employee under an accident or health 
plan for a period of absence from work on account of personal injuries 
or sickness. Payments on which withholding is required by this 
subdivision are wages as defined in section 3401(a), and the employer 
shall deduct and withhold in accordance with the requirements of chapter 
24 of subtitle C of the Code. Third party payments of sick pay, as 
defined in section 3402(o) and the regulations thereunder, are not wages 
for purposes of this section.
    (b) Payments made by an agent of the employer. (1) Payments are 
considered made by the employer if a third party makes the payments as 
an agent of the employer. The determining factor as to whether a third 
party is an agent of the employer is whether the third party bears any 
insurance risk. If the third party bears no insurance risk and is 
reimbursed on a cost plus fee basis, the third party is an agent of the 
employer even if the third party is responsible for making 
determinations of the eligibility of individual employees of the 
employer for sick pay payments. If the third party is paid an insurance 
premium and not reimbursed on a cost plus fee basis, the third party is 
not an agent of the employer, but the third

[[Page 198]]

party is a payor of third party sick pay for purposes of voluntary 
withholding from sick pay under sections 3402(o) and 6051(f) and the 
regulations thereunder. If a third party and an employer enter into an 
agency agreement as provided in paragraph (c) of Sec. 31.6051-3 
(relating to statements required in case of sick pay paid by third 
parties), that agency agreement does not make the third party an agent 
of the employer for purposes of this paragraph.
    (2) Payments made by agents subject to this paragraph are 
supplemental wages as defined in Sec. 31.3402(g)-1, and are therefore 
subject to the rules regarding withholding tax on supplemental wages 
provided in Sec. 31.3402(g)-1. For purposes of those rules, unless the 
agent is also an agent for purposes of withholding tax from the 
employee's regular wages, the agent may deem tax to have been withheld 
from regular wages paid to the employee during the calendar year.
    (3) This paragraph is only applicable to amounts paid on or after 
May 25, 1983 unless the agent actually withheld taxes before that date.
    (c) Exceptions to withholding. (1) Withholding is not required on 
payments that are specifically excepted under the numbered paragraphs of 
section 3401(a) (relating to the definition of wages), under section 
3402(e) (relating to included and excluded wages), or under section 
3402(n) (relating to employees incurring no income tax liability).
    (2) Withholding is not required on disability payments to the extent 
that the payments are excludable from gross income under section 105(d). 
In determining the excludable portion of the disability payments, the 
employer may assume that payments that the employer makes to the 
employee are the employee's sole source of income. This exception 
applies only if the employee furnishes the employer with adequate 
verification of disability. A certificate from a qualified physician 
attesting that the employee is permanently and totally disabled (within 
the meaning of section 105(d)) shall be deemed to constitute adequate 
verification. This exception does not affect the requirement that a 
statement (which includes any amount paid under section 105(d)) be 
furnished under either section 6041 (relating to information at source) 
or section 6051 (relating to receipts for employees) and the regulations 
thereunder.
    (ii) Amounts paid after December 31, 1955 and before January 1, 
1977--(a) In general. The term ``wage continuation payment'', as used in 
this subdivision, means any payment to an employee which is made after 
December 31, 1955, and before January 1, 1977 under a wage continuation 
plan (as defined in paragraph (a)(2)(i) of Sec. 1.105-4 and Sec. 
1.105-5 of Part 1 of this chapter (Income Tax Regulations)) for a period 
of absence from work on account of personal injuries or sickness, to the 
extent such payment is attributable to contributions made by the 
employer which were not includable in the employee's gross income or is 
paid by the employer. Any such payment, whether or not excluded from the 
gross income of the employee under section 105(d), constitutes ``wages'' 
(unless specifically excepted under any of the numbered paragraphs of 
section 3401(a) or under section 3402(e) and withholding thereon is 
required except as provided in paragraphs (b)(8)(ii) (b), (c), and (d) 
of this section.
    (b) Amounts paid before January 1, 1977, by employer for whom 
services are performed for period of absence beginning after December 
31, 1963. (1) Withholding is not required upon the amount of any wage 
continuation payment for a period of absence beginning after December 
31, 1963, paid before January 1, 1977, to an employee directly by the 
employer for whom he performs services to the extent that such payment 
is excludable from the gross income of the employee under the provisions 
of section 105(d) in effect with respect to such payments, provided the 
records maintained by the employer--
    (i) Separately show the amount of each such payment and the 
excludable portion thereof, and
    (ii) Contain data substantiating the employee's entitlement to the 
exclusion provided in section 105(d) with respect to such amount, either 
by a written statement from the employee specifying whether his absence 
from work during the period for which the payment was made was due to a 
personal injury or to sickness and whether

[[Page 199]]

he was hospitalized for at least one day during this period; or by any 
other information which the employer reasonably believes establishes the 
employee's entitlement to the exclusion under section 105(d). Employers 
shall not be required to ascertain the accuracy of any written statement 
submitted by an employee in accordance with this subdivision (b)(1)(ii).

For purposes of this subdivision (b)(1), wage continuation payments 
reasonably expected by the employer to be made on behalf of the employer 
by another person shall be taken into account in determining whether the 
75 percent test contained in section 105(d) is met and in computing the 
amount of any wage continuation payment made directly by the employer 
for whom services are performed by the employee which is within the $75 
or $100 weekly rate of exclusion from the gross income of the employee 
provided in section 105(d). In making this latter computation, the 
amount excludable under section 105(d) shall be applied first against 
payments reasonably expected to be made on behalf of the employer by the 
other person and then, to the extent any part of the exclusion remains, 
against the payments made directly by the employer. In a case in which 
wage continuation payments are not paid at a constant rate for the first 
30 calendar days of the period of absence, the determination of whether 
the 75 percent test contained in section 105(d) is met shall be based 
upon the length of the employee's absence as of the end of the period 
for which the payment by the employer is made, without regard to the 
effect which any further extension of such absence may have upon the 
excludability of the payment.
    (2) The computation of the amount of any wage continuation payment 
with repect to which the employer may refrain from withholding may be 
illustrated by the following examples:

    Example 1. A, an employee of B, normally works Monday through Friday 
and has a regular weekly rate of wages of $100. On Monday, November 5, 
1974, A becomes ill, and as a result is absent from work for two weeks, 
returing to work on Monday, November 19, 1974. A is not hospitalized. 
Under B's noncontributory wage continuation plan, A receives no benefits 
for the first three working days of absence and is paid benefits 
directly by B at the rate of $85 a week thereafter ($34 for the last two 
days of the first week of absence and $85 for the second week of 
absence). No wage continuation payment is made by any other person. 
Since the benefits are entirely attributable to contributions to the 
plan by B, such benefits are wage continuation payments in their 
entirety. The wage continuation payments for the first seven calender 
days of absence are not excludable from A's gross income because A was 
not hospitalized for at least one day during his period of absence, and 
therefore B must withhold with respect to such payments. Under section 
105(a), the wage continuation payments attributable to absence after the 
first seven calendar days of absence are excludable to the extent that 
they do not exceed a rate of $75 a week. Under the principles stated in 
paragraph (e)(6)(iv) of Sec. 1.105-4 of this chapter (Income Tax 
Regulations), the wage continuation payments in this case are at a rate 
not in excess of 75 percent (\119/200\ or 59.5 percent) of A's regular 
weekly rate of wages. Accordingly, B may refrain from withholding with 
respect to $75 of the wage continuation payment attributable to the 
second week of absence.
    Example 2. Assume the facts in example 1 except that A is unable to 
return to work until Monday, February 11, 1975, and that, of the $85 a 
week of wage continuation payments $35 is paid directly by B and $50 is 
reasonably expected by B to be paid by C, an insurance company, on 
behalf of B. In such a case, both the $50 and the $35 payments 
constitute wage continuation payments and the amount of such payments 
which is attributable to the first 30 calendar days of absence is at a 
rate not in excess of 75 percent (\323/440\ or 73.4 percent) of A's 
regular weekly rate of wages. Therefore, under section 105(d), the 
portion of such payments which is attributable to absence after the 
first seven calendar days of absence is excludable to the extent that it 
does not exceed a rate of $75 a week for the eighth through the 
thirtieth calendar day of absence and does not exceed a rate of $100 a 
week thereafter. B may refrain from withholding with repect to $25 a 
week (the amount by which the $75 maximum excludable amount exceeds the 
$50 reasonably expected by B to be paid by C) of his direct payments for 
the eighth through the thirtieth calendar day of absence. Thereafter, B 
may refrain from withholding with respect to the entire $35 paid 
directly by him since the maximum excludable amount ($100 a week) 
exceeds the total of payments made by B and payments which B reasonably 
expects will be made by C.

    (c) Amounts paid by employer for whom services are performed for 
period of absence beginning before January 1, 1964. Withholding is not 
required upon the

[[Page 200]]

amount of any wage continuation payment for a period of absence 
beginning before January 1, 1964, made to an employee directly by the 
employer for whom he performs services to the extent that such payment 
is excludable from the gross income of the employee under the provisions 
of section 105(d) in effect with respect to such payments, provided the 
records maintained by the employer--
    (1) Separately show the amount of each such payment and the 
excludable portion thereof, and
    (2) Contain data substantiating the employee's entitlement to the 
exclusion provided in section 105(d) with respect to such amount, either 
by a written statement from the employee specifying whether his absence 
from work during the period for which the payment was made was due to a 
personal injury or whether such absence was due to sickness, and, if the 
latter, whether he was hospitalized for at least one day during this 
period; or by any other information which the employer reasonably 
believes establishes the employee's entitlement to the exclusion under 
section 105(d). Employers shall not be required to ascertain the 
accuracy of the information contained in any written statement submitted 
by an employee in accordance with this paragraph (b)(8)(ii)(c)(2). For 
purposes of this paragraph (b)(8)(ii)(c), the computation of the amount 
excludable form the gross income of the employee under section 105(d) 
may be made either on the basis of the wage continuation payments which 
are made directly by the employer for whom the employee performs 
services, or on the basis of such payments in conjunction with any wage 
continuation payments made on behalf of the employer by a person who is 
regarded as an employer under section 3401(d)(1).
    (d) Amounts paid before January 1, 1977 by person other than the 
employer for whom services are performed. No tax shall be withheld upon 
any wage continuation payment made to an employee by or on behalf of a 
person who is not the employer for whom the employee performs services 
but who is regarded as an employer under section 3401(d)(1). For 
example, no tax shall be withheld with respect to wage continuation 
payments made on behalf of an employer by an insurance company under an 
accident or health policy, by a separate trust under an accident or 
health plan, or by a State agency from a sickness and disability fund 
maintained under State law.
    (e) Cross references. See sections 6001 and 6051 and the regulations 
thereunder for rules with respect to the records which must be 
maintained in connection with wage continuation payments and for rules 
with respect to the statements which must be furnished an employee in 
connection with wage continuation payments, respectively. See also 
section 105 and Sec. 1.105-4 of this chapter (Income Tax Regulations).
    (9) Value of meals and lodging. The value of any meals or lodging 
furnished to an employee by his employer is not subject to withholding 
if the value of the meals or lodging is excludable from the gross income 
of the employee. See Sec. 1.119-1 of this chapter (Income Tax 
Regulations).
    (10) Facilities or privileges. Ordinarily, facilities or privileges 
(such as entertainment, medical services, or so-called ``courtesy'' 
discounts on purchases), furnished or offered by an employer to his 
employees generally, are not considered as wages subject to withholding 
if such facilities or privileges are of relatively small value and are 
offered or furnished by the employer merely as a means of promoting the 
health, good will, contentment, or efficiency of his employees.
    (11) Tips or gratuities. Tips or gratuities paid, prior to January 
1, 1966, directly to an employee by a customer of an employer, and not 
accounted for by the employee to the employer are not subject to 
withholding. For provisions relating to the treatment of tips received 
by an employee after December 31, 1965, as wages, see Sec. Sec. 
31.3401(f)-1 and 31.3402(k)-1.
    (12) Remuneration for services performed by permanent resident of 
Virgin Islands--(i) Exemption from withholding. No tax shall be withheld 
for the United States under chapter 24 from a payment of wages by an 
employer, including the United States or any agency thereof, to an 
employee if at the time of payment it is reasonable to believe

[[Page 201]]

that the employee will be required to satisfy his income tax obligations 
with respect to such wages under section 28(a) of the Revised Organic 
Act of the Virgin Islands (68 Stat. 508). That section provides that all 
persons whose permanent residence is in the Virgin Islands ``shall 
satisfy their income tax obligations under applicable taxing statutes of 
the United States by paying their tax on income derived from all sources 
both within and outside the Virgin Islands into the treasury of the 
Virgin Islands''.
    (ii) Claiming exemption. If the employee furnishes to the employer a 
statement in duplicate that he expects to satisfy his income tax 
obligations under section 28(a) of the Revised Organic Act of the Virgin 
Islands with respect to all wages subsequently to be paid to him by the 
employer during the taxable year to which the statement relates, the 
employer may, in the absence of information to the contrary, rely on 
such statement as establishing reasonable belief that the employee will 
so satisfy his income tax obligations. The employee's statement shall 
identify the taxable year to which it relates, and both the original and 
the duplicate copy thereof shall be signed and dated by the employee.
    (iii) Disposition of statement. The original of the statement shall 
be retained by the employer. The duplicate copy of the statement shall 
be sent by the employer to the Director of International Operations, 
Washington, D.C. 20225, on or before the last day of the calendar year 
in which the employer receives the statement from the employee.
    (iv) Applicability of subparagraph. This subparagraph has no 
application with respect to any payment of remuneration which is not 
subject to withholding by reason of any other provision of the 
regulations in this subpart.
    (13) Federal employees resident in Puerto Rico. Except as provided 
in paragraph (d) of Sec. 31.3401(a)(6)-1, the term ``wages'' includes 
remuneration for services performed by a nonresident alien individual 
who is a resident of Puerto Rico if such services are performed as an 
employee of the United States or any agency thereof. The place where the 
services are performed is immaterial for purposes of this subparagraph.
    (14) Supplemental unemployment compensation benefits. (i) 
Supplemental unemployment compensation benefits paid to an individual 
after December 31, 1970, shall be treated (for purposes of the 
provisions of Subparts E, F, and G of this part which relate to 
withholding of income tax) as if they were wages, to the extent such 
benefits are includible in the gross income of such individual.
    (ii) For purposes of this subparagraph, the term ``supplemental 
unemployment compensation benefits'' means amounts which are paid to an 
employee, pursuant to a plan to which the employer is a party, because 
of the employee's involuntary separation from the employment of the 
employer, whether or not such separation is temporary, but only when 
such separation is one resulting directly from a reduction in force, the 
discontinuance of a plant or operation, or other similar conditions.
    (iii) For the meanings of the terms ``involuntary separation from 
the employment of the employer'' and ``other similar conditions'', see 
subparagraphs (3) and (4) of Sec. 1.501(c)(17)-1(b) of this chapter 
(Income Tax Regulations).
    (iv) As used in this subparagraph, the term ``employee'' means an 
employee within the meaning of paragraph (a) of Sec. 31.3401(c)-1, the 
term ``employer'' means an employer within the meaning of paragraph (a) 
of Sec. 31.3401(d)-1, and the term ``employment'' means employment as 
defined under the usual common law rules.
    (v) References in this chapter to wages as defined in section 
3401(a) shall be deemed to refer also to supplemental unemployment 
compensation benefits which are treated under this subparagraph as if 
they were wages.
    (15) Split-dollar life insurance arrangements. See Sec. 1.61-22 of 
this chapter for rules relating to the treatment of split-dollar life 
insurance arrangements.
    (c) Geographical definitions. For definition of the term ``United 
States'' and

[[Page 202]]

for other geographical definitions relating to the Continental Shelf see 
section 638 and Sec. 1.638-1 of this chapter.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6654, 28 FR 
5251, May 28, 1963; T.D. 6908, 31 FR 16775, Dec. 31, 1966; T.D. 7001, 34 
FR 1000, Jan. 23, 1969; T.D. 7068, 35 FR 17328, Nov. 11, 1970; T.D. 
7277, 38 FR 12742, May 15, 1973; T.D. 7493, 42 FR 33728, July 1, 1977; 
T.D. 7670, 45 FR 6932, Jan. 31, 1980; T.D. 7888, 48 FR 17587, Apr. 25, 
1983; T.D. 8276, 54 FR 51028, Dec. 12, 1989; T.D. 8324, 55 FR 51697, 
Dec. 17, 1990; T.D. 9092, 68 FR 54361, Sept. 17, 2003; T.D. 9276, 71 FR 
42054, July 25, 2006]



Sec. 31.3401(a)-1T  Question and answer relating to the definition of
wages in section 3401(a) (Temporary).

    The following question and answer relates to the definition of wages 
in section 3401(a) of the Internal Revenue Code of 1954, as amended by 
section 531(d)(4) of the Tax Reform Act of 1984 (98 Stat. 886):
    Q-1: Are fringe benefits included in the definition of ``wages'' 
under section 3401(a)?
    A-1: Yes, unless specifically excluded from the definition of 
``wages'' pursuant to section 3401(a) (1) through (20). For example, a 
fringe benefit provided to or on behalf of an employee is excluded from 
the definition of ``wages'' if at the time such benefit is provided it 
is reasonable to believe that the employee will be able to exclude such 
benefit from income under section 117 or 132.

[T.D. 8004, 50 FR 756, Jan. 7, 1985]



Sec. 31.3401(a)-2  Exclusions from wages.

    (a) In general. (1) The term ``wages'' does not include any 
remuneration for services performed by an employee for his employer 
which is specifically excepted from wages under section 3401(a).
    (2) The exception attaches to the remuneration for services 
performed by an employee and not to the employee as an individual; that 
is, the exception applies only to the remuneration in an excepted 
category.

    Example. A is an individual who is employed part time by B to 
perform domestic service in his home (see Sec. 31.3401(a)(3)-1). A is 
also employed by C part time to perform services as a clerk in a 
department store owned by him. While no withholding is required with 
respect to A's remuneration for services performed in the employ of B 
(the remuneration being excluded from wages), the exception does not 
embrace the remuneration for services performed by A in the employ of C 
and withholding is required with respect to the wages for such services.

    (3) For provisions relating to the circumstances under which 
remuneration which is excepted is nevertheless deemed to be wages, and 
relating to the circumstances under which remuneration which is not 
excepted is nevertheless deemed not to be wages, see Sec. 31.3402(e)-1.
    (4) For provisions relating to payments with respect to which a 
voluntary withholding agreement is in effect, which are not defined as 
wages in section 3401(a) but which are nevertheless deemed to be wages, 
see Sec. Sec. 31.3401(a)-3 and 31.3402(p)-1.
    (b) Fees paid a public official. (1) Authorized fees paid to public 
officials such as notaries public, clerks of courts, sheriffs, etc., for 
services rendered in the performance of their official duties are 
excepted from wages and hence are not subject to withholding. However, 
salaries paid such officials by the Government, or by a Government 
agency or instrumentality, are subject to withholding.
    (2) Amounts paid to precinct workers for services performed at 
election booths in State, county, and municipal elections and fees paid 
to jurors and witnesses are in the nature of fees paid to public 
officials and therefore are not subject to withholding.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6654, 28 FR 
5251, May 28, 1963; T.D. 7096, 36 FR 5216, Mar. 18, 1971]



Sec. 31.3401(a)-3  Amounts deemed wages under voluntary withholding agreements.

    (a) In general. Notwithstanding the exceptions to the definition of 
wages specified in section 3401(a) and the regulations thereunder, the 
term ``wages'' includes the amounts described in paragraph (b)(1) of 
this section with respect to which there is a voluntary withholding 
agreement in effect under section 3402(p). References in this chapter to 
the definition of wages contained in section 3401(a) shall be deemed to 
refer also to this section (Sec. 31.3401(a)-3).

[[Page 203]]

    (b) Remuneration for services. (1) Except as provided in 
subparagraph (2) of this paragraph, the amounts referred to in paragraph 
(a) of this section include any remuneration for services performed by 
an employee for an employer which, without regard to this section, does 
not constitute wages under section 3401(a). For example, remuneration 
for services performed by an agricultural worker or a domestic worker in 
a private home (amounts which are specifically excluded from the 
definition of wages by section 3401(a) (2) and (3), respectively) are 
amounts with respect to which a voluntary withholding agreement may be 
entered into under section 3402(p). See Sec. Sec. 31.3401(c)-1 and 
31.3401(d)-1 for the definitions of ``employee'' and ``employer''.
    (2) For purposes of this paragraph, remuneration for services shall 
not include amounts not subject to withholding under Sec. 31.3401(a)-
1(b)(12) (relating to remuneration for services performed by a permanent 
resident of the Virgin Islands), Sec. 31.3401(a)-2(b) (relating to fees 
paid to a public official), section 3401(a)(5) (relating to remuneration 
for services for foreign government or international organization), 
section 3401(a)(8)(B) (relating to remuneration for services performed 
in a possession of the United States (other than Puerto Rico) by 
citizens of the United States), section 3401(a)(8)(C) (relating to 
remuneration for services performed in Puerto Rico by citizens of the 
United States), section 3401(a)(11) (relating to remuneration other than 
in cash for service not in the course of employer's trade or business), 
section 3401(a)(12) (relating to payments from or to certain tax-exempt 
trusts, or under or to certain annuity plans or bond purchase plans), 
section 3401(a)(14) (relating to group-term life insurance), section 
3401(a)(15) (relating to moving expenses), or section 3401(a)(16)(A) 
(relating to tips paid in any medium other than cash).

[T.D. 7096, 36 FR 5216, Mar. 18, 1971]



Sec. 31.3401(a)-4  Reimbursements and other expense allowance amounts.

    (a) When excluded from wages. If a reimbursement or other expense 
allowance arrangement meets the requirements of section 62(c) of the 
Code and Sec. 1.62-2 and the expenses are substantiated within a 
reasonable period of time, payments made under the arrangement that do 
not exceed the substantiated expenses are treated as paid under an 
accountable plan and are not wages. In addition, if both wages and the 
reimbursement or other expense allowance are combined in a single 
payment, the reimbursement or other expense allowance must be identified 
either by making a separate payment or by specifically identifying the 
amount of the reimbursement or other expense allowance.
    (b) When included in wages--(1) Accountable plans--(i) General rule. 
Except as provided in paragraph (b)(1)(ii) of this section, if a 
reimbursement or other expense allowance arrangement satisfies the 
requirements of section 62(c) and Sec. 1.62-2, but the expenses are not 
substantiated within a reasonable period of time or amounts in excess of 
the substantiated expenses are not returned within a reasonable period 
of time, the amount paid under the arrangement in excess of the 
substantiated expenses is treated as paid under a nonaccountable plan, 
is included in wages, and is subject to withholding and payment of 
employment taxes no later than the first payroll period following the 
end of the reasonable period.
    (ii) Per diem or mileage allowances. If a reimbursement or other 
expense allowance arrangement providing a per diem or mileage allowance 
satisfies the requirements of section 62(c) and Sec. 1.62-2, but the 
allowance is paid at a rate for each day or mile of travel that exceeds 
the amount of the employee's expenses deemed substantiated for a day or 
mile of travel, the excess portion is treated as paid under a 
nonaccountable plan and is included in wages. In the case of a per diem 
or mileage allowance paid as a reimbursement, the excess portion is 
subject to withholding and payment of employment taxes when paid. In the 
case of a per diem or mileage allowance paid as an advance, the excess 
portion is subject to withholding and payment of employment taxes no 
later than the first payroll period following the payroll period in 
which the expenses with respect to which the advance was paid

[[Page 204]]

(i.e., the days or miles of travel) are substantiated. The Commissioner 
may, in his discretion, prescribe special rules in pronouncements of 
general applicability regarding the timing of withholding and payment of 
employment taxes on per diem and mileage allowances.
    (2) Nonaccountable plans. If a reimbursement or other expense 
allowance arrangement does not satisfy the requirements of section 62(c) 
and Sec. 1.62-2 (e.g., the arrangement does not require expenses to be 
substantiated or require amounts in excess of the substantiated expenses 
to be returned), all amounts paid under the arrangement are treated as 
paid under a nonaccountable plan, are included in wages, and are subject 
to withholding and payment of employment taxes when paid.
    (c) Withholding rate. Payments made under reimbursement or other 
expense allowance arrangements that are subject to income tax 
withholding are supplemental wages as defined in Sec. 31.3402(g)-1. 
Accordingly, withholding on such supplemental wages is calculated under 
the rules provided with respect to supplemental wages in Sec. 
31.3402(g)-1.
    (d) Effective dates. This section generally applies to payments made 
under reimbursement or other expense allowance arrangements received by 
an employee on or after July 1, 1990, with respect to expenses paid or 
incurred on or after July 1, 1990. Paragraph (b)(1)(ii) of this section 
applies to payments made under reimbursement or other expense allowance 
arrangements received by an employee on or after January 1, 1991, with 
respect to expenses paid or incurred on or after January 1, 1991.

[T.D. 8324, 55 FR 51698, Dec. 17, 1990, as amended by T.D. 9276, 71 FR 
42054, July 25, 2006]



Sec. 31.3401(a)(1)-1  Remuneration of members of the Armed Forces of
the United States for active service in combat zone or while 

hospitalized as a result of 
          such service.

    Remuneration paid for active service as a member of the Armed Forces 
of the United States performed in a month during any part of which such 
member served in a combat zone (as determined under section 112) or is 
hospitalized at any place as a result of wounds, disease, or injury 
incurred while serving in such a combat zone is excepted from wages and 
is, therefore, not subject to withholding. The exception with respect to 
hospitalization is applicable, however, only if during all of such month 
there are combatant activities in some combat zone (as determined under 
section 112). See Sec. 1.112-1 of this chapter (Income Tax 
Regulations).



Sec. 31.3401(a)(2)-1  Agricultural labor.

    The term ``wages'' does not include remuneration for services which 
constitute agricultural labor as defined in section 3121(g). For 
regulations relating to the definition of the term ``agricultural 
labor'', see Sec. 31.3121(g)-1.



Sec. 31.3401(a)(3)-1  Remuneration for domestic service.

    (a) In a private home. (1) Remuneration paid for services of a 
household nature performed by an employee in or about a private home of 
the person by whom he is employed is excepted from wages and hence is 
not subject to withholding. A private home is a fixed place of abode of 
an individual or family. A separate and distinct dwelling unit 
maintained by an individual in an apartment house, hotel, or other 
similar establishment may constitute a private home. If a dwelling house 
is used primarily as a boarding or lodging house for the purpose of 
supplying board or lodging to the public as a business enterprise, it is 
not a private home, and the remuneration paid for services performed 
therein is not within the exception.
    (2) In general, services of a household nature in or about a private 
home include services performed by cooks, waiters, butlers, 
housekeepers, governesses, maids, valets, baby sitters, janitors, 
laundresses, furnacemen, caretakers, handymen, gardeners, footmen, 
grooms, and chauffeurs of automobiles for family use.
    (b) In a local college club or local chapter of a college fraternity 
or sorority. (1) Remuneration paid for services of a household nature 
performed by an employee in or about the club rooms or house of a local 
college club or of a local chapter of a college fraternity or

[[Page 205]]

sorority by which he is employed is excepted from wages and hence is not 
subject to withholding. A local college club or local chapter of a 
college fraternity or sorority does not include an alumni club or 
chapter. If the club rooms or house of a local college club or local 
chapter of a college fraternity or sorority is used primarily for the 
purpose of supplying board or lodging to students or the public as a 
business enterprise, the remuneration paid for services performed 
therein is not within the exception.
    (2) In general, services of a household nature in or about the club 
rooms or house of a local college club or local chapter of a college 
fraternity or sorority include services rendered by cooks, waiters, 
butlers, maids, janitors, laundresses, furnacemen, handymen, gardeners, 
housekeepers, and housemothers.
    (c) Remuneration not excepted. Remuneration paid for services not of 
a household nature, such as services performed as a private secretary, 
tutor, or librarian, even though performed in the employer's private 
home or in a local college club or local chapter of a college fraternity 
or sorority, is not within the exception. Remuneration paid for services 
of a household nature is not within the exception if performed in or 
about rooming, or lodging houses, boarding houses, clubs (except local 
college clubs), hotels, hospitals, eleemosynary institutions, or 
commercial offices or establishments.



Sec. 31.3401(a)(4)-1  Cash remuneration for service not in the course 
of employer's trade or business.

    (a) Cash remuneration paid for services not in the course of the 
employer's trade or business performed by an employee for an employer in 
a calendar quarter is excepted from wages and hence is not subject to 
withholding unless--
    (1) The cash remuneration paid for such services performed by the 
employee for the employer in the calendar quarter is $50 or more; and
    (2) Such employee is regularly employed in the calendar quarter by 
such employer to perform such services.

Unless the tests set forth in both paragraphs (a)(1) and (2) of this 
section are met, cash remuneration for service not in the course of the 
employer's trade or business is excluded from wages. (For provisions 
relating to the exclusion from wages of remuneration paid in any medium 
other than cash for services not in the course of the employer's trade 
or business, see Sec. 31.3401(a)(11)-1.)
    (b) The term ``services not in the course of the employer's trade or 
business'' includes services that do not promote or advance the trade or 
business of the employer. As used in this section, the term does not 
include service not in the course of the employer's trade or business 
performed on a farm operated for profit or domestic service in a private 
home, local college club, or local chapter of a college fraternity or 
sorority. Accordingly, this exception does not apply with respect to 
remuneration which is excepted from wages under section 3401(a)(2) or 
section 3401(a)(3) (see Sec. Sec. 31.3401(a)(2)-1 and 31.3401(a)(3)-1, 
respectively). Remuneration paid for service performed for a corporation 
does not come within the exception.
    (c) The test relating to cash remuneration of $50 or more is based 
on the remuneration earned during a calendar quarter rather than on the 
remuneration paid in a calendar quarter. However, for purposes of 
determining whether the test is met, it is also required that the 
remuneration be paid, although it is immaterial when the remuneration is 
paid. Furthemore, in determining whether $50 or more has been paid for 
service not in the course of the employer's trade or business, only cash 
remuneration for such service shall be taken into account. The term 
``cash remuneration'' includes checks and other monetary media of 
exchange. Remuneration paid in any other medium, such as lodging, food, 
or other goods or commodities, is disregarded in determining whether the 
cash-remuneration test is met.
    (d) For purposes of this exception, an individual is deemed to be 
regularly employed by an employer during a calendar quarter only if--
    (1) Such individual performs service not in the course of the 
employer's trade or business for such employer for some portion of the 
day on at least 24

[[Page 206]]

days (whether or not consecutive) during such calendar quarter; or
    (2) Such individual was regularly employed (as determined under 
paragraph (d)(1) of this section) by such employer in the performance of 
service not in the course of the employer's trade or business during the 
preceding calendar quarter.
    (e) In determining whether an employee has performed service not in 
the course of the employer's trade or business on at least 24 days 
during a calendar quarter, there shall be counted as one day--
    (1) Any day or portion thereof on which the employee actually 
performs such service; and
    (2) Any day or portion thereof on which the employee does not 
perform service of the prescribed character but with respect to which 
cash remuneration is paid or payable to the employee for such service, 
such as a day on which the employee is sick or on vacation.

An employee who on a particular day reports for work and, at the 
direction of his employer, holds himself in readiness to perform service 
not in the course of the employer's trade or business shall be 
considered to be engaged in the actual performance of such service on 
that day. For purposes of this exception, a day is a continuous period 
of 24 hours commencing at midnight and ending at midnight.



Sec. 31.3401(a)(5)-1  Remuneration for services for foreign government
or international organization.

    (a) Services for foreign government. (1) Remuneration paid for 
services performed as an employee of a foreign government is excepted 
from wages and hence is not subject to withholding. The exception 
includes not only remuneration paid for services performed by 
ambassadors, ministers, and other diplomatic officers and employees but 
also remuneration paid for services performed as a consular or other 
officer or employee of a foreign government or as a nondiplomatic 
representative of such a government. However, the exception does not 
include remuneration for services performed for a corporation created or 
organized in the United States or under the laws of the United States or 
any State (including the District of Columbia or the Territory of Alaska 
or Hawaii) or of Puerto Rico even though such corporation is wholly 
owned by such a government.
    (2) The citizenship or residence of the employee and the place where 
the services are performed are immaterial for purposes of the exception.
    (b) Services for international organization. (1) Subject to the 
provisions of section 1 of the International Organizations Immunities 
Act (22 U.S.C. 288), remuneration paid for services performed within or 
without the United States by an employee for an international 
organization as defined in section 7701(a)(18) is excepted from wages 
and hence is not subject to withholding. The term ``employee'' as used 
in the preceding sentence includes not only an employee who is a citizen 
or resident of the United States but also an employee who is a 
nonresident alien individual. The term ``employee'' also includes an 
officer. An organization designated by the President through appropriate 
Executive order as entitled to enjoy the privileges, exemptions, and 
immunities provided in the International Organizations Immunities Act 
may enjoy the benefits of the exclusion from wages with respect to 
remuneration paid for services performed for such organization prior to 
the date of the issuance of such Executive order, if (i) the Executive 
order does not provide otherwise and (ii) the organization is a public 
international organization in which the United States participates, 
pursuant to a treaty or under the authority of an act of Congress 
authorizing such participation or making an appropriation for such 
participation, at the time such services are performed.
    (2) Section 7701(a)(18) provides as follows:

    Sec. 7701. Definitions. (a) When used in this title, where not 
otherwise distinctly expressed or manifestly incompatible with the 
intent thereof--

                                * * * * *

    (18) International organization. The term ``international 
organization'' means a public international organization entitled to 
enjoy privileges, exemptions, and immunities as an

[[Page 207]]

international organization under the International Organizations 
Immunities Act (22 U.S.C. 288-288f).

    (3) Section 1 of the International Organizations Immunities Act 
provides as follows:

    Section 1. [International Organizations Immunities Act.] For the 
purposes of this title [International Organizations Immunities Act], the 
term ``international organization'' means a public international 
organization in which the United States participates pursuant to any 
treaty or under the authority of any Act of Congress authorizing such 
participation or making an appropriation for such participation, and 
which shall have been designated by the President through appropriate 
Executive order as being entitled to enjoy the privileges, exemptions, 
and immunities herein provided. The President shall be authorized, in 
the light of the functions performed by any such international 
organization, by appropriate Executive order to withhold or withdraw 
from any such organization or its officers or employees any of the 
privileges, exemption, and immunities provided for in this title 
(including the amendments made by this title) or to condition or limit 
the enjoyment by any such organization or its officers or employees of 
any such privilege, exemption, or immunity. The President shall be 
authorized, if in his judgment such action should be justified by reason 
of the abuse by an international organization or its officers and 
employees of the privileges, exemptions, and immunities herein provided 
or for any other reason, at any time to revoke the designation of any 
international organization under this section, whereupon the 
international organization in question shall cease to be classed as an 
international organization for the purposes of this title.



Sec. 31.3401(a)(6)-1  Remuneration for services of nonresident 
alien individuals.

    (a) In general. All remuneration paid after December 31, 1966, for 
services performed by a nonresident alien individual, if such 
remuneration otherwise constitutes wages within the meaning of Sec. 
31.3401(a)-1 and if such remuneration is effectively connected with the 
conduct of a trade or business within the United States, is subject to 
withholding under section 3402 unless excepted from wages under this 
section. In regard to wages paid under this section after February 28, 
1979, the term ``nonresident alien individual'' does not include a 
nonresident alien individual treated as a resident under section 6013 
(g) or (h).
    (b) Remuneration for services performed outside the United States. 
Remuneration paid to a nonresident alien individual (other than a 
resident of Puerto Rico) for services performed outside the United 
States is excepted from wages and hence is not subject to withholding.
    (c) Remuneration for services of residents of Canada or Mexico who 
enter and leave the United States at frequent intervals--(1) 
Transportation service. Remuneration paid to a nonresident alien 
individual who is a resident of Canada or Mexico and who, in the 
performance of his duties in transportation service between points in 
the United States and points in such foreign country, enters and leaves 
the United States at frequent intervals, is excepted from wages and 
hence is not subject to withholding. This exception applies to personnel 
engaged in railroad, bus, truck, ferry, steamboat, aircraft, or other 
transportation services and applies whether the employer is a domestic 
or foreign entity. Thus, the remuneration of a nonresident alien 
individual who is a resident of Canada and an employee of a domestic 
railroad, for services as a member of the crew of a train operating 
between points in Canada and points in the United States, is not subject 
to withholding under section 3402.
    (2) Service on international projects. Remuneration paid to a 
nonresident alien individual who is a resident of Canada or Mexico and 
who, in the performance of his duties in connection with the 
construction, maintenance, or operation of a waterway, viaduct, dam, or 
bridge traversed by, or traversing, the boundary between the United 
States and Canada or the boundary between the United States and Mexico, 
as the case may be, enters and leaves the United States at frequent 
intervals, is excepted from wages and hence is not subject to 
withholding. Thus, the remuneration of a nonresident alien individual 
who is a resident of Canada, for services as an employee in connection 
with the construction, maintenance, or operation of the Saint Lawrence 
Seaway and who, in the performance of such services, enters and leaves 
the United States at frequent intervals, is

[[Page 208]]

not subject to withholding under section 3402.
    (3) Limitation. The exceptions provided by this paragraph do not 
apply to the remuneration of a resident of Canada or of Mexico who is 
employed wholly within the United States as, for example, where such a 
resident is employed to perform service at a fixed point or points in 
the United States, such as a factory, store, office, or designated area 
or areas within the United States, and who commutes from his home in 
Canada or Mexico, in the pursuit of his employment within the United 
States.
    (4) Certificate required. In order for an exception provided by this 
paragraph to apply for any taxable year, the nonresident alien employee 
must furnish his employer a statement in duplicate for the taxable year 
setting forth the employee's name, address, and taxpayer identifying 
number, and certifying (i) that he is not a citizen or resident of the 
United States, (ii) that he is a resident of Canada or Mexico, as the 
case may be, and (iii) that he expects to meet the requirements of 
paragraph (c)(1) or (2) of this section with respect to remuneration to 
be paid during the taxable year in respect of which the statement is 
filed. The statement shall be dated, shall identify the taxable year to 
which it relates, shall be signed by the employee, and shall contain, or 
be verified by, a written declaration that it is made under the 
penalties of perjury. No particular form is prescribed for this 
statement. The duplicate copy of each statement filed during any 
calendar year pursuant to this paragraph shall be forwarded by the 
employer with, and attached to, the Form 1042S required by paragraph (c) 
of Sec. 1.1461-2 with respect to such remuneration for such calendar 
year.
    (d) Remuneration for services performed by residents of Puerto Rico. 
(1) Remuneration paid for services performed in Puerto Rico by a 
nonresident alien individual who is a resident of Puerto Rico for an 
employer (other than the United States or any agency thereof) is 
excepted from wages and hence is not subject to withholding.
    (2) Remuneration paid for services performed outside the United 
States but not in Puerto Rico by a nonresident alien individual who is a 
resident of Puerto Rico for an employer (other than the United States or 
any agency thereof) is excepted from wages and hence is not subject to 
withholding if such individual does not expect to be a resident of 
Puerto Rico during the entire taxable year. In order for the exception 
provided by this subparagraph to apply for any taxable year, the 
nonresident alien employee must furnish his employer a statement for the 
taxable year setting forth the employee's name and address and 
certifying (i) that he is not a citizen or resident of the United States 
and (ii) that he is a resident of Puerto Rico but does not expect to be 
a resident of Puerto Rico during the entire taxable year. The statement 
shall be dated, shall identify the taxable year to which it relates, 
shall be signed by the employee, and shall contain, or be verified by, a 
written declaration that it is made under the penalties of perjury. No 
particular form is prescribed for this statement.
    (3) Remuneration paid for services performed outside the United 
States by a nonresident alien individual who is a resident of Puerto 
Rico as an employee of the United States or any agency thereof is 
excepted from wages and hence is not subject to withholding if such 
individual does not expect to be a resident of Puerto Rico during the 
entire taxable year. In order for the exception provided by this 
subparagraph to apply for any taxable year, the nonresident alien 
employee must furnish his employer a statement for the taxable year 
setting forth the employee's name and address and certifying (i) that he 
is not a citizen or resident of the United States and (ii) that he is a 
resident of Puerto Rico but does not expect to be a resident of Puerto 
Rico during the entire taxable year. This statement shall be dated, 
shall identify the taxable year to which it relates, shall be signed by 
the employee, and shall contain, or be verified by, a written 
declaration that it is made under the penalties of perjury. No 
particular form is prescribed for this statement.
    (e) Exemption from income tax for remuneration paid for services 
performed before January 1, 2001. Remuneration paid for services 
performed within the United States by a nonresident alien

[[Page 209]]

individual before January 1, 2001, is excepted from wages and hence is 
not subject to withholding if such remuneration is, or will be, exempt 
from income tax imposed by chapter 1 of the Internal Revenue Code by 
reason of a provision of the Internal Revenue Code or an income tax 
convention to which the United States is a party. In order for the 
exception provided by this paragraph to apply for any taxable year, the 
nonresident alien employee must furnish his employer a statement in 
duplicate for the taxable year setting forth the employee's name, 
address, and taxpayer identifying number, and certifying (1) that he is 
not a citizen or resident of the United States, (2) that the 
remuneration to be paid to him during the taxable year is, or will be, 
exempt from the tax imposed by chapter 1 of the Code, and (3) the reason 
why such remuneration is so exempt from tax. If the remuneration is 
claimed to be exempt from tax by reason of a provision of an income tax 
convention to which the United States is a party, the statement shall 
also indicate the provision and tax convention under which the exemption 
is claimed, the country of which the employee is a resident, and 
sufficient facts to justify the claim to exemption. The statement shall 
be dated, shall identify the taxable year for which it is to apply and 
the remuneration to which it relates, shall be signed by the employee, 
and shall contain, or be verified by, a written declaration that it is 
made under the penalties of perjury. No particular form is prescribed 
for this statement. The duplicate copy of each statement filed during 
any calendar year pursuant to this paragraph shall be forwarded by the 
employer with, and attached to, the Form 1042S required by paragraph (c) 
of Sec. 1.1461-2 with respect to such remuneration for such calendar 
year.
    (f) Exemption from income tax for remuneration paid for services 
performed after December 31, 2000. Remuneration paid for services 
performed within the United States by a nonresident alien individual 
after December 31, 2000, is excepted from wages and hence is not subject 
to withholding if such remuneration is, or will be, exempt from the 
income tax imposed by chapter 1 of the Internal Revenue Code by reason 
of a provision of the Internal Revenue Code or an income tax convention 
to which the United States is a party. An employer may rely on a claim 
that the employee is entitled to an exemption from tax if it complies 
with the requirements of Sec. 1.1441-1(e)(1)(ii) of this chapter (for a 
claim based on a provision of the Internal Revenue Code) or Sec. 
1.1441-4(b)(2) of this chapter (for a claim based on an income tax 
convention).

[T.D. 6908, 31 FR 16775, Dec. 31, 1966, as amended by T.D. 7670, 45 FR 
6932, Jan. 31, 1980; T.D. 7977, 49 FR 36836, Sept. 20, 1984; T.D. 8734, 
62 FR 53493, Oct. 14, 1997; T.D. 8804, 63 FR 72189, Dec. 31, 1998; T.D. 
8856, 64 FR 73412, Dec. 30, 1999]



Sec. 31.3401(a)(6)-1A  Remuneration for services of certain nonresident
alien individuals paid before January 1, 1967.

    (a) Except in the case of certain nonresident alien individuals who 
are residents of Canada, Mexico, or Puerto Rico or individuals who are 
temporarily present in the United States as nonimmigrants under 
subparagraph (F) or (J) of section 101(a)(15) of the Immigration and 
Nationality Act (8 U.S.C. 1101), as amended, remuneration for services 
performed by nonresident alien individuals does not constitute wages 
subject to withholding under section 3402. For withholding of income tax 
on remuneration paid for services performed within the United States in 
the case of nonresident alien individuals generally, see Sec. 1.1441-1 
and following of this chapter (Income Tax Regulations).
    (b) Remuneration paid to nonresident aliens who are residents of a 
contiguous country (Canada or Mexico) and who enter and leave the United 
States at frequent intervals is not excepted from wages under section 
3401(a)(6). See, however, Sec. 31.3401(a)(7)-1, relating to 
remuneration paid to such nonresident alien individuals when engaged in 
transportation service.
    (c) Remuneration paid to a nonresident alien individual for services 
performed in Puerto Rico for an employer (other than the United States 
or any agency thereof) is excepted from

[[Page 210]]

wages and hence is not subject to withholding, even though such alien 
individual is a resident of Puerto Rico at the time when such services 
are performed. Wages paid for services performed by a nonresident alien 
individual who is a resident of Puerto Rico are subject to withholding 
if such services are performed as an employee of the United States or 
any agency thereof. The place of performance of such services is 
immaterial, provided such alien individual is a resident of Puerto Rico 
at the time of performance of the services. Wages representing 
retirement pay for services in the Armed Forces of the United States, 
the Coast and Geodetic Survey, or the Public Health Service, or a 
disability annuity paid under the provisions of section 831 of the 
Foreign Service Act of 1946, as amended (22 U.S.C. 1081; 60 Stat. 1021), 
are subject to withholding, under the limitations specified in paragraph 
(b)(1)(ii) of Sec. 31.3401(a)-1, in the case of an alien resident of 
Puerto Rico.
    (d) (1) Remuneration paid after 1961 to a nonresident alien 
individual who is temporarily present in the United States as a 
nonimmigrant under subparagraph (F) or (J) of section 101(a)(15) of the 
Immigration and Nationality Act (8 U.S.C. 1101), as amended, is not 
excepted from wages under section 3401(a)(6) if the remuneration is 
exempt from withholding under section 1441(a) by reason of section 
1441(c)(4)(B) and is not exempt from taxation under section 872(b)(3). 
See Sec. Sec. 1.872-2 and 1.1441-4 of this chapter (Income Tax 
Regulations). A nonresident alien individual who is temporarily present 
in the United States as a nonimmigrant under subparagraph (J) includes 
an alien individual admitted to the United States as an ``exchange 
visitor'' under section 201 of the United States Information and 
Educational Exchange Act of 1948 (22 U.S.C. 1446).
    (2) Section 101 of the Immigration and Nationality Act (8 U.S.C. 
1101), as amended, provides in part, as follows:

    Sec. 101. Definitions. [Immigration and Nationality Act (66 Stat. 
166)]
    (a) As used in this chapter--* * *
    (15) The term ``immigrant'' means every alien except an alien who is 
within one of the following classes of nonimmigrant aliens--

                                * * * * *

    (F) (i) An alien having a residence in a foreign country which he 
has no intention of abandoning, who is a bona fide student qualified to 
pursue a full course of study and who seeks to enter the United States 
temporarily and solely for the purpose of pursuing such a course of 
study at an established institution of learning or other recognized 
place of study in the United States, particularly designated by him and 
approved by the Attorney General after consultation with the Office of 
Education of the United States, which institution or place of study 
shall have agreed to report to the Attorney General the termination of 
attendance of each nonimmigrant student, and if any such institution of 
learning or place of study fails to make reports promptly the approval 
shall be withdrawn, and (ii) the alien spouse and minor children of any 
such alien if accompanying him or following to join him;

                                * * * * *

    (J) An alien having a residence in a foreign country which he has no 
intention of abandoning who is a bona fide student, scholar, trainee, 
teacher, professor, research assistant, specialist, or leader in a field 
of specialized knowledge or skill, or other person of similar 
description, who is coming temporarily to the United States as a 
participant in a program designated by the Secretary of State, for the 
purpose of teaching, instructing or lecturing, studying, observing, 
conducting research, consulting, demonstrating special skills, or 
receiving training, and the alien spouse and minor children of any such 
alien if accompanying him or following to join him.

    (e) This section shall not apply with respect to remuneration paid 
after December 31, 1966. For rules with respect to such remuneration see 
Sec. 31.3401(a)(6)-1.

(Sec. 101. Immigration and Nationality Act, as amended by sec. 101, Act 
of June 27, 1952, 66 Stat. 166; sec. 109, Act of Sept. 21, 1961, 75 
Stat. 534)

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6654, 28 FR 
5251, May 28, 1963; T.D. 6727, 29 FR 5869, May 5, 1964; T.D. 6908, 31 FR 
16775, Dec. 31, 1966]

[[Page 211]]



Sec. 31.3401(a)(7)-1  Remuneration paid before January 1, 1967, for
services performed by nonresident alien individuals who are residents 

of a contiguous 
          country and who enter and leave the United States at frequent 
          intervals.

    (a) Transportation service. Remuneration paid to nonresident aliens 
who are residents of a contiguous country (Canada or Mexico) and who, in 
the performance of their duties in transportation service between points 
in the United States and points in a contiguous country, enter and leave 
the United States at frequent intervals, is excepted from wages and 
hence is not subject to withholding. This exception applies to personnel 
engaged in railroad, bus, ferry, steamboat, and aircraft services and 
applies whether the employer is a domestic or foreign entity. Thus, the 
remuneration of a nonresident alien individual who is a resident of 
Canada and an employee of a domestic railroad, for services as a member 
of the crew of a train operating between points in Canada and points in 
the United States, is not subject to withholding under section 3402.
    (b) Service on international projects. Remuneration paid to 
nonresident aliens who are residents of a contiguous country (Canada or 
Mexico) and who, in the performance of their duties in connection with 
the construction, maintenance or operation of a waterway, viaduct, dam, 
or bridge traversed by or traversing the boundary between the United 
States and Canada or the boundary between the United States and Mexico, 
as the case may be, enter and leave the United States at frequent 
intervals, is excepted from wages and hence is not subject to 
withholding. Thus, the remuneration of a nonresident alien individual 
who is a resident of Canada, for services as an employee in connection 
with the construction, maintenance, or operation of the Saint Lawrence 
Seaway and who, in the performance of such services, enters and leaves 
the United States at frequent intervals, is not subject to withholding 
under section 3402.
    (c) Limitation on application of section. The exception provided by 
this section has no application to the remuneration of a resident of 
Canada or of Mexico who is employed wholly within the United States as, 
for example, where such a resident is employed to perform service at a 
fixed point or points in the United States, such as a factory, store, 
office, or designated area or areas within the United States, and who 
commutes from his home in Canada or Mexico in the pursuit of his 
employment within the United States.
    (d) Certificate required. In order for the exception to apply, the 
nonresident alien employee must furnish his employer a statement setting 
forth the employee's name and address and certifying (1) that he is not 
a citizen of the United States, (2) that he is a resident of Canada or 
Mexico, as the case may be, and (3) the approximate period of time 
during which he has had such status. Such statement shall be dated, 
shall be signed by the employee, and shall contain, or be verified by, a 
written declaration that it is made under the penalties of perjury. No 
particular form is prescribed for this statement.
    (e) Effective date. This section shall not apply with respect to 
remuneration paid after December 31, 1966. For rules with respect to 
such remuneration see Sec. 31.3401(a)(6)-1.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6908, 31 FR 
16776, Dec. 31, 1966]



Sec. 31.3401(a)(8)(A)-1  Remuneration for services performed outside 
the United States by citizens of the United States.

    (a) Remuneration excluded from gross income under section 911. (1) 
(i) Remuneration paid for services performed outside the United States 
for an employer (other than the United States or any agency thereof) by 
a citizen of the United States does not constitute wages and hence is 
not subject to withholding, if at the time of payment it is reasonable 
to believe that such remuneration will be excluded from gross income 
under the provisions of section 911. The reasonable belief contemplated 
by the statute may be based upon any evidence reasonably sufficient to 
induce such belief, even though such evidence may be insufficient upon 
closer examination by the district director or the courts finally to 
establish that the remuneration is excludable from gross

[[Page 212]]

income under the provisions of section 911. The reasonable belief shall 
be based upon the application of section 911 and the regulations 
thereunder in Part 1 of this chapter (Income Tax Regulations).
    (ii) Remuneration paid by an employer to an employee constitutes 
wages, and hence is subject to withholding only to the extent that the 
remuneration is expected to exceed the aggregate amount which is 
excludable from the employee's gross income under section 911(a). For 
amounts paid after December 31, 1984, the determination of the amount 
subject to withholding shall be made by applying the excludable amount, 
on a pro rata basis, to each payment of remuneration to the employee. 
For this purpose, an employer is not required to ascertain information 
with respect to amounts received by his employee from any other source; 
but, if the employer has such information, he shall take it into account 
in determining whether the earned income of the employee is in excess of 
the applicable limitation. For purposes of section 911(d)(5) and Sec. 
1.911-2(c), relating to an employee who states to the authorities of a 
foreign country that he is not a resident of that country, the employer 
is not required to ascertain whether such a statement has been made; but 
if an employer knows that such a statement has been made, he shall 
presume that the employee is not a bona fide resident of that country, 
unless the employer also knows that the authorities of the foreign 
country have determined, notwithstanding the statement that the employee 
is a resident of that country. For purposes of section 911(d)(1) or 
Sec. 1.911-2(a) relating to the definition of a qualified individual, 
the reasonable belief contemplated by the statute may be based on a 
presumption as set forth in subparagraph (2) or (3) of this paragraph. 
For purposes of sections 911(a)(2) and 911(c)(2) and Sec. 1.911-4(b) 
and (d)(1), relating to the housing cost amount exclusion and the 
definition of housing expenses, the reasonable belief contemplated by 
the statute may be based on the presumption set forth in subparagraph 
(4) of this paragraph.
    (2)(i) The employer may, in the absence of cause for a reasonable 
belief to the contrary, presume that an employee will maintain a tax 
home in a foreign country or countries and be a bona fide resident of a 
foreign country or countries, within the meaning of section 911(d)(1), 
for an uninterrupted period which includes each taxable year of the 
employee, or applicable portion thereof, in respect of which the 
employee properly executes and delivers to the employer a statement that 
the employee meets or will meet the requirement of Sec. 1.911-2(a) 
relating to maintaining a tax home and a bona fide residence in a 
foreign country for the taxable year. This statement must set forth the 
facts alleged as the basis for this determination and contain a 
declaration by the employee that the statement is made under the 
penalties of perjury. Sample forms of acceptable statements may be 
obtained by writing to the Foreign Operations District, Internal Revenue 
Service, Washington, D.C. 20225 (Form IO-673).
    (ii) If the employer was entitled to presume for the two consecutive 
taxable years immediately preceding an employee's current taxable year 
that such employee was a bona fide resident of a foreign country or 
countries for an uninterrupted period which includes such preceding 
taxable years, he may, if such employee is residing in a foreign country 
on the first day of such current taxable year, presume, in the absence 
of cause for a reasonable belief to the contrary, and without obtaining 
from the employee the statement prescribed in subdivision (i) of this 
subparagraph, that the employee will be a bona fide resident of a 
foreign country or countries in such current taxable year.
    (3) The employer may, in the absence of cause for a reasonable 
belief to the contrary, presume that an employee will maintain a tax 
home in a foreign country or countries and be present in a foreign 
country or countries during at least 330 full days during any period of 
twelve consecutive months, within the meaning of section 911(d)(1), and 
that such period includes each taxable year of the employee, or 
applicable portion thereof, in respect of which the

[[Page 213]]

employee properly executes and delivers to the employer a statement that 
the employee meets or will meet the requirements of Sec. 1.911-2(a) 
relating to maintaining a tax home and being physically present in a 
foreign country for the taxable year. This statement must set forth the 
facts alleged as the basis for this determination and contain a 
declaration by the employee that the statement is made under the 
penalties of perjury. Sample forms of acceptable statements may be 
obtained by writing to the Foreign Operations District, Internal Revenue 
Service, Washington, D.C. 20225 (Form IO-673).
    (4) The employer may, in the absence of cause for a reasonable 
belief to the contrary, presume that an employee's housing cost amount 
will be the amount shown on a statement properly executed and delivered 
to the employer. This statement must set forth the employee's estimation 
of the following items: housing expenses (as defined in Sec. 1.911-
4(b)), the housing cost amount exclusion (as defined in Sec. 1.911-
4(d)(1)), and the qualifying period (as defined in Sec. 1.911-2(a)). 
The statement must contain a declaration by the employee that it is made 
under the penalties of perjury. Sample forms of acceptable statements 
may be obtained by writing to the Foreign Operations District, Internal 
Revenue Service, Washington, D.C. 20225 (IO-673). The employer may not 
rely on a statement from an employee if the employer, based on his or 
her knowledge of housing costs in the vicinity of the employee's tax 
home (as defined in Sec. 1.911-2(b)), believes the employee's housing 
expenses are lavish or extravagant under the circumstances.
    (b) Remuneration subject to withholding of income tax under law of a 
foreign country or a possession of the United States. (1) Remuneration 
paid for services performed in a foreign country or in a possession of 
the United States for an employer (other than the United States or any 
agency thereof) by a citizen of the United States does not constitute 
wages and hence is not subject to withholding, if at the time of the 
payment of such remuneration the employer is required by the law of any 
foreign country or of any possession of the United States to withhold 
income tax upon such remuneration. This paragraph, insofar as it relates 
to remuneration paid for services performed in a possession of the 
United States, applies only with respect to remuneration paid on or 
after August 9, 1955.
    (2) Remuneration is not exempt from withholding under this paragraph 
if the employer is not required by the law of a foreign country or of a 
possession of the United States to withhold income tax upon such 
remuneration. Mere agreements between the employer and the employee 
whereby the estimated income tax of a foreign country or of a possession 
of the United States is withheld from the remuneration in anticipation 
of actual liability under the law of such country or possession will not 
suffice.
    (3) The exemption from withholding provided by this paragraph does 
not apply by reason of withholding of income tax pursuant to the law of 
a territory of the United States, of a political subdivision of a 
possession of the United States, or of a political subdivision of a 
foreign state.
    (4) For provisions relating to remuneration for services performed 
by a permanent resident of the Virgin Islands, see paragraph (b)(12) of 
Sec. 31.3401(a)-1.
    (c) Limitation on application of section. This section has no 
application to the remuneration paid to a citizen of the United States 
for services performed outside the United States as an employee of the 
United States or any agency thereof.

(Approved by the Office of Management and Budget under control number 
1545-0067)

(Sec. 911, 95 Stat. 194; 26 U.S.C. 911), sec. 7805 (68A Stat. 917; 26 
U.S.C. 7805) of the Internal Revenue Code of 1954)

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6697, 28 FR 
13745, Dec. 17, 1963; T.D. 8006, 50 FR 2977, Jan. 23, 1985]



Sec. 31.3401(a)(8)(B)-1  Remuneration for services performed in 
possession of the United States (other than Puerto Rico) by citizen

of the United States.

    (a) Remuneration paid for services for an employer (other than the 
United States or any agency thereof) performed by a citizen of the 
United States within a possession of the

[[Page 214]]

United States (other than Puerto Rico) does not constitute wages and 
hence is not subject to withholding, if it is reasonable to believe that 
at least 80 percent of the remuneration to be paid to the employee by 
such employer during the calendar year will be for such services. The 
reasonable belief contemplated by section 3401(a)(8)(B) may be based 
upon any evidence reasonably sufficient to induce such belief, even 
though such evidence may be insufficient upon closer examination by the 
district director or the courts finally to establish that at least 80 
percent of the remuneration paid by the employer to the employee during 
the calendar year was for services performed within such a possession of 
the United States.
    (b) This section has no application to remuneration paid to a 
citizen of the United States for services performed in any possession of 
the United States as an employee of the United States or any agency 
thereof.
    (c) For provisions relating to remuneration for services performed 
by a permanent resident of the Virgin Islands, see paragraph (b)(12) of 
Sec. 31.3401(a)-1.



Sec. 31.3401(a)(8)(C)-1  Remuneration for services performed in Puerto 
Rico by citizen of the United States.

    (a) Remuneration paid for services performed within Puerto Rico for 
an employer (other than the United States or any agency thereof) by a 
citizen of the United States does not constitute wages and hence is not 
subject to withholding, if it is reasonable to believe that during the 
entire calendar year the employee will be a bona fide resident of Puerto 
Rico. The reasonable belief contemplated by section 3401(a)(8)(C) may be 
based upon any evidence reasonably sufficient to induce such belief, 
even though such evidence may be insufficient upon closer examination by 
the district director or the courts finally to establish that the 
employee was a bona fide resident of Puerto Rico for the entire calendar 
year.
    (b) The employer may, in the absence of cause for a reasonable 
belief to the contrary, presume that an employee will be a bona fide 
resident of Puerto Rico during the entire calendar year.
    (1) Unless the employee is known by the employer to have maintained 
his abode at a place outside Puerto Rico at some time during the current 
or the preceding calendar year; or
    (2) In any case where the employee files with the employer a 
statement (containing a declaration under the penalties of perjury that 
such statement is true to the best of the employee's knowledge and 
belief) that such employee has at all times during the current calendar 
year been a bona fide resident of Puerto Rico and that he intends to 
remain a bona fide resident of Puerto Rico during the entire remaining 
portion of such current calendar year.
    (c) This section has no application to remuneration paid to a 
citizen of the United States for services performed in Puerto Rico as an 
employee of the United States or any agency thereof.



Sec. 31.3401(a)(9)-1  Remuneration for services performed by a minister
of a church or a member of a religious order.

    (a) In general. Remuneration paid for services performed by a duly 
ordained, commissioned, or licensed minister of a church in the exercise 
of his ministry, or by a member of a religious order in the exercise of 
duties required by such order, is excepted from wages and hence is not 
subject to withholding.
    (b) Service by a minister in the exercise of his ministry. Except as 
provided in paragraph (c)(3) of this section, service performed by a 
minister in the exercise of his ministry includes the ministration of 
sacerdotal functions and the conduct of religious worship, and the 
control, conduct, and maintenance of religious organizations (including 
the religious boards, societies, and other integral agencies of such 
organizations), under the authority of a religious body constituting a 
church or church denomination. The following rules are applicable in 
determining whether services performed by a minister are performed in 
the exercise of his ministry:
    (1) Whether service performed by a minister constitutes the conduct 
of religious worship or the ministration of sacerdotal functions depends 
on the tenents and practices of the particular

[[Page 215]]

religious body constituting his church or church denomination.
    (2) Service performed by a minister in the control, conduct, and 
maintenance of a religious organization relates to directing, managing, 
or promoting the activities of such organization. Any religious 
organization is deemed to be under the authority of a religious body 
constituting a church or church denomination if it is organized and 
dedicated to carrying out the tenents and principles of a faith in 
accordance with either the requirements or sanctions governing the 
creation of institutions of the faith. The term ``religious 
organization'' has the same meaning and application as is given to the 
term for income tax purposes.
    (3) (i) If a minister is performing service in the conduct of 
religious worship or the ministration of sacerdotal functions, such 
service is in the exercise of his ministry whether or not it is 
performed for a religious organization.
    (ii) The rule in paragraph (b)(3)(i) of this section may be 
illustrated by the following example:

    Example. M, a duly ordained minister, is engaged to perform service 
as chaplain at N University. M devotes his entire time to performing his 
duties as chaplain which include the conduct of religious worship, 
offering spiritual counsel to the university students, and teaching a 
class in religion. M is performing service in the exercise of his 
ministry.

    (4) (i) If a minister is performing service for an organization 
which is operated as an integral agency of a religious organization 
under the authority of a religious body constituting a church or church 
denomination, all service performed by the minister in the conduct of 
religious worship, in the ministration of sacerdotal functions, or in 
the control, conduct, and maintenance of such organization (see 
paragraph (b)(2) of this section) is in the exercise of his ministry.
    (ii) The rule in paragraph (b)(4)(i) of this section may be 
illustrated by the following example:

    Example. M, a duly ordained minister, is engaged by the N Religious 
Board to serve as director of one of its departments. He performs no 
other service. The N Religious Board is an integral agency of O, a 
religious organization operating under the authority of a religious body 
constituting a church denomination. M is performing service in the 
exercise of his ministry.

    (5) (i) If a minister, pursuant to an assignment or designation by a 
religious body constituting his church, performs service for an 
organization which is neither a religious organization nor operated as 
an integral agency of a religious organization, all service performed by 
him, even though such service may not involve the conduct of religious 
worship or the ministration of sacerdotal functions, is in the exercise 
of his ministry.
    (ii) The rule in subdivision (i) of this subparagraph may be 
illustrated by the following example:

    Example. M, a duly ordained minister, is assigned by X, the 
religious body constituting his church, to perform advisory service to Y 
Company in connection with the publication of a book dealing with the 
history of M's church denomination. Y is neither a religious 
organization nor operated as an integral agency of a religious 
organization. M performs no other service for X or Y. M is performing 
service in the exercise of his ministry.

    (c) Service by a minister not in the exercise of his ministry. (1) 
Section 3401(a)(9) does not except from wages remuneration for service 
performed by a duly ordained, commissioned, or licensed minister of a 
church which is not in the exercise of his ministry.
    (2) (i) If a minister is performing service for an organization 
which is neither a religious organization nor operated as an integral 
agency of a religious organization and the service is not performed 
pursuant to an assignment or designation by his ecclesiastical 
superiors, then only the service performed by him in the conduct of 
religious worship or the ministration of sacerdotal functions is in the 
exercise of his ministry. See, however, paragraph (b)(3) of this 
section.
    (ii) The rule in subdivision (i) of this subparagraph may be 
illustrated by the following example:

    Example. M, a duly ordained minister, is engaged by N University to 
teach history and mathematics. He performs no other service for N 
although from time to time he performs marriages and conducts funerals 
for relatives and friends. N University is neither a religious 
organization nor operated as an integral agency of a religious 
organization.

[[Page 216]]

M is not performing the service for N pursuant to an assignment or 
designation by his ecclesiastical superiors. The service performed by M 
for N University is not in the exercise of his ministry. However, 
service performed by M in performing marriages and conducting funerals 
is in the exercise of his ministry.

    (3) Service performed by a duly ordained, commissioned, or licensed 
minister of a church as an employee of the United States, or a State, 
Territory, or possession of the United States, or the District of 
Columbia, or a foreign government, or a political subdivision of any of 
the foregoing, is not considered to be in the exercise of his ministry 
for purposes of the collection of income tax at source on wages, even 
though such service may involve the ministration of sacerdotal functions 
or the conduct of religious worship. Thus, for example, service 
performed by an individual as a chaplain in the Armed Forces of the 
United States is considered to be performed by a commissioned officer in 
his capacity as such, and not by a minister in the exercise of his 
ministry. Similarly, service performed by an employee of a State as a 
chaplain in a State prison is considered to be performed by a civil 
servant of the State and not by a minister in the exercise of his 
ministry.
    (d) Service in the exercise of duties required by a religious order. 
Service performed by a member of a religious order in the exercise of 
duties required by such order includes all duties required of the member 
by the order. The nature or extent of such service is immaterial so long 
as it is a service which he is directed or required to perform by his 
ecclesiastical superiors.



Sec. 31.3401(a)(10)-1  Remuneration for services in delivery or 
distribution of newspapers, shopping news, or magazines.

    (a) Services of individuals under age 18. Remuneration for services 
performed by an employee under the age of 18 in the delivery or 
distribution of newspapers, or shopping news, not including delivery or 
distribution (as, for example, by a regional distributor) to any point 
for subsequent delivery or distribution, is excepted from wages and 
hence is not subject to withholding. Thus, remuneration for services 
performed by an employee under the age of 18 in making house-to-house 
delivery or sale of newspapers or shopping news, including handbills and 
other similar types of advertising material, is excepted from wages. The 
remuneration is excepted irrespective of the form or method thereof. 
Remuneration for incidental services by the employee who makes the 
house-to-house delivery, such as services in assembling newspapers, is 
considered to be within the exception. The exception continues only 
during the time that the employee is under the age of 18.
    (b) Services of individuals of any age. Remuneration for services 
performed by an employee in, and at the time of, the sale of newspapers 
or magazines to ultimate consumers under an arrangement under which the 
newspapers or magazines are to be sold by him at a fixed price, his 
remuneration being based on the retention of the excess of such price 
over the amount at which the newspapers or magazines are charged to him, 
is excepted from wages and hence is not subject to withholding. The 
remuneration is excepted whether or not the employee is guaranteed a 
minimum amount or remuneration, or is entitled to be credited with the 
unsold newspapers or magazines turned back. Moreover, the remuneration 
is excepted without regard to the age of the employee. Remuneration for 
services performed other than at the time of sale to the ultimate 
consumer is not within the exception. Thus, remuneration for services of 
a regional distributor which are antecedent to but not immediately part 
of the sale to the ultimate consumer is not within the exception. 
However, remuneration for incidental services by the employee who makes 
the sale to the ultimate consumer, such as services in assembling 
newspapers or in taking newspapers or magazines to the place of sale, is 
considered to be within the exception.



Sec. 31.3401(a)(11)-1  Remuneration other than in cash for service not
in the course of employer's trade or business.

    (a) Remuneration paid in any medium other than cash for services not 
in the course of the employer's trade or

[[Page 217]]

business is excepted from wages and hence is not subject to withholding. 
Cash remuneration includes checks and other monetary media of exchange. 
Remuneration paid in any medium other than cash, such as lodging, food, 
or other goods or commodities, for services not in the course of the 
employer's trade or business does not constitute wages. Remuneration 
paid in any medium other than cash for other types of services does not 
come within this exception from wages. For provisions relating to cash 
remuneration for service not in the course of employer's trade or 
business, see Sec. 31.3401(a)(4)-1.
    (b) As used in this section, the term ``services not in the course 
of the employer's trade or business'' has the same meaning as when used 
in Sec. 31.3401(a)(4)-1.



Sec. 31.3401(a)(12)-1  Payments from or to certain tax-exempt trusts,
or under or to certain annuity plans or bond purchase plans, or to 

individual retirement 
          plans.

    (a) Payments from or to certain taxexempt trusts. The term ``wages'' 
does not include any payment made--
    (1) By an employer, on behalf of an employee or his beneficiary, 
into a trust, or
    (2) To, or on behalf of, an employee or his beneficiary from a 
trust,

if at the time of such payment the trust is exempt from tax under 
section 501(a) as an organization described in section 401(a). A payment 
made to an employee of such a trust for services rendered as an employee 
of the trust and not as a beneficiary thereof is not within this 
exclusion from wages. Also, since supplemental unemployment compensation 
benefits are treated under paragraph (b) (14) of Sec. 31.3401 (a)-1 as 
if they were wages for purposes of this chapter, this section does not 
apply to such benefits.
    (b) Payments under or to certain annuity plans. (1) The term 
``wages'' does not include any payment made after December 31, 1962--
    (i) By an employer, on behalf of an employee or his beneficiary, 
into an annuity plan, or
    (ii) To, or on behalf of, an employee or his beneficiary under an 
annuity plan, if at the time of such payment the annuity plan is a plan 
described in section 403(a).
    (2) The term ``wages'' does not include any payment made before 
January 1, 1963--
    (i) By an employer, on behalf of an employee or his beneficiary, 
into an annuity plan, or
    (ii) To, or on behalf of, an employee or his beneficiary under an 
annuity plan, if at the time of such payment the annuity plan meets the 
requirements of section 401 (a) (3), (4), (5), and (6).
    (c) Payments under or to certain bond purchase plans. The term 
``wages'' does not include any payment made after December 31, 1962--
    (1) By an employer, on behalf of an employee or his beneficiary, 
into a bond purchase plan, or
    (2) To, or on behalf of, an employee or his beneficiary under a bond 
purchase plan,

if at the time of such payment the plan is a qualified bond purchase 
plan described in section 405(a).
    (d) Payment to individual retirement plans. (1) The term ``wages'' 
does not include any payment to an individual retirement plan described 
in section 7701(a)(37) by an employer after December 31, 1974, on behalf 
of an employee, if, at the time of such payment, it is reasonable for 
the employer to believe that the employee will be entitled to a 
deduction for such payment under section 219(a).
    (2) The term ``wages'' does not include any payment to an individual 
retirement plan described in section 7701(a)(37) by an employer after 
December 31, 1976, on behalf of an employee, if, at the time of such 
payment, it is reasonable for the employer to believe that the employee 
on whose behalf the payment is made will be entitled to a deduction for 
such payment under section 220(a).
    (3) The term ``wages'' does not include any payment to a simplified 
employee pension arrangement described in section 408(k) by an employer 
after December 31, 1978, on behalf of an employee, if, at the time of 
such payment,

[[Page 218]]

it is reasonable for the employer to believe that the employee on whose 
behalf the payment is made will be entitled to a deduction for such 
payment under section 219(a).

[T.D. 6654, 28 FR 5252, May 28, 1963, as amended by T.D. 7068, 35 FR 
17329, Nov. 11, 1970; T.D. 7730, 45 FR 72652, Nov. 3, 1980]



Sec. 31.3401(a)(13)-1  Remuneration for services performed by Peace 
Corps volunteers.

    (a) Remuneration paid after September 22, 1961, for services 
performed as a volunteer or volunteer leader within the meaning of the 
Peace Corps Act (22 U.S.C. 2501) is excepted from wages, and hence is 
not subject to withholding, unless the remuneration is paid pursuant to 
section 5(c) or section 6(1) of the Peace Corps Act.
    (b) Sections 5 and 6 of the Peace Corps Act (22 U.S.C. 2504, 2505) 
provide, in part, as follows:

    Sec. 5 Peace Corps Volunteers [Peace Corps Act (75 Stat. 613); as 
amended by sec. 2(b), Act of December 13, 1963 (P.L. 88-200, 77 Stat. 
359); sec. 2(a), Act of August 24, 1965, (P.L. 89-134, 79 Stat. 549); 
sec. 3(a), Act of July 24, 1970 (P.L. 91-352, 84 Stat. 464)]

                                * * * * *

    (c) Readjustment allowances. Volunteers shall be entitled to receive 
a readjustment allowance at a rate not to exceed $75 for each month of 
satisfactory service as determined by the President; except that, in the 
cases of volunteers who have one or more minor children at the time of 
their entering a period of pre-enrollment training, one parent shall be 
entitled to receive a readjustment allowance at a rate not to exceed 
$125 for each month of satisfactory service as determined by the 
President. The readjustment allowance of each volunteer shall be payable 
on his return to the United States: Provided, however, That, under such 
circumstances as the President may determine, the accrued readjustment 
allowance, or any part thereof, may be paid to the volunteer, members of 
his family or others, during the period of his service, or prior to his 
return to the United States. In the event of the volunteer's death 
during the period of his service, the amount of any unpaid readjustment 
allowance shall be paid in accordance with the provisions of section 
5582(b) of Title 5. For purposes of the Internal Revenue Code of 1954, a 
volunteer shall be deemed to be paid and to receive each amount of a 
readjustment allowance to which he is entitled after December 31, 1964, 
when such amount is transferred from funds made available under this 
chapter to the fund from which such readjustment allowance is payable.

                                * * * * *

    Sec. 6 Peace Corps Volunteer Leaders; number; applicability of 
chapter; benefits [Peace Corps Act (75 Stat. 615), as amended by sec. 3, 
Act of December 13, 1963 (P.L. 88-200, 77 Stat. 360)] The President may 
enroll in the Peace Corps qualified citizens or nationals of the United 
States whose services are required for supervisory or other special 
duties or responsibilities in connection with programs under this 
chapter (referred to in this Act as ``volunteer leaders''). The ratio of 
the total number of volunteer leaders to the total number of volunteers 
in service at any one time shall not exceed one to twenty-five. Except 
as otherwise provided in this Act, all of the provisions of this Act 
applicable to volunteers shall be applicable to volunteer leaders, and 
the term ``volunteers'' shall include ``volunteer leaders'': Provided, 
however, That--
    (1) Volunteer leaders shall be entitled to receive a readjustment 
allowance at a rate not to exceed $125 for each month of satisfactory 
service as determined by the President;

[T.D. 6654, 28 FR 5252, May 28, 1963, as amended by T.D. 7493, 42 FR 
33729, July 1, 1977]



Sec. 31.3401(a)(14)-1  Group-term life insurance.

    (a) The cost of group-term life insurance on the life of an employee 
is excepted from wages, and hence is not subject to withholding. For 
provisions relating generally to such remuneration, and for reporting 
requirements with respect to such remuneration, see sections 79 and 
6052, respectively, and the regulations thereunder in Part 1 of this 
chapter (Income Tax Regulations).
    (b) The cost of group-term life insurance on the life of an 
employee's spouse or children is not subject to withholding if it is 
excludable from the employee's gross income because it is merely 
incidental. See paragraph (d)(2)(ii)(b) of Sec. 1.61-2 in Part 1 of 
this chapter (Income Tax Regulations).

[T.D. 7493, 42 FR 33730, July 1, 1977]



Sec. 31.3401(a)(15)-1  Moving expenses.

    (a) An amount paid to or on behalf of an employee after March 4, 
1964, either as an advance or a reimbusement, specifically for moving 
expenses incurred or expected to be incurred is excepted from wages, and 
hence is not subject to

[[Page 219]]

withholding, if (and to the extent that) at the time of payment it is 
reasonable to believe that a corresponding deduction is or will be 
allowable to the employee under section 217. The reasonable belief 
contemplated by the statute may be based upon any evidence reasonably 
sufficient to induce such belief, even though such evidence may be 
insufficient upon closer examination by the district director or the 
courts finally to establish that a deduction is allowable under section 
217. The reasonable belief shall be based upon the application of 
section 217 and the regulations thereunder in Part 1 of this chapter 
(Income Tax Regulations). When used in this section, the term ``moving 
expenses'' has the same meaning as when used in section 217. See Sec. 
1.6041-2(a) in Part 1 of this chapter (Income Tax Regulations), relating 
to return of information as to payments to employees, and Sec. 31.6051-
1(e), relating to the reporting of reimbursements of or payments of 
certain moving expenses.
    (b) Except as otherwise provided in paragraph (a) of this section, 
or in a numbered paragraph of section 3401(a), amounts paid to or on 
behalf of an employee for moving expenses constitute wages subject to 
withholding.

[T.D. 7493, 42 FR 33730, July 1, 1977]



Sec. 31.3401(a)(16)-1  Tips.

    Tips paid to an employee are excepted from wages and hence not 
subject to withholding if--
    (a) The tips are paid in any medium other than cash, or
    (b) The cash tips received by an employee in any calendar month in 
the course of his employment by an employer are less than $20.

However, if the cash tips received by an employee in a calendar month in 
the course of his employment by an employer amount to $20 or more, none 
of the cash tips received by the employee in such calendar month are 
excepted from wages under this section. The cash tips to which this 
section applies include checks and other monetary media of exchange. 
Tips received by an employee in any medium other than cash, such as 
passes, tickets, or other goods or commodities do not constitute wages. 
If an employee in any calendar month performs services for two or more 
employers and receives tips in the course of his employment by each 
employer, the $20 test is to be applied separately with respect to the 
cash tips received by the employee in respect of his services for each 
employer and not to the total cash tips received by the employee during 
the month. As to the time tips are deemed paid, see Sec. 31.3401(f)-1. 
For provisions relating to the treatment of tips received by an employee 
prior to 1966, see paragraph (b)(11) of Sec. 31.3401(a)-1.

[T.D. 7001, 34 FR 1001, Jan. 23, 1969]



Sec. 31.3401(a)(17)-1  Remuneration for services performed on a boat
engaged in catching fish.

    (a) Remuneration for services performed on or after December 31, 
1954, by an individual on a boat engaged in catching fish or other forms 
of aquatic animal life (hereinafter ``fish'') is excepted from wages and 
hence is not subject to withholding if--
    (1) The individual receives a share of the boat's (or boats' for a 
fishing operation involved more than one boat) catch of fish or a share 
of the proceeds from the sale of the catch,
    (2) The amount of the individual's share depends solely on the 
amount of the boat's (or boats' for a fishing operation involving more 
than one boat) catch of fish,
    (3) The individual does not receive, and is not entitled to receive, 
any cash remuneration, other than remuneration that is described in 
subparagraph (1) of this paragraph, and
    (4) The crew of the boat (or of each boat from which the individual 
receives a share of the catch) normally is made up of fewer than 10 
individuals.
    (b) The requirement of paragraph (a)(2) of this section is not 
satisfied if there exists an agreement with the boat's (or boats') owner 
or operator by which the individual's remuneration is determined 
partially or fully by a factor not dependent on the size of the catch. 
For example, if a boat is operated under a remuneration arrangement, 
e.g., a union contract, which specifies that crew members, in addition 
to receiving a share of the catch,

[[Page 220]]

are entitled to an hourly wage for repairing nets, regardless of whether 
this wage is actually paid, then all the crew members covered by the 
arrangement are entitled to receive cash remuneration other than as a 
share of the catch and are not excepted from employment by section 
3121(b)(20).
    (c) The operating crew of a boat includes all persons on the boat 
(including the captain) who receive any form of remuneration in exchange 
for services rendered while on a boat engaged in catching fish. See 
Sec. 1.6050A-1 for reporting requirements for the operator of a boat 
engaged in catching fish with respect to individuals performing services 
described in this section.
    (d) During the same return period, service performed by a crew 
member may be excepted from employment by section 3121(b)(20) and this 
section for one voyage and not so excepted on a subsequent voyage on the 
same or on a different boat.

[T.D. 7716, 45 FR 57124, Aug. 27, 1980]



Sec. 31.3401(a)(18)-1  Payments or benefits under a qualified educational
assistance program.

    A payment made, or benefit furnished, to or for the benefit of an 
employee in a taxable year beginning after December 31, 1978, does not 
constitute wages and hence is not subject to withholding if, at the time 
of such payment or furnishing, it is reasonable to believe that the 
employee will be able to exclude such payment or benefit from income 
under section 127.

[T.D. 7898, 48 FR 31019, July 6, 1983]



Sec. 31.3401(a)(19)-1  Reimbursements under a self-insured medical 
reimbursement plan.

    Amounts reimbursed to or on behalf of an employee after December 31, 
1979, as a medical care reimbursement under a self-insured medical 
reimbursement plan (within the meaning of section 105(h)(6)) do not 
constitute wages and hence are not subject to withholding even though 
such reimbursement is includible in the gross income of an employee. For 
rules with respect to self-insured medical reimbursement plans, see 
section 105(h) and Sec. 1.105-11 of this Chapter (Income Tax 
Regulations).

(Secs. 105(h) and 7805 Internal Revenue Code of 1954; 94 Stat. 2855, 68A 
Stat. 917 (26 U.S.C. 105(h) and 7805))

[T.D. 7754, 46 FR 3509, Jan. 15, 1981. Redesignated by T.D. 7898, 48 FR 
31019, July 6, 1983]



Sec. 31.3401(b)-1  Payroll period.

    (a) The term payroll period means the period of service for which a 
payment of wages is ordinarily made to an employee by his employer. It 
is immaterial that the wages are not always paid at regular intervals. 
For example, if an employer ordinarily pays a particular employee for 
each calendar week at the end of the week, but if for some reason the 
employee in a given week receives a payment in the middle of the week 
for the portion of the week already elapsed and receives the remainder 
at the end of the week, the payroll period is still the calendar week; 
or if, instead, that employee is sent on a 3-week trip by his employer 
and receives at the end of the trip a single wage payment for three 
weeks' services, the payroll period is still the calendar week, and the 
wage payment shall be treated as though it were three separate weekly 
wage payments.
    (b) For the purpose of section 3402, an employee can have but one 
payroll period with respect to wages paid by any one employer. Thus, if 
an employee is paid a regular wage for a weekly payroll period and in 
addition thereto is paid supplemental wages (for example, bonuses) 
determined with respect to a different period, the payroll period is the 
weekly payroll period. For computation of tax on supplemental wage 
payments, see Sec. 31.3402(g)-1.
    (c) The term payroll period also means the period of accrual of 
supplemental unemployment compensation benefits for which a payment of 
such benefits is ordinarily made. Thus if benefits are ordinarily 
accrued and paid on a monthly basis, the payroll period is deemed to be 
monthly.
    (d) The term miscellaneous payroll period means a payroll period 
other than

[[Page 221]]

a daily, weekly, biweekly, semi-monthly, monthly, quarterly, semiannual, 
or annual payroll period.

[T.D. 6516, 25 FR 13096, Dec. 20, 1960, as amended by T.D. 7068, 35 FR 
17329, Nov. 11, 1970]



Sec. 31.3401(c)-1  Employee.

    (a) The term employee includes every individual performing services 
if the relationship between him and the person for whom he performs such 
services is the legal relationship of employer and employee. The term 
includes officers and employees, whether elected or appointed, of the 
United States, a State, Territory, Puerto Rico, or any political 
subdivision thereof, or the District of Columbia, or any agency or 
instrumentality of any one or more of the foregoing.
    (b) Generally the relationship of employer and employee exists when 
the person for whom services are performed has the right to control and 
direct the individual who performs the services, not only as to the 
result to be accomplished by the work but also as to the details and 
means by which that result is accomplished. That is, an employee is 
subject to the will and control of the employer not only as to what 
shall be done but how it shall be done. In this connection, it is not 
necessary that the employer actually direct or control the manner in 
which the services are performed; it is sufficient if he has the right 
to do so. The right to discharge is also an important factor indicating 
that the person possessing that right is an employer. Other factors 
characteristic of an employer, but not necessarily present in every 
case, are the furnishing of tools and the furnishing of a place to work 
to the individual who performs the services. In general, if an 
individual is subject to the control or direction of another merely as 
to the result to be accomplished by the work and not as to the means and 
methods for accomplishing the result, he is not an employee.
    (c) Generally, physicians, lawyers, dentists, veterinarians, 
contractors, subcontractors, public stenographers, auctioneers, and 
others who follow an independent trade, business, or profession, in 
which they offer their services to the public, are not employees.
    (d) Whether the relationship of employer and employee exists will in 
doubtful cases be determined upon an examination of the particular facts 
of each case.
    (e) If the relationship of employer and employee exists, the 
designation or description of the relationship by the parties as 
anything other than that of employer and employee is immaterial. Thus, 
if such relationship exists, it is of no consequence that the employee 
is designated as a partner, coadventurer, agent, independent contractor, 
or the like.
    (f) All classes or grades of employees are included within the 
relationship of employer and employee. Thus, superintendents, managers 
and other supervisory personnel are employees. Generally, an officer of 
a corporation is an employee of the corporation. However, an officer of 
a corporation who as such does not perform any services or performs only 
minor services and who neither receives nor is entitled to receive, 
directly or indirectly, any remuneration is not considered to be an 
employee of the corporation. A director of a corporation in his capacity 
as such is not an employee of the corporation.
    (g) The term employee includes every individual who receives a 
supplemental unemployment compensation benefit which is treated under 
paragraph (b)(14) of Sec. 31.3401(a)-1 as if it were wages.
    (h) Although an individual may be an employee under this section, 
his services may be of such a nature, or performed under such 
circumstances, that the remuneration paid for such services does not 
constitute wages within the meaning of section 3401(a).

[T.D. 6516, 25 FR 13096, Dec. 20, 1960, as amended by T.D. 7068, 35 FR 
17329, Nov. 11, 1970]



Sec. 31.3401(d)-1  Employer.

    (a) The term employer means any person for whom an individual 
performs or performed any service, of whatever nature, as the employee 
of such person.
    (b) It is not necessary that the services be continuing at the time 
the wages are paid in order that the status of employer exist. Thus, for 
purposes of withholding, a person for whom an individual has performed 
past services

[[Page 222]]

for which he is still receiving wages from such person is an employer.
    (c) An employer may be an individual, a corporation, a partnership, 
a trust, an estate, a joint-stock company, an association, or a 
syndicate, group, pool, joint venture, or other unincorporated 
organization, group or entity. A trust or estate, rather than the 
fiduciary acting for or on behalf of the trust or estate, is generally 
the employer.
    (d) The term employer embraces not only individuals and 
organizations engaged in trade or business, but organizations exempt 
from income tax, such as religious and charitable organizations, 
educational institutions, clubs, social organizations and societies, as 
well as the governments of the United States, the States, Territories, 
Puerto Rico, and the District of Columbia, including their agencies, 
instrumentalities, and political subdivisions.
    (e) The term employer also means (except for the purpose of the 
definition of wages) any person paying wages on behalf of a nonresident 
alien individual, foreign partnership, or foreign corporation, not 
engaged in trade or business within the United States (including Puerto 
Rico as if a part of the United States).
    (f) If the person for whom the services are or were performed does 
not have legal control of the payment of the wages for such services, 
the term employer means (except for the purpose of the definition of 
wages) the person having such control. For example, where wages, such as 
certain types of pensions or retired pay, are paid by a trust and the 
person for whom the services were performed has no legal control over 
the payment of such wages, the trust is the employer.
    (g) The term employer also means a person making a payment of a 
supplemental unemployment compensation benefit which is treated under 
paragraph (b)(14) of Sec. 31.3401(a)-1 as if it were wages. For 
example, if supplemental unemployment compensation benefits are paid 
from a trust which was created under the terms of a collective 
bargaining agreement, the trust shall generally be deemed to be the 
employer. However, if the person making such payment is acting solely as 
an agent for another person, the term employer shall mean such other 
person and not the person actually making the payment.
    (h) It is a basic purpose to centralize in the employer the 
responsibility for withholding, returning, and paying the tax, and for 
furnishing the statements required under section 6051 and Sec. 31.6051-
1. The special definitions of the term employer in paragraphs (e), (f), 
and (g) of this section are designed solely to meet special or unusual 
situations. They are not intended as a departure from the basic purpose.

[T.D. 6516, 25 FR 13096, Dec. 20, 1960, as amended by T.D. 7068, 35 FR 
17329, Nov. 11, 1970]



Sec. 31.3401(e)-1  Number of withholding exemptions claimed.

    (a) The term number of withholding exemptions claimed means the 
number of withholding exemptions claimed in a withholding exemption 
certificate in effect under section 3402(f) of the Internal Revenue Code 
of 1954 or in effect under section 1622(h) of the Internal Revenue Code 
of 1939. If no such certificate is in effect, the number of withholding 
exemptions claimed shall be considered to be zero. The number of 
withholding exemptions claimed must be taken into account in determining 
the amount of tax to be deducted and withheld under section 3402, 
whether the employer computes the tax in accordance with the provisions 
of subsection (a) or subsection (c) of section 3402.
    (b) The employer is not required to ascertain whether or not the 
number of withholding exemptions claimed is greater than the number of 
withholding exemptions to which the employee is entitled. For rules 
relating to invalid withholding exemption certificates, see Sec. 
31.3402(f)(2)-1(e), and for rules relating to required submission of 
copies of certain withholding exemption certificates to the Internal 
Revenue Service, see Sec. 31.3402(f)(2)-1(g).
    (c) As to the number of withholding exemptions to which an employee 
is entitled, see Sec. 31.3402(f)(1)-1.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 7423, 41 FR 
26217, June 23, 1976; T.D. 7682, 45 FR 15526, Mar. 11, 1980; T.D. 7803, 
47 FR 3547, Jan. 26, 1982]

[[Page 223]]



Sec. 31.3401(f)-1  Tips.

    (a) Tips considered wages. Tips received after 1965 by an employee 
in the course of his employment are considered to be wages, and thus 
subject to withholding of income tax at source. For an exception to the 
rule that tips constitute wages, see Sec. Sec. 31.3401(a)(16) and 
31.3401(a)(16)-1, relating to tips paid in a medium other than cash and 
cash tips of less than $20. For definition of the term ``employee,'' see 
Sec. Sec. 31.3401(c) and 31.3401(c)-1.
    (b) When tips deemed paid. Tips reported by an employee to his 
employer in a written statement furnished to the employer pursuant to 
section 6053(a) (see Sec. 31.6053-1) shall be deemed to be paid to the 
employee at the time the written statement is furnished to the employer. 
Tips received by an employee which are not reported to his employer in a 
written statement furnished pursuant to section 6053(a) shall be deemed 
to be paid to the employee at the time the tips are actually received by 
the employee.

[T.D. 7001, 34 FR 1001, Jan. 23, 1969]



Sec. 31.3402(a)-1  Requirement of withholding.

    (a) Section 3402 provides alternative methods, at the election of 
the employer, for use in computing the amount of income tax to be 
collected at source on wages. Under the percentage method of withholding 
(see Sec. 31.3402(b)-1), the employer is required to deduct and 
withhold a tax computed in accordance with the provisions of section 
3402(a). Under the wage bracket method of withholding (see Sec. 
31.3402(c)-1), the employer is required to deduct and withhold a tax 
determined in accordance with the provisions of section 3402(c). The 
employer may elect to use the percentage method, the wage bracket 
method, or certain other methods (see Sec. 31.3402(h) (4)-1). Different 
methods may be used by the employer with respect to different groups of 
employees.
    (b) The employer is required to collect the tax by deducting and 
withholding the amount thereof from the employee's wages as and when 
paid, either actually or constructively. Wages are constructively paid 
when they are credited to the account of or set apart for an employee so 
that they may be drawn upon by him at any time although not then 
actually reduced to possession. To constitute payment in such a case, 
the wages must be credited to or set apart for the employee without any 
substantial limitation or restriction as to the time or manner of 
payment or condition upon which payment is to be made, and must be made 
available to him so that they may be drawn upon at any time, and their 
payment brought within his own control and disposition.
    (c) Except as provided in sections 3402 (j) and (k) (see Sec. Sec. 
31.3402(j)-1 and 31.3402(k)-1, relating to noncash remuneration paid to 
retail commission salesman and to tips received by an employee in the 
course of his employment, respectively), an employer is required to 
deduct and withhold the tax notwithstanding the wages are paid in 
something other than money (for example, wages paid in stocks or bonds; 
see Sec. 31.3401 (a)-1) and to pay over the tax in money. If wages are 
paid in property other than money, the employer should make necessary 
arrangements to insure that the amount of the tax required to be 
withheld is available for payment in money.
    (d) For provisions relating to the circumstances under which tax is 
required to be deducted and withheld from certain amounts received under 
accident and health plans, see paragraph (b)(8) of Sec. 31.3401(a)-1.
    (e) As a matter of business administration, certain of the 
mechanical details of the withholding process may be handled by 
representatives of the employer. Thus, in the case of an employer having 
branch offices, the branch manager or other representative may actually, 
as a matter of internal administration, withhold the tax or prepare the 
statements required under section 6051. Nevertheless, the legal 
responsibility for withholding, paying, and returning the tax and 
furnishing such statements rests with the employer. For provisions 
relating to statements under section 6051, see Sec. 31.6051-1.

[[Page 224]]

    (f) The amount of any tax withheld and collected by the employer is 
a special fund in trust for the United States. See section 7501.

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 7001, 34 FR 
1001, Jan. 23, 1969; T.D. 7115, 36 FR 9209, May 21, 1971; T.D. 7888, 48 
FR 17588, Apr. 25, 1983]



Sec. 31.3402(b)-1  Percentage method of withholding.

    With respect to wages paid after April 30, 1975, the amount of tax 
to be deducted and withheld under the percentage method of withholding 
shall be determined under the applicable percentage method withholding 
table contained in Circular E (Employer's Tax Guide) according to the 
instructions contained therein.

(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26 
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat. 
917))

[T.D. 7915, 48 FR 44073, Sept. 27, 1983]



Sec. 31.3402(c)-1  Wage bracket withholding.

    (a) In general. (1) The employer may elect to use the wage bracket 
method provided in section 3402(c) instead of the percentage method with 
respect to any employee. The tax computed under the wage bracket method 
shall be in lieu of the tax required to be deducted and withheld under 
section 3402(a). With respect to wages paid after July 13, 1968, the 
correct amount of withholding shall be determined under the applicable 
wage bracket withholding table contained in the Circular E (Employer's 
Tax Guide) issued for use with respect to the period in which such wages 
are paid.
    (2) For provisions relating to the treatment of wages paid under 
accident and health plans and wages paid other than in cash to retail 
commission salesmen, see paragraph (b)(8) of Sec. 31.3401(a)-1 and 
Sec. 31.3402(j)-1, respectively.
    (b) Established payroll periods, other than daily or miscellaneous, 
covered by wage bracket withholding tables. The wage bracket withholding 
tables contained in Circular E for established periods other than daily 
or miscellaneous should be used in determining the tax to be withheld 
for any such period without reference to the time the employee is 
actually engaged in the performance of services during such payroll 
period.

    Example 1. On June 30, 1971, employee A is paid wages for a 
semimonthly payroll period. A has in effect a withholding exemption 
certificate indicating that he claims two withholding exemptions and 
that he is married. A's wages are determined at the rate of $2 per hour. 
During a certain payroll period he works only 24 hours and earns $48. 
Although A worked only 24 hours during the semimonthly payroll period, 
the applicable wage bracket withholding table contained in Circular E 
for a semimonthly payroll period for an employee who is married should 
be used in determining the tax to be withheld. Under this table it will 
be found that no tax is required to be withheld from a wage payment of 
$48 when two withholding exemptions are claimed.
    Example 2. On May 14, 1971, employee B is paid wages for a weekly 
payroll period. B has in effect a withholding exemption certification 
indicating that he claims one withholding exemption and that he is 
single. B's wages are determined at the rate of $2 per hour. During a 
certain payroll period B works 18 hours and earns $36. Although B worked 
only 18 hours during the weekly payroll period the applicable wage 
bracket withholding table for a weekly payroll period for an employee 
who is single should be used in determining the tax to be withheld. 
Under this table it will be found that $0.50 is the amount of tax to be 
withheld from a wage payment of $36 when one withholding exemption is 
claimed.

    (c) Periods to which the tables for a daily or miscellaneous payroll 
period are applicable--(1) In general. The tables applicable to a daily 
or miscellaneous payroll period show the tax for employees who are to be 
withheld from as single persons and for employees who are to be withheld 
from as married persons on the amount of wages for one day. Where the 
withholding is computed under the rules applicable to a miscellaneous 
payroll period, the wages and the amounts shown in the applicable table 
must be placed on a comparable basis. This may be accomplished by 
reducing the wages paid for the period to a daily basis by dividing the 
total wages by the number of days (including Sundays and holidays) in 
the period. The amount of the tax shown in the applicable table as the 
tax required to be withheld from the wages, as so reduced to a daily 
basis,

[[Page 225]]

should then be multiplied by the number of days (including Sundays and 
holidays) in the period.
    (2) Period not a payroll period. If wages are paid for a period 
which is not a payroll period, the amount to be deducted and withheld 
under the wage bracket method shall be the amount applicable in the case 
of a miscellaneous payroll period containing a number of days (including 
Sundays and holidays) equal to the number of days (including Sundays and 
holidays) in the period with respect to which such wages are paid.

    Example. An individual performs services for a contractor in 
connection with a construction project. He has in effect a withholding 
exemption certificate indicating that he claims two withholding 
exemptions and that he is married. Wages have been fixed at the rate of 
$36 per day, to be paid upon completion of the project. The project is 
completed before July 1, 1971, in 12 consecutive days, at the end of 
which period the individual is paid wages of $360 for 10 days' services 
performed during the period. Under the wage bracket method the amount to 
be deducted and withheld from such wages is determined by dividing the 
amount of the wages ($360) by the number of days in the period (12), the 
result being $30. The amount of tax required to be withheld is 
determined under the appropriate table applicable to a miscellaneous 
payroll period for an employee who is married. Under this table the tax 
required to be withheld is $47.40 (12 x $3.95).

    (3) Wages paid without regard to any period. If wages are paid to an 
employee without regard to any particular period, as, for example, 
commissions paid to a salesman upon consummation of a sale, the amount 
of tax to be deducted and withheld shall be determined in the same 
manner as in the case of a miscellaneous payroll period containing a 
number of days (including Sundays and holidays) equal to the number of 
days (including Sundays and holidays) which have elapsed, beginning with 
the latest of the following days:
    (i) The first day after the last payment of wages to such employee 
by such employer in the calendar year, or
    (ii) The date on which such individual's employment with such 
employer began in the calendar year, or
    (iii) January 1 of such calendar year, and ending with (and 
including) the date on which such wages are paid.

    Example. On April 2, 1971, C is employed by the X Real Estate 
Company to sell real estate on a commission basis, commissions to be 
paid only upon consummation of sales. C has in effect a withholding 
exemption certificate indicating that he claims one withholding 
exemption and that he is not married. On May 22, 1971, C receives a 
commission of $300, his first commission since April 2, 1971. Again on 
June 19, 1971, C receives a commission of $420. Under the wage bracket 
method, the amount of tax to be deducted and withheld in respect of the 
commission paid on May 22, is $10, which amount is obtained by 
multiplying $0.20 (tax per day under the appropriate wage bracket table 
applicable to a daily or miscellaneous payroll period for an employee 
who is not married where wages are at least $6 but less than $6.25 a 
day) by 50 (number of days elapsed); and the amount of tax to be 
withheld with respect to the commission paid on June 19 is $54.60, which 
amount is obtained by multiplying $1.95 (tax under the appropriate wage 
bracket table for a daily or miscellaneous payroll period where wages 
are at least $15 but less than $15.50 a day) by 28 (number of days 
elapsed).

    (d) Period or elapsed time less than 1 week. (1) It is the general 
rule that if wages are paid for a payroll period or other period of less 
than 1 week, the tax to be deducted and withheld under the wage bracket 
method shall be the amount computed for a daily payroll period, or for a 
miscellaneous payroll period containing the same number of days 
(including Sundays and holidays) as the payroll period, or other period, 
for which such wages are paid. In the case of wages paid without regard 
to any period, if the elapsed time computed as provided in paragraph (c) 
of this section is less than 1 week, the same rule is applicable.

    Example 1. On May 14, 1971, an employee who has a daily payroll 
period is paid wages of $15 per day. The employee has in effect a 
withholding exemption certificate indicating that he claims one 
withholding exemption and that he is not married. Under the applicable 
table for a daily payroll period for an employee who is not married, the 
amount of tax to be deducted and withheld from each such payment of 
wages is $1.95.
    Example 2. An employee works for a certain employer on 4 consecutive 
days for which he is paid wages totalling $60 on July 25, 1971. The 
employee has in effect a withholding exemption certificate claiming two 
withholding exemptions and indicating that he is married. The amount of 
tax to be deducted

[[Page 226]]

and withheld under the wage bracket method is $5.60 (4x$1.40).

    (2) If the payroll period, other period or elapsed time where wages 
are paid without regard to any period, is less than one week, the 
employer may, under certain conditions, elect to deduct and withhold the 
tax determined by the application of the wage table for a weekly payroll 
period to the aggregate of the wages paid to the employee during the 
calendar week. The election to use the weekly wage table in such cases 
is subject to the limitations and conditions prescribed in Circular E 
with respect to employers using the percentage method in similar cases.
    (3) As used in this paragraph the term ``calendar week'' means a 
period of seven consecutive days beginning with Sunday and ending with 
Saturday.
    (e) Rounding off of wage payment. In determining the amount to be 
deducted and withheld under the wage bracket method the wages may, at 
the election of the employer, be computed to the nearest dollar, 
provided such wages are in excess of the highest wage bracket of the 
applicable table. For the purpose of the computation to the nearest 
dollar, the payment of a fractional part of a dollar shall be 
disregarded unless it amounts to one-half dollar or more, in which case 
it shall be increased to $1.00. Thus, if the payroll period of an 
employee is weekly and the wage payment of such employee is $255.49, the 
employer may compute the tax on the excess over $200 as if the excess 
were $55 instead of $55.49. If the weekly wage payment is $255.50, the 
employer may, in computing the tax, consider the excess over $200 to be 
$56 instead of $55.50.

(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26 
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat. 
917))

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6860, 30 FR 
13942, Nov. 4, 1965; T.D. 7115, 36 FR 9215, May 21, 1971; T.D. 7888, 48 
FR 17588, Apr. 25, 1983; T.D. 7915, 48 FR 44073, Sept. 27, 1983]



Sec. 31.3402(d)-1  Failure to withhold.

    If the employer in violation of the provisions of section 3402 fails 
to deduct and withhold the tax, and thereafter the income tax against 
which the tax under section 3402 may be credited is paid, the tax under 
section 3402 shall not be collected from the employer. Such payment does 
not, however, operate to relieve the employer from liability for 
penalties or additions to the tax applicable in respect of such failure 
to deduct and withhold. The employer will not be relieved of his 
liability for payment of the tax required to be withheld unless he can 
show that the tax against which the tax under section 3402 may be 
credited has been paid. See Sec. 31.3403-1, relating to liability for 
tax.



Sec. 31.3402(e)-1  Included and excluded wages.

    (a) If a portion of the remuneration paid by an employer to his 
employee for services performed during a payroll period of not more than 
31 consecutive days constitutes wages, and the remainder does not 
constitute wages, all the remuneration paid the employee for services 
performed during such period shall for purposes of withholding be 
treated alike, that is, either all included as wages or all excluded. 
The time during which the employee performs services, the remuneration 
for which under section 3401(a) constitutes wages, and the time during 
which he performs services, the remuneration for which under such 
section does not constitute wages, determine whether all the 
remuneration for services performed during the payroll period shall be 
deemed to be included or excluded.
    (b) If one-half or more of the employee's time in the employ of a 
particular employer in a payroll period is spent in performing services 
the remuneration for which consititutes wages, then all the remuneration 
paid the employee for services performed in that payroll period shall be 
deemed to be wages.
    (c) If less than one-half of the employee's time in the employ of a 
particular employer in a payroll period is spent in performing services 
the remuneration for which constitutes wages, then none of the 
remuneration paid the employee for services performed in that payroll 
period shall be deemed to be wages.
    (d) The application of the provisions of paragraphs (a), (b), and 
(c) of this section may be illustrated by the following examples:


[[Page 227]]


    Example 1. Employer B, who operates a store and a farm, employs A to 
perform services in connection with both operations. The remuneration 
paid A for services on the farm is excepted as remuneration for 
agricultural labor, and the remuneration for services performed in the 
store constitutes wages. Employee A is paid on a monthly basis. During a 
particular month, A works 120 hours on the farm and 80 hours in the 
store. None of the remuneration paid by B to A for services performed 
during the month is deemed to be wages, since the remuneration paid for 
less than one-half of the services performed during the month 
constitutes wages. During another month A works 75 hours on the farm and 
120 hours in the store. All of the remuneration paid by B to A for 
services performed during the month is deemed to be wages since the 
remuneration paid for one-half or more of the services performed during 
the month constitutes wages.
    Example 2. Employee C is employed as a maid by D, a physician, whose 
home and office are located in the same building. The remuneration paid 
C for services in the home is excepted as remuneration for domestic 
service, and the remuneration paid for her services in the office 
constitutes wages. C is paid on a weekly basis. During a particular week 
C works 20 hours in the home and 20 hours in the office. All of the 
remuneration paid by D to C for services performed during that week is 
deemed to be wages, since the remuneration paid for one-half or more of 
the services performed during the week constitutes wages. During another 
week C works 22 hours in the home and 15 hours in the office. None of 
the remuneration paid by D to C for services performed during that week 
is deemed to be wages, since the remuneration paid for less than one-
half of the services performed during the week constitutes wages.

    (e) The rules set forth in this section do not apply (1) with 
respect to any remuneration paid for services performed by an employee 
for his employer if the periods for which remuneration is paid by the 
employer vary to the extent that there is no period which constitutes a 
payroll period within the meaning of section 3401(b) (see Sec. 
31.3401(b)-1), or (2) with respect to any remuneration paid for services 
performed by an employee for his employer if the payroll period for 
which remuneration is paid exceeds 31 consecutive days. In any such case 
withholding is required with respect to that portion of such 
remuneration which constitutes wages.



Sec. 31.3402(f)(1)-1  Withholding exemptions.

    (a) In general. (1) Except as otherwise provided in section 
3402(f)(6) (see Sec. 31.3402(f)(6)-1), an employee receiving wages 
shall on any day be entitled to withholding exemptions as provided in 
section 3402(f)(1). In order to receive the benefit of such exemptions, 
the employee must file with his employer a withholding exemption 
certificate as provided in section 3402(f)(2). See Sec. 31.3402(f)(2)-
1.
    (2) The number of exemptions to which an employee is entitled on any 
day depends upon his status as single or married, upon his status as to 
old age and blindness, upon the number of his dependents, upon the 
number of exemptions claimed by his spouse (if he is married), and upon 
the number of withholding allowances to which he is entitled under 
section 3402(m).
    (b) Withholding exemptions to which an employee is entitled in 
respect of himself. An employee is entitled to one withholding exemption 
for himself. An employee shall on any day be entitled to an additional 
withholding exemption for himself if he will have attained the age of 65 
before the close of his taxable year which begins in, or with, the 
calendar year in which such day falls. If the employee is blind, he may 
claim an additional withholding exemption for blindness. For purposes of 
claiming a withholding exemption for blindness, an individual shall be 
considered blind only if his central visual acuity does not exceed 20/
200 in the better eye with correcting lenses or if his visual acuity is 
greater than 20/200 but is accompanied by a limitation in the fields of 
vision such that the widest diameter of the visual field subtends an 
angle no greater than 20 degrees. For definition of the term 
``blindness'', see section 151(d)(3). An employee may also be entitled 
under section 3402(m) to withholding exemptions with respect to 
withholding allowances (see Sec. 31.3402(m)-1).
    (c) Withholding exemptions to which an employee is entitled in 
respect to his spouse. (1) A married employee, whose spouse is an 
employee receiving wages, is entitled to claim any withholding

[[Page 228]]

exemption to which his spouse is entitled under paragraph (b) of this 
section, unless the spouse has in effect a withholding exemption 
certificate claiming such withholding exemption. A married employee, 
whose spouse is not an employee receiving wages, is entitled to claim 
any withholding exemption to which his spouse would be entitled under 
paragraph (b) of this section if the spouse were an employee receiving 
wages.

    Example 1. Assume that both the husband and wife have attained the 
age of 65 and are employees receiving wages. Each spouse is entitled 
under paragraph (b) of this section to claim 2 withholding exemptions in 
respect of himself or herself. Either spouse may claim, in addition to 
the withholding exemptions to which he or she is entitled in respect of 
himself or herself, any withholding exemption to which the other spouse 
is entitled under such paragraph (b) of this section but does not claim 
on a withholding exemption certificate.
    Example 2. Assume the same facts as in Example 1 except that only 
the husband is an employee receiving wages. The husband is entitled to 
claim 4 withholding exemptions, that is, the 2 withholding exemptions to 
which he is entitled in respect of himself and the 2 withholding 
exemptions to which his spouse would be entitled under paragraph (b) of 
this section if she were an employee receiving wages.

    (2) In determining the number of withholding exemptions to which an 
employee is entitled for himself and his spouse on any day, the 
employee's status as a single person or a married person and, if 
married, whether a withholding exemption is claimed by his spouse, shall 
be determined as of such day. However, in the case of an employee whose 
spouse dies in the taxable year of the employee which begins in, or 
with, the calendar year in which the spouse dies, any withholding 
exemption which would be allowable to the employee in respect of such 
spouse, if living and not an employee receiving wages, may be claimed by 
the employee for that portion of the calendar year which occurs after 
his spouse's death. For provisions applicable in the case of an employee 
whose taxable year is not a calendar year, and whose spouse dies in that 
portion of the calendar year which precedes the first day of the taxable 
year of the employee which begins in the calendar year, see paragraph 
(b) of Sec. 31.3402(f)(2)-1. An employee legally separated from his 
spouse under a decree of divorce or of separate maintenance or an 
employee who is a surviving spouse (as defined in section 2 and the 
regulations thereunder) shall not be entitled to any withholding 
exemptions in respect of his spouse.
    (d) Withholding exemptions to which an employee is entitled in 
respect of dependents. Subject to the limitations stated in this 
paragraph, an employee shall be entitled on any day to a withholding 
exemption for each individual who may reasonably be expected to be his 
dependent for his taxable year beginning in, or with, the calendar year 
in which such day falls. For purposes of the withholding exemption for 
an individual who may reasonably be expected to be a dependent, the 
following rules shall apply:
    (1) The determination that an individual may or may not reasonably 
be expected to be a dependent shall be made on the basis of facts 
existing at the beginning of the day for which a withholding exemption 
for such individual is to be claimed. The individual in respect of whom 
an exemption is claimed by an employee must, on the day in question, be 
in existence and be within one of the categories listed in section 
152(a), which defines the term ``dependent''. However, a withholding 
exemption for a dependent who dies continues for the portion of the 
calendar year which occurs after the dependent's death, except that, in 
the case of an employee whose taxable year is not a calendar year, the 
withholding exemption does not continue for a dependent, within the 
meaning of section 152(a) (9) or (10), whose death occurs before the 
first day of the employee's taxable year beginning in the calendar year 
of death.
    (2) The determination that an individual may or may not reasonably 
be expected to be a dependent shall be made for the taxable year of the 
employee in respect of which amounts deducted and withheld in the 
calendar year in which the day in question falls are allowed as a 
credit. In general, amounts deducted and withheld during any calendar 
year are allowed as a

[[Page 229]]

credit against the tax imposed by chapter 1 of the Code for the taxable 
year which begins in, or with, such calendar year. Thus, in order for an 
employee to be able to claim for a calendar year a withholding exemption 
with respect to a particular individual as a dependent there must be a 
reasonable expectation that the employee will be allowed an exemption 
with respect to such individual under section 151(e) for his taxable 
year which begins in, or with, such calendar year.
    (3) For the employee to be entitled on any day of the calendar year 
to a withholding exemption for an individual as a dependent, such 
individual must on such day--
    (i) Be an individual referred to in one of the numbered paragraphs 
in section 152(a),
    (ii) Reasonably be expected to receive over one-half of his support, 
within the meaning of section 152, from the employee in the calendar 
year, and
    (iii) Either (a) reasonably be expected to have gross income of less 
than the amount determined pursuant to Sec. 1.151-2 of this chapter 
(Income Tax Regulations) applicable to the calendar year in which the 
taxable year of the taxpayer begins, or (b) be a child (son, stepson, 
daughter, stepdaughter, adopted son, or adopted daughter) of the 
employee who (1) will not have attained the age of 19 at the close of 
the calendar year or (2) is a student as defined in section 151.
    (4) An employee is not entitled to claim a withholding exemption for 
an individual otherwise reasonably expected to be a dependent of the 
employee if such individual is not a citizen of the United States, 
unless such individual (i) is at any time during the calendar year a 
resident of the United States (including, in regard to wages paid after 
February 28, 1979, and individual treated as a resident under section 
6013 (g) or (h)) Canada, Mexico, the Canal Zone, or the Republic of 
Panama, or (ii) is a child of the employee born to him, or legally 
adopted by him, in the Philippine Islands before January 1, 1956, and 
the child is a resident of the Republic of the Philippines, and the 
employee was a member of the Armed Forces of the United States at the 
time the child was born to him or legally adopted by him.
    (e) Additional withholding exemption to which an employee is 
entitled in respect of the standard deduction. After November 30, 1986, 
an employee is entitled to one additional withholding exemption unless:
    (1) The employee is married (as determined under section 143) and 
the employee's spouse is an employee receiving wages subject to 
withholding, or
    (2) The employee has withholding exemption certificates in effect 
with respect to more than one employer.

These restrictions do not apply if the combined wages of the employee 
and the spouse (if any) from other than one employer is less than the 
amount specified in the instructions to Form W-4 or W-4A (Employee's 
Withholding Allowance Certificate).

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6654, 28 FR 
5252, May 28, 1963; T.D. 7065, 35 FR 16539, Oct. 23, 1970; T.D. 7114, 36 
FR 9020, May 18, 1971; T.D. 7115, 36 FR 9234, May 21, 1971; T.D. 7670, 
45 FR 6932, Jan. 31, 1980; T.D. 7915, 48 FR 44073, Sept. 27, 1983; T.D. 
8164, 52 FR 45633, Dec. 1, 1987]



Sec. 31.3402(f)(2)-1  Withholding exemption certificates.

    (a) On commencement of employment. On or before the date on which an 
individual commences employment with an employer, the individual shall 
furnish the employer with a signed withholding exemption certificate 
relating to his marital status and the number of withholding exemptions 
which he claims, which number shall in no event exceed the number to 
which he is entitled, or, if the statements described in Sec. 
31.3402(n)-1 are true with respect to an individual, he may furnish his 
employer with a signed withholding exemption certificate which contains 
such statements. For form and contents of such certificates, see Sec. 
31.3402(f)(5)-1. The employer is required to request a withholding 
exemption certificate from each employee, but if the employee fails to 
furnish such certificate, such employee shall be considered as a single 
person claiming no withholding exemptions.
    (b) Change in status which affects calendar year. (1) If, on any day 
during the

[[Page 230]]

calendar year, the number of withholding exemptions to which the 
employee is entitled is less than the number of withholding exemptions 
claimed by him on the withholding exemption certificate then in effect, 
the employee must within 10 days after the change occurs furnish the 
employer with a new withholding exemption certificate relating to the 
number of withholding exemptions which the employee then claims, which 
must in no event exceed the number to which he is entitled on such day. 
The number of withholding exemptions to which an employee is entitled 
decreases, for example, for any one of the following reasons:
    (i) The employee's wife (or husband) for whom the employee has been 
claiming a withholding exemption (a) is divorced or legally separated 
from the employee, or (b) claims her (or his) own withholding exemption 
on a separate certificate.
    (ii) In the case of an employee whose taxable year is not a calendar 
year, the employee's wife (or husband) for whom the employee has been 
claiming a withholding exemption dies in that portion of the calendar 
year which precedes the first day of the taxable year of the employee 
which begins in the calendar year in which the spouse dies.
    (iii) The employee finds that no exemption for his taxable year 
which begins in, or with, the current calendar year will be allowable to 
him under section 151(e) in respect of an individual claimed as a 
dependent on the employee's withholding exemption certificate.
    (iv) It becomes unreasonable for the employee to believe that his 
wages for an estimation year will not be more, or that the determinable 
additional amounts for each item under Sec. 31.3402(m)-1 for an 
estimation year will not be less, than the corresponding figure used in 
connection with a claim by him under section 3402 (m) of a withholding 
allowance to such an extent that the employee would no longer be 
entitled to such withholding allowance.
    (v) It becomes unreasonable for an employee who has in effect a 
withholding exemption certificate on which he claims a withholding 
allowance under section 3402(m), computed on the basis of the preceding 
taxable year, to believe that his wages and the determinable additional 
amounts for each item under Sec. 31.3402(m)-1 in such preceding taxable 
year or in his present taxable year will entitle him to such withholding 
allowance in the present taxable year.
    (2) If, on any day during the calendar year, the number of 
withholding exemptions to which the employee is entitled is more than 
the number of withholding exemptions claimed by him on the withholding 
exemption certificate then in effect, the employee may furnish the 
employer with a new withholding exemption certificate on which the 
employee must in no event claim more than the number of withholding 
exemptions to which he is entitled on such day.
    (3) If, on any day during the calendar year, the statements 
described in Sec. 31.3402(n)-1 are true with respect to an employee, 
such employee may furnish his employer with a withholding exemption 
certificate which contains such statements.
    (4) If, on any day during the calendar year, it is not reasonable 
for an employee, who has furnished his employer with a withholding 
exemption certificate which contains the statements described in Sec. 
31.3402(n)-1, to anticipate that he will incur no liability for income 
tax imposed under subtitle A (as defined in Sec. 31.3402(n)-1) for his 
current taxable year, the employee must within 10 days after such day 
furnish the employer with a new withholding exemption certificate which 
does not contain such statements. If, on any day during the calendar 
year, it is not reasonable for such an employee whose liability for 
income tax imposed under subtitle A is determined on a basis other than 
the calendar year to so anticipate with respect to his taxable year 
following his current taxable year, the employee must furnish the 
empl