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H.R. CONF. REP.

105-220
P.L. 105-34 , TAXPAYER RELIEF ACT OF 1997
HOUSE CONFERENCE REPORT NO. 105–220

Conference Agreement

The conference agreement follows the House bill.

3. Clarification of exemption from self-employment tax for certain termination payments


received by former insurance salesmen (sec. 933 of the House bill)

Present Law

Under the self-employment contributions act (“SECA”), taxes are imposed on an


individual's net earnings from self employment. In general, net earnings from self
employment means the gross income derived by an individual from any trade or business
carried on by such individual, less the deductions allowed which are attributable to such
trade or business. The SECA tax rate is the same *458 as the combined employer and
employee FICA rates (i.e., 12.4 percent for old age, survivors, and disability income
(OASDI) and 2.9 percent for Medicare Hospital Insurance taxes) and the maximum
amount of earnings subject to the OASDI portion of SECA taxes is coordinated with and
is set at the same level as the maximum level of wages and salaries subject to the OASDI
portion of FICA taxes ($65,400 for 1997). There is no limit on the amount of self-
employment income subject to the HI portion of the tax.
Certain insurance salesmen are independent contractors and therefore subject to tax
under SECA. Under case law, certain payments received by a former insurance salesmen
who had sold insurance as an independent contractor are not net earnings from self
employment and therefore are not subject to SECA. See, e.g., Jackson v. Comm'r, 108
TC No. 10 (1997); Gump v. U.S., 86 F. 3d 1126 (CA FC 1996); Milligan v. Comm'r, 38
F. 3d 1094 (9th Cir. 1994).

House Bill

The House bill codifies case law by providing that net earnings from self employment
do not include any amount received during the taxable year from an insurance company
on account of services performed by such individual as an insurance salesman for such
company if (1) such amount is received after termination of the individual's agreement to
perform services for the company, (2) the individual performs no services for the
company after such termination and before the close of the taxable year, (3) the amount
of the payment depends solely on policies sold by the individual during the last year of
the agreement and the extent to which such policies remain in force for some period after
such termination, and does not depend on the length of service or overall earnings from
services performed for the company, and (4) the payments are conditioned upon the
salesman agreeing not to compete with the company for at least one year following such
termination.
The House bill also amends the Social Security Act to provide that such termination
payments are not treated as earnings for purposes of determining social security benefits.
No inference is intended with respect to the SECA tax treatment of payments that are
not described in the proposal.
Effective date.–The provision is effective with respect to payments after December 31,
1997. No inference is intended that the proposal is not present law.

H.R. REP. 105-148


P.L. 105-34, TAXPAYER RELIEF ACT OF 1997
HOUSE REPORT NO. 105–148

Senate Amendment

No provision.

3. Clarification of exemption from self-employment tax for certain termination payments


received by former insurance salesmen (sec. 933 of the bill and sec. 1402 of the Code)

Present Law

As part of the Federal Insurance Contributions Act (“FICA”) a tax is imposed on


employees and employers. The tax consists of two parts: old-age, survivor, and disability
insurance (“OASDI”) and Medicare Hospital Insurance (“HI”). For wages paid in 1997,
the OASDI tax rate is 6.2 percent of wages up to $65,400 (indexed for inflation) on both
the employer and employee. The HI tax rate on both the employer and the employee is
1.45 percent of wages (with no wage cap).
Similarly, under the self-employment contributions act (“SECA”), taxes are imposed on
an individual's net earnings from self employment. In general, net earnings from self
employment means the gross income derived by an individual from any trade or business
carried on by such individual, less the deductions allowed which are attributable to such
trade or business. The SECA tax rate is the same as the combined employer and
employee FICA rates (i.e., 12.4 percent for OASDI and 2.9 percent for HI) and the
maximum amount of earnings subject to the OASDI portion of SECA taxes is
coordinated with and is set at the same level as the maximum level of wages and salaries
subject to the OASDI portion of FICA taxes. There is no limit on the amount of self-
employment income subject to the HI portion of the tax.
Certain insurance salesmen are independent contractors and therefore subject to tax
under SECA.
Under case law, certain payments received by a former insurance salesmen who had
sold insurance as an independent contractor are not net earnings from self employment
and therefore are not subject to SECA. See, e.g., Jackson v. Comm'r, 108 TCXXNo.
10**796 *402 (1997); Gump v. U.S., 86 F. 3d 1126 (CA FC 1996); Milligan v. Comm'r,
38 F. 3d 1094 (9th Cir. 1994).

Reasons for Change

Clarifying the SECA tax treatment of certain payments would provide greater certainty
to taxpayers and would reduce the need for further litigation.

Explanation of Provision

The bill codifies case law by providing that net earnings from self employment do not
include any amount received during the taxable year from an insurance company on
account of services performed by such individual as an insurance salesman for such
company if (1) such amount is received after termination of the individual's agreement to
perform services for the company, (2) the individual performs no services for the
company after such termination and before the close of the taxable year, (3) the amount
of the payment depends solely on policies sold by the individual during the last year of
the agreement and the extent to which such policies remain in force for some period after
such termination, and does not depend on the length of service or overall earnings from
services performed for the company, and (4) the payments are conditioned upon the
salesman agreeing not to compete with the company for at least one year following such
termination.
The bill will also amend the Social Security Act to provide that such termination
payments are not treated as earnings for purposes of determining social security benefits.
No inference is intended with respect to the SECA tax treatment of payments that are
not described in the proposal.

Effective Date

The provision is effective with respect to payments after December 31, 1997. No
inference is intended that the proposal is not present law.