Federal-State 

Reference Guide

A Federal-State Cooperative Publication

•	 Social Security Administration

•	 Internal Revenue Service

•	 National Conference of State Social Security Administrators

Providing guidelines for Social Security and Medicare 

coverage and tax withholding requirements for state, 

local and Indian tribal government employees and 

public employers.

Publication 963 (Rev. 7-2020) Catalog Number 21843B Department of the Treasury Internal Revenue Service www.irs.gov
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Introduction

The Federal-State Reference Guide provides state and local government employers a comprehensive reference source on Social Security and Medicare coverage and federal tax withholding issues. The guide was first published 

by the Internal Revenue Service (IRS) in 1995 with assistance from the State of Colorado and is a cooperative effort of 

the Social Security Administration (SSA), the IRS and the National Conference of State Social Security Administrators 

(NCSSSA). Topics addressed in this publication include determination of worker status, public retirement systems (FICA 

replacement plans), Social Security and Medicare coverage and benefits, agreements under Section 218 of the Social 

Security Act (Section 218 Agreements), employment tax laws and other tax issues. The tax information generally applies to 

federal agencies, with some exceptions; for example, the discussion of employment that is subject to Social Security and 

Medicare taxes, including the Section 218 Agreement information, and the discussion of relief under Section 530 of the 

Revenue Act of 1978 (Section 530 relief) doesn't apply to federal agencies.

All IRS forms and publications mentioned in this publication can be ordered without charge from the IRS at 800-829-3676, 

or can be downloaded at www.irs.gov/forms. Governmental taxpayers may get assistance with general or account-related 

questions by calling Customer Account Services at 877-829-5500, Monday through Friday.

This publication also includes information for Indian tribal governments. Federal tax law establishes the role of Indian 

tribal governments as employers. Tribal governments are required to follow substantially the same procedures as other 

employers. Tribes are not eligible for Section 218 Agreements; however, tribes may apply to SSA to have wages paid to 

tribal council members covered by an agreement under section 218A of the Social Security Act (Section 218A Agreement). 

Other special statutory provisions apply to tribal governments. For more information about Indian tribal governments, visit 

IRS.gov/tribes. Publication 4268, Employment Tax for Indian Tribal Governments, addresses employment tax issues for 

tribal governments.

Frequently asked questions appear at the end of each chapter of this publication. After each answer, the primary contact 

for the topic is indicated - IRS, SSA or STATE.

The Federal-State Reference Guide is for informational and reference purposes only. This content cannot be used or cited 

as authority for assuming, or attempting to sustain, a technical position on employment tax, Social Security benefits or 

other legal issues. Valid citations of authority for technical matters are:

•	 The Internal Revenue Code (IRC);

•	 Certain statutory tax provisions affecting the IRC that are not actually part of the IRC (off-IRC provisions, such as 

Section 530 of the Revenue Act of 1978) and the Social Security Act (Act); and

•	 Regulations, other published administrative guidance (such as rulings) and case law related to these laws.
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Contents

CHAPTER 1 | Social Security and Government Employers

CHAPTER 2 | Government Entities and Federal Taxes

CHAPTER 3 | Wage Reporting and Employment Taxes

CHAPTER 4 | Determining Worker Status

CHAPTER 5 | Social Security and Medicare Coverage

CHAPTER 6 | Social Security and Public Retirement Systems

CHAPTER 7 | Social Security Administration

CHAPTER 8 | Internal Revenue Service

CHAPTER 9 | State Social Security Administrators

GLOSSARY

APPENDIX

Section 218 of Social Security Act

Amended Section 530 of Revenue Act of 1978

Revenue Procedure 85-18

Revenue Ruling 2000-6

Revenue Ruling 2003-46

Revenue Ruling 86-88

Revenue Ruling 88-36

Revenue Procedure 91-40

Guide to the Citations in this Publication

Statutory Citations for State Enabling Laws

INDEX
1

n Chapter 1

Social Security and Government Employers

Federal tax requirements generally apply to public employers in the same way that they do to private employers. However, 

there are some differences arising from the unique history of laws governing Social Security and Medicare coverage 

for state and local government employees. Special provisions apply to the application of these taxes as well as certain 

withholding requirements.

Historical Overview

Social Security taxes were first collected in 1937. The funding mechanism for the Social Security program was officially 

established in the Internal Revenue Code (IRC) as the Federal Insurance Contributions Act (FICA). Under the original 

Social Security Act of 1935, state and local government employees were excluded from Social Security coverage because 

of unresolved legal questions about the federal government’s authority to impose taxes on state and local governments 

and their employees.

Beginning in 1951, states could enter into voluntary agreements with the federal government to provide Social Security 

coverage to public employees. These arrangements are called “Section 218 Agreements” because they are authorized 

by Section 218 of the Social Security Act. Originally, government entities filed with the SSA, but since 1987, the IRS has 

been responsible for collecting these taxes from governmental employers. All 50 states, Puerto Rico, the Virgin Islands 

and approximately 60 interstate instrumentalities have Section 218 Agreements with SSA, providing varying degrees of 

coverage for employees in the state.

Social Security coverage of government employees varies greatly from state to state. In 22 states, at least 90% of state 

and local government employees work in positions covered by Social Security. By contrast, in Alaska, California, Colorado, 

Louisiana, Massachusetts, Ohio, Nevada and Texas, less than half of state and local government employees are covered. 

As of 2014, 28.1% of the state and local government workforce, or 6.4 million state and local government employees were 

not covered by Social Security. 

The largest portion of uncovered government employees work at the local level. Most uncovered local government public 

employees are police officers, firefighters and teachers. 

The following chart includes the major historical developments since state and local employees first became eligible for 

Social Security coverage in 1951.
2

Key Dates

January 1, 1951 Beginning this date, states could voluntarily elect Social Security coverage for public 

employees not covered under a public retirement system (FICA replacement plan) by entering 

into a Section 218 Agreement with SSA. Prior to this date, there was no mandatory Social 

Security coverage.

January 1, 1955 Beginning this date, states could extend Social Security coverage to employees (other than 

police officers and firefighters) covered under a public retirement system. 

July 1, 1966 Beginning this date, employees covered for Social Security under a Section 218 Agreement 

are automatically covered for Medicare.

April 20, 1983 Beginning this date, coverage under a Section 218 Agreement cannot be terminated unless 

the governmental entity is legally dissolved.

April 1, 1986 State and local government employees hired on or after this date, not already covered, are 

mandatorily covered for Medicare, unless the position is specifically excluded by law. For 

state and local government employees hired before April 1, 1986, Medicare coverage may be 

elected under a Section 218 Agreement.

January 1, 1987 Beginning this date, State Social Security Administrators are no longer responsible for 

collecting Social Security contributions from public employers or for verifying and depositing 

the taxes owed by public employers. After 1986, public employers pay FICA taxes directly to 

the IRS in the same manner as do private employers.

July 2, 1991 Beginning this date, state and local government employees became subject to mandatory 

Social Security and Medicare coverage, unless they are (1) members of a qualifying public 

retirement system, or (2) covered under a Section 218 Agreement.

August 15, 1994 The Social Security Independence and Program Improvements Act of 1994 established the 

SSA as an independent agency, effective March 31, 1995. This Act also increased the FICA 

exclusion amount for election workers from $100 to any amount less than the threshold 

amount mandated by law in a calendar year. (To verify the current year amount, see the 

SSA website.) States were authorized to amend their Section 218 Agreements to increase 

the FICA exclusion amount for election workers to the statutorily mandated threshold. This 

Act also amended Section 218 to allow all states the option to extend Social Security and 

Medicare coverage to police officers and firefighters who participate in a public retirement 

system. (Under previous law, only 23 states were authorized to do so.)

October 21, 

1998

Public Law 105-277 provided a 3-month period for states to modify their Section 218 

Agreements to exclude from coverage services performed by students. This provision was 

effective July 1, 2000, for states that exercised the option to take this exclusion.

March 2, 2004 Public Law 108-203 requires public employers to furnish Form SSA-1945 to public employees 

hired after December 31, 2004, informing them that they are earning retirement benefits not 

covered by Social Security; also closed the Government Pension Offset (GPO) loophole, 

effective April 1, 2004.
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Key Public Employer Responsibilities

The following are the major responsibilities that apply to all public employers, regardless of their Social Security coverage 

and public retirement system:

•	 Properly classify workers as either independent contractors or employees.

•	 Solicit and collect valid taxpayer identification numbers from all employees and payees.

•	 Determine which employees are exempt from Social Security and/or Medicare taxes.

•	 Withhold, report and pay appropriate Social Security and Medicare taxes, or Medicare-only taxes, for each 

employee.

•	 Obtain clarifications of laws, regulations and other appropriate information from State Social Security 

Administrators, IRS and SSA.

Considerations for Social Security Coverage (Section 218 and Mandatory)

Social Security coverage can vary widely within a state or even a local area. Do not make an assumption about Section 

218 Agreement coverage for an entity and whether it complies with all applicable laws merely because of the status of a 

similar entity, either in the same or a different state. For Section 218 Agreement coverage questions, contact your State 

Social Security Administrator (see www.NCSSSA.org). Related information can also be found at SSA State and Local 

Government Employers.

In general, to determine the correct coverage for a group of employees, a government employer must address the 

following questions:

If employees are covered by a Section 218 Agreement:

1. When did the state enter into a Section 218 Agreement to elect Social Security coverage for a 

particular political subdivision?

2. What optional exclusions and what coverage groups were listed in that Agreement or later 

modification?

3. Does the political subdivision have more than one modification?

4. Did the state or political subdivision terminate voluntary Social Security coverage in its entirety or for 

any coverage groups before April 20, 1983?

5. Has the state elected to provide Medicare-only coverage for a particular entity?

If employees are not covered by a Section 218 Agreement:

1. Does the state or political subdivision have any employees who were hired prior to April 1, 1986, and 

who are exempt from mandatory Medicare?

2. Does the state or political subdivision have a public retirement system?* If so, employees who are 

qualified participants in the public retirement system are not subject to mandatory Social Security 

coverage that began July 2, 1991.

*Throughout this publication, the term “public retirement system” (also known as FICA replacement plan) refers to a retirement system 

administered by a state, political subdivision or instrumentality thereof that meets the requirements of IRC Section 3121(b)(7)(F). See Revenue 

Procedure 91-40. For Section 218 purposes, it is irrelevant whether the retirement system meets the minimum benefit standards for a qualified 

plan under the Employee Retirement Income Security Act (ERISA). See Chapter 6. 

Note: In some situations, legal challenges occur that are resolved in the federal courts. It’s even possible that, while 

cases are pending, the application of the laws can vary and be applied by the IRS and SSA solely in one state (if a case 

has been heard and decided in a federal district court) or in states only in one federal circuit (if a case has been heard 

and decided at the federal circuit court level). It’s important in these situations to be aware of which federal district or 

circuit court has jurisdiction over federal laws that apply to each state. To locate a map and contact information for 

federal courts, see www.uscourts.gov/court_locator.
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Steps to Determine Social Security and Medicare Coverage of State and Local 

Government Employees

State and local government employees may be covered for Social Security and Medicare under either a Section 218 

Agreement, which applies to anyone holding the affected position, or under mandatory coverage, which is based on the 

individual employee’s situation.

If the position is covered under a Section 218 Agreement, any employee occupying that position is covered. This is the 

first coverage consideration for a governmental employer. If, however, the position is not covered under a Section 218 

Agreement, then the employer must determine whether mandatory FICA coverage applies. To do this, the employer must 

first determine whether the employee is deemed to be a member of a public retirement system (FICA replacement plan). 

This is a critical consideration in determining whether and how a Section 218 Agreement or mandatory FICA coverage 

applies to an employee.

The following steps outline how a public employer should determine whether Social Security and Medicare coverage or 

Medicare-only coverage applies to an employee.

Step 1: Determine whether the employee’s position is covered by a Section 218 Agreement (Chapter 5, Social 

Security and Medicare Coverage).* If yes, the employee is covered for Social Security and Medicare under 

the Agreement, unless an exclusion applies for that position. If no, proceed to the next step.

Step 2: If the employee’s position is not covered under a Section 218 Agreement, determine whether the employee 

is a member of a public retirement system (Chapter 6, Social Security and Public Retirement Systems). If 

no, the employee is subject to mandatory Social Security and Medicare, unless an exclusion applies. If yes 

(the employee is a member of a public retirement system), the employee is exempt from mandatory Social 

Security. Medicare is mandatory for public employees hired or rehired after March 31, 1986, regardless of 

membership in a public retirement system. Proceed to the next step to determine Medicare coverage for 

any employee hired before April 1, 1986.

Step 3: Determine whether a Section 218 Agreement provides Medicare only coverage for employees hired before 

April 1, 1986. If yes, the employee is covered for Medicare only. If no, proceed to the next step.

Step 4: Determine whether the Medicare continuing employment exception applies to the employee (Chapter 5). 

If yes, the employee is exempt from mandatory Medicare. If no, the employee is subject to mandatory 

Medicare, unless an exclusion applies.

* State enabling legislation can have an effect on positions and entities covered by the particular state’s Section 218 Agreement. Consult the 

appropriate state’s enabling legislation to determine which positions are eligible for coverage under that state’s Section 218 Agreement. For a list 

of state enabling statutes, see the Appendix of this publication.
5

The following flowchart illustrates these steps:

SOCIAL SECURITY AND MEDICARE COVERAGE OF 

STATE AND LOCAL GOVERNMENT EMPLOYEES

This chart is a guide only and is not a substitute for discussing complex Section 218 Agreement coverage situations with 

your State Social Security Administrator or FICA taxation issues with your IRS agent.

 

(1) Section 218 required and optional exclusions (see Chapter 5)

(2) Exclusions from mandatory Social Security and Medicare (see Chapter 5)

(3) Medicare continuing employment exception (see Chapter 5)

Yes

Is the position or service 

covered for Social 

Security and Medicare 

under a Section 218 

Agreement?

Withhold Social Security 

and Medicare taxes, unless 

exclusion applies (1)

No

Withhold Medicare 

taxes for those 

employees, unless 

exclusion applies (1)

Is employee covered by 

a Section 218 Agreement 

that provides Medicare-only 

coverage for employees hired 

before April 1,1986?

Is employee a qualified 

member of a public 

retirement system?

Yes Yes

No No

Withhold mandatory 

Social Security 

and Medicare taxes, 

unless exclusion 

applies (2)

No Social Security 

or Medicare taxes 

withheld

Does Medicare continuing 

employment exception 

apply? (3)

Yes

No

Withhold Medicare taxes only, 

unless exclusion applies (2)
6

SSA, IRS, State Social Security Administrators and Public Employer Social 

Security and Medicare Tax Responsibilities

The Social Security Administration (SSA) is responsible for administering the Social Security Act, including the 

interpretation of individual Section 218 Agreements. SSA also administers benefits and maintains individual earnings 

records. See Chapter 7, Social Security Administration.

The Internal Revenue Service (IRS) is responsible for administering the Internal Revenue Code, which includes the 

Federal Insurance Contributions Act (FICA), advising employers of their responsibilities, collecting taxes and working with 

SSA and State Social Security Administrators on Social Security coverage and related tax issues. See Chapter 8, Internal 

Revenue Service.

The State Social Security Administrator (SSSA) is the designated official legally appointed to act for the state in 

negotiations with the SSA. This official acts for the state with respect to the initial Section 218 Agreement and 

modifications, the performance of the state’s responsibilities under the agreement, and in all state dealings on the 

administration of the agreement. Each state’s Section 218 Agreement and Social Security Regulation 404.1204 provide a 

legal obligation for each state to designate an official. In many states the actual day-to-day responsibilities are delegated to 

the staff of the designated state official. See Chapter 9, State Social Security Administrators.

Public employers are responsible for:

•	 Properly classifying workers as either independent contractors or employees

•	 Soliciting and collecting valid taxpayer identification numbers from all employees and payees

•	 Determining which employees are exempt from Social Security and/or Medicare taxes

•	 Withholding, reporting and paying appropriate Social Security and Medicare taxes, or Medicare-only taxes for 

each employee

•	 Obtaining clarifications of laws, regulations and other information from State Social Security Administrators, IRS 

and SSA

Where to Direct Questions

The IRS, SSA and State Social Security Administrator have different responsibilities and areas of authority in dealing with 

issues on Social Security coverage, taxation and reporting.

The following indicates the primary point of contact for many common questions.

Topics for the IRS:

•	 Federal income tax

•	 Worker classification (employee or independent contractor) 

•	 Collection of Social Security and/or Medicare tax

•	 Completion and filing of Forms W-2, W-3, 1099 and 1096

•	 Employment tax returns (Forms 941, 944)

•	 Definition of public retirement system (FICA replacement plan)

•	 Whether an employee is covered by mandatory Social Security

•	 Whether certain payments are subject to Social Security and/or Medicare tax 

•	 Questions about employer identification numbers

Topics for the SSA:

•	 Social Security benefits

•	 Section 218 coverage 
7

•	 Individual earnings records and quarters of coverage

•	 Verification of Section 218 terms

•	 Form W-2 records

•	 Problems with Social Security number

Topics for the SSSA:

•	 Existence and/or terms of a Section 218 Agreement

•	 Modifications to the Section 218 Agreement

•	 Treatment of a specific position under a Section 218 Agreement

•	 Other issues involving interpretation of state law

Frequently Asked Questions

1. What is a Section 218 Agreement? 

A Section 218 Agreement is a written, voluntary agreement between one of the 50 states (or Puerto 

Rico, the Virgin Islands or an interstate instrumentality) and the SSA under Section 218 of the Social 

Security Act. This agreement provides Social Security and Medicare, or Medicare-only coverage 

for designated groups of state and local government employees. The term refers to the original 

agreement and all subsequent modifications. These agreements can cover services of employees 

who are covered by a public retirement system as well as those who are not. To determine whether 

your entity is covered under a Section 218 Agreement, or can execute one, contact your State 

Social Security Administrator. See the list of State Administrators at NCSSSA.org. [SSA/STATE]

2. How may a Section 218 Agreement affect employees who are qualifying members of a public 

retirement system? 

An agreement may provide Social Security and Medicare coverage for employees already covered 

by a public retirement system (or FICA replacement plan). This may include:

a. Employees covered by a public retirement system who elect coverage under a referendum. The Social 

Security and Medicare coverage applies in addition to retirement system coverage.

b. Employees performing services that are excluded from mandatory Social Security coverage provisions, 

but are only optionally excluded under Section 218 Agreements, such as student services, and services 

of election workers who earn less than the threshold amount.

c. Election workers in some state Section 218 Agreements that establish a dollar threshold for FICA

coverage that’s lower than the federal statutory requirement.

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

3. Why might a Section 218 Agreement be modified? 

Modifications to Section 218 Agreements are necessary to include additional coverage groups, to 

cover additional services in a group already covered (services previously optionally excluded), to 

cover ineligibles, to cover employees changing to the “Yes” group in a divided retirement system, 

to cover previously terminated groups, or to identify political subdivisions joining a covered public 

retirement system. See Chapter 5. [STATE]

4. I was told by the State Social Security Administrator that my town is covered for Social 

Security under the state’s Section 218 Agreement and the coverage cannot be terminated. Is 

this true? 

Yes. By law after April 20, 1983, coverage under a Section 218 Agreement cannot be terminated. 

Beginning July 2, 1991, any state and local government employees not covered for Social Security 

under a Section 218 Agreement who are not qualified members of a public retirement system (FICA 

replacement plan), are covered under mandatory Social Security. [STATE/SSA]

5. Are Indian tribal government employers eligible to enter into Section 218 Agreements? 

No, Indian tribal governments are not considered states or subdivisions of states for Section 218 

purposes. See IRC Section 7871. However, the Tribal Social Security Fairness Act of 2018 (PDF) 

provides information about Indian tribes wishing to offer Social Security coverage to tribal council 
8

members per Section 218A of the Social Security Act. For more information about Social Security 

coverage, Medicare and tribal governments, see the IRS Indian Tribal Governments website. [IRS]

6. I have a question about Social Security and Medicare coverage requirements for employees 

of my city. Whom do I contact? 

The State Social Security Administrator should always be your first contact on any questions 

about coverage under Social Security or Medicare. Consult SSA if you need additional assistance 

on coverage. Direct questions about whether specific services are subject to mandatory Social 

Security and Medicare taxes to the IRS. [STATE]

7. What is the responsibility of State Social Security Administrators for non-Section 218 

entities? 

Under Section 218 of the Act, the primary legal responsibility State Social Security Administrators 

have is for Section 218 entities. However, the Administrator’s responsibilities to entities not covered 

under the state’s Section 218 Agreement (non-Section 218 entities) vary from state to state. Some 

State Administrators may not interact with non-Section 218 entities, while in other states the State 

Administrator may perform monitoring, quasi-regulatory and enforcement functions for them. If a 

non-Section 218 entity needs information about coverage under an agreement, contact the State 

Social Security Administrator. [STATE]

8. If an entity has a Section 218 Agreement in effect, and joins the state’s public employee 

retirement system, does Section 218 Agreement coverage continue? 

After April 20, 1983, a Section 218 Agreement cannot be terminated for any reason as long as that 

entity exists. The addition of a retirement system does not affect employee coverage under the 

Section 218 Agreement. [SSA]
9

n Chapter 2

Government Entities and Federal Taxes

The Bureau of the Census collected data showing that there were approximately 89,000 units of local government in the 

United States in 2012. These units of government employ more than 20% of the American workforce.

This chapter discusses the legal basis for different types of government entities and the specific tax questions that arise in 

connection with them. Many tax laws apply differently to government entities than to other organizations and individuals.

The income of certain government entities, including states, political subdivisions of states, or integral parts of states or 

political subdivisions, is generally exempt from tax. The income of other government entities, such as instrumentalities, 

might be excludable from gross income under IRC Section 115 if that income is derived from the exercise of an essential 

governmental function and accrues to a state or political subdivision of a state.

Certain government entities, such as colleges or universities, that are agencies or instrumentalities of a state or political 

subdivision of a state, are subject to the tax on unrelated business income under IRC Section 511. For more information, 

see Publication 598, Tax on Unrelated Business Income of Exempt Organizations.

State Government

States are recognized as entities by the U.S. Constitution. However, different definitions of a state apply for different legal 

purposes. Federal employment taxes generally apply to all 50 states, the District of Columbia and all U.S. Territories. 

For purposes of a Section 218 Agreement, a state may refer to any of the 50 states, Puerto Rico, the Virgin Islands and 

interstate instrumentalities. For this purpose, the definition of a state does not include the District of Columbia, Guam, 

American Samoa, the Commonwealth of the Northern Mariana Islands or Indian tribal governments.

Authority

The states have primary responsibility for many aspects of government. The 10th Amendment to the U.S. Constitution 

reserves to the states, or to the people, all powers not delegated to the federal government nor prohibited by the 

Constitution. Some services for which the state has primary responsibility include:

•	 Protection of lives and property by maintenance of a police force

•	 Regulation and improvement of transportation and roads within the state

•	 Regulation of business within the state

•	 Education and maintenance of schools within the state

•	 Condemnation of property through eminent domain within the state

In many cases, the federal and state governments share responsibility, with the federal government providing most of the 

funding and the state distributing the services. Some common services involving shared responsibility include:

•	 Health care

•	 Public assistance for persons in need

•	 Protection of natural resources

•	 Improvement in living and working conditions
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Local Government and Political Subdivisions

Local governments are generally political subdivisions of states. They differ from state and federal governments in that their 

authority is not based directly on a constitution. Each state constitution governs the procedure for the establishment of 

local governments. In most cases, the state legislature must approve the creation or incorporation of a local government. 

The local government then receives a charter defining its organization, authority and responsibilities, including the means 

for electing governing officials.

Local government units bear a variety of names, such as city, county, township, village, parish, borough or district. The 

legal significance of these terms may vary from state to state.

Authority

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

government has the authority to:

•	 Impose taxes

•	 Try people accused of breaking local laws or ordinances

•	 Administer local programs within its boundaries

In addition to funding provided by local taxes, fees and other sources, local governments receive financial aid from state 

and federal governments in providing these services according to need.

Some of the services that local governments take primary responsibility for providing include:

•	 Conducting and coordinating elections

•	 Maintaining public safety

•	 Building and repairing local roads and streets

•	 Providing police and fire protection

•	 Collecting garbage and recycling

•	 Ensuring the safety of drinking water

•	 Maintaining courts, courthouses and jails

•	 Collecting state and local government taxes

•	 Keeping official records, such as for marriage, birth and death

Instrumentalities

An instrumentality is an organization separate from, but affiliated with, a state or local government. It may or may not 

be created by or pursuant to state statute, but it is operated for public purposes. Generally, an instrumentality performs 

governmental functions, but does not have the full powers of a government, such as police authority, taxation and eminent 

domain (sovereign powers). Direct questions on the legal status of an instrumentality, for federal tax or Social Security 

and Medicare purposes, to the IRS. Address questions on a specific Section 218 Agreement to the State Social Security 

Administrator or the SSA (see Chapter 7).

A wholly-owned instrumentality of one or more states or political subdivisions is treated as a state or local government 

employer for purposes of the mandatory Social Security and Medicare provisions of IRC Section 3121(b)(7)(F).

Interstate Instrumentalities

An interstate instrumentality is an independent legal entity organized by two or more states to carry on governmental 

functions. Examples include a regional planning authority, transportation system or water district. For purposes of Section 

218 Agreements, an interstate instrumentality is treated as a state.
11

A referendum (vote) for Social Security and/or Medicare coverage must be held prior to the execution of a Section 218 

Agreement for interstate instrumentality employees in positions under a retirement system. All interstate instrumentalities 

are authorized to hold a referendum using either a majority vote or a divided system retirement process. (see Chapter 

5 for referendum procedures). Employees of an interstate instrumentality who are not covered for Social Security under 

a Section 218 Agreement, but who are qualified participants in a public retirement system, are not covered for Social 

Security even if the employer incorrectly continues to withhold and report Social Security taxes.

Characteristics of Instrumentalities

In Revenue Ruling 57-128, 1957-1 C.B. 311, the IRS addressed the question of whether an organization is a wholly-owned 

instrumentality of one or more states or political subdivisions. This revenue ruling established the following factors as 

relevant to a determination of whether the entity is an instrumentality of a government:

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

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

•	 Whether there are any private interests involved, or whether the states or political subdivisions involved have the 

powers and interests of an owner

•	 Whether control and supervision of the organization is vested in public authority or authorities

•	 The degree of financial autonomy and the source of operating expenses

•	 Whether express or implied statutory or other authority is necessary for its creation and/or use of the 

instrumentality, and whether that authority exists

Schools, hospitals and libraries, as well as associations formed for public purposes, such as soil and water conservation 

districts, may be instrumentalities of government, depending on the facts and circumstances. State sponsorship of an 

organization, state regulation of its activities, the participation of its employees in a public retirement system, and operation 

with public funds are among the factors to be considered in determining whether an organization is an instrumentality. If an 

organization is essentially under private ownership and control, it is not an instrumentality of government.

Associations formed for conservation, protection and promotion, although carrying out a public purpose, may not rise to 

the level of state instrumentalities. The following associations may or may not be state instrumentalities:

•	 Soil and water conservation districts

•	 Fire associations that protect forestland

•	 Associations that promote a state or municipality

To determine the status of an entity, it is essential to review the documents that establish statutory authority. The following 

cases elaborate on the principles established in Revenue Ruling 57-128.

Soil and Water Conservation Districts - Entities whose revenues are principally generated from fees collected from land 

owners within the district may or may not be instrumentalities of government, depending upon application of the factors 

listed above, including whether the district is under public or private control.

Example: A soil conservation district in Minnesota was established to carry out a state conservation program. The 

Soil Conservation Service of the U.S. Department of Agriculture furnished the district with technical and clerical 

personnel. The disbursements made by the district were made from fees collected from members (occupiers of the 

land within the district) for services rendered, from funds allocated by the U.S. Department of Agriculture and from 

state appropriations. The soil conservation district was created by statute as a political subdivision of the state 

and was under the control of a board of supervisors elected or appointed in accordance with state law. The soil 

conservation district is a political subdivision of the state. [Revenue Ruling 57-120, 1957-1 C.B. 310]

Example: A Connecticut soil and water conservation district was formed as a private nonstock corporation by 

private individuals. The state had authority to assist private individuals in forming conservation districts but did 

not have the power to operate them. The private individuals had complete control over the corporate operations, 

revenue and expenditures. Therefore, the soil and water conservation district is not a wholly-owned instrumentality 

of the state. [Revenue Ruling 69-453, 1969-2 C.B. 182]
12

Fire Associations - Fire associations may or may not be instrumentalities of government, depending on whether they are 

under public or private control.

Example: A fire association was organized under an Oregon state law that required all forest land in the state 

to be adequately protected from the dangers of fire. While the fire association was organized as a result of an 

Oregon law, it was organized and operated for the mutual benefit of its members and was not an instrumentality 

of the state. Furthermore, except for the work it performed on a cost basis for the state and federal government, 

the association derived most of its support from assessments imposed on its members. [Revenue Ruling 70-483, 

1970-2 C.B. 201]

Example: Under the laws of the state of Pennsylvania, townships have the authority to purchase fire engines and 

fire apparatus out of general township funds for use of the township and to appropriate money to fire companies 

located in the township to secure fire protection. These volunteer fire companies are instrumentalities under 

Pennsylvania state law, and the members of volunteer fire departments are employees of the political subdivision. 

[Revenue Ruling 70-484, 1970-2 C.B. 202]

Associations that Promote a State or Municipality - State sponsorship of promotional activities is not sufficient to raise 

an association to instrumentality status.

Example: A municipal league comprised of qualified officials of member cities or villages, but with no control and 

supervision vested in a public authority, is not a state instrumentality. The league’s activities consisted of publishing 

a monthly magazine featuring articles on governmental matters, conducting conferences, and sponsoring and 

participating in municipal law institutes and seminars. The state had no statute for the incorporation of a league of 

this nature as an instrumentality. [Revenue Ruling 65-26, 1965-1 C.B. 444]

Note: Some state statutes specifically create certain associations as instrumentalities. A review of the establishing 

legislation is required to make a status determination.

Indian Tribal Governments

The legal relationship between the United States and Indian tribal governments is set forth in the Constitution, treaties, 

statutes and court decisions. Congress may limit the authority of Indian tribal governments, but within those limits, the 

tribal governments retain attributes of sovereignty over both their members and their territory. Generally, Indian tribal 

governments provide government services, such as transportation, education and medical care to its members.

Authority

Tribal governmental power includes the authority to:

•	 Choose the form of tribal government

•	 Determine tribal membership

•	 Regulate tribal and individual property

•	 Levy taxes

•	 Establish courts

•	 Maintain law and order

Employment Taxes

Generally, Indian tribal governments should follow general rules that apply to nongovernmental entities for employment tax. 

Publication 15 (Circular E), Employer’s Tax Guide, and Publication 15-A, Employer’s Supplemental Tax Guide, provide the 

basic rules for employers. There are, however, some special employment tax rules that apply to Indian tribal governments:

•	 An exception applies to the definition of “employment” for FUTA purposes for services performed in the 

employ of an Indian tribe (IRC Section 3306(c)(7)). An Indian tribe may elect to make contributions to the state 

unemployment fund as if services by its employees were employment under FUTA, or it may make payments 

in lieu of the contributions to reimburse the state for benefits paid former employees of the tribe. An Indian tribe 

may make separate elections for any subdivision, subsidiary or business enterprise wholly owned by it. If an 
13

Indian tribe fails to make either form of payment within 90 days of receiving a notice of delinquency, or if it fails to 

post a required payment bond, then service for the tribe is not excepted from “employment” until the failure has 

been corrected (IRC Section 3309(d)). For this purpose, the term “Indian tribe” has the meaning given in 25 USC 

Section 450b(e) (Section 4(e) of the Indian Self-Determination and Education Assistance Act), and includes any 

subdivision, subsidiary or business enterprise wholly-owned by an Indian tribe (IRC Section 3306(u)).

Amounts paid to members of Indian tribal councils for services performed as council members are generally not 

wages for purposes of FICA and income tax withholding, although these amounts are includible in gross income. 

(Revenue Ruling 59-354). The Tribal Social Security Fairness Act of 2018 authorizes SSA to enter into voluntary 

agreements with Indian tribes to provide individual tribal council members with Social Security coverage. Visit 

SSA.gov for more information. 

•	 Certain income derived by Indians from the exercise of their recognized tribal fishing rights is exempt from federal 

income and employment taxes (IRC Section 7873). Wages paid to a member of a tribe employed by another 

member of the same tribe, or by a qualified Indian entity, for services performed in a fishing rights-related activity 

of the employee’s tribe, are exempt not only from federal income tax, but also from both the employer’s and the 

employee’s share of the Social Security and Medicare tax (Notice 89-34, 1989-1 C.B. 674).

Information addressing Indian tribal governments and employment tax issues can be found in Publication 4268, 

Employment Tax for Indian Tribal Governments. 

Frequently Asked Questions

1. How is the tax treatment of governments different from that of other entities? 

The income of certain government entities, including states, political subdivisions of states, or 

integral parts of states or political subdivisions, is generally not taxable. The income of other 

government entities, such as instrumentalities, might be excludable from gross income under IRC 

Section 115 if that income is derived from the exercise of an essential governmental function and 

accrues to a state or political subdivision of a state. Colleges and universities that are agencies or 

instrumentalities of any government, or any political subdivision of government, or that are owned or 

operated by a government or political subdivision of a government, are subject to tax on unrelated 

business income. [IRS]

2. Can the IRS issue a letter indicating that our entity is a tax-exempt government? 

For a government entity to receive an official determination of its status as a political subdivision, 

instrumentality of government, or whether its income is excludable from gross income under IRC 

Section 115, it must obtain a private letter ruling (PLR) by following the procedures in Rev. Proc. 

2020-1 (updated annually). There is a fee to receive a PLR. [IRS]

As a service to government entities, IRS can issue a “governmental information letter” free of charge. 

This letter describes government entity exemption from federal income tax and cites the IRC sections 

on deductible contributions and income exclusion. Most organizations and individuals will accept 

the governmental information letter as the substantiation required for these purposes. Contact IRS 

Customer Account Services at 877-829-5500. [IRS] 
14

n Chapter 3

Wage Reporting and Employment Taxes

A government entity that has employees needs to be familiar with the basic responsibilities and requirements that apply to all employers, as well as some provisions that are unique to governments. This chapter briefly covers the main 

types of compensation that are included in employee wages and the requirements for tax withholding and payments. Tax 

requirements for employers are discussed in Publication 15, (Circular E), Employer’s Tax Guide. This chapter highlights 

some key requirements for employers and matters of special interest to governmental employers.

All governmental entities that employ workers are subject to federal employment taxes on wages, except where the law 

provides specific exceptions. The Internal Revenue Code defines wages subject to income tax withholding under Section 

3401 and defines wages for Social Security and Medicare tax purposes under Section 3121. As discussed in Chapter 2, a 

broad exception exempts government employment from federal unemployment tax (FUTA).

Social Security and Medicare taxes, also referred to as FICA taxes, consist of Old-Age, Survivors and Disability Insurance 

(OASDI, or Social Security) and Hospital Insurance (Medicare) taxes. IRC Section 3101 imposes taxes on the employee, 

and Section 3111 imposes taxes on the employer. State or local entities covered by Social Security and Medicare must 

withhold and pay over the employee share of the taxes and must pay the employer share. Under Section 3402, employers 

are also generally required to withhold income tax from wages.

In general, all compensation provided to an employee is included in taxable wages unless an exception is provided by law. 

An exception may apply for FICA taxes, or federal income tax withholding, or both. The following discussion addresses the 

treatment of certain forms of compensation, focusing on some that are of interest to government employers.

Social Security and Medicare Wages

IRC Section 3121(a) provides that wages include all remuneration for employment, whether paid in cash or in some other 

form, unless specifically excluded by statute. Examples of wages for Social Security and Medicare purposes include 

salaries, fees, stipends, bonuses, prizes, awards and commissions. It is immaterial whether the payments are based on 

the hour, week, month, year, piecework, percentage of revenue or other system.

An important exception is provided by IRC Section 3121(b)(7)(F), which excludes services performed by state and 

local government employees from Social Security tax if the employee’s services are not covered under a Section 218 

Agreement (voluntary Social Security coverage) and if the employee is a qualifying member of a public retirement system 

(FICA replacement plan) as described in Treas. Reg. Section 31.3121(b)(7)-2. Chapters 5 and 6 discuss the application of 

the tax to governmental employees.

The Social Security Administration establishes the maximum amount of wages subject to the Social Security tax each 

year. This amount is updated annually and is $137,700 in 2020. Since 1994, there has been no wage base limit for 

Medicare tax.
15

Social Security, Medicare and Additional Medicare Tax Rates and Limits

Social Security and Medicare Tax

2016 2017 2018 2019 2020

Social Security Tax (OASDI) Information

Employee Rate 6.20% 6.20% 6.20% 6.20% 6.20%

Employer Rate 6.20% 6.20% 6.20% 6.20% 6.20%

Maximum Wages 

Subject to Tax $118,500 $127,200 $128,400 $132,900 $137,700

Medicare Tax Information

Employee Rate 1.45% 1.45% 1.45% 1.45% 1.45%

Employer Rate 1.45% 1.45% 1.45% 1.45% 1.45%

Maximum Wages 

Subject to Tax No maximum (applies to all wages)

Additional Medicare Tax Information

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

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

Withholding 

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

Additional Medicare Tax

As of 2013, a 0.9% Additional Medicare Tax applies to Medicare wages over a threshold amount based on the taxpayer’s 

filing status. However, an employer must withhold Additional Medicare Tax from wages in excess of $200,000 it pays to an 

employee in a calendar year, without regard to the employee’s filing status or wages paid by another employer. 

Unlike Social Security and basic Medicare taxes, there is no employer match for Additional Medicare Tax.

An employer is required to begin withholding Additional Medicare Tax in the pay period in which it pays wages in excess of 

$200,000 to an employee and continue withholding it until the end of the calendar year.

For more information on Additional Medicare Tax, see Questions and Answers for the Additional Medicare Tax.

Chapter 5 also discusses in detail the application of Social Security and Medicare to the compensation of governmental 

employees.

Other Forms of Cash Compensation

In addition to salary or wages, employees may receive cash in other ways. Some common forms of cash compensation 

include:
16

Sick Pay

Sick pay is an amount paid to an employee because of inability to work due to sickness or injury. Sick pay is generally 

subject to Social Security and Medicare taxes the same as other remuneration paid to the employee, regardless of 

whether the employer or a third party pays the sick pay. Sick pay paid by an employer is also subject to income tax 

withholding. The employer withholds income tax from sick pay based on the employee’s Form W-4, Employee’s Withholding 

Certificate. 

Sick pay is sometimes paid by a third party, such as an insurance company or employee trust. The rules on third-party 

withholding, paying and reporting Social Security and Medicare taxes differ, depending upon whether: 

•	 The third party is acting as an agent of the employer or an independent insurer, and 

•	 The terms of an agreement between the employer and agent or insurer.

If the third party paying sick pay is an agent of the employer, the third party is generally required to withhold income tax 

from the sick pay. If the third-party payer is not an agent of the employer, the third-party payer is not required to withhold 

income tax, unless the employee requests that income tax be withheld by completing and giving the third party a Form 

W-4S, Request for Federal Income Tax Withholding From Sick Pay.

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

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

1. Payments received under a workers’ compensation act, or under a statute in the nature of a workers’ 

compensation act.

2. Payments, or portions of payments, attributable to the employees’ contributions to a sick pay plan.

3. Payments on account of sickness or injury made by, or on behalf of, an employer more than six 

months after the last calendar month in which the employee worked for the employer.

Vacation Pay

Vacation pay is wages and is subject to Social Security, Medicare and income tax withholding. When vacation pay is paid 

in addition to regular wages for the vacation period, withhold on the vacation pay as a supplemental wage payment. See 

Section 7, “Supplemental Wages,” in Publication 15.

Military Differential Pay

Military differential pay is payment:

•	 Made by an eligible employer to a qualified individual for any period the individual is called to active duty in the 

uniformed services for a period of more than 30 days, and

•	 Represents part or all the wages the individual would have received from the employer if the individual were 

performing services for the employer during that time.

Differential wage payments are treated as wages for income tax withholding but aren’t subject to Social Security, Medicare 

or FUTA taxes. Employers should report differential wage payments in Box 1 of Form W-2. For more information about the 

tax treatment of differential wage payments, see IRS Revenue Ruling 2009-11. 

Deceased Employee’s Wages

If an employee dies during the year, the employer must report the accrued wages, vacation pay and other compensation 

paid after the date of death. Also, report wages that were available to the employee while they were alive, regardless of 

whether the wages were in the employee’s possession, as well as any other regular wage payment, even if it is necessary 

to reissue the payment in the name of the estate or beneficiary. How the payment is reported depends on the year in which 

payment is made.

Payment made in the year of death - If you made the payment after the employee’s death but in the same year the 

employee died, you must withhold Social Security and Medicare taxes on the payment and report the payment on the 
17

employee’s Form W-2 only as Social Security wages (box 3) and Medicare wages and tips (box 5) to ensure proper Social 

Security and Medicare taxes withheld in boxes 4 and 6. Do not show the payment in box 1.

Payment made after the year of death - If you made the payment after the year of death, do not report it on Form W-2 

and do not withhold Social Security and Medicare taxes.

Whether you made the payment in the year of death or after the year of death, report it in box 3 of Form 1099-MISC, 

Miscellaneous Income, as a payment to the estate or beneficiary. Use the name and taxpayer identification number (TIN) 

of the estate or beneficiary on Form 1099-MISC. 

See the Instructions for Form W-2 and Publication 559, Survivors, Executors, and Administrators, for more information on 

the treatment of payments on behalf of a decedent.

Back Pay

Back pay is pay received in a tax year for actual or deemed employment in an earlier year. For Social Security coverage 

and benefit purposes, all back pay is wages, except amounts specifically and legitimately designated otherwise, such as 

interest, penalties and legal fees. For tax purposes, back pay is treated as wages in the year received and is reported on 

Form W-2 for that year. Income, Social Security and Medicare tax withholding apply in the year of payment at the rates in 

effect for that period.

SSA treatment of back pay under a statute - Under the law, the SSA credits back pay awarded under a statute (for 

example, under the Americans with Disabilities Act or Fair Labor Standards Act) to an individual’s earnings record in 

the periods the wages should have been paid. However, payments of back pay under a statute will be posted to the 

employee’s Social Security earnings record in the year reported on Form W-2 unless the employer or employee notifies the 

SSA in a special, separate report. If this is done, SSA can then allocate the statutory back pay to the appropriate periods 

for purposes of retirement benefit calculations. This is important because wages not credited to the proper year may result 

in lower Social Security benefits or failure to meet the requirements for benefits. See Publication 957, Reporting Back Pay 

and Special Wage Payments to the Social Security Administration, for more information.

Workers’ Compensation

Amounts received by police officers, firefighters and other employees or their survivors for personal injuries or sickness 

incurred in the course of employment are excludable from income, Social Security and Medicare taxes if they are paid 

under a workers’ compensation act or a statute in the nature of a workers’ compensation act that provides compensation to 

employees for personal injuries or sickness incurred during employment.

This exclusion does not apply to retirement plan benefits based on age, length of service or prior contributions to the plan, 

even if the individual retired because of an occupational sickness or injury.

Noncash Payments

Generally, noncash payments are wages subject to income, Social Security and Medicare tax. The dollar value of wages 

paid in a medium other than cash should be computed based on the fair market value of the property at the time of the 

payment. The fair market value may be based on the prevailing value of the item in the locality or on a reasonable value 

established for other purposes. Special rules may apply to noncash fringe benefits.

Fringe Benefits

Fringe benefits, which generally include any compensation other than cash wages or salary, must be included in an 

employee’s wages unless the law provides an exception. A fringe benefit is a form of pay for the performance of services. 

For example, you provide an employee with a fringe benefit when you allow the employee to use a business vehicle to 

commute to and from work. 
18

Provider of benefit - You’re the provider of a fringe benefit if it’s provided for services performed for you. You’re considered 

the provider of a fringe benefit even if a third party, such as your client or customer, provides the benefit to your employee 

for services the employee performs for you. Thus, you are responsible for any employment tax liability related to the fringe 

benefit if it’s provided for services performed for you.

Examples of employer-provided fringe benefits include, but are not limited to:

•	 Vehicles for personal use

•	 Meals

•	 Health or life insurance

•	 Tickets to entertainment or sporting events

•	 Holiday gifts

•	 Personal use of employer facilities

•	 Transportation (commuting) benefits and passes

•	 De minimis (minimal) benefits

•	 Tuition reduction

•	 Educational assistance

•	 Dependent care assistance

•	 Employee discounts

•	 Employer-provided cell phones

•	 Moving expense reimbursements

•	 Achievement awards

The tax treatment of some of these benefits is determined by specific statutes; others fall under general rules for broader 

categories of fringe benefits. Publication 15-B, Employer’s Tax Guide to Fringe Benefits, addresses fringe benefits for all 

employers. In addition, Publication 5137, Fringe Benefit Guide, addresses fringe benefits for government employers. 

Business Expense Reimbursements – Accountable Plan

Payments to employees for travel and other ordinary and necessary expenses of the employer’s business generally 

are wages subject to Social Security and Medicare taxes and income tax withholding unless they are made under an 

accountable plan. There are three requirements for a reimbursement to be treated as being paid under an accountable 

plan:

1. The expenses must qualify as deductible business expenses incurred while performing services for 

the employer,

2. The employee must adequately account for the expenses to the employer within a reasonable period 

of time, and

3. The employee must return any amounts received that exceed expenses within a reasonable period of 

time.

See Publication 15 and Publication 5137 for more information on accountable plans.

The use of per diem rates at or below the federal rate for travel expenses can reduce and simplify the recordkeeping 

requirements for accounting for these expenses. See Publication 463, Travel, Gift, and Car Expenses, or Publication 5137

for more information on per diem reimbursement systems.

Reimbursements Not Made Under Accountable Plan

If an employer provides reimbursements that do not comply with the accountable plan rules, these amounts are treated as 

wages and subject to employment taxes the same as other pay of the employee. 
19

Retirement Plans

Regardless of Social Security coverage, most public employees are covered by some form of retirement plan. The terms 

of these plans may vary, but in general provide for tax-deferred income placed in trust for the benefit of employees. These 

plans may involve employee or employer contributions, or both. Under certain provisions of the Internal Revenue Code, 

contributions may be deferred from tax until they are withdrawn. The term “qualified” is used to describe private-sector 

plans under IRC Section 401 that meet specific provisions of ERISA that enables them to offer certain tax advantages to 

the participants. Many public employees, however, are covered by nonqualified plans, generally under IRC Sections 403(b) 

or 457, discussed below and at Government Retirement Plans Toolkit. 

Income Tax Withholding on Qualified Retirement Plans

For income tax withholding purposes, employer and employee contributions made under qualified plans (up to the 

maximum allowable for the year) are deferred from income tax. The employee is subject to tax on distributions of these 

amounts when they are withdrawn from the plan. In most cases, withdrawals not rolled over into another plan are subject 

to mandatory income tax withholding on distribution.

Employer “Pick-Up” Contributions

IRC Section 414(h)(2) allows state and local government entities with IRC Section 414(d) governmental plans to treat 

contributions that have been designated as employee contributions, but are “picked up” (paid) by the employer, to 

be treated as employer contributions, and therefore as excludable from income. These “picked up” contributions are 

also exempt from Social Security and Medicare tax if they aren’t made under a salary reduction agreement. For more 

information on the conditions required for employer pick-up, see IRC Section 414(h)(2) or search for “Employer pick-up 

contributions” on IRS.gov.

Section 403(b) Plans

Plans under IRC Section 403(b), also called tax-sheltered annuities, are available to certain employees of public schools, 

employees of tax-exempt organizations and certain ministers. These plans resemble qualified plans in many respects. 

Many public school employees are covered by 403(b) plans in addition to receiving Social Security coverage under a 

Section 218 Agreement.

Employer contributions to tax-sheltered annuities under Section 403(b) for public school employees are exempt from 

Social Security and Medicare taxes, unless the contributions are made by reason of a salary reduction agreement. 

Eligible participants may defer amounts from income tax up to an annual limit ($19,500 in 2020, subject to annual cost 

of living adjustments (COLA)). This amount may be increased for certain employees with more than 15 years of service. 

Employees age 50 or older may also make additional tax-deferred “catch-up” contributions.

Employee contributions, including those made by salary reduction arrangements, are subject to Social Security and 

Medicare tax (See IRC Section 3121(a)(5)(D)).

For more information, see Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans), and the 403(b) plan webpage on 

IRS.gov.

Section 457 (Nonqualified) Plans

Many public employees participate in nonqualified IRC Section 457 deferred compensation plans. These plans can be 

established by state and local governments or tax-exempt organizations. If they meet the requirements of Section 457(b), 

they are considered “eligible” plans; if not they are considered “ineligible” plans and are governed by Section 457(f).

Section 457(b) – Eligible Plans

Governmental Section 457(b) plans must be funded with assets held in trust for the benefit of employees. Plans eligible 

under Section 457(b) may defer amounts from income tax up to an annual limit ($19,500 in 2020, subject to COLA). 
20

Governmental Section 457(b) plans may make “catch-up” contributions to employees age 50 or older, in addition to the 

basic Section 457(b) catch-up. 

Social Security and Medicare taxes generally apply to all employer and employee contributions. Amounts deferred from 

wages into eligible Section 457(b) plans are not subject to income tax withholding until they are distributed from the plan or 

made available to the participant or beneficiary. See Section VI of Notice 2003-20 and IRC 457(b) Deferred Compensation 

Plans for more information.

Section 457(f) – Ineligible Plans

Nonqualified state or local government plans that do not meet the requirements of Section 457(b) are ineligible plans, 

or Section 457(f) plans. There is no limit on the annual deferrals on these plans, but to defer taxation, all deferrals must 

be subject to substantial risk of forfeiture. Amounts deferred under a Section 457(f) plan are generally subject to Social 

Security and Medicare taxes at the later of the time 1) when the services giving rise to the related compensation are 

performed, or 2) when there is no substantial risk of forfeiture of the rights to the amounts.

Reporting Responsibilities

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

see Publication 15.

Employer Identification Number (EIN)

When two entities are combined (for example, when one municipality annexes another, or when school districts are 

consolidated) the EIN of the annexed area or abolished district should no longer be used, as it is no longer a separate 

entity. A continuing entity that absorbs or annexes another can retain and use its EIN. However, if a new entity is created 

from the dissolution of two or more pre-existing entities, the new entity should obtain a new EIN. When an unincorporated 

area is incorporated, it becomes a separate entity and must obtain its own EIN.

See Publication 1635, Employer Identification Number, Understanding Your EIN, and About Form 8832, Entity 

Classification Election, for additional information on how to avoid common EIN problems.

Notify the IRS immediately if you change your business name or address. Write to the IRS office where you file your 

returns, using the Without a Payment address provided in the instructions for your employment tax return, to notify the IRS 

of any business name or address change. 

Form SSA-1945

State and local government employers must notify employees hired in jobs not covered by Social Security of the effects of 

the Windfall Elimination Provision and the Government Pension Offset. Section 419(c) of the Social Security Protection Act 

of 2004 requires newly hired public employees to sign Form SSA-1945, Statement Concerning Your Employment in a Job 

Not Covered by Social Security. This indicates they are aware of a possible reduction in their future Social Security benefit 

entitlement. For more detailed information about this law, see Chapter 7 or Form SSA-1945. 

Form W-2

An employer is responsible for furnishing Form W-2, Wage and Tax Statement, to each employee from whom income, 

Social Security or Medicare tax was withheld, or would have been withheld if the employee had claimed no more than one 

withholding allowance or had not claimed exemption from withholding on Form W-4, Employee’s Withholding Certificate. 

The aggregate amounts are reported on Form W-3, Transmittal of Wage and Tax Statements. 

Employers are required to send Copy A of Forms W-2 and W-3 to the Social Security Administration by January 31 of the 

following year for both paper and electronic forms. Employers must furnish Copy B to employees by January 31 of the 

following year. 
21

Employers who file 250 or more Forms W-2 must file them electronically. Statements may be furnished to employees 

electronically only if the employee affirmatively consents to it. See Publication 1141, General Rules and Specifications for 

Substitute Forms W-2 and W-3, for more information.

SSA’s Regional Employer Services Liaison Officers (ESLOs) provide assistance with filing Forms W-2 and other wage 

reporting questions. See ESLO or call 800-772-6270. Specifications for electronic reporting of Form W-2 information can 

be found at the SSA employer page.

Form 941

Form 941, Employer’s QUARTERLY Federal Tax Return, is used to report:

•	 Wages paid, 

•	 Federal income taxes withheld, 

•	 Both the employer’s and employees’ share of Social Security and Medicare taxes, and

•	 Additional Medicare tax withheld from employees. 

The IRS matches amounts reported on your four quarterly Forms 941 with Form W-2 amounts totaled on your Form W-3. If 

the amounts don’t agree, the IRS or SSA may contact you.

To prepare Form 941, the total wages and compensation for the quarter must be determined. Wage payments are included 

in the quarter in which they are paid. For example, an employee works for the county in a pay period ending on March 

20 but is not paid until April 5. In this situation, the employee’s wage payment is included in the second quarter when the 

payment is made, not the first quarter when the work was done. Special timing rules apply in determining when certain 

noncash fringe benefits are treated as paid. See Publication 15-B.

Total wages and compensation entered on line 2 of Form 941 include all payments to employees. Examples of these 

payments include:

1. Wages, salaries, commissions, fees and bonuses

2. Vacation allowances

3. Dismissal and severance pay

4. Tip income

5. Noncash payments, including goods, lodging, food, clothing or services

Wages from which Social Security and Medicare tax must be withheld may differ from total wages. This may be because 

certain amounts are not included in wages for income tax withholding purposes but are subject to Social Security and 

Medicare tax (for example, deferred compensation in a nonqualified deferred compensation plan). Another common 

reason for a difference in the totals is that earnings exceeding the annual wage base are not subject to the OASDI portion 

of Social Security tax. The total income tax withheld (line 3) includes all federal income tax withheld from all employees for 

the calendar quarter covered by the return.

Form 941 must be filed with the IRS by the last day of the month following the calendar quarter. For example, the first 

quarter return covering January through March is due by April 30. See the Instructions for Form 941 for additional 

information.

Form 944

Certain taxpayers with small payrolls (those whose annual liability for Social Security, Medicare and withheld federal 

income taxes is $1,000 or less) will file and pay these taxes only once a year instead of every quarter. The IRS will notify 

taxpayers when they must use Form 944, Employer’s ANNUAL Federal Tax Return. An employer may contact the IRS to 

request to file a quarterly Form 941 instead of a Form 944. See Revenue Procedure 2009-51. The deposit requirements, 

discussed below, are the same for annual and quarterly filers. For more information regarding this form, see Publication 15 

or the Instructions for Form 944.
22

Form 941-X and Form 944-X

Employers correct errors to Form 941 or 944 by filing Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return 

or Claim for Refund, or Form 944-X, Adjusted Employer’s ANNUAL Federal Tax Return or Claim for Refund. These forms 

are stand-alone returns that should be filed as soon as the error is discovered. The return for the period when the error is 

discovered is not affected. Additional requirements are discussed in the Instructions for Form 941 and Form 944, as well 

as in the Instructions for Form 941-X and Form 944-X. 

Form 945

Nonpayroll federal income tax withholding (reported on Forms 1099 and Form W-2G, Certain Gambling Winnings) must 

be reported on Form 945, Annual Return of Withheld Federal Income Tax. Separate deposits are required for payroll (Form 

941 or Form 944) and nonpayroll (Form 945) withholding. Nonpayroll items include:

•	 Pensions (including distributions from tax-favored retirement plans, for example, 401(k), 403(b) and governmental 

457(b) plans) and annuities

•	 Payments subject to backup withholding

•	 Gambling winnings

•	 Certain other payments, such as unemployment compensation and Social Security, subject to voluntary 

withholding

Multiple Employers and the Wage Base

Because each employer must withhold Social Security tax on wages up to the annual maximum, an employee who works 

for more than one employer in one calendar year may have excess Social Security taxes withheld. To get a refund of the 

excess Social Security tax withheld by the employers, the employee shows the overpayment on Form 1040, U.S. Individual 

Income Tax Return. Employers are not responsible for making any adjustments based on wages paid by other employers 

and cannot claim a refund in this situation, because each employer is responsible for withholding and paying Social 

Security tax on wages paid to each employee up to the wage base.

Special Reporting Situations for Government Employers

Medicare Qualified Government Employment 

As explained in Chapter 2, all employees hired after March 31, 1986, are subject to mandatory Medicare tax. Federal, state 

and local employers that provide coverage under a public retirement system may have employees who are not subject to 

Social Security but are subject to Medicare tax. This is referred to as Medicare Qualified Government Employment (MQGE).

MQGE Forms W-2 are filed separately from those for employees covered by Social Security and Medicare, or from Forms 

W-2 having no Social Security or Medicare wages. Paper MQGE Forms W-2 must be transmitted with a covering Form 

W-3 with “Medicare Govt. Emp.” checked in box b. See the Instructions for Forms W-2 and W-3. 

Employees Covered for MQGE and FICA

If they are employed in more than one capacity, some state and local employees may be subject to both Medicare-only 

withholding and full Social Security and Medicare in the same reporting year. When an employee is in a continuous 

employment relationship with the same employer for the year, and the employer has both types of employees, the 

employer has two reporting options: 

1. Prepare a single Form W-2 with the total annual wages in box 1, the total Medicare wages and taxes 

from BOTH positions in box 5 and box 6. Social Security and Medicare wages and taxes are entered 

in box 3 and box 4 (SSA prefers that this method be used to reduce errors), or 

2. Use a separate Form W-2 for wage data from the Medicare-only position and a second Form W-2 for 

FICA wage data from the positions with both Social Security and Medicare coverage. 
23

See SSA Specifications for Filing Forms W-2 Electronically (EFW2) for specifics on how to report these various employee 

wage situations. Special Situations - 2.5 – Government Employer, covers the situations discussed above. 

Information Reporting for Election Workers

If the compensation of an election worker is less than a statutorily established amount that is subject to an adjustment 

for inflation each year ($1,900 for 2020), it is generally not subject to mandatory Social Security and Medicare tax (IRC 

Sections 3121(b)(7)(F)(iv) and 3121(u)(2)(B)(ii)(V)). However, under a state’s Section 218 Agreement an election worker’s 

compensation may be subject to Social Security and Medicare taxes at a level below the statutory amount. In any case, 

compensation of election workers is not subject to income tax withholding.

If an election worker’s wages are subject to withholding of Social Security and Medicare tax, Form W-2 reporting is 

required for all compensation, regardless of the amount. If an election worker’s compensation is not subject to withholding 

of Social Security and Medicare tax, Form W-2 reporting is required for payments that aggregate $600 or more in a 

calendar year. 

See Election Workers: Reporting and Withholding and Revenue Ruling 2000-6 for more information.

Information Returns

Government entities must file with the IRS, and furnish to recipients, information returns for certain types of payments. In 

most cases, these payments are reported on Form 1099-MISC, Miscellaneous Income.

IRC Section 6041(a) states that all persons engaged in a trade or business and making payment in the course of the 

trade or business to another person of rent, salaries, wages, premiums, annuities, compensation, remuneration or other 

fixed and determinable gains, profits and income (with certain exceptions) of $600 or more in any year must furnish an 

information return indicating the amount of the income and the name and address of the recipient of the payment. 

Common payments that must be reported (payments of $600 or more) include services, rents, income payments, awards 

and prizes, and medical and health care payments. 

Payees for whom payments must be reported include individuals, partnerships, estates, trusts, and medical and legal 

service providers. 

Never use Form 1099-MISC to report payments for services by an employee. Only use Forms W-2 and W-3 to report 

compensation to employees. 

The Form W-9, Request for Taxpayer Identification Number and Certification, is used to get the payee’s correct name 

and taxpayer identification number by an individual or entity required to file information returns with the IRS. Obtain this 

information before payments are made. (See Backup Withholding, below.) Payments for nonemployee compensation are 

discussed in the Instructions for Form 1099-MISC.

Governments must file Form 1099-G, Certain Government Payments, for payments including:

•	 State or local income tax refunds

•	 Unemployment compensation

•	 Taxable grants

See the Instructions for Form 1099-G for more information. 

Taxpayers responsible for filing 250 or more information returns of any one type (for example, Form 1099-MISC) must file 

them electronically with the IRS. If a written statement to an information return recipient is required, it may be furnished 

to them electronically rather than by paper if the recipient consents affirmatively to that and the payer meets necessary 

requirements. For more details on electronic and other information return requirements, see the General Instructions for 

Certain Information Returns and Publication 1220, Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921, 

3922, 5498, and W-2G.
24

Backup Withholding

You generally must withhold 24% (starting in 2018, previously 28%) of certain taxable payments if the payee fails to furnish 

you with their correct TIN prior to payment. This withholding is referred to as “backup withholding” and is reported on Form 

945. Publication 15 provides additional information. 

Information Reporting Customer Service Site

You may call 866-455-7438 (toll-free), 304-263-8700 (toll call) or 304-579-4827 (TDD/TTY for persons who are deaf, hard 

of hearing or have a speech disability) to discuss your questions. You can also reach the center by email at mccirp@irs.gov. 

Don’t include TINs or attachments in email correspondence because electronic mail isn’t secure.

Depositing Taxes

In general, employers are required to deposit federal employment taxes (federal income tax withheld and both the 

employer and employee Social Security and Medicare taxes) if the total tax liability for Form 941 or Form 944 for the 

current or previous quarter (year for Form 944) is $2,500 or more. These taxes are required to be deposited using the 

Electronic Federal Tax Payment System (EFTPS). A balance due on the Form 941 or 944 of less than $2,500 is not 

required to be deposited; it may be paid with the return. For more information on using the EFTPS, see IRS Publication 

966, Electronic Federal Tax Payment System A Guide To Getting Started.

Deposit Requirements for Nonpayroll (Form 945) Tax Liabilities

Separate deposits are required for nonpayroll (Form 945) and payroll income tax withholding. Don’t combine deposits for 

Forms 941 (or Form 944) and Form 945 tax liabilities. 

The general deposit rules and dollar thresholds that apply to Form 941 also apply to Form 945. However, because Form 

945 is an annual return, the rules for determining your deposit schedule (discussed below) are different from those for 

Form 941. See the Instructions for Form 945 for more information.

When to Deposit

An employer will use either the monthly or the semiweekly schedule for depositing Social Security, Medicare and withheld 

income taxes. These schedules determine when a deposit is due after a tax liability arises (a payday). Before the beginning 

of each calendar year, employers must determine which of the two deposit schedules they must use. The deposit schedule 

used is based on the total tax liability reported on Form 941 during a four-quarter lookback period. The deposit schedule 

is not determined by how often employees are paid. To determine your payment schedule for Forms 941, 944 and 945, 

review Publication 15.

Calculating Federal Income Tax Withholding

Employers are generally required to withhold federal income tax from the wages paid to employees. The withheld amount 

is credited to the employees’ individual income taxes.

Each employee should submit a signed Form W-4 when employment begins. The amount of federal income tax withheld 

on an employee depends on five factors:

1. Payroll period;

2. Employee marital status, as shown on Form W-4;

3. Amount of wages;

4. Number of withholding allowances claimed by the employee on Form W-4; and

5. Additional amounts the employee requests to have withheld.
25

However, Form W-4 is revised annually. Future revisions of Form W-4 and Publication 15 may provide for a different 

procedure for determining the amount to withhold.

If a new employee doesn’t give you a completed Form W-4, withhold income tax by treating the employee as single 

with the number of withholding allowances provided for this situation in the current year’s revision of Publication 15. For 

2020, withhold income tax on employees who don’t give you a completed Form W-4 by treating them as single, with no 

withholding allowances.

Publication 15 contains the tax withholding tables and percentage tables to figure out how much to withhold. It also 

explains the procedure used in calculating withholding. 

Federal Unemployment Tax Act

The Federal Unemployment Tax Act (FUTA) provides a federal-state insurance system for workers who lose their jobs. 

Most private employers pay both a federal and state unemployment tax. State and local governments, including their 

political subdivisions are exempt from FUTA tax. However, state and local government employees, with certain exceptions, 

must be covered by state unemployment insurance. Contact your state employment or labor agency for more information.

Interest and Penalties

Tax that isn’t paid when due or in the manner required may be subject to civil penalties and interest on the amount due.

Employment Tax Penalties

The following are the most commonly assessed penalties related to employment tax. There are penalties for filing a return 

late and paying or depositing taxes late, unless there is reasonable cause.

IRC Section Penalty Assessed For Penalty Rates

6651(a)(1) Failure to file a tax return (failure to 

timely file)

5% of the tax due per month up to 25%

6651(a)(2) Failure to pay tax shown on the return 

(failure to timely pay) (imposed if the 

amount of tax shown on the return is 

not paid on or before the prescribed 

date)

0.5% (1/2 of 1%) of the tax due per month 

up to 25%

6651(c) Both failure to timely file and failure to 

timely pay

When both penalties apply for any month, 

the failure to file penalty is assessed at 

4.5%

6652(b) Failure to report tips Imposes a penalty for tip income 

unreported to the employer; the penalty is 

50% of the employee Social Security and 

Medicare tax on the unreported tip income
26

IRC Section Penalty Assessed For Penalty Rates

6656 Deposit penalties:

1-5 days late 2%

6-15 days late 5%

More than 15 days late, but paid by 

the 10th day after notice and demand 

(Notice and demand date is the 

assessment date)

10%

Taxes still unpaid after the 10th day 

following notice and demand

15%

Failure to deposit electronically 10%

6662 Underpayment of employment taxes 

due to disregard of the rules and 

regulations (accuracy-related)

20% of the underpayment attributable 

to negligence or disregard of rules and 

regulations

6672 Failure to withhold or pay over trust 

fund taxes

100% of unpaid tax (see below)

Trust Fund Recovery Penalty

To encourage prompt payment of withheld income and other employment taxes, IRC Section 6672 provides for the trust 

fund recovery penalty. These taxes are called trust fund taxes because the employees’ money is held in trust until a 

federal tax deposit is made in that amount. This penalty may be imposed on all persons the IRS determines is responsible 

for collecting, accounting for and paying over these taxes, and who acted willfully in not doing so. The penalty is the full 

amount of the unpaid trust fund tax.

A responsible person can be an officer, employee or volunteer. A responsible person also may include one who signs 

checks for the business or otherwise has authority to cause the spending of funds. Willfully means voluntarily, consciously 

and intentionally. A responsible person acts willfully if the person knows that the required actions are not taking place.

Information Reporting Penalties

The penalty rates and maximums for not filing correct information returns or not furnishing correct payee statements, 

including inflationary adjustments, are reflected at Increase in Information Return Penalties. 

Note that these penalties can be substantial amounts, and increased penalties can apply for certain failures in the case of 

intentional disregard.

Interest

Interest is assessed on any taxes due and unpaid, in addition to any penalties that may be imposed. However, the law 

allows an employer who has made an underpayment of Social Security and Medicare taxes or income tax withholding to 

make an interest-free adjustment (IRC Section 6205(a)(1)). The following requirements must be met:

1. Correction of the error must be made in the period in which the error was ascertained, and

2. Payment of the tax must be made no later than the due date of the return for the return period in 

which the error was ascertained. Additional tax due as a result of an IRS examination or ruling may 

qualify for an interest-free adjustment.

See Revenue Ruling 2009-39 for additional information about interest-free adjustments. 
27

Frequently Asked Questions

1. If board members are paid nominal amounts, for example, under $1,000 per year, must Social 

Security and Medicare taxes be withheld? 

Generally, yes. Elected and most appointed officials are employees of the public entity they serve 

and are generally subject to the withholding rules that apply to other workers. Withhold Social 

Security and Medicare taxes for any official who is either 1) covered under a Section 218 Agreement 

or 2) not a qualified participant in a public retirement system (also called a FICA replacement plan) 

and therefore subject to mandatory coverage. Any official elected or appointed after March 31, 

1986, is subject to Medicare. See Chapter 4 for more information on who is an employee. [IRS] 

2. What is the statute of limitations date for an adjustment or claim for refund of payroll taxes? 

The general rule is that an adjustment or claim for refund of any overpayment of federal payroll 

taxes must be filed within three years from the date the return was due or three years from the date 

it was filed, if that date is later. For this purpose, a Form 941 and Form 944 return for any calendar 

quarter is considered filed on April 15 of the following calendar year, if it's in fact filed by that date. 

[IRS]

3. What is the Social Security tax treatment of prison inmate labor? 

Generally, services performed by inmates, for the state or local political subdivision that operates 

the prison are excluded from Social Security coverage, whether or not performed outside the 

confines of the prison. Inmates usually are not in an employment relationship with the state or 

political subdivision. In general, services performed by inmates, as part of the rehabilitative and 

therapeutic program of the institution, are not usually performed as employees. Services performed 

by inmates for an entity other than the state or local governmental unit, for example a work-release 

program, may be covered if an employment relationship exists. The relevant factor for determining 

Social Security coverage is whether an employer/employee relationship exists between the inmate 

and the nongovernmental employer, not the place where the inmate is incarcerated. Services 

performed by inmates outside the institution for the same unit of government that operates it are 

considered performed in the institution. 

4. Are services of police officers and firefighters considered emergency services that are excluded 

from Social Security and Medicare coverage?

Police officers and firefighters are not considered emergency workers for purposes of the exclusion 

from Social Security and Medicare coverage for certain emergency workers. This exclusion applies 

only to services of an employee who was hired because of an unforeseen emergency to work in 

connection with that emergency on a temporary basis (for example, an individual hired to battle 

a major forest fire or to provide emergency assistance in other similar disasters such as volcano 

eruption, severe ice storm, earthquake or flood). Regular, long-term police and fire employees are 

not emergency workers for this purpose and subject to the same rules as other public employees to 

determine whether they are covered by Social Security. [IRS]

5. How are tax deposits made? 

Deposits of employment taxes must be made electronically. In some cases, employment taxes 

may be paid with the tax return if the amount of tax is below certain threshold and deposits are not 

required. See Publication 15, (Circular E), Employer’s Tax Guide. [IRS]
28

n Chapter 4

Determining Worker Status

I

t is critical for any entity paying compensation to know whether its workers are properly classified as employees or 

independent contractors. In some cases, workers may be designated as employees by a Section 218 Agreement. In other 

cases, workers may be defined as “statutory employees” or “statutory nonemployees” because specific laws address the 

occupation (see Publication 15-A for more information on these workers). In general, however, the determination of worker 

status is made by applying an established common-law standard that addresses the facts and circumstances concerning 

how the work is performed. Whether workers are employees has significant consequences for tax liability and reporting.

Generally, when workers are employees, the government entity that employs them must withhold and pay employment 

taxes and file employment tax returns. Employment taxes consist of federal income tax withholding, Old-Age, Survivors 

and Disability Insurance (OASDI or Social Security) tax and the Hospital Insurance (Medicare) tax. The Social Security 

and Medicare tax make up the Federal Insurance Contributions Act (FICA) contributions, which are paid through 

employer and employee shares. State and local governments generally pay the Social Security tax on employees covered 

under Section 218 Agreements and on employees not covered by a public retirement system (mandatory coverage), 

and generally pay the Medicare portion on all employees hired after March 31, 1986. Wages paid by state and local 

governments are not subject to taxes under the Federal Unemployment Tax Act (FUTA), but state unemployment taxes 

may apply.

When workers are independent contractors, the governmental entity may have information-reporting and backup 

withholding responsibilities, but it is not required to withhold and pay employment taxes on behalf of those workers.

This chapter deals with the general rules for determining whether workers are employees, and the laws that apply to 

different categories of public employment.

Workers Covered Under Section 218 Agreements

As discussed in Chapter 1, states can enter into agreements with SSA to provide Social Security and Medicare coverage 

for their employees pursuant to Section 218 of the Social Security Act (Section 218 Agreements). If a position is covered by 

a Section 218 Agreement, then anyone holding that position is an employee. Therefore, the first question for a government 

to ask about a worker’s status is whether the worker is in a position covered under a Section 218 Agreement. If Section 

218 Agreement coverage applies, this fact takes precedence over other considerations, including the common law tests 

discussed below and the mandatory coverage rules.

If you aren’t sure whether the Section 218 Agreement covers a specific position, contact your State Social Security 

Administrator (see NCSSA for a listing by state), or the SSA Regional Office for assistance. If a group of workers is covered 

under a Section 218 Agreement, the Agreement cannot be terminated or modified to exclude that coverage group.

Employees who are not covered under a Section 218 Agreement are generally subject to Social Security and Medicare 

unless they participate in a public retirement system that serves as a FICA replacement plan, discussed in Chapter 6. 

However, Medicare taxes generally apply to wages of all state and local government employees hired after March 31, 

1986. See Chapter 5 for further information.

See IRC Section 7871 for information on the treatment of Indian tribes as governments. Indian tribal governments are 

not treated as states for purposes of Section 218. However, the Tribal Social Security Fairness Act of 2018 provides 

information about Indian tribes wishing to offer Social Security coverage to tribal council members under Section 218A of 

the Social Security Act. For more information about Social Security coverage, Medicare and tribal governments, see the 

IRS Indian Tribal Governments website.
29

Common-Law Standard - Employee for Employment Taxes (FICA and Income Tax 

Withholding) 

For employment tax purposes, an employee is defined by IRC Section 3121(d)(2) as “any individual who, under the 

usual common law rules applicable in determining the employer-employee relationship, has the status of an employee.” 

The common law test for determining whether a worker is an employee is whether the service recipient (the government 

entity) has the right to direct and control the worker as to the manner and means of the worker’s job performance. In other 

words, does the entity have the right to tell the worker not only what will be done, but how it will be done? See Treas. Reg. 

Sections 31.3121(d)-1(c)(1) and 31.3401(c)-1(a).

In determining whether the person providing service is an employee or an independent contractor, all information that 

provides evidence of the degree of control and independence must be considered.

Facts that provide evidence of the degree of control and independence fall into three categories:

1. Behavioral: Does the company control or have the right to control what the worker does and how 

the worker does their job?

2. Financial: Are the business aspects of the worker’s job controlled by the payer? (These include 

things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, 

and so on.)

3. Type of Relationship: Are there written contracts or employee type benefits (for example, 

retirement plan, insurance, vacation pay)? Will the relationship continue and is the work performed a 

key aspect of the business?

All these factors must be weighed when determining whether a worker is an employee or independent contractor. Some 

factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent 

contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, 

and no one factor stands alone in making this determination. Also, factors that are relevant in one situation may not be 

relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to 

document each of the factors used in coming up with the determination.

Behavioral Control

Facts that fall under this category show whether the entity has a right to direct and control how the worker performs the 

specific task for which they are engaged. Many times, when workers perform their tasks satisfactorily, the entity does not 

appear to exercise much control. The critical question, however, is whether there is a right to control. If the entity has the 

right to do so, it isn’t necessary that it actually direct and control the manner in which the services are performed. 

The following considerations address the elements of behavioral control with respect to government employees: 

Instructions,

Training and

Required

Procedures

An employee is generally subject to the government entity’s instructions about when, 

where, and how to work. The employer has established policies, which the workers 

are required to learn and follow. Daily or ongoing instructions about the expected tasks 

are especially indicative of employee status. Training is a classic means of explaining 

detailed methods and procedures to be used in performing a task. Periodic or ongoing 

training about procedures to be followed and methods to be used indicates that the 

employer wants the services performed in a particular manner. This type of training 

is strong evidence of an employer-employee relationship. For instance, police officers 

and firefighters must be trained to comply with departmental rules and regulations. 

They don’t have the independence characteristic of independent contractors. Other 

examples of training that indicates employment include a state statute requiring 

that animal control officers receive state-sponsored training and a statute requiring 

that inspectors of sanitary facilities be trained and state-certified. These facts 

are indicative of a right to control. Election workers are trained to follow uniform 

procedures established for the polling place. They are directed by a supervisor.
30

These facts suggest they would typically be employees. Government employees 

often work subject to regulations and manuals, which specify how their jobs are to 

be done. Teachers are required to receive periodic training in departmental policies. 

They are required to attend meetings, to follow an established curriculum, to use 

certain textbooks, to submit lesson plans and to abide by departmental policies 

concerning professional conduct. However, some types of training or minimal 

instructions may be provided to either an employee or an independent contractor, 

including orientation or information sessions about a government entity’s policies and 

voluntary programs for which there is no compensation.

Government

Identification

Government workers may be required to identify themselves by wearing a uniform 

or driving a marked vehicle. When individuals represent themselves as agents of 

a government, that gives them an appearance of authority. Wearing a uniform, 

displaying government identification, or using forms and stationery that indicate one 

is representing a government are highly indicative of employee status.

Nature of

Occupation 

The nature of the worker’s occupation affects the degree of direction and control 

necessary to determine worker status. Highly-trained professionals such as doctors, 

accountants, lawyers, engineers or computer specialists may require very little, if any, 

instruction on how to perform their specific services.

Attorneys, doctors and other professionals can, however, be employees. In such 

cases, the entity may not train the individuals or tell them how to practice their 

professions, but may retain other kinds of control, such as requiring work to be 

done at government offices, controlling scheduling, holidays, vacations and other 

conditions of employment. Again, the government entity should consult state statutes 

to determine whether a professional position is statutorily created. On the other hand, 

professionals can be engaged in an independent trade, business or profession in 

which they offer their services to the public, including work for government entities. In 

this case, they may be independent contractors and not employees. In analyzing the 

status of professional workers, evidence of control or autonomy with respect to the 

financial details is especially important, as is evidence concerning the relationship of 

the parties as discussed below.

Evaluation 

Systems

Evaluation systems are used by virtually all government entities to monitor the 

quality of work performed. This isn’t necessarily an indication of employee status. In 

analyzing whether a government entity’s evaluation system provides evidence of the 

right to control work performance, consider how the evaluation system may influence 

the workers’ behavior in performing the details of the job. If there is a periodic, formal 

evaluation system that measures compliance with performance standards concerning 

the details, the system and its enforcement are evidence of control over the workers’ 

behavior.

Financial Control

This second category includes evidence of whether the entity controls the business and financial aspects of the workers’ 

activities. Employees do not generally have the risk of incurring a loss in the course of their work, but generally receive 

a salary for as long as they work. An independent contractor has a genuine possibility of profit or loss. Facts showing 

possibility of profit or loss include significant investment in equipment, tools or facilities; unreimbursed expenses, including 

the requirement to provide materials or hiring helpers; working by the day or by the job rather than on a continuous basis; 

having fixed costs that must be paid regardless of whether the individual works; and payment based on contract price, 

regardless of what it costs to accomplish the job.
31

The following considerations address the elements of financial control:

Method of 

Payment

The method of payment must be considered. An individual who is paid a contract price, 

regardless of what it costs to accomplish the job, has a genuine possibility of profit or loss 

and, therefore, would not generally be considered an employee. An individual who is paid 

by the hour, week or month is typically an employee. However, this is not always the case; 

for example, independent contractor attorneys usually bill by the hour. An individual who 

is paid by the unit of work, such as a court reporter, may or may not be an independent 

contractor, depending on the facts.

Offering 

Services 

to the 

Public

Another factor favoring independent contractor status exists when the individual makes 

their services available to the public or a relevant segment of the market. Relevant 

questions that address this issue include:

• Does the individual advertise?

• Does the individual use a private business logo?

• Does the individual maintain a visible workplace?

• Does the individual work for more than one entity?

Corporate 

Form of 

Business

If the individual is incorporated and observes corporate formalities associated with this 

status, this makes it unlikely that they are an employee of the government entity. (A 

corporate officer will be an employee of the corporation.) The mere fact of incorporation or 

use of a corporate name, however, does not transform an employee into an independent 

contractor. The corporation must serve an intended business function or purpose, or be 

engaged in business.

Part-Time 

Status

The fact that workers work on a part-time or temporary basis, or work for more than one 

entity, does not make them independent contractors. A part-time, temporary or seasonal 

worker may be an employee or an independent contractor under the common-law rules. 

Relationship of the Parties

The third category used to determine worker status is evidence of the relationship between the parties, including how 

they view their relationship. The relationship of the parties is generally evidenced by examining the parties’ agreements 

and actions with respect to each other, paying close attention to those facts that show not only how they perceive their 

relationship, but also how they represent their relationship to others.

For example, the intent of how the parties perceive their relationship may be expressed in a written contract. A written 

agreement describing the worker as an independent contractor is evidence of the parties’ intent, and in situations where it 

is unclear whether a worker is an independent contractor or employee, the intent of the parties, as reflected in the contract, 

may resolve the issue.

However, a contractual designation, in and of itself, is not sufficient evidence for determining worker status. The facts and 

circumstances under which a worker performs services are determinative. The substance of the relationship, not the label, 

governs the worker’s status (Treas. Reg. 31.3121(d)-1(a)(3)). The following items may reflect the intent of the parties:

•	 Filing a Form W-2 or withholding payroll taxes for an individual indicates the entity’s belief that the worker is an 

employee.

•	 A worker doing business in corporate form, with observance of corporate formalities, indicates the worker is not 

an employee of the government entity.

•	 Providing employee benefits, such as paid vacation, sick days and health insurance, is evidence that the entity 

regards the individual as an employee. The evidence is strongest if the worker is provided with benefits under a 

tax-qualified retirement plan, Section 403(b) annuity or cafeteria plan because, by statute, these benefits can be 

provided only to employees.
32

The following are other considerations in evaluating the elements involving the relationship of the parties:

Discharge or

Termination

The circumstances under which a business and a worker can terminate their 

relationship have traditionally been considered useful evidence concerning the 

status of the worker. However, business practices and legal standards governing 

worker termination have changed since these general principles developed. Under a 

traditional analysis, a government entity’s ability to terminate the work relationship at 

will, without penalty, provided a highly effective method to control the worker. The ability 

to fire at will is indicative of employee status. In the traditional independent contractor 

relationship, the government entity could terminate the relationship only if the worker 

failed to provide the intended product or service, thus indicating that the business did 

not have the right to control how the work was performed. In the current environment, 

however, a government entity rarely has complete flexibility in discharging employees. 

The reasons a government entity can terminate an employee may be limited by law, by 

contract, or by its own practices. Consequently, inability to freely discharge a worker, 

by itself, no longer constitutes persuasive evidence that the worker is an independent 

contractor.

Termination of 

Contracts

Historically, a worker’s ability to terminate work at will was considered to illustrate 

that the worker merely provided labor and tended to indicate an employer-employee 

relationship. In contrast, if the worker terminated work, and payment could be 

refused, or the worker could be sued for nonperformance, this traditionally tended 

to indicate an independent contractor relationship. Today, however, it is more 

common that independent contractors may enter short-term contracts for which 

nonperformance remedies are inappropriate, or may negotiate limits on their liability 

for nonperformance. For example, professionals, such as doctors and attorneys, are 

typically able to terminate their contractual relationship without penalty. Accordingly, the 

worker’s protection from liability for terminating the relationship does not necessarily 

indicate employee status.

Nonperformance 

of Employees

Employers may successfully sue employees for substantial damages resulting from 

their failure to perform the services for which they were engaged. As a result, the 

presence or absence of limits on a worker’s ability to terminate the relationship, by 

itself, is less relevant in determining worker status. On the other hand, a government 

entity’s ability to refuse payment for unsatisfactory work continues to be characteristic 

of an independent contractor relationship. Because the meaning of the right to 

discharge or terminate is so often unclear, and depends primarily on contract and labor 

law, these facts should be viewed with great caution.

Permanency The permanency of the relationship between the worker and service recipient 

is somewhat relevant to determining whether there is an employer-employee 

relationship. If a worker is engaged with the expectation that the relationship will 

continue indefinitely, rather than for a specific project or period, this is generally 

considered evidence of intent to create an employment relationship. However, a longterm relationship may also exist between a government entity and an independent 

contractor. There may be a long-term contract, or contracts may be renewed regularly 

due to superior service, competitive costs or lack of alternative service providers. 

Part-time, seasonal or temporary workers may also be employees under the common 

law. The fact that workers do not have full-time, permanent status is irrelevant to their 

classification.
33

Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes 

and Income Tax Withholding

In difficult cases, the IRS can provide a determination as to whether a worker is an employee or an independent contractor. 

To obtain a determination from the IRS, file Form SS-8. Either a governmental entity or a worker may submit Form SS-8. The 

IRS will acknowledge receipt of the form and will request information from the other party. If a contract has been executed 

between the worker and the entity, a copy of the contract should be submitted with Form SS-8. In some cases, the State 

Social Security Administrator may help determine whether the entity and position are covered by a Section 218 Agreement. 

The IRS will generally issue a formal determination to the entity and will send a copy to the worker.

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

years previously examined.

Classification Issues Involving Government Employees

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

Elected Officials and Officers

Under IRC Section 3401(c), an officer, employee or elected official of a state or local government is an employee for 

income tax withholding purposes. Thus, by federal statute, public officers are specifically included within the term 

“employee” for income tax withholding purposes (and conversely are not “independent contractors” for income tax 

withholding purposes). Treas. Reg. 31.3401(c)-1(a) clarifies the officers or employees can either be elected or appointed.

For Social Security and Medicare purposes, elected officials (also referred to as individuals in elective positions) are 

subject to a degree of control that typically makes them employees under the common law, and therefore subject to these 

taxes. Elected officials are responsible to the public, which has the power to vote them out of office. Elected officials may 

also be subject to recall by the public or a superior official. Very few elected officials have sufficient independence to be 

considered independent contractors. 

Public Officer or Official

The term “public officer” refers to someone who has authority to exercise the power of the government and does so as an 

agent and employee of the government. The Internal Revenue Code does not define the term “public officer,” but Treas. 

Reg. Section 1402(c)-2(b), addressing self-employment tax, provides that holders of “public office” are not in a trade or 

business and are therefore not subject to self-employment tax. Rather, an individual recognized as a “public officer” is an 

employee. 

An exception to this rule applies for certain public officials paid solely on a fee basis (see Chapter 5). 

The Treas. Reg. give the following examples of positions that constitute “public office”:

•	 Governor

•	 Mayor

•	 Member of a legislature or elected representative (elective office)

•	 County commissioner

•	 State or local judge, or justice of the peace

•	 County or city attorney

•	 Marshal, sheriff, constable

•	 Registrar of deeds

•	 Tax collector or tax assessor

•	 Road commissioners

•	 Members of boards and commissions, such as school boards, utility districts, zoning boards and boards of health
34

It may not always be clear whether a worker holds public office. In Metcalf & Eddy v. Mitchell, 269 U.S. 514 (1926), the 

U.S. Supreme Court addressed the definition of an officer. The Court ruled that an office is a public station conferred by 

the appointment of a government. The term “officer” includes the idea of tenure, duration, emolument and duties fixed by 

law, and where an office is created, the law usually determines its term, duties and compensation. In Buckley v. Valeo, 424 

U.S. 1 (1975), the Supreme Court stated that anyone who exercises significant authority pursuant to the laws of the United 

States is an officer. The term “officers” embraces all appointed officials exercising responsibility under the public laws of the 

nation. Officers perform a significant governmental duty exercised pursuant to a public law and administer and enforce the 

public law. 

If there is some question as to whether a worker is a public officer and employee, a critical factor to consider is whether 

there is a provision of the state constitution or a statute establishing the position. State statutes should be reviewed to 

determine whether they establish enough control for the individual to be classified as an employee under the commonlaw test. A statute may state that a specific position is that of a public official, in which case there is likely to be a right to 

control sufficient to make the individual an employee. Statutes may also specify the duties of a public office and generally 

establish the officer’s superiors and subordinates, if any. Statutes establish an official’s term of office and sometimes the 

compensation. They may require that a public official take an oath of office. Statutes often establish general and specific 

penalties for dereliction of duty. For instance, members of boards who are paid for each meeting they attend may face 

termination if they fail to attend a certain number of meetings.

Example: State A establishes the position of city attorney by statute and indicates that the position holder is an 

officer and an employee. This statute defines the duties of the position. The city attorney is required to direct all 

litigation in which the city is a party, including prosecution of criminal cases; to represent the city in all legal matters 

in which the city or a city officer is a party; to attend meetings of the commissioners, advise commissioners, 

mayors, and so on on all legal questions; and approve all contracts and legal documents. A city manager appoints, 

supervises and controls the work of the city attorney. The city attorney must take an oath of office. These facts 

show the importance of state statutes in establishing a right of direction and control over a public official and thus 

classifying the individual as a common-law employee.

Home Care Service Recipients

A home care service recipient (HCSR) is an individual who receives home care services while enrolled in a program 

administered by a federal, state or local government agency that provides funding for that individual’s home care services. 

Home care services include health care and personal attendant care services rendered to the HCSR. Generally, the HCSR 

is considered the employer of the service provider under the common-law rules. The provision of home care services 

generally constitutes household employment.

The HCSR may request that the IRS authorize, under Section 3504, an agent to act on their behalf to withhold, report and 

pay the federal employment taxes for the workers who provide home care services. See Revenue Procedure 2013-39 and 

Form 2678, Employer/Payer Appointment of Agent. Special rules apply when a state or local government agency acts as 

the Section 3504 agent. A state or local government agency acting as a Section 3504 agent on behalf of an HCSR files 

an aggregate Form 941 and aggregate Form 940, attaching Schedule R (Form 941), Allocation Schedule for Aggregate 

Form 941 Filers, and Schedule R (Form 940), Allocation Schedule for Aggregate Form 940 Filers. Agencies must have an 

employer identification number separate from the one used to report taxes of its own employees for this purpose. The state 

agent may engage a reporting agent or subagent to perform the reporting and payment of employment taxes that the state 

agent would otherwise perform on behalf of the service recipient. 

Volunteer Firefighters

Compensation paid in an employer-employee relationship is taxable wages (unless an exclusion applies), regardless of 

whether the workers are termed “volunteers.” In some cases, rather than receive salaries, firefighters may receive amounts 

intended to reimburse them for expenses. They may also receive other cash or in-kind benefits that may be wages. Unless 

these reimbursements are paid under an accountable plan, discussed in Chapter 3, these reimbursements are taxable as 

wages.
35

Amounts that are termed “reimbursements” but are not paid under an accountable plan are treated as wages and subject 

to income, Social Security and Medicare taxes.

Therefore, a per diem or fixed amount paid to a firefighter (or other worker), that does not reimburse actual, documented 

expenses, is includible in income and subject to income tax withholding, Social Security and Medicare.

The services of volunteers are generally not eligible for the exclusion from FICA for emergency workers, discussed in 

Chapter 5. IRC Section 3121(b)(7)(F)(iii) provides that services performed by employees on a temporary basis in the case 

of fire, storm, snow, earthquake, flood or other similar emergency are exempt from employment. Firefighters who are on 

call and work part-time or intermittently do not qualify for the emergency worker exclusion. This exception applies only for 

temporary workers who are hired because of an unforeseen emergency.

Medical Residents

Medical residents are generally common-law employees of the hospitals for which they work, and therefore are subject 

to Social Security and Medicare taxes (unless they are excepted by a Section 218 Agreement). IRC Section 3121(b)(10) 

provides an exception for students employed by a school, college or university (SCU) who are enrolled and regularly 

attending classes at the SCU. However, this exception is not available to full-time employees. Under Treas. Reg. Section 

31.3121(b)(10)-2(d)(3)(iii), an employee whose normal work schedule is 40 hours or more per week is always considered a 

full-time employee. Therefore, medical residents generally do not qualify to exclude payments for their services from Social 

Security and Medicare taxes.

Identity of the Employer for Tax Purposes

In certain cases, it is clear that the work in question is performed by employees, but it may not be clear which of two or 

more entities, organizations or individuals is the employer. This situation may arise when workers are supplied or paid by 

one entity but work under the direction of another (for example, leased workers).

The term “employer” is defined in IRC Section 3401(d), for income tax withholding and reporting purposes, as the person 

for whom an individual performs any service, of whatever nature, as an employee. However, an exception is provided if the 

person for whom the individual performs the services does not have control of the payment of the wages. In this situation, 

the term “employer” means the person having legal control of the payment of the wages except for purposes of the 

definition of wages under Section 3401(a) (IRC Section 3401(d)(1) and Treas. Reg. Section 31.3401(d)-1(f)). In the situation 

where there is an employer under Section 3401(d)(1), there are three parties for employment tax purposes: (1) the 

employee, (2) the employer under Section 3401(d)(1) (also known as a Section 3401(d)(1) employer) and (3) the employer 

under the common law rules (the common law employer).

When a question is raised about the identity of the employer, all facts relating to the employment must be considered. If 

there is any provision in a statute or ordinance that authorizes the employment by a government entity of the individual, 

and the individual is hired under this authority, the individual is generally an employee under the common law rules of 

that governmental entity. Any statutory provisions relating to the relationship should be reviewed. If there is no statutory 

authority, the identity of the employer must be determined under the common law control test. 

If an entity is a Section 3401(d)(1) employer with respect to payments of wages to an employee, that employer under 

Section 3401(d)(1) is liable for the payment of employment taxes on the wages. However, the determination of whether 

the remuneration paid the employee is wages under Section 3121(a) for Social Security or Medicare purposes and wages 

under Section 3401(a) for income tax withholding purposes is made with respect to the common law employer. Thus, for 

example, a Section 3401(d) employer who is paying wages to employees on behalf of two or more common law employers 

cannot aggregate employees’ wages for purposes of calculating the wage base for taxes under FICA and FUTA. See 

Cencast Services, L.P. v. United States, 729 F.3d 1352 (Fed. Cir. 2013). 
36

Employee Status for Other Purposes

A state or federal agency may make determinations of employee status for workers’ compensation, minimum wage 

or other purposes. The state or federal agency may apply different standards from those used to determine worker 

classification for federal employment tax purposes. Characterizations of individuals as employees based on state or nontax laws should be weighed with caution, and in some cases disregarded, because the laws or regulations involved may 

use different definitions of an employee for their purposes.

Independent Contractor Reporting Responsibilities

Independent contractors are subject to the taxes imposed under the Self-Employment Contributions Act (SECA). Taxes 

imposed under the SECA are usually referred to as self-employment tax, or SECA tax, to distinguish from the Social 

Security taxes and Medicare taxes under the FICA that apply in the case of employment. Generally, payments to 

independent contractors of $600 or more during a calendar year must be reported on Form 1099-MISC. Independent 

contractors are required to provide a taxpayer identification number to the entity that pays them. Form W-9 contains the 

required certification and can be used for this purpose.

For more information about requirements for information reporting to independent contractors, see the Instructions for 

Form 1099-MISC. Workers who have been treated as independent contractors but are later determined to be employees 

will need to file amended returns if they reported income on Form 1040, Schedule C, and calculated self-employment 

tax (SECA) on Schedule SE. A worker in this situation should use Form 8919, Uncollected Social Security and Medicare 

Tax on Wages, to figure and report the employee share of Social Security and Medicare taxes imposed under the FICA. 

Entities that misclassify employees as independent contractors may be held liable for back taxes, penalties and interest.

Worker Providing Services as an Employee and as an Independent Contractor

Individuals who are employees for some services may not be employees for other services they provide. For example, a 

teacher may be retained to remove snow from school property. This individual may be an employee as a teacher but an 

independent contractor for the snow-removal activity. Apply the common law rules separately to each activity to establish 

whether it is an independent trade or business.

Revenue Ruling 58-505 explains that for an individual to work in two capacities (employee and contractor), the services 

must not be interrelated. Stated differently, an individual does not work in two capacities when the same type of work, such 

as legal services, is divided into two components, one in an employee capacity and one in an independent contractor 

capacity. The services and remuneration for the two activities must be separate.

Section 530 Relief

State and local government entities under examination by the IRS may be entitled to relief from employment tax for certain 

workers under Section 530 of the Revenue Act of 1978 (Section 530). If applicable, Section 530 terminates an entity’s 

federal employment taxes, including Social Security and Medicare, income tax withholding and any penalties attributable 

to the liability. See Revenue Procedure 85-18. This relief is not available for services covered by a Section 218 Agreement.

If the requirements for Section 530 relief are met, but the services are covered by a Section 218 Agreement, the entity 

may obtain relief from liability for income tax withholding for prior years. However, Section 530 relief from income tax 

withholding will not apply with respect to wages paid after the date on which the entity is advised that the workers are 

covered under a Section 218 Agreement. This is because the entity would have begun withholding FICA taxes, which 

constitutes treatment of the workers as employees. See Revenue Procedure 85-18, section 3.03(C) and 3.04.

Section 530 provides relief for an entity that treated workers as nonemployees if the entity had a reasonable basis for the 

classification and acted consistently on that basis. To qualify for Section 530 relief, the entity must have a reasonable basis 

for treating the worker as an independent contractor. Section 530 provides three safe harbors for satisfying the reasonable 

basis requirement:
37

1. Published ruling or judicial precedent;

2. Prior IRS examination of the taxpayer (if after 1996, the examination must have included a review of 

worker classification); or

3. Longstanding recognized practice of a significant segment of the industry. Alternatively, an entity may 

establish some other reasonable basis. For more information, see Revenue Procedure 85-18.

In addition, the entity must:

1. Have filed all federal tax returns (including information returns) on a basis consistent with treatment of 

the worker as a nonemployee; and

2. Not have treated the worker, or any other worker in a substantially similar position, as an employee.

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

Section 530?

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

was extended indefinitely in 1982.

Tax Consequences for Workers

In some cases, a government entity may be entitled to relief under Section 530, but workers find, through a determination 

letter or some other means, that they have been misclassified and are employees under the common law. Section 530 

does not extend employment tax liability relief to workers. It does not convert them from employees to independent 

contractors. Misclassified employees remain liable for the employee share of Social Security and Medicare taxes rather 

than for SECA (self-employment) tax. (See Form 8919 for this computation.) If the workers have been filing income tax 

returns as independent contractors, they should file amended returns for years for which the statute of limitations is open. 

As employees, they are not entitled to deduct unreimbursed business expenses on Schedule C. Because these Section 

530 relieved employers are entitled to continue treating these workers as independent contractors, the workers will not be 

subject to income tax, Social Security or Medicare withholding and will generally have to make estimated tax payments to 

cover their tax liabilities. Information provided in Notice 989, Commonly Asked Questions When IRS Determines Your Work 

Status is “Employee”, although not written specifically to Section 530 employees, provides information for filing their income 

tax returns or amended returns. Please note, however, that not all references of Notice 989 are applicable, for example, the 

Section 530 employer will not be liable to provide a corrected Form W-2 in in this situation. 

Frequently Asked Questions

1. What are the consequences of misclassifying a worker? 

Generally, when an employer erroneously classifies an employee as an independent contractor and 

does not withhold federal payroll taxes, the employer is liable for the employer and employee shares 

of all applicable federal payroll taxes, as well as penalties and interest. [IRS]

2. What do you do if you cannot determine whether a worker is an employee? 

The state or local entity or the worker can request a formal determination by submitting to the IRS 

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

Tax Withholding. The IRS will review the facts and circumstances and officially determine the 

worker’s status. [IRS]

3. Are volunteers considered employees? 

The common law tests apply to determining the status of individuals regardless of whether they are 

deemed “volunteers.” If an individual considered a volunteer meets the common law tests, any form 

of compensation or benefit they receive is considered wages, unless a specific exception applies. 

[IRS]

4. What effect does the presence of a Section 218 Agreement have on worker status? 

If an existing Section 218 Agreement classifies a position as that of an employee covered by the 

Agreement then an individual in that position is an employee, subject to FICA and income tax 

withholding; the common law tests are not considered. Positions not covered by a Section 218 

Agreement should be evaluated under the common law tests. [SSA/IRS]
38

n Chapter 5

Social Security and Medicare Coverage

As discussed in Chapter 3, cash or noncash compensation for services is subject to income, Social Security and Medicare taxes unless certain exceptions apply. In addition, state and local employees may be exempted from Social 

Security (and in some cases, Medicare) taxes based on coverage under a public retirement system. A public employee 

may be covered for Social Security and Medicare, Medicare only, or may be exempt from both. The flowchart in Chapter 1, 

illustrates the process for determining the Social Security and Medicare coverage that applies to an employee. This 

chapter addresses various categories of employees and rules by which coverage is established, including the process for 

obtaining coverage under a Section 218 Agreement. As a supplement to the Social Security coverage information provided 

in this publication, refer to the SSA State and Local Government Employers page. Additional information is also available 

at IRS.gov/FSLG.

 All state and local government employees fall into one of three categories with respect to Social Security:

1. Section 218 Agreement coverage (also called voluntary coverage). These employees are 

covered for Social Security by a voluntary (coverage is requested by the state) Section 218 

Agreement between the state and the SSA. They may or may not participate in a public retirement 

system. 

2. Mandatory Social Security coverage. After July 1, 1991, employees are required to be covered for 

amounts deemed to be wages unless they are covered by a Section 218 Agreement or are members 

of a qualifying public retirement system. 

3. No Social Security coverage. These employees are not covered by a Section 218 Agreement but 

are covered by a qualifying public retirement system and, therefore, exempt from mandatory Social 

Security. 

Each of the three categories of employees is discussed below.

Employees Under Section 218 Agreement Coverage

State and local government employees can be covered for Social Security and Medicare through a Section 218 Agreement 

between the state and the SSA. This agreement may provide coverage for any of the following:

•	 Groups of employees in positions covered by a retirement system.

•	 Groups of employees in positions not covered by a retirement system.

•	 Employees in positions that are excluded from mandatory coverage provisions but are optional exclusions under 

Section 218 Agreements (for example, student services).

•	 Medicare Hospital Insurance (HI)-only coverage for employees hired prior to April 1, 1986, who are members of a 

public retirement system.

Each state’s original agreement incorporates the basic provisions, definitions and conditions for coverage. Only the State 

Social Security Administrator can initiate a request for Section 218 Agreement coverage on behalf of an entity in the state. 

Additional coverage can be provided by modifications. Each modification, like the original agreement, is binding on all 

parties.

To establish an agreement, authority must exist under state law (state enabling legislation) to enter into an agreement 

and to extend coverage under an agreement. The types and extent of coverage provided under an agreement must be 

consistent with federal and state laws.

State and local government employees who are covered under an agreement have the same benefits, rights and 

responsibilities as employees who have mandatory Social Security coverage. The cost to the employer of providing Social 

Security protection for state and local government employees is the same as that for employees in mandatory coverage.
39

Coverage under an agreement must be provided for groups of employees. An agreement may be modified to increase, but 

not to decrease, the extent of coverage. (An exception applies to election worker services and solely fee-based positions; 

see Optional Section 218 Exclusions, below.)

The effective date of coverage is the date specified by the state for coverage to begin. See SL 30001.375: Effective Dates 

of Coverage.

Important: The Internal Revenue Code limits the statutory period of assessment and collection of taxes to the three-year 

period after the tax return for a particular year was filed. This can come into conflict with SSA’s Section 218 effective date of 

retroactivity when a state or local government seeks a retroactive modification to a Section 218 agreement covering a fiveyear period. Thus, SSA can only process and approve any modification to a Section 218 Agreement requesting a period 

of coverage in excess of the three years beyond the statutory period for FICA tax collection if the taxpayer agrees that it 

will execute a closing agreement with the IRS. See SL 40001.420: Modifications to the Agreement for more information on 

closing agreements. 

Termination of Agreements

Before legislation was enacted in 1983, states could terminate coverage for any group of employees covered under the 

state’s Section 218 Agreement. A state did this by providing a two-year advance notice to the federal government. Once 

it was terminated, the coverage for this group of employees could not be reinstated. The Social Security Amendments of 

1983 rescinded this provision and prohibited states from terminating coverage on or after April 20, 1983, but permitted 

states to cover again any group terminated before this date.

Coverage Groups

Coverage under Section 218 Agreements can be extended only to groups of employees, referred to as coverage groups. 

Once an employee position is covered under a Section 218 Agreement, any employee filling that position is a member of 

the coverage group for Social Security and Medicare. There are two types of coverage groups: (1) an absolute or nonretirement coverage group (employees not in a retirement system) and (2) a retirement system coverage group. Each state 

decides, within federal and state law, which groups to include under its agreement and when their coverage begins. The 

state can choose to cover non-retirement system groups, retirement system groups or both.

Absolute Coverage Groups (Non-Retirement System Groups)

An absolute coverage group includes the services of employees in positions not covered by a retirement system, except 

those whose services are mandatorily or optionally excluded from Social Security and Medicare coverage. They may also 

be referred to as non-retirement system groups or Section 218(b)(5) groups. A state may extend Section 218 Agreement 

coverage to an absolute retirement system group without considering the desires of the employees. An absolute coverage 

group may consist of any of the following:

•	 All employees of a state engaged in performing services in connection with governmental (nonproprietary) 

functions

•	 All employees of a state engaged in performing services in connection with a single proprietary (other than 

governmental in nature) function 

•	 All employees of a political subdivision of a state engaged in performing services in connection with 

governmental (nonproprietary) functions

•	 All employees of a political subdivision of a state engaged in performing services in connection with a single 

proprietary (other than governmental in nature) function

•	 Certain civilian employees working with the National Guard of a state

•	 Individuals employed under an agreement between a state and the United States to perform services as 

inspectors of agricultural products
40

Retirement System Coverage Group

A retirement system coverage group consists of employees working in positions covered by a public retirement system 

(also called a FICA replacement plan), as provided in Section 218(d)(4) of the Social Security Act (Act). This group may be 

provided Social Security and Medicare coverage under an agreement only if approved by a referendum. The Act gives the 

state the option, for referendum purposes, of breaking down a retirement system into its components. If a retirement system 

covers positions of employees of one or more political subdivisions of the state, the state may hold a referendum for:

1. All employees in positions under the retirement system,

2. State employees in positions under the system,

3. Employees of one or more political subdivisions in positions under the system,

4. Any combination of the groups in 2 and 3,

5. Employees of a hospital that is an integral part of a political subdivision,

6. Employees of two or more hospitals (each hospital must be an integral part of the same political 

subdivision), or

7. Employees of each institution of higher learning.

The referendum for retirement system employees is conducted either on a majority vote basis (allowed in all states) or on 

a divided system basis (allowed in certain states).

Majority Vote Referendum

Under this type of referendum, Social Security and Medicare coverage may be extended to employees in positions 

covered by a retirement system only if a majority of the eligible employees vote in favor of the coverage. A majority of 

all the eligible employees under the system (not a majority of the eligible employees casting votes) must vote in favor 

of coverage. All states are authorized by federal law to use the majority vote referendum procedures. Although the 

referendum itself is a state matter, federal law requires that the following conditions be met to establish coverage:

1. Eligible employees are given not less than 90 days notice of the referendum

2. An opportunity to vote is given and limited to eligible employees who were in an employment 

relationship with the employer both on the date the notice was given and on the date the referendum 

is held

3. The referendum is held by secret ballot

4. The referendum is supervised by the governor (or designee)

5. A majority of the retirement system’s eligible employees vote for coverage

Divided System Retirement Referendum

In addition to the majority vote referendum procedure, certain states and all interstate instrumentalities are authorized 

to divide a retirement system based on whether the employees in positions under the retirement system want coverage. 

Under the divided vote referendum, only those employees who vote “yes” and all future employees who become members 

of the retirement system will be covered. Members who vote “no” are not covered as long as they maintain continuous 

employment in a position within the same public retirement system coverage group.

The states having this authority under Section 218(d)(6)(c) of the Act are:

Alaska 

California 

Connecticut 

Florida 

Georgia 

Hawaii

Illinois 

Kentucky 

Louisiana 

Massachusetts 

Minnesota 

Nevada

New Jersey 

New Mexico 

New York 

North Dakota 

Pennsylvania 

Rhode Island

Tennessee 

Texas 

Vermont 

Washington 

Wisconsin 
41

These “divided vote” states may choose between a divided system vote and a majority vote referendum.

States authorized to use the divided vote retirement system referendum to extend coverage may use either of two voting 

procedures:

1. Simplified One-Step Method: Poll all eligible members and divide the system into two parts, with 

each member placed in either the “Yes” or “No” group based on their choice (simplified one-step 

referendum), or

2. Original Two-Step Method: Subdivide the retirement system into two parts or systems – “Yes” 

and “No” groups – based on each individual member’s choice and then, after the individuals are 

separated based on this preference, conduct a majority vote referendum among the “Yes” group. 

These individuals can then change their original poll vote.

The conditions for a divided vote referendum are the same as those given for the majority vote referendum with two 

exceptions: (1) the ballots are not secret because the individuals choosing coverage must be identified and (2) the 

individual must be in an employment relationship and a member of the retirement system when the vote is held (but not 

necessarily when the referendum notice was given).

At the discretion of the state, employees who become members of the retirement system after the referendum (division) 

date and before the execution of the modification extending coverage to the retirement system coverage group may be 

given a choice to receive coverage.

The referendum procedures must be conducted under the direction of the State Social Security Administrator.

Continuation of Coverage Rules

Once coverage is provided for state and local government employees, it generally continues unless an event occurs that 

results in termination of the coverage, such as a change in employer. The continuation rules are applied for each type of 

coverage group as follows:

Absolute Coverage Group: Social Security and Medicare coverage for non-retirement system groups continues as long 

as the continuing governmental entity exists. This is true even if the positions are later placed under a retirement system. 

(This provision includes police and firefighter positions that were first covered as an absolute coverage group.)

Majority Vote Retirement System Group: Following a favorable majority vote referendum, services under the retirement 

system, including positions brought under the retirement system in the future, are compulsorily covered for Social Security 

under the state’s Section 218 Agreement. Social Security and Medicare coverage will continue as long as the continuing 

governmental entity exists, even though the positions are later removed from under the retirement system, the system is 

abolished or the positions are placed under an additional retirement system.

Divided Vote Retirement System Group: If the use of the original two-step referendum results in a favorable majority, 

then the entire “Yes” group and all future members of the retirement system are covered.

As a result of the simplified one-step referendum all those retirement system members who voted “Yes” and all future 

retirement system members are covered for Social Security. If all current retirement system members vote against Social 

Security coverage (the “No” group), then only future retirement system members will be covered for Social Security and 

make up the “Yes” group.

Under a divided retirement system, employees carry the “No” or “Yes” vote with them if they transfer to another position 

within the same retirement system coverage group.

Social Security coverage is not terminated because the positions are later covered under an additional retirement system.

If the divided vote retirement system is later abolished or positions are removed from coverage under it, the “Yes” group 

(those employees who voted “Yes” in the referendum and those subsequently hired retirement system members) continue 

to be covered for Social Security. New employees hired into positions after the removal from, or abolishment of, the former 
42

retirement system, are not covered for Social Security because they would not be considered new members of that former 

retirement system.

Section 218 Coverage Exclusions

When a state or local government entity voluntarily enters into the state’s Section 218 Agreement with the SSA, it’s 

important to determine which employee services will be excluded from Social Security coverage. If services are excluded, 

any employees performing these services are not covered by the agreement.

Certain services – known as required exclusions – are excluded from voluntary Social Security coverage by Section 

218(c)(6) of the Act.

Other services, however, are optional exclusions under Sections 218(c)(3), (5) and (8) and, therefore, may be covered 

under a voluntary Section 218 Agreement. Coverage under a Section 218 Agreement supersedes all other considerations. 

If optional exclusion services are covered under a Section 218 Agreement, these amounts are subject to Social Security 

and Medicare tax.

Required Section 218 Exclusions

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

•	 Services performed by individuals hired to be relieved from unemployment. The intent of the program 

establishes whether the program is designed to relieve individuals from unemployment. This is usually 

determined from the statutes or other authorities that established the program. The exclusion does not include 

services performed by individuals under programs, such as work-study, where the primary purpose is to provide 

work experience and training to increase the employability of the person, because the primary intent of the 

programs is not to relieve them from unemployment.

•	 Services performed in a hospital, home or other institution by a patient or inmate thereof as an employee 

of a state or local government. Generally, these services are performed by individuals who are not normally in 

an employment relationship with the state or political subdivision. In the case of work performed by inmates in a 

state prison or local jail, they are excluded from coverage, whether or not the services are performed outside the 

confines of the prison or jail, because in either case the inmates are normally not in an employment relationship 

with the state or political subdivision. However, services performed by inmates outside the prison or jail for an 

entity other than the state or local government operating the prison or jail, such as on a work-release program, 

may be covered if an employment relationship exists. The employer for tax purposes is determined under the 

common-law rules, discussed in Chapter 4. Note: Services performed by patients or inmates as part of the 

rehabilitative or therapeutic program of the institution are not usually considered to be services performed by 

employees.

•	 Covered transportation service. This includes services performed by transportation system employees who are 

covered for Social Security under Section 210(k) of the Social Security Act.

•	 Other services that would be excluded if performed for a private employer because the work is not 

defined as employment under Section 210(a) of the Social Security Act. This includes services performed 

by a nonresident alien temporarily residing in the U.S. holding an F-1, J-1, M-1 or Q-1 visa, when the services are 

performed to carry out the purpose for which the alien was admitted to the U.S. (A state may optionally include 

certain agricultural services under a Section 218 Agreement.) See Foreign Students, Teachers and Apprentices.

•	 Services performed by an employee hired temporarily in case of fire, storm, snow, earthquake, flood 

or similar emergency. This exclusion applies only to those who are hired on a temporary basis in response 

to a specific emergency. It doesn’t include workers considered temporary for other reasons or individuals in a 

continuous employment relationship who perform services related to emergencies on a regular or continuing 

basis.

•	 Service described in Section 210(a)(7)(F) of the Social Security Act that is included as “employment” 

under Section 210(a). Services by individuals not covered by a public retirement system and subject to 

mandatory coverage are excluded from coverage under a Section 218 Agreement.

Caution: Required exclusions apply to voluntary Social Security coverage situations (through a Section 218 

Agreement) and should not be confused with the different set of exclusions that applies to mandatory Social Security 

coverage situations.
43

Optional Section 218 Exclusions

Under a Section 218 Agreement, a state has the option to exclude from Social Security coverage the services listed 

below when they are performed by members of any coverage group, including retirement system coverage groups. If the 

agreement does not specifically exclude these services, they are covered.

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

•	 All services in any class or classes of elective positions. These are positions filled by an election; they also 

may be referred to as “elected officials.” The election may be by a legislative body, a board or committee, or by 

the qualified electorate of a jurisdiction. The method of selection must constitute an election under state law. The 

election may be conducted through open voting by the electorate at large, or by a chosen body from a list of 

candidates. Generally, elective positions fall into three classes: executive, legislative and judicial.

•	 All services in any class or classes of part-time positions. A part-time position is one for which the number of 

work hours normally required by the position in a week or a pay period is less than the normal time requirements 

for the majority of the positions in the employing entity. The part-time position exclusion is based on the 

normal time requirements of the position and not the time spent by an employee in the position. If a position is 

established as a full-time position, but the employee works part-time in this position, the exclusion does not apply. 

Conversely, if a position is established as a part-time position and the employee works full-time in this position, 

the services of the employee are excluded. Whether seasonal or temporary positions that require full-time 

services for a period of short duration are part-time positions depends on the definition of part-time established 

for the coverage group. Where the part-time position exclusion is taken, the state should include a definition of 

“part-time” in the modification if one has not been previously established.

Note: The definition of “part-time” under Section 218 Agreement provisions may be different from the 

definition of “part-time” used to determine whether an individual is a qualified participant in a public retirement 

system (discussed in Chapter 6).

Example: A city provides Social Security coverage to some of its employees under a Section 218 Agreement, 

but excludes services performed in part-time positions. The Section 218 Agreement defines part-time positions 

as positions normally requiring less than 50 hours of service per month. The city must apply the definition 

in the Section 218 Agreement to determine which employees are excluded from Social Security coverage 

under the agreement. Any employees excluded from coverage under the agreement may then be subject to 

mandatory coverage.

•	 Fee-based public officials services in any class or classes of positions compensated solely by fees 

received directly from the public, by an individual who is treated by the municipality as self-employed.

See Fee-Based Public Officials.

•	 Agricultural labor, but only those services that would be excluded if performed for a private sector 

employer. A state that initially excludes agricultural labor may later modify its agreement to cover it. However, 

if agricultural labor is not excluded initially, it cannot be excluded later. If a state has not taken the agricultural 

exclusion, then all remuneration for agricultural labor is covered for Social Security.

•	 Services performed by students enrolled and regularly attending classes at the school, college or 

university for which they are working. The student exclusion applies only during periods of regular school 

attendance, whether during the regular academic year or in summer session. The exclusion does not apply to 

work done during summer vacation if the student is not attending a summer session. Services performed by 

students during holidays, weekends, seasonal breaks and between semesters falling within the academic year 

when classes are not scheduled are excluded.

•	 Services performed by election officials or election workers paid less than the calendar year threshold 

amount mandated by law. (If the state’s Section 218 Agreement does not have an election-worker exclusion, or 

the entity has an agreement that does not exclude election workers, Social Security and Medicare taxes apply 

from the first dollar paid.) See Election Officials and Election Workers.

Note: Effective July 2, 1991, elective and part-time positions, although optionally excluded under a Section 218 

Agreement, must be covered under a qualifying public retirement system or else they will be covered for Social Security 

under the mandatory Social Security provisions.
44

Optional exclusions can be taken by the state in any combination and applied to both absolute and retirement system 

coverage groups. Any services a state excludes can be included later if permitted by federal and state law and the state’s 

agreement. Generally, if one of the types of work listed above has been included in a coverage group, it cannot later be 

removed from coverage, except for services performed by election officials/workers and solely fee-based positions.

Optional exclusions apply only to voluntary Social Security coverage under a Section 218 Agreement; there are no optional 

exclusions from mandatory coverage.

Note: The 1972 Amendments to the Social Security Act allowed states a limited period to exclude services in part-time 

positions and services performed by students, in cases where this exclusion was not initially chosen. An additional 

window to make this election was provided by Public Law 105-277, enacted October 21, 1998, which allowed states a 

limited period to exclude the services of students employed by the public school, college or university where they are 

regularly attending classes. In those states exercising this option, the student exclusion was effective July 1, 2000. Where 

a state used either or both of these special one-time provisions for excluding services that had been covered previously, it 

cannot again cover these services under a Section 218 Agreement.

Employees Under Mandatory Social Security Coverage

Public Law 101-508 mandated full Social Security coverage beginning July 2, 1991, for state and local government 

employees who are not members of a qualifying public retirement system (also called a FICA replacement plan) and who 

are not covered under a Section 218 Agreement, unless a specific exclusion applies under the law.

If an employee is mandatorily covered for Social Security, then becomes a member of a qualifying public retirement 

system, mandatory coverage ends; Social Security coverage would apply only if the position becomes covered by a 

Section 218 Agreement.

If an employee becomes a member of a public retirement system and is covered for Social Security under a Section 218 

Agreement, the employee continues to be covered for Social Security and Medicare.

The determination of whether an employee is covered by mandatory Social Security is made individually. For example, a 

Section 218 Agreement may exclude part-time positions and a public retirement system may exclude part-time employees 

for the same entity. If an employee is excluded from Section 218 coverage because of work performed in a part-time 

position (as defined under the agreement) and is also excluded from membership in a public retirement system because of 

part-time status, that employee is subject to mandatory Social Security.

Example: A city has a Section 218 Agreement that excludes part-time positions requiring less than 18 hours of 

work a week. City cafeteria positions require employees to work only 3 hours per day, or 15 hours per week. The 

city’s public retirement system does not allow membership for employees unless they work 25 hours or more per 

week. The cafeteria workers are subject to mandatory Social Security.

Exclusions from Mandatory Social Security Coverage

Under Section 210(a) of the Social Security Act, the following categories of employees are not subject to mandatory Social 

Security coverage, even if they are not covered by a public retirement system:

•	 Services performed by individuals hired to be relieved from unemployment. The intent of the program 

establishes whether the program is designed to relieve individuals from unemployment. This is usually 

determined from the statutes or other authorities that established the program. The exclusion doesn’t include 

services performed by individuals under programs, such as work-study, where the primary purpose is to provide 

work experience and training to increase the employability of the person, because the primary intent of the 

programs is not to relieve them from unemployment.

•	 Services performed in a hospital, home or other institution by a patient or inmate thereof as an employee 

of a state or local government. Generally, services performed by inmates in a state prison or local jail are 

excluded from coverage. This is true whether or not the services are performed outside the confines of the prison 

or jail, because the inmates are not normally in an employment relationship with the state or political subdivision. 

However, services performed by inmates outside the prison or jail for an entity other than the state or local 
45

government operating the prison or jail, such as on a work-release program, may be covered if an employment 

relationship exists. The employer for tax purposes is determined under the common-law rules, discussed in 

Chapter 4. Note: Services performed by patients or inmates as part of the rehabilitative or therapeutic program of 

the institution are generally not employment.

•	 Services performed by an employee hired temporarily in case of fire, storm, snow, earthquake, flood or 

similar emergency. This exclusion applies only to those workers who are hired on a temporary basis in response 

to a specific emergency. It doesn’t include workers considered temporary for other reasons or individuals in a 

continuous employment relationship who perform services related to emergencies on a regular or continuing 

basis.

•	 Services performed by election officials or election workers paid less than the calendar year threshold 

amount mandated by law, unless a Section 218 Agreement covers election workers. See Election Officials 

and Election Workers, below.

•	 Services in positions compensated solely by fees that are subject to self-employment tax, unless a 

Section 218 Agreement covers these services. See Fee-Based Public Officials. 

•	 Services performed by a nonresident alien temporarily residing in the U.S. holding an F-1, J-1, M-1 or Q-1 

visa, when the services are performed to carry out the purpose for which the individual was admitted to 

the U.S. See Foreign Students, Teachers and Apprentices.

•	 Services performed by students enrolled and regularly attending classes at the school, college or 

university where they are working, unless a Section 218 Agreement covers student services.

•	 Services that would be excluded if performed for a private employer because the work is defined as 

employment under Section 210(a) of the Social Security Act, unless a Section 218 Agreement covers 

certain agricultural services.

Note: Coverage under a Section 218 Agreement always takes precedence over other employment circumstances. When 

considering whether the mandatory Social Security coverage and exclusion rules apply to a worker’s services, first 

determine whether the services are covered by a Section 218 Agreement.

Election Officials and Election Workers

Prior to the Social Security Amendments of 1967, there was no specific provision for the exclusion of election officials or 

election workers. The Social Security Act was amended to allow states to modify their agreements to exclude the services 

of election officials and election workers whose pay was below an annually determined threshold amount.

The FICA tax exclusion for election officials and election workers is $1,900 for the 2020 calendar year unless those wages 

are subject to Social Security and Medicare at a lower threshold under the state’s Section 218 Agreement.

If the entity is covered by a Section 218 Agreement, the agreement determines the treatment of election workers for FICA 

purposes. The agreement may specify a lower threshold amount for election officials and election workers (for example, 

$50 a calendar quarter or $100 a calendar year). In these states, the Social Security and Medicare tax applies when the 

amount specified in the state’s agreement is met. States may modify the agreement to exclude the services of election 

officials and election workers paid less than the threshold amount mandated by law. These modifications are effective in 

the calendar year the modification is mailed or delivered to the Social Security Administration.

If the Section 218 Agreement does not exclude election workers from coverage, or does not provide a threshold for 

coverage, Social Security and Medicare taxes apply from the first dollar paid. If the entity is not covered under a Section 

218 Agreement, the rules for mandatory Social Security and Medicare under Section 210(a)(7)(F) of the Social Security 

Act apply.
46

Go to SSA election workers for the latest FICA tax exclusion for election officials and elections workers. The election 

official/worker thresholds under mandatory Social Security for calendar years prior to 2021 are:

2020 $1,900

2017 – 2019 $1,800

2016 $1,700

2013 – 2015 $1,600

2009 – 2012 $1,500

2008 $1,400

2006 – 2007 $1,300

2002 – 2005 $1,200

2000 – 2001 $1,100

1995 – 1999 $1,000

1978 – 1994 $100

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

Generally, Form W-2 is required for these workers; however, if the worker received only wages for election work and the 

total is less than $600 total for the year, Form W-2 is not required and no Social Security or Medicare tax withholding 

is required. The amount paid is includible in the gross income of the worker. Revenue Ruling 2000-6 provides reporting 

procedures for payments to election officials and election workers in different situations. 

Contact your State Social Security Administrator concerning the status of election officials and election workers under the 

state’s Section 218 Agreement. Additional information and threshold amounts can be found at SSA.gov.

Fee-Based Public Officials

A fee-based public official receives and retains remuneration directly from the public. An individual who receives payment for 

services from government funds in the form of wages or salary is not a fee-based public official, even if the compensation is 

called a fee.

Beginning in 1968, services performed in positions compensated solely by fees are excluded from coverage under Section 

218 Agreements unless the state specifically covers these services. If a state covered these positions before 1968, it may 

modify its agreement to exclude these positions prospectively. The exclusion is effective the first day of the year following 

the year in which the modification is mailed or delivered to SSA. If a state covered and later excluded these positions, the 

state cannot again cover these positions.

Fee-Basis Exclusion – Positions Compensated Solely by Fees

Services in positions compensated solely by fees are excluded from coverage under Section 218 Agreements (except where 

the state specifically included these services) and are covered as self-employment and subject to self-employment tax.

Fee-Basis Exclusion – Position Compensated by Salary and Fees

Generally, a position compensated by a salary and fees is considered a fee-basis position if the fees are the principal 

source of compensation, unless a state law provides that a position for which any salary is paid is not a fee-basis position.

If the state law does include this provision, none of the compensation, including the salary, is covered wages under 

the state’s Section 218 Agreement. In this case, the salary payment, while excluded under the agreement, is subject to 

mandatory Social Security if the official is not a qualified participant in a public retirement system.

Police Officers and Firefighters

Beginning August 16, 1994, all states were allowed to extend Section 218 Social Security and Medicare or Medicare-only 

coverage to police officer and firefighter positions covered under a retirement system through a referendum procedure 
47

conducted by the state. (Prior to August 16, 1994, only 23 states, and all interstate instrumentalities, were specifically 

authorized by Congress to do so.) Those states were:

Alabama 

California 

Florida

Georgia 

Hawaii 

Idaho

Kansas

Maine 

Maryland

Mississippi

Montana 

New York

North Carolina

North Dakota

Oregon

Puerto Rico

South Carolina

South Dakota 

Tennessee 

Texas 

Vermont

Virginia 

Washington

As noted earlier, all states may use the majority vote referendum procedure. Some states are also authorized under the 

Act to use the divided retirement system referendum, discussed earlier. (Interstate instrumentalities may use the majority 

or divided retirement system referendum procedures.) As with other retirement system employees, before referendums 

can be held and coverage extended to police officer and firefighter positions already covered by a retirement system, there 

must first be authority to provide the coverage under state law (state statutes and/or the enabling act) and the federal-state 

agreement (via a modification to the state’s Section 218 Agreement).

Generally, state statutes and court decisions establish the definition of police officer and firefighter positions. For Social 

Security purposes, the terms do not include services in positions that, although connected with police and firefighting 

functions, do not meet the definitions of police officer and firefighter positions.

Note: Police officers and firefighters are not considered emergency workers for purposes of the mandatory exclusion 

from Social Security and Medicare coverage for these workers. This exclusion applies only to services of an employee 

who was hired because of an unforeseen emergency to do work in connection with that emergency on a temporary basis 

to provide emergency assistance in fires or other disasters such as severe ice storm, earthquake, volcano eruption or 

flood.

Police and Firefighter Positions Not Covered Under a Retirement System

If police officer and firefighter positions are not covered under a retirement system, these positions are mandatorily covered 

for Social Security and Medicare unless the positions were already covered under a Section 218 Agreement as part of a 

non-retirement system (absolute) coverage group.

Foreign Students, Teachers and Apprentices

Individuals admitted to the United States under an F-1, J-1, M-1 or Q-1 visa are generally exempt from both Social Security 

and Medicare taxes. Wages earned within the United States are subject to income tax, whether or not the workers are U.S. 

citizens.

Nonresident students who are not U.S. citizens, permanent residents or resident aliens for tax purposes may be able 

to take advantage of treaty exemptions to exclude a portion of their U.S. source income from withholding. For more 

information on specific treaty provisions, contact the IRS or SSA. The following IRS publications have additional 

information on Social Security and Medicare coverage for foreign workers:

•	 Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities

•	 Publication 519, U.S. Tax Guide for Aliens

•	 Publication 901, U.S. Tax Treaties

Employees With No Social Security Coverage

The final category of workers includes those who are not subject to any voluntary or mandatory Social Security coverage. 

This can only occur where the workers are covered by a FICA replacement plan and are not covered by a Section 218 

Agreement. Employers of these workers will not withhold Social Security taxes or show any Social Security wages on 

Form W-2; they are generally covered for Medicare. Public retirement systems are the subject of Chapter 6.
48

Identifying Covered Employment

In addition to determining whether specific employees are members of a Social Security coverage group, questions may 

arise as to whether certain positions constitute employment. These determinations may be based on decisions regarding 

specific issues to which either federal or state law applies. It’s important to know whether federal or state law is applied 

in making a determination on a specific issue. Generally, questions involving interpretation or application of state law are 

resolved by the authorized legal officers of the state according to their state and local laws, regulations and the state court 

decisions. Jurisdiction for some of the major questions include:

Federal Law:

Does an employer-employee relationship exist? 

Who is the employer?

Are the earnings wages? 

What are emergency services? 

What are student services?

State Law:

Who is an officer of a state or political subdivision? 

Is an entity a political subdivision?

Is a function governmental (nonproprietary)? 

Is a function other than governmental in nature (proprietary)? 

Is a position under a retirement system?

Which employees are eligible for membership in a retirement system? 

Who is an employee for purposes of retirement system participation?

Although federal law determines whether earnings are wages subject to Social Security and Medicare, state laws have a 

bearing on the issue of employment, such as whether a position is that of a public official of a state. Where this is the case, 

an opinion of the state legal officer may be requested. The state’s opinion will be given weight in making the decision, but 

it will not be determinative of the issue. Before contacting IRS or SSA, contact the State Social Security Administrator for 

guidance.

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

Note: Federal Circuit Court decisions are binding only in the circuit in which they are issued. For a map of federal Circuit 

Court jurisdictions, see the interactive map at www.uscourts.gov/court_locator.aspx.

Identity of the Employer for Social Security Coverage Purposes

Because entities have different Social Security and retirement plan situations, it’s important to determine which of two 

or more entities, organizations or individuals is the employer. In some cases, certain individuals, referred to as leased 

workers, are supplied or paid by one entity but work under the direction of another. Generally, if there is a provision in a 

statute or ordinance that creates a position and the individual is hired or elected under this authority, the individual is an 

employee of the state or political subdivision to which the provision applies. If there is no such authority, the employer is 

the entity that has the right to control the worker in the performance of the work, the common-law employer.

The employing entity is responsible for withholding and paying Social Security and Medicare taxes on its employees’ 

wages, as well as reporting to SSA the amount of wages paid. These withholding, paying and reporting requirements apply 

to wages of individuals subject to mandatory Social Security and Medicare, as well as to wages of individuals covered 

under a Section 218 Agreement. See Publication 15.
49

Indian Tribal Governments and Section 218

Indian tribal governments, while treated as states for other purposes, are not treated as states for Social Security and 

Medicare tax purposes under IRC Section 7871. Thus, Indian tribal governments do not enter into Section 218 Agreements 

with SSA and may not participate in a public retirement system as an alternative to paying Social Security and Medicare 

tax under IRC Section 3121(b)(7)(F). (However, Indian tribal governments can enter into agreements under Section 218A 

of the Social Security Act to provide coverage for certain Indian tribal council members.)

Mandatory Medicare Coverage

Prior to April 1, 1986, state and local government employees could only be covered for Medicare through voluntary 

Section 218 Agreements between the state and the federal government. This changed with the enactment of the 

Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985, which mandated that all state and local government 

employees hired or rehired after March 31, 1986, must be covered for Medicare, and pay Medicare taxes regardless of 

their membership in a retirement system. Employees covered by Social Security under a Section 218 Agreement are 

automatically covered for Medicare.

Public employees already covered under a Section 218 Agreement are covered under Medicare and subject to the tax. 

Employees who are not covered by Social Security, but are subject to the Medicare-only portion of FICA, are referred to as 

Medicare Qualified Government Employees (MQGE). Reporting procedures for MQGEs are covered in Chapter 3.

Employees who have been in continuous employment with the employer since March 31, 1986, who are not covered 

under a Section 218 Agreement nor subject to the mandatory Social Security and Medicare provisions, remain exempt 

from both Social Security and Medicare taxes, provided they are members of a public retirement system. (See Continuing 

Employment Exception, below.)

The flowchart in Chapter 1 shows how to determine whether Medicare coverage applies.

Continuing Employment Exception

Services performed after March 31, 1986, by an employee who was hired by a state or political subdivision employer 

before April 1, 1986, are exempt from mandatory Medicare tax if the employee is a member of a qualifying public 

retirement system and all the following requirements are met:

•	 The employee was performing regular and substantial services for remuneration for the state or political 

subdivision employer before April 1, 1986, 

•	 The employee was a bona fide employee of that employer on March 31, 1986, 

•	 The employment relationship with that employer was not entered into for purposes of avoiding the Medicare tax, 

and

•	 The employment relationship with that employer has been continuous since March 31, 1986.

In general, the following employment changes are considered continuous employment and qualify the employee for the 

exception:

•	 From a state agency to another state agency in the same state.

•	 From an employer of one political subdivision to an employer in the same political subdivision.

The following are not considered continuous employment for this purpose:

•	 From a state agency to a political subdivision of that state.

•	 From a political subdivision to a state agency.

•	 From one political subdivision to another.

•	 From a state agency to an agency of another state.

See Revenue Ruling 2003-46, Revenue Ruling 86-88 and Revenue Ruling 88-36, for more information about the 

continuing employment exception.
50

The Centers for Medicare & Medicaid Services (CMS) is the federal agency that administers the Medicare program. For 

more information, go to CMS.hhs.gov.

Services Not Subject to Mandatory Medicare Coverage

The following are not subject to mandatory Medicare tax even though the services are performed by an employee hired 

after March 31, 1986. (Note: These are the same services that are excluded from mandatory Social Security coverage, 

discussed earlier.)

•	 Services performed by individuals hired to be relieved from unemployment. (This doesn’t include many programs 

financed from federal funds where the primary purpose is to give the employee work experience or training.)

•	 Services performed in a hospital, home or other institution by a patient or inmate thereof as an employee of a 

state or local government employer.

•	 Services performed by an employee on a temporary basis in case of fire, storm, snow, earthquake, flood or other 

similar emergency.

•	 Services performed by nonresident aliens with F-1, J-1, M-1 and Q-1 visas.

•	 Services in positions compensated solely by fees that are subject to SECA (unless a Section 218 Agreement 

covers these services).

•	 Services performed by a student enrolled and regularly attending classes at the school, college or university 

where they work (unless a Section 218 Agreement covers student services).

•	 Services performed by an election worker or official whose pay in a calendar year is less than the amount 

mandated by law (unless a Section 218 Agreement covers election workers).

•	 Services that would be excluded if performed for a private employer because it isn’t work defined as employment 

under Section 210(a) of the Social Security Act (unless a Section 218 Agreement covers certain agricultural 

services).

See Required Exclusions and Optional Exclusions for more details on these exclusions.

Voluntary Medicare Coverage

A Section 218 Agreement can be executed to provide Medicare-only coverage for employees who are qualified participants 

in a public retirement system and not covered under a Section 218 Agreement and not subject to the mandatory Medicare 

provisions. Contact your State Social Security Administrator for further information. (A list of State Administrators is 

available at www.ncsssa.org.)
51

Frequently Asked Questions

1. Are any services excluded from mandatory Social Security and Medicare coverage? 

Yes. The same exclusions apply to mandatory Social Security and mandatory Medicare; however, 

some services excluded from mandatory coverage under provisions of the Internal Revenue Code 

may be covered by a Section 218 Agreement. [IRS, SSA]

2. If a local government has a public retirement system that qualifies as a FICA replacement 

plan and does not have a Section 218 Agreement, can employees voluntarily elect to 

participate in Social Security? 

No. An employee can only participate in Social Security if the position is covered either by the 

mandatory provisions or by a Section 218 Agreement. Only the State Social Security Administrator 

can initiate a request for Section 218 coverage. [SSA]

3. Do college students employed by a university during the summer months qualify for the 

student Social Security and Medicare exception from mandatory Social Security if they are not 

regularly enrolled and attending classes at the university during that time? 

If an individual is not enrolled in classes during school breaks of more than five weeks, including 

summer breaks, the student Social Security and Medicare exception does not apply (other than 

during payroll periods of a month or less that fall wholly or partially within the academic term). See 

Revenue Procedure 2005-11, sections 7.04 and 7.05. [IRS]

4. Are elected and appointed officials considered employees? 

For income tax purposes, elected (or elective) and most appointed officials are defined by IRC 

Section 3401(c) as employees of the public entity they serve (mayors, members of the legislature, 

county commissioners, city council members and board or commission members). In general, 

elected and appointed officials will meet the common-law tests to be considered employees. 

Regardless of the common-law tests, some positions may be defined as employment by state 

statute. Some fee-basis officials are by law treated as self-employed. An elected or appointed 

official who is an employee is subject to rules for mandatory Social Security and Medicare unless 

covered under a Section 218 Agreement or a qualified participant in a retirement system. All officials 

elected or appointed to their positions after March 31, 1986, are subject to Medicare withholding. 

See Chapter 4. [IRS]

5. How is “termination of employment” defined for purposes of determining whether the 

continuing employment exception for Medicare tax applies? 

Whether an employment relationship has terminated must be determined based on facts and 

circumstances. Great weight, however, will be given to the state or political subdivision employer’s 

personnel rules to determine whether an employment relationship has been terminated. (Revenue 

Ruling 86-88) [IRS]

6. An employee who was hired by the state before April 1, 1986, transferred after March 31, 

1986, to another state agency. The transfer was made without terminating the employee’s 

employment with the state. Does the employee qualify for the continuing employment 

exception? 

Yes. An employee hired by a state employer before April 1, 1986, who transfers after March 31, 

1986, to another state employer of the same state may qualify for the continuing employment 

exception, provided the transfer was made without a termination of the employee’s overall 

employment relationship with that state. The same rule applies to an employee hired before April 1, 

1986, by a political subdivision employer, who transfers after March 31, 1986, to another employer 

of that same political subdivision. However, an employee hired before April 1, 1986, does not qualify 

for the continuing employment exception if after March 31, 1986, the employee transfers from a 

state employer to a political subdivision employer or from a political subdivision employer to a state 

employer. Likewise, an employee does not qualify for the exception if the employee transfers from 

a political subdivision employer in one political subdivision to a political subdivision employer in a 

different political subdivision, or from a state employer in one state to a state employer in a different 

state. [IRS]
52

7. Can employees who were hired prior to April 1, 1986, and who are not currently paying into 

Medicare, enroll in Medicare in the future? 

Individual employees can never elect voluntarily to participate in Social Security or Medicare. 

State or local public employers can voluntarily choose to cover one or more groups of employees 

under Medicare-only, even if they are otherwise exempt because of the continuing employment 

exception. To elect this coverage, the state or local government (through the state) must enter into a 

modification of the state’s Section 218 Agreement. Contact your State Social Security Administrator 

for further information about a Medicare-only modification. If an individual’s state or local 

government employment is not covered under Social Security or Medicare, the individual may not 

have enough work credits for Medicare based on their own wages. That individual may be entitled 

to coverage based on sufficient other work covered for Social Security or Medicare on their own 

earnings record or that of an insured spouse. [SSA] 
53

n Chapter 6

Social Security and Public Retirement Systems

Effective July 2, 1991, Congress made Social Security coverage mandatory for state and local government employees who are neither covered by a Section 218 Agreement nor qualified participants in a FICA replacement plan. States 

can provide employees with membership in a public retirement system as an alternative to mandatory Social Security 

coverage.

As a supplement to the Social Security and public retirement systems information provided in this publication, refer to 

IRS.gov/FSLG.

This chapter provides information about the requirements a retirement system must meet to qualify as an alternative to 

Social Security coverage.

Public Retirement Systems (FICA Replacement Plans)

A public retirement system, as defined in IRC Section 3121(b)(7)(F) and Treas. Reg. Section 31.3121(b)(7)-2, is a pension, 

annuity, retirement or similar fund or system maintained by a state or local government that provides a retirement benefit 

to the employee comparable to the benefit provided under the Old-Age portion of the Old-Age, Survivors and Disability 

Insurance (Social Security) part of FICA.

To be a retirement system for this purpose, the plan must provide a minimum retirement benefit. In this context, the term 

“employer” is a state, political subdivision or instrumentality. The term “employee” is used here only to refer to an employee 

of a state, political subdivision or instrumentality.

Note: A “public retirement system” for this purpose is not required to be a qualified plan within the meaning of ERISA. 

The ERISA provisions relate to the tax treatment of contributions and benefits of employee plans and are irrelevant to 

the coverage issues addressed here. To avoid confusion, this publication does not use the term “qualified” to refer to 

public retirement systems. For mandatory coverage purposes, the employee may be a member of any type of retirement 

system, including a system that is nonqualified under ERISA (for example, a Section 457 plan), as long as the plan 

provides the minimum level of benefits required for a public retirement system. These requirements are discussed below 

and in Treas. Reg. Section 31.3121(b)(7)-2(e) and Revenue Procedure 91-40.

For purposes of determining whether mandatory coverage applies for an employee holding more than one position, Social 

Security is NOT a public retirement system.

Example: An individual holds two positions with the same political subdivision. The wages earned in one position 

are subject to Social Security and Medicare tax under a Section 218 Agreement; the other position is not covered. 

The Social Security system is not a retirement system for this purpose. Thus, mandatory Social Security coverage 

applies to service in the other (non-218) position unless the employee is a member of a public retirement system 

with respect to that position. See Treas. Reg. 31.3121(b)(7)-2(e)(1).

In general, there are two types of public retirement systems that may meet the minimum benefit requirement — the 

defined contribution plan and the defined benefit plan.
54

Defined Contribution Plan

A defined contribution plan provides an individual account for each participant. The participants’ benefits from this plan are 

based solely on the amount contributed to their account and any income, expenses, gains or losses that may be allocated 

to their account. See IRC Section 414(i).

A defined contribution plan that satisfies the definition of a retirement system under Treas. Reg. 31.3121(b)(7)-2(e)(2)(iii) 

must provide for an allocation to the employee’s account of at least 7.5% of the employee’s compensation during any 

period under consideration. A variety of plan types could meet the requirement; for example, plans established under 

IRC Sections 401(a), 403(b) or 457. Contributions from both the employer and the employee may be used to make up 

the 7.5%. Matching contributions by the employer may be taken into account for this purpose. A plan with only employee 

contributions would also satisfy the minimum benefit requirement, provided the contributions constitute at least 7.5% of 

compensation. However, the percent cannot include any earnings on the account.

Compensation

For a defined contribution plan, the definition of “compensation” used to determine whether the benefit is sufficient must 

include at least the employee’s base pay, provided that the definition of “base pay” is reasonable. Thus, for example, a 

defined contribution retirement system may disregard overtime pay; bonuses or single-sum amounts received on account 

of death or separation from service; amounts received under a bona fide vacation, compensatory time or sick pay plan; or 

amounts received under severance pay plans. Any compensation in excess of the Social Security contribution wage base 

for that year ($132,900 in 2019 and $137,700 in 2020) may also be disregarded for this purpose.

Example: A political subdivision maintains an elective defined contribution plan that is a retirement system within 

the meaning of IRS regulations. The plan is on a calendar year. An employee contributes to the plan at a rate of 

7.5% of base pay. Assume that the employee's compensation will reach the Social Security maximum contribution 

base in October. The employee is a qualified participant in the plan for the entire plan year, even if the employee 

ceases to contribute to the plan after reaching the maximum contribution base. See Treas. Reg. 31.3121(b)(7)-2(e)

(2)(iii)(B).

Generally, for an employee who holds more than one position with the same employer, all compensation with that 

employer is considered in applying the 7.5% test.

However, at the employer’s option, compensation from only one position may be considered, if that position is not parttime, temporary or seasonal. See Treas. Reg. 31.3121(b)(7)-2(c)(2)(iv).

Reasonable Interest Rate Requirement

Generally, a defined contribution retirement system must credit the employee’s account with earnings at a reasonable 

rate, under all the facts and circumstances. Alternatively, employees’ accounts may be held in a separate trust subject to 

general fiduciary standards and credited with actual earnings of the trust fund. Whether the interest rate is reasonable is 

determined after reducing the rate to adjust for the payment of any administrative expenses. See Treas. Reg. 31.3121(b)

(7)-2(e)(2)(iii)(C).

Defined Benefit Plan

For purposes of determining whether it qualifies as a public retirement system, a defined benefit plan is any plan other 

than a defined contribution plan, including a hybrid plan. A defined benefit plan (including a hybrid plan) requires the use of 

an actuary to calculate benefits based on a formula, generally based on age, years of service and salary level.

A defined benefit retirement system that qualifies as an alternative to Social Security provides for a retirement benefit 

to the employee that is comparable to the benefit provided by the Social Security part of FICA. Generally, a plan meets 

the requirement if the benefit under the system is at least 1.5% of average compensation during an employee’s last 

three years of employment, multiplied by the employee’s number of years of service. Apply the formulas in Revenue 

Procedure 91-40 and the IRS regulations to determine whether a defined benefit retirement system meets this requirement.
55

Who Is a Qualified Participant?

For an employee to be excluded from mandatory Social Security coverage, the employing entity must maintain a 

retirement system within the meaning of IRC Section 3121(b)(7)(F) and the employee must be a qualified participant in 

that system, as defined in IRC Section 3121(b)(7)(F) and Treas. Reg. 31.3121(b)(7)-2(d). This test must be applied to each 

employee separately. An entity may maintain a retirement system in which not every employee is a qualified participant. 

For both a defined contribution plan and a defined benefit plan, the determination of whether an individual is a qualified 

participant is made as services are performed; however, there are different tests to determine participation.

Qualified Participant in a Defined Contribution Retirement System

An employee is a qualified participant in a defined contribution retirement system with respect to services performed on a 

given day if, on that day, the employee has satisfied all conditions (other than vesting) for receiving an allocation to their 

account (exclusive of earnings) that meets the minimum retirement benefit requirement. The benefit must be calculated on 

compensation during a period ending on that day and beginning on or after the beginning of the plan year of the retirement 

system. This is the case regardless of whether the allocations were made or accrued before the effective date of IRC 

Section 3121(b)(7)(F).

Example 1: A state-owned hospital maintains a nonelective defined contribution plan. Under the terms of the plan, 

employees must be employed on the last day of a plan year to receive any allocation for the year. Employees may 

not be treated as qualified participants in the plan before the last day of the year.

Example 2: The situation is the same as in Example 1, except that under the terms of the plan, an employee 

who terminates service before the end of a plan year receives a pro rata portion of the allocation they would have 

received at the end of the year, that is based on compensation earned since the beginning of the year. If the pro 

rata allocation available on a given day would meet the minimum retirement benefit requirement with respect to 

compensation from the beginning of the plan year through that day (or some later day), the employee is treated as 

a qualified participant in the plan on that day.

Example 3: A political subdivision maintains an elective defined contribution plan. The plan operates on a 

calendar year. It has two open seasons—in December and June—when employees can change their contribution 

elections. In December, an employee elects not to contribute to the plan. In June, the employee elects (beginning 

July 1) to contribute a uniform percentage of compensation for each pay period to the plan for the remainder of 

the plan year. The employee is not a qualified participant in the plan during the period January-June, because 

no allocations are made to the employee’s account during that time. If the level of contributions during the period 

of July-December meets the minimum retirement benefit requirement with respect to compensation during that 

period, the employee is treated as a qualified participant during that period.

Example 4: Assume the same facts as in Example 3, except 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 with respect to compensation during that period, the employee is treated as a 

qualified participant during that period. In addition, if the contributions during the period July-October are high 

enough to meet the requirements for the entire period July-December, the employee is treated as a qualified 

participant in the plan throughout the period July-December, even though no allocations are made to the 

employee’s account in the last two months of the year. There is no requirement that the period used to determine 

whether an employee is a qualified participant on a given day remain the same from day to day, as long as the 

period begins on or after the beginning of the plan year and ends on the date the determination is being made. 

See Treas. Reg. 31.3121(b)(7)-2(d)(1)(ii).

Qualified Participant in a Defined Benefit Retirement System

An employee is a qualified participant in a defined benefit retirement system with respect to services performed on a given 

day if on that day: 

•	 The employee is (or ever has been) an actual participant in the retirement system, and 

•	 The employee actually has a total accrued benefit that meets the minimum retirement benefit requirement. 
56

An employee may not be treated as an actual participant or as actually having an accrued benefit for this purpose to the 

extent that the participation or benefit is subject to any conditions (other than vesting) that have not been satisfied. The 

disqualifying conditions might include a requirement that the employee attain a minimum age, perform a minimum period 

of service, make an election to participate or be present at the end of the plan year to be credited with an accrual.

Example: A political subdivision maintains a defined benefit plan. Under the terms of the plan, service during 

a plan year is not credited for accrual purposes unless a participant has at least 1,000 hours of service during 

the year. For purposes of determining whether mandatory Social Security coverage applies, benefits that accrue 

only upon satisfaction of this 1,000-hour requirement may not be taken into account in determining whether an 

employee is a qualified participant in the plan before the 1,000-hour requirement is satisfied. See Treas. Reg. 

31.3121(b)(7)-2(d)(1)(i).

Part-Time, Seasonal, Temporary Employees

Special rules apply to part-time, seasonal and temporary employees for purposes of determining whether they are 

qualified participants in a public retirement system. To be exempt from mandatory Social Security coverage, these 

employees must not only be qualified participants; they must be fully vested in their benefits. This means the benefits 

cannot be forfeited. If a part-time, seasonal or temporary employee (as defined below) is not a qualified participant in a 

public retirement system with benefits fully vested from the first day of employment, that employee is subject to mandatory 

Social Security and Medicare tax until the employee becomes fully vested.

The special vesting requirement is considered to be met if a part-time, seasonal or temporary employee in a defined 

contribution plan has the right to receive a single sum payment of at least 7.5% of the compensation the employee earned 

while covered under the retirement system (plus interest) when the employee separates from employment.

Part-Time Employees

For purposes of applying the qualified participant test, part-time employees are those who normally work 20 hours or 

less per week. (This definition of “part-time” should not be confused with a definition of “part-time” that may be used for a 

Section 218 Agreement.) If mandatory coverage applies, part-time positions cannot be excluded; but part-time positions 

may be excluded from coverage under a Section 218 Agreement, at the option of the state. Contact the State Social 

Security Administrator to determine the definition of part-time positions under the state’s Section 218 Agreement.

A special rule provides that a teacher employed by a post-secondary educational institution (a community or junior 

college, post-secondary vocational school, college, university or graduate school) is not considered part-time if the teacher 

normally teaches classroom hours of one-half or more of the number of classroom hours normally considered to be fulltime employment.

Example: A community college treats a teacher as a full-time employee if the teacher is assigned to work 15 

classroom hours per week. A new teacher is assigned to work eight classroom hours per week. Because the 

assigned classroom hours of the teacher are at least one-half of the hours designated by the school as constituting 

full-time employment, the teacher is not a part-time employee. See Treas. Reg. 1.3121(b)(7)-2(d)(2)(iii)(A).

Seasonal Employees

For purposes of applying the qualified participant test, a seasonal employee is any employee who normally works full-time 

less than five months a year. Thus, for example, individuals who are hired by a political subdivision during the tax return 

season to process incoming returns and work full-time over a three-month period are seasonal employees. See Treas. 

Reg. 31.3121(b)(7)-2(d)(2)(iii)(B).

Temporary Employees

For purposes of applying the qualified participant test, a temporary employee is one who performs services under a 

contractual arrangement that is expected to last two years or less. Under this rule, a teacher under an annual contract 

may or may not be a temporary employee. Possible contract extensions must be considered in determining the duration 

of a contractual arrangement if there is a significant likelihood that the employee’s contract will be extended. Contract 
57

extensions are considered likely to occur if, on average, 80% of similarly situated employees have had bona fide offers 

to renew their contracts in the immediately preceding two academic or calendar years. Contract extensions are also 

considered significantly likely to occur if the employee has a history of contract extensions in the current position. See 

Treas. Reg. 31.3121(b)(7)-2(d)(2)(iii)(C).

Individuals Employed in More Than One Position

If an employee is not covered by a Section 218 Agreement but is a member of a retirement system for one full-time 

position, the employee is generally treated as a member of a retirement system for any other position with the same 

employer.

Example: An individual is employed full-time by a county and is a qualified participant in its retirement plan. In 

addition to this full-time employment, the individual is employed part-time in another position with the same county. 

The part-time position is not covered by the county retirement plan. Nevertheless, if the individual is a qualified 

participant in the retirement plan for the full-time position, the part-time position is excluded from mandatory Social 

Security coverage. See Treas. Reg. 31.3121(b)(7)-2(c)(2).

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

Example: An individual is employed full-time by a state and is a member of its retirement plan and is also 

employed part-time by a city located in the state, but does not participate in the city’s retirement plan. The services 

of the individual for the city are not excluded from mandatory Social Security coverage, because the determination 

of whether services constitute employment for such purposes is made separately for each political subdivision for 

which services are performed. See Treas. Reg. 31.3121(b)(7)-2(c)(2).

Whether an employee is part-time, seasonal or temporary is generally determined on the basis of service in each position 

in which allocations or benefits were earned. This determination generally does not take into account service in other 

positions with the same or different public employers. However, all an employee’s service in other positions with the same 

or different employers may be taken into account to determine whether an employee is a part-time, seasonal or temporary 

employee with respect to benefits under the retirement system provided that:

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

•	 All service aggregated for purposes of determining whether an employee is a part-time, seasonal or temporary 

employee (and related compensation) is aggregated under the system for all purposes in determining benefits 

(including vesting); and

•	 The employee is treated at least as favorably as a full-time employee under the retirement system for benefit 

accrual purposes.

Example: Assume an employee works 15 hours per week for a county and 10 hours per week for a municipality, 

and both these employers contribute to the same statewide public employee retirement system. Assume further 

that the employee’s service in both positions is aggregated under the system for all purposes in determining 

benefits (including vesting). If the employee is covered under the retirement system with respect to both positions 

and is treated for benefit accrual purposes at least as favorably as full-time employees, then the employee is not 

considered a part-time employee of either employer. The requirement of being fully vested for determining the 

applicability of mandatory Social Security coverage does not apply. See Treas. Reg. 31.3121(b)(7)-2(d)(2)(iii)(D).

Alternative Lookback Rule

Under an alternative lookback rule, an employee may be treated as a qualified participant in a retirement system 

throughout a calendar year if the employee was a qualified participant in the system at the end of the plan year of the 

system ending in the preceding calendar year.

Example: An employee is a qualified participant in a retirement plan of a city on the last day of the plan year, 

May 31, 2018. If the alternative lookback rule is used, no liability for Social Security tax exists for the employee for 

calendar year 2019. See Treas. Reg. 31.3121(b)(7)-2(d)(3).
58

For the first year of participation, an employee who participates in the retirement system may be treated as a qualified 

participant during the year only if it’s reasonable to believe that the employee will be a qualified participant on the last day 

of the plan year.

Former Participants

In general, the rules on qualified participants apply to former participants who continue to perform services for the 

employer or who return after a break in service.

Thus, for example, a former employee, with a deferred benefit under a defined benefit retirement system, who is reemployed by the same employer but does not resume participation in the retirement system, may continue to be a qualified 

participant in the system after becoming re-employed if the individual’s total accrued benefit under the system meets the 

minimum retirement benefit requirement (taking into account all periods of service, including current service). If this is so, 

the employer is not required to withhold and pay Social Security tax, or make additional payments to the retirement system 

on his behalf. The individual’s status as a qualified participant must be continually re-evaluated, however, for employment 

of more than a short period. (Treas. Reg. 31.3121(b)(7)-2(d)(4)(i)).

Rehired Annuitants

A rehired annuitant is a retiree who is rehired by their employer or another employer that participates in the same 

retirement system as the former employer. A rehired annuitant is either receiving a retirement benefit from that retirement 

system, or has reached retirement age under the retirement system.

Rehired annuitants are excluded from mandatory Social Security coverage.

Example: A teacher retires from service with a school district that participated in a statewide teachers’ retirement 

system and did not have a Section 218 Agreement. The teacher begins to receive benefits from the system and 

later becomes a substitute teacher in another school district that participates in the same statewide system. The 

employee is treated as a rehired annuitant and is not subject to mandatory Social Security tax, but is subject to 

Medicare tax. See Treas. Reg. 31.3121(b)(7)-2(d)(4)(ii).

However, if an employee is rehired to perform services in a state or local government position that is covered for Social 

Security under a Section 218 Agreement, services in that position are covered for Social Security. If an individual returns to 

work for an employer under mandatory coverage, the employment is subject to the mandatory coverage.

Note: Retirees rehired after March 31, 1986, are subject to the Medicare tax regardless of whether they qualify as rehired 

annuitants for Social Security purposes.

Frequently Asked Questions

1. What is a “public retirement system” for purposes of the mandatory coverage rules? 

A “public retirement system” (sometimes referred to as a “FICA replacement plan” or simply as a 

“retirement system”) is a pension or other retirement plan maintained by a public employer that 

meets the requirements of IRC Section 3121(b)(7)(F). See Revenue Procedure 91-40 and Treas. 

Reg. 31.3121(b)(7)-2. These requirements must be met for a retirement system to be used as an 

alternative to mandatory Social Security coverage. A retirement system may be a pension, annuity, 

retirement or similar fund or system established by a state or political subdivision. The system need 

not be created by the legislature of the state, nor does it have to be a plan under which the benefits 

are guaranteed by the state constitution. A retirement system can include a group annuity policy 

purchased by the state or political subdivision from a private insurance company. Whether a system 

qualifies as a “public retirement system” does not depend on whether it meets the requirements to 

be a qualified plan under the ERISA. [IRS]

2. What does it mean to be a qualified participant in a retirement system? 

To be a qualified participant, a member must actually participate in the system. An employee who 

is eligible for an optional system, but decides not to participate, will be subject to mandatory Social 

Security tax. Under an alternate rule, an employer is entitled to treat an employee as a qualified 
59

participant for the entire year if they were a qualified participant in the retirement system on the last 

day of the plan year ending in the previous calendar year. [IRS]

3. How are part-time, seasonal and temporary workers defined for purposes of determining 

whether they are qualified participants in a public retirement system under IRC Section 

3121(b)(7)(F)? 

A part-time employee normally works 20 hours or less per week. A seasonal employee may work 

full-time, but for less than five months a year. In the case of teachers above the high-school level, 

part-time is defined as less than one-half the classroom hours designated as full-time by the school. 

A temporary employee performs services under a contractual arrangement of two years or less. 

Possible contract extensions must be considered in determining the duration of a contractual 

arrangement if there is a significant likelihood that the employee’s contract will be extended. Future 

contract extensions are considered likely if (1) on average 80% of similarly situated employees 

have had bona fide offers to renew their contracts in the immediately preceding two academic 

or calendar years or (2) the contract history of an employee indicates that the employee is not a 

temporary employee. [IRS]

4. Are there special vesting rules for part-time, seasonal and temporary workers? 

For part-time, seasonal and temporary employees to be qualified participants in an employersponsored retirement plan, they must be immediately and fully (100%) vested in the plan. The 

vesting requirement for a defined contribution plan is met if an employee has a nonforfeitable right 

to receive a payment equal to 7.5% of the compensation the employee earned while participating in 

the system plus a reasonable rate of interest. [IRS]

5. If a local government participates in a statewide retirement system, is the plan considered 

“established” by the employer? 

Yes. The fact that each local government is a separate employer for tax purposes is irrelevant. Even 

though the plan is not maintained by the local government, it is offered through that entity as an 

employer and is considered established by the employer. [IRS]

6. For new employees entering a retirement system, is there any waiting period for coverage 

during which mandatory Social Security and Medicare taxes do not have to be paid? 

If a full-time employee can be enrolled in the plan by the first day of the first full calendar month 

of service, Social Security and Medicare taxes do not have to be paid during the partial month in 

which they begin work. This rule does not apply to part-time, seasonal and temporary employees. 

[IRS]

7. Is a retirement system that does not cover all employees a “retirement system” within the 

meaning of Treas. Reg. 31.3121(b)7-2? 

A retirement system is not required to cover all employees; it may be a retirement system for some 

employees and not for others. The coverage determination is made separately for each individual. 

[IRS]

8. A teacher who is a participant in a retirement system during the academic year also works a 

few hours per week in the summer in the school library. The library job is not covered by a 

Section 218 Agreement or by the public retirement system because it does not fall during the 

normal 10-month school year. Are the wages for the summer job subject to Social Security 

and Medicare taxes? 

The wages are not subject to Social Security taxes because the teacher is a qualified participant 

in the public retirement system with respect to their full-time job. A teacher who is expected to be 

employed on a continuing basis qualifies for treatment as employed simultaneously in multiple 

positions with the same entity. Consequently, the determination may be made solely by reference to 

service in the teacher’s full-time position. The Medicare tax applies, unless the employee was hired 

prior to April 1, 1986, and qualifies for the continuing employment exception. [IRS]

9. A teacher retires from a school district, starts collecting a pension under the state retirement 

system, and returns to work for the same school district as a bus driver. The bus driving 

position is not covered by a Section 218 Agreement and is not covered by the state retirement 

system. Is the employee subject to mandatory Social Security tax on the wages as a bus 

driver? 

No. The employee is a rehired annuitant. He is deemed to be a qualified participant in the retirement 

system without regard to whether he continues to accrue a benefit. He is subject to Medicare 

tax because the continuing employment exception cannot apply since the original employment 

relationship terminated at retirement. [IRS]
60

n Chapter 7

Social Security Administration

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

SSA is the primary income security agency for Americans. It administers the federal Old-Age, Survivors and Disability 

Insurance (OASDI) program, the largest income-maintenance program in the United States. The Supplemental Security 

Income (SSI) program provides monthly benefits designed to replace, in part, the loss of income due to retirement, 

disability or death. The SSI program provides or supplements the income of aged, blind or disabled individuals with limited 

income and resources. Children, as well as adults, can receive payments because of disability or blindness.

Organization

SSA’s organization features centralized management in Baltimore, Maryland, and a nationwide network of 10 regional 

offices overseeing approximately 1,230 field offices (FOs), 162 hearing offices, 35 teleservice centers, 6 processing centers 

and a national data operations center in Wilkes-Barre, Pennsylvania.

All components within SSA’s central office perform a supporting role to SSA FOs by providing direction, guidance and 

material resources. FOs are located in cities and rural communities across the nation and are the agency’s main personal 

point of contact with beneficiaries and the public. Additionally, the Social Security Disability Insurance (SSDI) program 

depends on the work of 54 offices of Disability Determination Services in all 50 states, the District of Columbia, Guam and 

Puerto Rico.

For questions about Social Security coverage for specific workers or groups of workers, public employers should first 

consult the State Social Security Administrator for the state. Public employers who have questions about electronic filing or 

other SSA reporting processes or reporting applications, should contact the appropriate Employer Services Liaison Officer 

(ESLO) listed at the SSA ESLO webpage. Direct questions about employer or employee tax liability to the IRS. Direct 

inquiries about state and local coverage issues to the SSA State and Local Coverage Specialist for your state or territory.

Regional Office 

Regional office staff works under the direction of the Regional Commissioner. The regional office provides leadership and 

technical direction in the coverage area for the state and local program within the region, consistent with established policy. 

Within the regional office structure is the Assistant Regional Commissioner, who has ongoing responsibility for state and 

local coverage activities within the region. The regional office:

•	 Interprets, reviews, processes and executes Section 218 Agreements and modifications;

•	 Reviews supporting documentation to state notices to remove legally dissolved entities from coverage under 

Section 218 Agreements;

•	 Makes and reviews coverage and wage determinations consistent with established policy;

•	 Provides guidance and advice to states on proposed legislation and regulations that may have impact on the 

state’s Section 218 Agreement;

•	 Interprets and advises states on established policies and procedures;

•	 Refers to central office questions for which no policy has been established, or for which present policy may 

require a change that may have national impact;

•	 Maintains files of original agreements and modifications;

•	 Maintains the summaries of state agreements; and

•	 Handles inquiries and answers questions about electronic filing and paper reporting of wages.
61

Office of Income Security Programs

The Office of Income Security Programs is primarily responsible for administering the state and local coverage program. 

Organizationally, the office is located under the Deputy Commissioner, Retirement and Disability Policy.

Social Security Earnings Records

The Social Security number (SSN) is used for posting and maintaining the earnings and employment records of persons 

covered under the Social Security program. Employers withhold Social Security and Medicare taxes from employee 

paychecks and, with the employer tax, deposit these amounts or pay them with the tax return. (See Chapter 3 for 

information on reporting and deposit rules.) By the end of January employers file wage reports with the SSA showing the 

wages paid to each employee during the preceding year. SSA shares this information with the IRS. SSA also sends weekly 

updates to IRS with information on newly established SSN records and corrected information for previously established 

SSN records. Reported earnings are posted to the worker’s earnings record.

When a worker or a worker’s family member applies for Social Security benefits, the worker’s earnings record is used 

to determine the eligibility for benefits and the amount of any cash benefits payable. It is critical that employers maintain 

accurate, up-to-date SSN information on their employees to make sure each employee’s earnings are correctly posted to 

that employee’s earnings record.

Under the Federal Insurance Contributions Act, Social Security and Medicare benefits are financed through taxes paid by 

employees and their employers. The Social Security and Medicare tax rates are set by law. The tax rate on wages for the 

OASDI program applies to earnings up to an annual maximum amount. This amount, called the earnings base, is adjusted 

annually based on changes in average wages. Medicare Hospital Insurance taxes are paid on total earnings; there is 

no wage base limit for Medicare tax. The Supplementary Medical Insurance part of Medicare is financed by monthly 

premiums charged to beneficiaries and by payments from general federal revenues.

Earning Credits

Individuals become eligible for Social Security benefits and Medicare hospital insurance based on credits for work covered by 

Social Security and/or Medicare. In 2019, one credit is earned for each quarter with $1,360 in earnings, for up to four quarters 

per year, adjusted yearly to reflect average wage increases. In 2020 the earnings credit amount increased to $1,410. 

Credits earned remain on the worker’s Social Security earnings record, regardless of periods of no earnings. The number 

of credits an individual needs to be eligible for Social Security and Medicare benefits depends on age and the type of 

benefit. Most people need 40 credits (10 years of work) to qualify for benefits. Younger people need fewer credits to be 

eligible for disability benefits, or for their family members to be eligible for survivors’ benefits in case of death.

Beginning in 1957, basic pay earned from active military duty or training in military service may earn Social Security 

credits. In addition, military service before 1957 may qualify a person for additional earnings credits. A determination of 

these additional credits is made at the time a person applies for benefits.

State and local government employees covered for Medicare-only must earn the same number of credits to qualify for 

Medicare as required for Social Security benefits.

If a question arises concerning the employment relationship of a worker for claims purposes, SSA determines whether 

there was a common-law employer-employee relationship for the purpose of determining the benefits of the claimant.

Retirement Income

Full Social Security retirement benefits are payable to individuals with 40 credits (10 years of work) at full retirement age 

(FRA). An individual can elect Social Security retirement benefits as early as age 62, but in that case, the individual’s 

monthly benefit is reduced by an established percentage. In 2003, FRA began to increase in gradual steps from age 65 to 

67. This provision affects people born in 1938 and later.
62

If an individual receives Social Security benefits before reaching FRA, benefits are further reduced if the individual 

continues to work and earn more than an annual exempt amount. The annual exempt amount changes each year. A 

worker can earn up to that amount and not experience any additional reduction of Social Security benefits. If the worker is 

under FRA and earns over the exempt amount, the benefits will be reduced $1 for every $2 in earnings above the exempt 

amount. In the year the individual reaches FRA, benefits will be reduced $1 for every $3 in earnings above the exempt 

amount.

A spouse or former spouse may qualify for benefits upon a worker’s retirement or disability. Benefits are paid as early as 

age 62, or at any age if the spouse is caring for the worker’s child. In this case the child must be under 16 or disabled and 

receive benefits on the worker’s record. A spouse’s benefits will be one-half or less of FRA monthly benefit.

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

2016 2017 2018 2019 2020

Earnings required for one credit $1,260 $1,300 $1,320 $1,360 $1,410

Exempt annual amount - under full 

retirement age

$15,720 $16,920 $17,040 $17,640 $18,240

Exempt amount - year attaining 

normal/full retirement age

$41,880 $44,880 $45,360 $46,920 $48,600

Full retirement age or older No limits effective January 2000

Benefits for divorced spouses age 62 or older may be payable if the insured former spouse is eligible for retirement 

benefits, even though not yet retired. Unmarried children under the age of 18 (under 19 if in high school) or any age if 

disabled before age 22 may qualify for Social Security benefits on a retired or disabled parent’s Social Security record.

Note: Although the full retirement age for Social Security may vary, Medicare eligibility is age 65 for everyone. Eligibility 

for Medicare is based on benefits as a retired worker, as a spouse of a retired or disabled worker, or as a spouse of 

a deceased worker. The individual qualifies even if the individual is not receiving monthly Social Security retirement 

benefits because the individual or the individual’s spouse continues to work.

Special rules apply to uninsured persons who are at least 65 but who are not eligible for Medicare under the regular rules. 

See Chapter 5.

Effect on Benefits from Work Not Covered by Social Security

There are two situations in which receipt of a pension based on employment not covered by Social Security will affect 

the amount of a Social Security benefit. Employees who participated in a public retirement system and also have a Social 

Security benefit based on another retirement system should be aware of these provisions.

The Windfall Elimination Provision (WEP) affects the way the Social Security retirement or disability benefit is computed 

for some individuals with non-covered employment.

The Government Pension Offset (GPO) affects the amount of the Social Security benefit received by a spouse or 

widow(er).

Windfall Elimination Provision 

The WEP affects some individuals who receive a monthly pension based in whole or in part on work not covered by Social 

Security. The weighting in the Social Security benefit formula is intended to help people who spend most of their working 

lives in low-paying jobs by providing them with a benefit that is higher in relation to their prior earnings than the benefit 

provided for workers with high career earnings. Before 1983, people who worked mainly in jobs not covered by Social 

Security had their benefits calculated as if they were long-term, low-wage workers.
63

Therefore, prior to the WEP, the benefit formula created an unintended advantage for workers who had pensions from 

non-covered employment in addition to Social Security coverage. It benefited people who worked for only a portion of their 

careers in jobs covered by Social Security but had their benefits computed as if they were long-term, low-wage workers. 

WEP was enacted to eliminate this unintended advantage by providing for a different, less heavily weighted benefit formula 

for persons who receive a pension based on non-covered employment.

If you receive a pension based on work not covered by Social Security, your Social Security retirement or disability benefit 

is computed using a modified benefit formula. The resulting benefit amount is lower than you would receive if you did not 

also receive a pension based on non-covered employment.

The modified formula applies to those who reach age 62 or become disabled after 1985 and first become eligible after 

1985 for a monthly pension based in whole or in part on work not covered by Social Security. You are considered eligible to 

receive a pension if you meet the requirements of the pension, even if you continue to work.

Workers with relatively low pensions are less affected by the law because the reduction in the Social Security benefit 

cannot be more than one-half of that part of the pension attributable to earnings not covered by Social Security.

The WEP does not apply to:

•	 A federal worker performing service on January 1, 1984, who becomes newly covered under Social Security on 

January 1, 1984, under the mandatory coverage provision in PL 98-21;

•	 An employee of a non-profit organization who is exempt from Social Security coverage on December 31, 1983, 

and who becomes covered for the first time as an employee of that organization on January 1, 1984, under the 

mandatory coverage provision of PL 98-21;

•	 Pensions based on earnings under the Railroad Retirement Act;

•	 Pensions based entirely on non-covered employment before 1957;

•	 Persons who have 30 or more years of substantial earnings under Social Security; or

•	 Survivor benefits.

For more information about the WEP, see the SSA WEP webpage and the WEP factsheet. 

Government Pension Offset 

The GPO applies to a worker who gets a government pension that is based on employment not covered by Social Security 

and is also eligible for Social Security as a spouse or widow/widower. Two-thirds of the government pension is used to 

offset any spouse’s or widow/widower’s Social Security benefit.

Before the GPO provisions were enacted in 1977, many government employees qualified for a pension from their 

government agencies and for a spouse’s benefit from Social Security, even though they were not dependent on that 

spouse.

This situation was considered unfair to employees in Social Security covered positions because Social Security rules 

require that an individual’s benefit as a spouse or surviving spouse be offset dollar for dollar by the amount of their own 

Social Security retirement benefit.

Example: Under GPO rules, an individual eligible for $1,200 in Social Security retirement benefits on their own 

work record and also eligible for a spousal benefit of $900 receives only the higher of the two benefits, $1,200 in 

this case. Before enactment of the GPO provision, if that individual was a government employee who did not pay 

into Social Security and who earned a $1,200 government pension, there was no offset; and they would receive 

the $900 Social Security spousal benefit as well as their $1,200 government pension. The GPO provision was 

enacted to prevent such inequities.

For applications filed before April 1, 2004, state and local government workers needed to be covered by Social Security 

only on the last day of employment with the government entity to be exempt from GPO. Many workers were able to take 

advantage of this exemption. Congress further tightened the GPO provision on March 2, 2004, with the Social Security 

Protection Act of 2004.
64

The Social Security Protection Act of 2004 required that beginning with applications filed April 1, 2004, state and local 

government workers be covered by Social Security throughout their last 60 months of employment with the government 

entity to be exempt from the GPO. If the worker’s last day of government employment was covered by both Social Security 

and the pension system, and the last day occurred before July 1, 2004, the worker is exempt from GPO with respect to all 

current and future applications for spouse’s or widow(er)’s benefits. For example, a teacher whose last day of government 

employment in June 2004 was covered under Social Security and the pension system would be exempt from the GPO 

regardless of when they filed for benefits.

The Act did provide a transition for workers whose last day of government employment occurred within five years after 

the date of enactment (March 2, 2004). Any state or local government worker whose last day of government employment 

occurred after June 30, 2004, and before March 2, 2009, could have the requirement for 60 months of Social Security 

covered government employment reduced. For these workers, the requirement for 60 consecutive months of Social 

Security covered employment was reduced (but not to less than one month) by the total number of months that the 

worker had in Social Security covered government service under the same retirement system before March 2, 2004. If 

the 60-month period was reduced, the remaining months of service needed to fulfill the requirement must have been 

performed after March 2, 2004.

Example: Ms. Jones was working in a non-covered position at the time of enactment of the GPO but had 

previously worked in a Social Security covered job in the same retirement system for 12 months in 1997. Because 

she had previously worked in Social Security covered employment for 12 months, the requirement that her last 60 

months of employment be in a Social Security covered position would be reduced to 48 months, or four years. If 

Ms. Jones began working after March 2, 2004, in Social Security covered employment under the same retirement 

system as her prior government work, and worked continuously in the covered position for at least the final 

48-month period of her employment and her last day of employment was before March 2, 2009, Ms. Jones would 

have been exempt from the GPO offset.

All other non-covered state and local government workers who first switched to government employment covered by Social 

Security and their pension plan after June 30, 2004, had to work in covered government employment for the entire final 

60-month period of their government employment in order to avoid the GPO.

The GPO does not apply to pension benefits that are:

•	 Not based on earnings, or

•	 Based on earnings in a job where the retiree was paying Social Security taxes, and

a. The recipient filed for and was entitled to a benefit as a spouse, widow or widower before April 1, 2004; or

b. The last day of employment that the pension is based on is before July 1, 2004; or

c. The retiree paid Social Security taxes on earnings during the last 60 months of government service.

Benefits as a spouse, widow or widower will also not be reduced by the GPO if the individual:

•	 Is a federal employee who elected to switch from the Civil Service Retirement System to the Federal Employees’ 

Retirement System after December 31, 1987; and either:

a. Filed for and was entitled to spouse’s, widow’s or widower’s benefits before April 1, 2004; or

b. The last day of service (that the pension is based on) is before July 1, 2004; or

c. Paid Social Security taxes on earnings for 60 months or more during the period beginning January 1988 and 

ending with the first month of entitlement to benefits; or

•	 Received or was eligible to receive a government pension before December 1982 and met all the requirements 

for Social Security spouse’s benefits in effect in January 1977; or

•	 Received or was eligible to receive a federal, state or local government pension before July 1, 1983, and was 

receiving one-half support from the spouse.

For more information, see the GPO Fact Sheet.
65

Savings Plans for WEP or GPO Purposes

The WEP and GPO apply to pensions provided by state and local government entities. Some public employers not covered by 

Social Security have established alternative retirement plans, such as a savings plan, instead of a conventional pension plan.

A plan is considered a savings plan and is not a pension for WEP/GPO purposes if:

•	 An employee voluntarily contributes to a plan that is separate from and in addition to a primary retirement plan;

•	 The employer makes no contributions to the plan;

•	 The withdrawals from the plan do not exceed the employee’s contributions (plus interest); and

•	 Withdrawals are not based on age, length of service or earnings.

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

•	 A Social Security retirement or disability benefit.

•	 An early incentive retirement payment.

A survivor annuity is exempt from the WEP; however, Social Security survivor benefits may be affected by the GPO.

Example 1: A part-time employee for a city is not covered by a Section 218 Agreement or mandatory Social 

Security. In July 1991, the employee elected to participate in the state’s public employees deferred compensation 

plan in lieu of mandatory Social Security coverage. The employee, upon retirement, will receive a payment from 

the deferred compensation plan based on employee and employer contributions to the plan, as this is the only 

plan to which the employee contributes. This plan is not considered a savings plan and the payment will be 

considered a pension and subject to the GPO or WEP provisions.

Example 2: A state employee is not covered by a 218 Agreement but is covered by a state employee retirement 

system and has also elected to make contributions to a deferred compensation plan. The payment from this 

deferred compensation plan is separate from and in addition to the primary retirement plan. The employer made 

no contributions to the deferred compensation plan and the payment from the deferred compensation plan is not 

based on age, length of service or earnings. While the payment from the retirement system is subject to GPO or 

WEP, the payment from the deferred compensation plan is not.

SSA Publication 05-10045, Windfall Elimination Provision, and SSA Publication 05-10007, Government Pension Offset, 

address these topics further. You can also request these publications from the Social Security Administration by calling 

800-772-1213. Employers assisting in retirement planning are urged to provide copies of these publications to their 

employees.

Medicare

SSA is the primary public contact point for eligibility and premium issues for the Centers for Medicare & Medicaid Services 

(CMS), which is responsible for administering the Medicare program. SSA staff determines and answers questions on 

Medicare eligibility. SSA also maintains records of Medicare eligibility and collects Medicare Part B premiums through 

withholding from Social Security payments.

The Medicare tax supports a federally-funded health insurance program for people age 65 and older and people with 

certain disabilities. Medicare has four parts:

1. Hospital insurance (Part A) that helps pay for inpatient care in a hospital or skilled nursing facility 

(following a hospital stay), some home health care and hospice care.

2. Medical insurance (Part B) that helps pay for doctors’ services and many other medical services and 

supplies that are not covered by hospital insurance.

3. Medicare Advantage (Part C) plans, available in many areas through third-party insurers. People with 

Medicare Parts A and B can choose to receive all of their health care services through one of these 

provider organizations under Part C.

4. Prescription drug coverage (Part D) that helps pay for medications doctors prescribe for treatment.

You can get more information about Medicare at www.medicare.gov.
66

Medicaid

Medicaid provides free or low-cost health insurance coverage to qualifying individuals and families. In 32 states and the 

District of Columbia, eligibility for SSI benefits confers automatic entitlement to Medicaid. SSA provides information and 

referral services in support of Medicaid and is directly funded by the states and CMS.

For more information, see www.medicaid.gov.

Reporting Wages to SSA

As discussed in Chapter 3, all employers are responsible for collecting Social Security numbers from employees, filing tax 

returns with the Internal Revenue Service, filing annual wage reports (Forms W-2) with the Social Security Administration, 

and furnishing copies of Forms W-2 to employees. To avoid costly errors, it’s crucial that Form W-2 filing be accurate.

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

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

systems; and

•	 Employee name and Social Security number verification.

Reports that have errors, do not match or do not meet edit conditions are returned to the employer (or submitter) for 

correction and resubmission.

Employers failing to meet filing requirements by the deadlines are subject to IRS late filing (see Chapter 3).

Note: If the initial report was filed timely and later returned for corrections, the employer will be subject to late filing 

penalties if the corrected report is not resubmitted by the due date.

Electronic Wage Reporting

Employers can submit their W-2 files using SSA’s SSA Business Services Online. This option is fast, free and secure. For 

security, a PIN and a password are required before you submit your W-2 file over this webpage; most registrations can be 

completed on the webpage. For more information, visit the SSA employer page or call your ESLO (see list at website).

Social Security Statement

Individuals can get their personal Social Security statement online by using their my Social Security account. This 

statement shows all earnings on which a worker has paid Social Security taxes during their working years. It also shows 

estimates for retirement, disability and survivors benefits. The statements should be examined closely to ensure that all 

earnings are properly credited. If the earnings shown on the statement are not correct, call SSA at 800-772-1213.

SSA mails paper statements to workers age 60 and older three months before their birthday if they do not receive Social 

Security benefits and do not yet have a my Social Security account.

To request a paper statement, call SSA at 800-772-1213 or visit a local field office, or to request by mail, print a copy of 

Form SSA-7004 and mail the completed form to the address provided. SSA will mail a printout of your Social Security 

statement within four to six weeks after receipt of your written request.

The Medicare portion of the Social Security statement reflects the amount of earnings that was taxed and an estimate of 

the amount of taxes paid to support the Medicare program. The taxes are estimated because SSA does not keep records 

of Medicare taxes paid. If an employee had both Social Security earnings and government earnings that qualified for 

Medicare in the same year, the statement would reflect an estimate of the combined Medicare taxes paid.

Workers may access online benefit planning tools at the SSA planning page. These can be used to project potential 

benefits using various earnings scenarios.
67

Note: Individuals who have worked only in non-covered employment (no Social Security and Medicare taxes) will not 

receive a Social Security statement.

Verifying Employee Names and Social Security Numbers

After wage reports have been entered into SSA’s system, each employee’s name and SSN is compared to SSA’s records to 

verify that it is correct. Matched wage reports are updated to the individual employee’s record; SSA identifies reports that 

do not match and contacts the employer or employee to provide a corrected name or SSN. Additionally, IRS may impose 

a penalty of up to $270 per misreported name and SSN. Accurate crediting of earnings to individual records is essential 

to the correct payment of Social Security benefits; this is one reason obtaining a correct name and SSN is very important. 

See IRS Publication 15, for a discussion of requirements for new hires.

Social Security Number Verification Service

The Social Security Number Verification Service (SSNVS) is a free, internet-based service of the SSA Business Services 

Online (BSO) where employers and third-party submitters can verify their employees’ names and SSNs against SSA’s 

records. Employers are required to register with SSA to use the service.

With SSNVS, you may verify up to 10 names and SSNs online and receive immediate results. There is no limit to the 

number of times the SSN verification webpage may be used within a session. You may upload electronic files of up to 

250,000 names and SSNs and will usually receive results the next government business day.

In addition to SSNVS, the BSO offers registration services and employer services. Registration services offers a user 

identification number (User ID) assignment, password selection and various registration maintenance functions. Employer 

services offers Form W-2 file upload, W-2 and W-2c online key-in functions (no special software or forms required) and the 

ability to track files and view processing results and notices. See the SSA BSO page for more information.

Note: SSNVS should only be used for the purpose for which it was intended. SSA will verify SSNs and names solely to 

ensure that the records of current or former employees are correct for the purpose of completing Form W-2.

Verifying Employment Eligibility

Under the Immigration and Nationality Act, employers must verify the identity and employment eligibility of anyone hired for 

employment in the United States. This includes citizens and non-citizens.

Form I-9, Employment Eligibility Verification, verifies that individuals are eligible to work in the United States. Completion 

of this form is required for every employee hired after November 6, 1986. The U.S. Citizenship and Immigration Service 

(USCIS) operates I-9 Central, a free website providing employers and employees access to resources, tips and guidance 

to properly complete Form I-9 and better understand the Form I-9 process.

USCIS also operates an electronic employment eligibility verification system, E-Verify, for employers. If you have questions 

about Form I-9, contact E-Verify customer support at 888-464-4218 or the E-Verify webpage.

You can download copies of Form I-9 from www.uscis.gov. USCIS Publication M-274, Handbook for Employers, includes 

Form I-9 and addresses questions relating to the form and employment issues related to immigration. Print copies are 

available to employers at USCIS regional and district offices, as well as local Government Printing Office bookstores. For 

questions not addressed in the handbook, visit www.uscis.gov or call 800-375-5283.

Correcting Wage Reports

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

Forms W-2c may be filed on paper or via electronic transmission. Electronic submissions should be formatted following 

the instructions in SSA Publication 42-007, Specifications for Filing Forms W-2 Electronically (EFW2), and are available on 

SSA’s website or from any ESLO. A list of the ESLOs is also available at this site.
68

Note: As of February 28, 2006, SSA no longer accepts magnetic media submissions for wage reports. If you are required 

to file 250 or more Forms W-2c during a calendar year, you must file them electronically unless IRS grants you a waiver. 

For information on filing Form 8508, Request for Waiver From Filing Information Returns Electronically, contact IRS at 

866-455-7438, or visit www.irs.gov.

If the employee has a name change, the employee must notify SSA and request a new Social Security card. Never change 

an employee’s name in your payroll system until the employee has shown you a new Social Security card showing the 

change. See IRS Publication 15 (Circular E), Employer’s Tax Guide, for rules on name changes.

If an error is identified before Form W-2 is filed with the SSA, but after providing the form to the employee, changes should 

be shown on a new original form. This form should be marked “Reissued Statement” at the top. Be sure to change the 

information submitted to SSA as well, either by marking the original paper W-2 “VOID” at the top (if you submit on paper) 

or by correcting the data file before filing electronically.

Form W-3c must accompany Copy A of Forms W-2c when they are sent to SSA. A separate Form W-3c must be used for 

each type of Form W-2 being corrected and must accompany a single Form W-2c or multiple Forms W-2c. Large numbers 

of Forms W-2c may also be filed electronically. Contact your ESLO for details.

Common Reporting Errors

Incorrect or missing employer identification number (EIN). SSA and IRS maintain records by the EIN. Reports 

received with missing or erroneous EINs may be credited to the wrong record and result in IRS assessing penalties for 

failure to file correct reports.

Incorrect employee names and Social Security numbers. SSA cannot credit earnings to an employee’s record unless 

the employee’s name and Social Security number on the wage report matches the name and number in the SSA files. 

Use the name exactly as it is shown on the employee’s Social Security card.

Wage reports for years after employee’s death. Payments on behalf of a deceased employee made after the year of 

death cannot be credited as wages for Social Security purposes. These payments should be reported to the employee’s 

estate on Form 1099-MISC, Miscellaneous Income. See Chapter 3.

Errors resulting in out-of-balance reports. Errors may occur due to application of an incorrect wage base for Social 

Security or a wage base limitation to the Medicare wages.

Tips. If an employee has tips, they must be reported in the “Social Security tips” field of Form W-2. They are not 

included in the “Social Security wages” field. These two fields are added together by SSA to obtain the total Social 

Security earnings.

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

Wrong tax year form used. SSA optical scanning and imaging systems are modified annually to meet changes in Form 

W-2 formats. The version of Form W-2 for the year reported must be used or SSA may be unable to read the form or 

post the earnings to the wrong year.

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

subject to error.

Failure to file Copy A of Form W-2 with SSA. Employers must always file Copy A of Form W-2 with SSA, unless they 

submit the same data electronically.

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

Wrong tax year entered. Make sure you show the correct tax year on the code “RE” records. Dollar totals (“RT” record) 

are used by SSA to determine whether the report is in balance and, if it is not, to show where the error may be found. 

Make sure you report employee names and Social Security numbers correctly.
69

Missing/Incorrect submitter (Code “RA”). This information helps SSA properly identify and control each report. It 

provides contact information for use if there is a problem with the submission.

Unreadable reports. Reports must meet the requirements set out in EFW2 to be processable on SSA’s electronic 

equipment. Unprocessable reports will be returned to the transmitter for correction and returned to SSA. Failure to return 

the corrected reports timely may result in IRS penalty assessment.

Incorrect or omitted Medicare wage/tip amounts. Medicare wages/tips must be shown separately from Social Security 

wages on Forms 941 filed with the IRS. All Medicare wages/tips are subject to Medicare taxes.

Showing non-covered amounts as Social Security or Medicare wages. Examples of non-covered amounts include 

employee earnings that exceed the wage base for Social Security and payments to an independent contractor shown as 

wages. See “Special Rules for Various Types of Services and Payments” in Publication 15 for information on other noncovered payments.

Failure to file Form W-2c or Form W-3c with SSA when adjusting prior year earnings on Form 941 or Form 941c.

Adjustments of tax liability filed with IRS that are based on changes in Social Security or Medicare wages must be 

matched by the filing of Forms W-2c and W-3c with SSA to allow entry of the wage changes on the employee’s Social 

Security earnings records.

Filing of duplicate or partially duplicate Forms 941. Social Security or Medicare wages shown on duplicate Forms 941 

may lead to costly and otherwise unnecessary reconciliations between SSA, the IRS and the employer.

Publications and Forms – Social Security Administration

To request SSA publications, call 800-772-1213 (toll-free) or TTY 800-325- 0778, or

email: DCBFQM.OFLM.OLM.RQCT.Orders@ssa.gov.

You can also download most forms and publications at SSA.gov/employer.

Publication/Form Title

Form SS-5 Application for a Social Security Card

Social Security Number Verification Service (SSNVS) Handbook

Pub. 42-007 Specifications for Filing Forms W-2 Electronically (EFW2)

Pub. 42-014 Specifications for Filing Forms W-2c Electronically (EFW2C)

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

Other SSA Services

SSA Speaker’s Bureau

SSA can arrange to have speakers available for wage reporting seminars, pre-retirement sessions and other employersponsored onsite meetings with employees to discuss Social Security matters. For more information, contact any Social 

Security office or call 800-772-1213. 

Employer Training Seminars

Each year, ESLOs provide a series of free training seminars to annual wage reporters. Call your local ESLO to find out 

when a seminar is held in your area or check the website for a list of seminars held around the nation.
70

Key SSA Webpages

Employer W-2 Filing Instructions & Information

This website addresses employer reporting and other interests.

Social Security Online

SSA’s home page lists available online services such as benefit planners, Social Security statements, Medicare card 

replacement and so on.

State and Local Government Employers

This site is for state and local government employers who are responsible for withholding, reporting and paying Social 

Security and Medicare taxes for public employees.

POMS State and Local Coverage Handbook

The Program Operations Manual System (POMS) is a primary source of information used by Social Security employees to 

process claims for Social Security benefits. The Social Security Handbook is written in plain language for use by the public. 

Chapter 10 focuses on state and local employment, specifically.

Research, Statistics & Policy Analysis

The research and policy analysis information on the SSA website is the result of a collaborative effort among three 

ORDP offices—the Office of Research, Demonstration and Employment Support, the Office of Research, Evaluation and 

Statistics and the Office of Retirement Policy. All three offices work together to conduct research and policy analysis and 

disseminate the results of their research in a variety of publications that are available on the website.

Frequently Asked Questions

1. If the IRS is responsible for answering questions on withholding and paying Social Security 

and Medicare taxes, why do we get reporting information from SSA and why do we have to 

send IRS Forms W-2 to SSA? 

SSA is responsible for keeping records of earnings and for determining eligibility and amounts 

for individuals applying for retirement, disability or survivor benefits. The amount of benefits an 

individual receives is based in part on that individual’s earnings over their working career. The 

information on an individual’s earnings record is taken directly from the Social Security and 

Medicare wage fields on the Form W-2 sent to SSA by the employer. After SSA processes this 

information, it is forwarded to the IRS. Either IRS or SSA can help you with Form W-2 reporting 

questions. [IRS/SSA]

2. How does an employee verify the information that SSA shows on their earnings record? 

Individuals can get their personal Social Security statement online by using their my Social Security 

account. SSA mails paper statements to workers age 60 and older three months before their 

birthday if they do not receive Social Security benefits and do not yet have a my Social Security 

account. [SSA] 

3. What information can be provided by SSA to State Social Security Administrators to help 

them perform their responsibilities? 

SSA may provide interpretations of the Social Security Act, Social Security regulations, rulings, the 

state Section 218 Agreement and its, as they apply to a public employer. [SSA]

4. Whom should I call when I have questions about annual wage reporting? 

Call your local SSA ESLO. See Chapter 7. [SSA]

5. My employees are paying into the State Teachers’ Retirement System and some have enough 

Social Security credits from former employment to be eligible for Social Security benefits. Will 

they receive benefits from both? 

Yes, but the Windfall Elimination Provision may reduce Social Security benefits. Additionally, spouses’ 

benefits may be reduced by the Government Pension Offset formula. See Chapter 6. [SSA]
71

n Chapter 8

Internal Revenue Service

The Internal Revenue Service (IRS), an agency of the U.S. Department of Treasury, is charged with the administration of the tax laws passed by Congress. This includes assisting taxpayers with education, account issues and filing 

responsibilities, as well as conducting compliance and enforcement activities. 

More information about the programs and responsibilities of the IRS is available at IRS.gov. Information for federal, state 

and local governments, including employment tax, is available at IRS.gov/FSLG. 

Organization

National headquarters for the IRS, in Washington, DC, develops nationwide policies and programs for the administration 

of the agency. The chief executive of the agency is the IRS Commissioner. Several functions report directly to the 

Commissioner, including:

•	 Chief Counsel

•	 Appeals

•	 Taxpayer Advocate Service

•	 Communications & Liaison

•	 Research, Applied Analytics, and Statistics

•	 Equity, Diversity and Inclusion

The IRS is organized around four specific “customer bases” or groups of taxpayers with generally common interests and 

needs. Each operating division has a Commissioner and its own Counsel to provide legal expertise and guidance. 

The four customer-based divisions are:

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

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

proprietors.

Large Business and International (LB&I) deals with large businesses and international tax issues. 

Tax Exempt and Government Entities (TE/GE) serves all government organizations as well as nonprofit and other 

exempt organizations. Most or all of the contact with the IRS that a government entity has will be with TE/GE, so it is 

discussed in more detail below. TE/GE has responsibility for providing assistance and education to taxpayers, as well 

as performing compliance activities related to these organizations.

Tax Exempt and Government Entities Division

The Tax Exempt and Government Entities Division was established in 1999 and replaced the former office of Assistant 

Commissioner (Employee Plans and Exempt Organizations). 

TE/GE customers range from small local community organizations and municipalities to major universities, large 

pension funds, state governments, federal agencies, Indian tribal governments and issuers of tax-exempt bonds. 

These organizations represent a large economic sector with unique needs. They are governed by often complex, highly 

specialized provisions of the tax law.

TE/GE serves three distinct customer segments:

•	 Employee Plans

» Retirement plans, IRAs and related trusts
72

» Plan participants and beneficiaries

» Employer sponsors of retirement plans

•	 Exempt Organizations

» Organizations exempt from income tax under IRC Section 501 (including charities, private foundations and 

other types of exempt organizations, such as business leagues, labor unions and veterans’ organizations)

» Political organizations described in IRC 527

•	 Government Entities

» Federal, State and Local Governments

» Indian Tribal Governments

» Tax Exempt Bonds

Federal, State and Local Governments/Employment Tax (FSL/ET), formerly known as FSLG, is responsible for 

administering the tax laws affecting federal, state and local government entities. Its primary focus is ensuring compliance 

on information return reporting and employment tax issues for government entities. It provides easily accessible and 

equitable voluntary compliance programs for its government customers.

Indian Tribal Governments helps Indian tribes deal with their federal tax matters and provides a single point of contact 

for assistance and service. The ITG specialists address issues and provide guidance to Indian tribes, whose concerns 

may relate to tribal governments as employers, distributions to tribal members and the establishment of governmental 

programs, trusts and businesses. Visit IRS.gov/tribes to find the ITG specialist assigned to your tribe and links to other 

information. 

Tax Exempt Bonds provides information to the tax-exempt bond community and encourages voluntary compliance 

through educational resources, Voluntary Closing Agreement Program and interactive forms. For more information, visit 

IRS.gov/bonds.

Customer Account Services

If you are authorized to represent a taxpayer, you can call 877-829-5500 toll-free for your government entities questions on:

•	 Your account

•	 General information about tax exemption of a government

•	 Private letter ruling requests

Note: Although the State Administrator is responsible for maintaining and interpreting your Section 218 Agreement, 

federal disclosure laws prohibit the State Administrator from inspecting your tax information without your consent. If you 

would like the State Administrator to assist you with a Section 218 Agreement or related Social Security coverage issue, 

you can expedite the process by completing Form 8821, Tax Information Authorization, and filing it with the IRS.
73

Publications and Forms — Internal Revenue Service

You can download most IRS forms and publications at IRS.gov/forms or order them online or by mail at 

IRS.gov/orderforms. 

Publication/ 

Form Number Title

1 Your Rights as a Taxpayer

15 (Circular E), Employer’s Tax Guide

15-A Employer’s Supplemental Tax Guide

15-B Employer’s Tax Guide to Fringe Benefits

80 (Circular SS), Federal Tax Guide for Employers in the U.S. Virgin Islands, Guam, 

American Samoa, and the Commonwealth of the Northern Mariana Islands

463 Travel, Gift, and Car Expenses

515 Withholding of Tax on Nonresident Aliens and Foreign Entities

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

594 The IRS Collection Process

947 Practice Before the IRS and Power of Attorney

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

Administration

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

1179 General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, 

and Certain Other Information Returns

1976 Do You Qualify for Relief Under Section 530?

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

4268 Employment Tax for Indian Tribal Governments

5137 Fringe Benefit Guide

SS-4 Application for Employer Identification Number

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

Income Tax Withholding

W-2 Wage and Tax Statement

W-2c Corrected Wage and Tax Statement

W-3 Transmittal of Wage and Tax Statements

W-3c Transmittal of Corrected Wage and Tax Statements

W-4 Employee’s Withholding Certificate

W-9 Request for Taxpayer Identification Number and Certification

941 Employer’s Quarterly Federal Tax Return
74

Publication/ 

Form Number Title

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

943 Employer’s Annual Tax Return for Agricultural Employees

944 Employer’s Annual Federal Tax Return

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

945 Annual Return of Withheld Federal Income Tax

945-A Annual Record of Federal Tax Liability

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

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

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

1099-MISC Miscellaneous Income

2848 Power of Attorney and Declaration of Representative

8233 Exemption From Withholding on Compensation for Independent (and Certain 

Dependent) Personal Services of a Nonresident Alien Individual

8821 Tax Information Authorization

14581-A Fringe Benefits Compliance Self-Assessment For Public Employers

14581-B International Issues Compliance Self-Assessment For Public Employers

14581-C Medicare Coverage Compliance Self-Assessment For State and Local 

Government Employers

14581-D Other Tax Issues Compliance Self-Assessment For Public Employers

14581-E Retirement Plan Coverage Compliance Self-Assessment For State and Local 

Government Entities

14581-F Social Security Coverage Compliance Self-Assessment For State and Local 

Government Entities

14581-G Employee or Independent Contractor Compliance Self-Assessment For 

Public Employers

Frequently Asked Questions

1. What information can IRS provide to a governmental unit about its Social Security coverage 

and tax liability? 

The IRS is responsible for assessing and collecting all taxes and interpreting and applying the tax 

law. By contacting Customer Account Services, an authorized person can receive tax information 

about an entity. Questions about Section 218 Agreement coverage should be directed to your State 

Social Security Administrator.

2. What information can IRS provide to State Social Security Administrators to help them 

perform their responsibilities, especially when an audit or review is to be conducted of a 

public employer in their state? 

IRC Section 6103 governs the disclosure of tax information by the IRS to other federal and state 

agencies. Without the consent of the taxpayer, no provision in Section 6103 authorizes the IRS 
75

to share specific taxpayer information with State Social Security Administrators. However, in 

performing a tax investigation, the IRS may request information from the State Social Security 

Administrator. State administrators are encouraged to share information, consistent with 

state law, with the IRS to help resolve matters of mutual interest. Your State Social Security 

Administrator can better assist you if you consent to make your federal tax information available 

for the Administrator’s review. A government entity can grant a State Administrator access to its 

tax information by completing Form 8821, Tax Information Authorization.

3. Can I arrange for the State Social Security Administrator to receive my tax information or 

discuss it with the IRS? 

If you have a Section 218 Agreement to provide Social Security coverage for your employees, you 

may wish to have the State Social Security Administrator consulted or otherwise involved in the 

examination. The State Administrator is not considered an official responsible for the administration 

of state or federal tax laws under Section 6103; therefore, there is no provision in the law allowing 

the IRS to disclose tax information in this situation. If you are reviewing an issue with the IRS 

involving Section 218 coverage, and you wish to have the State Administrator or a representative 

participate in the discussion, you should complete either Form 2848, Power of Attorney and 

Declaration of Representative, or Form 8821, Tax Information Authorization, as appropriate. These 

forms are discussed at Disclosure Laws.
76

n Chapter 9

State Social Security Administrators

SSA Regulation 20 CFR Section 404.1204 requires each state to designate at least one state official to act for them in 

administering that state’s Section 218 Agreement. This official, the State Social Security Administrator, acts for the state 

with respect to its responsibilities for maintaining and administering the provisions of the agreement as well as the proper 

application of Social Security and Medicare.

The designated State Social Security Administrator (State Administrator) acts for the state in negotiations with the SSA. 

This includes acting for the state with respect to the initial Section 218 Agreement and modifications, the performance of 

the state’s responsibilities under the agreement and in all state dealings concerning the administration of the agreement. 

Each state’s Section 218 Agreement and Social Security Regulations 404.1204 provide a legal obligation for each state 

to designate an official. In many states, however, the actual day-to-day responsibilities are delegated to the staff of the 

designated state official.

The state is responsible for notifying SSA of any changes regarding its designated state official. That official should send a 

notification to the SSA Regional and Parallel Social Security offices for that state.

The extent of the State Administrators' responsibilities vary from state to state. The location of State Social Security 

Administrators’ offices and the extent and scope of their responsibilities are determined by each state. Details on each 

state are contained in the respective state’s enabling legislation, citations for which are listed in the Appendix. Frequently, 

a State Administrator has other responsibilities, including those related to non-218 entities. A detailed list of basic State 

Administrator responsibilities is available at Program Operations Manual System (POMS). Also see SSA.gov/SLGE. 

For Section 218 Agreement purposes, the State Administrator:

•	 Administers and maintains the federal-state Section 218 Agreement that governs voluntary Social Security and 

Medicare coverage by state and local government employers in the state;

•	 Negotiates modifications to the original agreement to include additional coverage groups, corrects errors in 

modifications, conducts referendums and identifies additional political subdivisions that join a covered retirement 

system;

•	 Maintains in a secured location the state’s master agreements, modifications, dissolutions and intrastate 

agreements;

•	 Provides SSA with notice and evidence of the legal dissolution of covered state or political subdivision entities;

•	 Resolves coverage and taxation questions related to the agreement and modifications with SSA and IRS; 

•	 Negotiates with SSA to resolve Social Security contribution payment and wage reporting questions concerning 

wages paid before 1987;

•	 Informs SSA of name, title and address of designated officials involved in Section 218 administration and notifies 

SSA of any changes;

•	 Informs SSA of any changes in a government entity’s legal status, such as name changes, dissolutions or 

consolidations;

•	 Communicates regularly with SSA, IRS, employers and stakeholders on Section 218-related issues;

•	 Provides information to state and local public employers covered under agreements in accordance with the Act; 

and

•	 Determines necessary funding and staffing for administration of the Section 218 program.

Note: IRC Section 6103 governs the disclosure of tax information by the IRS to other federal and state agencies. Without 

the consent of the taxpayer, no provision in Section 6103 authorizes the IRS to share specific taxpayer information with 

State Social Security Administrators. However, in performing a tax investigation, the IRS may request information from 

the State Social Security Administrator.

The State Administrator is the principal state official responsible for these functions. The Administrator serves as the main 

resource to state and local employers for information and advice about Social Security coverage, taxation and many 
77

reporting issues. SSA, IRS, public employers and employees should contact the designated Administrator to help resolve 

coverage questions concerning groups or individual employees. Public employers should advise the State Social Security 

Administrator of any changes in a government entity’s legal status, such as name changes, dissolutions or consolidations. 

More detailed information is available at the SSA POMS webpage.

By allowing the State Administrator to inspect your tax information, you can speed up resolving any coverage or federal 

tax issues with the IRS. A government entity may consent to have a State Administrator or representative review tax 

information by filing Form 8821, Tax Information Authorization, and filing it with the IRS.

National Conference of State Social Security Administrators (NCSSSA)

The ever-changing and complex Social Security coverage statutes, withholding requirements, reporting obligations and 

associated employment tax regulations require constant monitoring and interpretation. For more than 50 years the National 

Conference of State Social Security Administrators (NCSSSA.org) has provided an effective network of communication for 

federal, state and local governments concerning Social Security coverage and federal employment tax policy.

With the enactment of Section 218 to the Act in 1950, states could exercise the option of providing Social Security 

coverage for state and local employees. By the end of 1951, 30 states had executed Section 218 Agreements with the 

federal government. The responsibility for administering the Social Security program varied from state to state, depending 

on the state’s enabling legislation.

State Administrators began to operate in an area where no precedent existed. It became apparent that a forum was 

needed where the administrators could address the many problems and questions posed by the new program. The 

first forum between State Social Security Administrators and federal officials was held in January 1952. As a result, the 

NCSSSA was established to provide a unified state perspective at the federal level to provide an on-going medium for 

problem-solving and to maintain an open forum for the development of new policy.

Since its formation in 1952, the NCSSSA has worked closely with SSA and IRS to address Social Security (and 

later Medicare) coverage and employment tax issues raised by state and local employers and State Social Security 

Administrators throughout the United States. The NCSSSA works with federal officials to ensure that legislative and 

regulatory changes address state and local concerns. They provide leadership to state and local governments through 

accurate interpretation of federal laws and regulations, communication of federal tax policy and resolution of problems 

arising at the state and local level. The NCSSSA hosts national workshops and annual meetings where SSA and IRS 

officials address the concerns of state and local government representatives in a face-to-face format. NCSSSA officials 

represent public sector employers on various SSA and IRS committees and work groups.

Audits and Reviews of Public Employers

When the IRS or SSA conducts an audit or review of a public employer, the State Administrator for that state may be 

contacted to clarify the employer’s status, including:

•	 Whether the employees are covered under a Section 218 Agreement; and, if so,

•	 The specific exclusions (required and optional) that apply to that entity that must be considered during the audit 

or review, including any that are unique to individual employees (for example, whether any employees are subject 

to the Medicare continuing employment exemption).

For further information about the NCSSSA, contact your State Social Security Administrator, or go to NCSSSA.org.
78

n Glossary

Absolute Coverage Group (also called a non-retirement coverage group) – for Section 218 coverage purposes, a 

group of employees whose positions are not covered under a public retirement system; also referred to as a “non-retirement 

system coverage group” or a “Section 218(b)(5) coverage group.”

Additional Medicare Tax – This tax on employees is imposed on the wages of certain employees under IRC Section 3101(b)(2) 

and is in addition to the Medicare tax under IRC Section 3101(b)(1). Employers must begin withholding the Additional Medicare Tax 

when an employee’s Medicare wages exceed $200,000 during a calendar year. 

Alternative Lookback Rule – An optional method for determining whether an employee can be treated as a qualified 

participant in a retirement plan for purposes of determining whether mandatory Social Security applies. Under this rule, an 

employer may treat an employee as a qualified participant in the first year of employment if it is reasonable to believe the employee 

will be a qualified participant on the last day of the plan year. An employer may treat an employee as a qualified participant in a 

calendar year if the employee was a qualified participant at the end of the previous plan year. Treas. Reg. 31.3121(b)(7)-2(d)(3).

Continuing Employment Exception – Provision for exclusion of an employee from Medicare tax and coverage for services 

of a state or local government employee who is not covered by a Section 218 Agreement, is a participant in a public retirement 

system and meets all of the following requirements:

•	 The employee was performing regular and substantial services for remuneration for the employer before April 1, 1986;

•	 The employee was a bona fide employee on March 31, 1986;

•	 The employment relationship was not entered into for purposes of avoiding the Medicare tax; and

•	 The employment relationship with the employer has not been terminated after March 31, 1986.

Coverage Groups – Categories of state and local government employees with respect to a Section 218 Agreement. There are 

two types of coverage groups:

1. Absolute coverage groups: employees in positions not covered under a retirement system

2. Retirement system coverage groups: employees in positions covered by a retirement system

The Social Security Act gives each state the right, within the limits of state and federal laws, to decide which coverage groups 

are to be included under its agreement and any modifications to the agreement.

Defined Benefit Plan – An employer plan that uses an actuary to determine retirement benefits under a formula, generally 

based on age, years of service and salary level.

Defined Contribution Plan – An employer plan that provides for an individual account for each participant and for benefits 

based solely on the amount contributed to the participant’s account, and any income, expenses, gains, losses and forfeitures of 

accounts of other participants that may be allocated to the participant’s account.

Earnings Record – The information maintained by the SSA for an individual indicating Social Security and Medicare covered 

wages and self-employment income. Each individual’s record is accessed by SSN.

Employee – Generally any individual who, under the usual common-law rules applicable in determining the employer-employee 

relationship, is subject to the employment tax requirements of IRC Sections 3121 and 3401. The term is defined for Social Security 

and Medicare purposes in Sections 210(j) and 218(b)(3) of the Social Security Act and IRC Section 3121(d).

Employer Identification Number (EIN) – A unique nine-digit identification number assigned by IRS to state and local 

governments, businesses and other entities for tax-filing and reporting purposes, including withholding and paying FICA taxes. An 

entity can obtain an EIN by filing Form SS-4, Application for Employer Identification Number, with the IRS.

Entity – A separate legal “person,” that is not an individual; includes a corporation, partnership, LLC or a political unit, including a 

state, a political subdivision, a wholly-owned instrumentality, a municipality and so on.

Federal Insurance Contributions Act (FICA) – (IRC Sections 3101-3128) Federal statute providing for payroll tax deductions 

of Social Security and Medicare taxes from employees’ wages (employee portion), for employer’s obligation to deduct from wages 

and pay over the employee portion and for employer liability for the employer portion of Social Security and Medicare taxes on 

wages to fund Social Security and Medicare coverage.
79

Federal Unemployment Tax Act (FUTA) – Federal statute imposing tax on employers to provide for payments of 

unemployment compensation to workers who have lost their jobs. States and political subdivisions of a state are exempt from 

paying FUTA, but under state unemployment law, most state and local government employees must be covered for state 

unemployment insurance.

Fee-Based Public Official – A public official who receives and retains remuneration directly from members of the public, for 

example, a justice of the peace. An official who receives payment for services from government funds in the form of a wage or 

salary is not a fee-based public official, even if the compensation is called a fee.

FICA Replacement Plan – Alternate name for a public retirement system, as described in the regulations for Section 3121(b)(7)(F) 

(See Treas. Reg. 31.3121(b)(7)-2). Refers to a pension, annuity, retirement or similar fund or system established by a state or political 

subdivision for the purpose of providing retirement benefits to employees. See Public Retirement System.

Full Retirement Age (FRA) – The age at which unreduced Social Security benefits are payable. Depending on the date of birth, 

an individual’s FRA ranges from 65 to 67.

Governmental Function – Activity normally associated with the authority of government, legislative, executive, judicial, such 

as the control and prevention of crime, promoting the general welfare and providing for public safety. Income derived from any 

essential governmental function is exempt from federal income tax under IRC Section 115.

Government Pension Offset (GPO) – A reduction in the Social Security benefits that applies to individuals who (1) receive a 

government pension from work not covered for Social Security and (2) are eligible for Social Security as a spouse or widow(er). 

Two-thirds of the government pension offsets any spouse’s or widow(er)’s Social Security benefit.

HI – Hospital Insurance (Medicare Part A).

Indian Tribal Government – The governing body of any federally recognized tribe, band, community, village or group of Indians 

or Alaska Natives that is determined by the Secretary of the Treasury, with the Secretary of the Interior, to exercise governmental 

functions under IRC Section 7701(a)(40). Under IRC Section 7871, an Indian tribal government is treated as a state for certain 

purposes. Likewise, a subdivision of an Indian tribal government is treated as a political subdivision of a state if the subdivision 

has been delegated the right to exercise one or more of the substantial governmental functions of the Indian tribal government. 

However, a tribal government is not a “state” for purposes of Section 218 and is not eligible for a Section 218 Agreement.

Interstate Instrumentality – An independent legal entity organized by two or more states to carry out one or more 

governmental functions. For purposes of a Section 218 Agreement, an interstate instrumentality has the status of a state.

IRC – Internal Revenue Code.

IRS – Internal Revenue Service.

Mandatory Exclusions – See Required Exclusions.

Mandatory Medicare Health Insurance – Medicare tax and coverage not included as part of a Section 218 Agreement; 

imposed on all state and local government employees hired or rehired after March 31, 1986.

Mandatory Social Security – Required Social Security coverage for state and local government employees who are not 

members of a public retirement system and who are not covered by a Section 218 Agreement; effective July 2, 1991.

Medicare – Federally established health insurance program for people age 65 and older and certain people with disabilities. 

Part A (Hospital Insurance) is financed through employer and employee taxes on covered wages/self-employment or by individual 

payment of monthly premiums. Part B (Supplemental Medical Insurance) is financed by individuals paying monthly premiums.

Medicare Qualified Government Employment (MQGE) – Services of state and local government employees subject to 

Medicare tax but not to Social Security tax.

Modification – An amendment to an original Section 218 Agreement to extend coverage to additional groups of employees or to 

implement changes in federal and state laws. Each modification, like the original agreement, is a legally binding document.

National Conference of State Social Security Administrators (NCSSSA) – Professional association of State Social 

Security Administrators. These state officials are authorized by state law to administer Section 218 Agreements with the SSA and 

are responsible for all other activities associated with federal and state laws addressing Social Security and Medicare coverage of 

state and local public employers. Additional duties of individual State Administrators vary from state to state.
80

Non-Covered Employment – Employment not covered by Social Security under the Social Security Act and the IRC.

Nonproprietary Function – Governmental activity integral to the operation of a state or political subdivision, for example, 

maintaining order or levying tax (distinguished from activity of a private or commercial venture).

Old-Age, Survivors and Disability Insurance Program (OASDI) – Program administered by the SSA, providing monthly 

benefits to retired and disabled workers, their spouses and children and to survivors of insured workers.

OASDI Taxes – Taxes imposed under IRC Section 3101(a) on employees and IRC Section 3111(a) on employers to help fund the 

OASDI program. These taxes are called “Social Security taxes” on IRS forms such as Form W-2 and the amount of wages subject 

to these taxes are “Social Security wages.” 

Optional Exclusions – Categories of services that, under the Social Security Act, may be included or excluded from coverage 

under a Section 218 Agreement at the option of the state.

Pension Plan – A plan that provides systematically for the payment of definitely determinable benefits to employees over a 

period of years, usually for life, after retirement. Retirement benefits are generally determined by factors such as an employee’s 

years of service, age and compensation.

Political Subdivision – A separate legal entity of a state that has governmental powers and functions. Examples of political 

subdivisions include a county, city, town, village, school district and other similar governmental entities.

Proprietary Function – Function of a governmental entity, such as a business venture for profit or in competition with private 

industry, or other discretionary act on behalf of citizens, that by its nature is not an integral governmental activity.

Public Retirement System – (Also called a “FICA replacement plan”) A plan, fund or system established by a state or political 

subdivision for the purpose of providing retirement benefits to employees that meets the tests under IRC Section 3121(b)(7)(F) 

and Treas. Reg. 31.3121(b)(7)-2(e). A public retirement system may be a pension, annuity, retirement or similar system. For this 

purpose, it is irrelevant whether a public retirement system is a “qualified plan” within the meaning of ERISA.

Qualified Participant – An individual who is (or has been) a participant in a public retirement system and who has a total 

accrued benefit under the retirement system that meets the minimum retirement benefit requirements of IRC Section 3121(b)(7) 

and regulations thereunder. Treas. Reg. 31.3121(b)(7)-2(d) establishes standards for defined contribution retirement systems. See 

Revenue Procedure 91-40 for safe-harbor formulas for defined benefit retirement systems.

Required (previously referred to as Mandatory) Exclusions – Categories of services that are not covered for Social 

Security under Sections 210 and 218 of the Social Security Act. These exclusions should not be confused with the different set of 

exclusions that apply to those services not covered under the Section 210 mandatory Social Security provisions.

Retirement System – See Public Retirement System.

Retirement System Coverage Group – A group of employees whose positions are covered under a retirement system by 

referendum under the provisions of Section 218(d). The retirement system does not need to meet the tests under IRC Section 

3121(b)(7)(F) and Treas. Reg. 31.3121(b)(7)-2(e) to secure coverage under a Section 218 Agreement.

Section 218 Agreement – Voluntary agreement between a state and the Commissioner of Social Security (prior to March 

31, 1995, the Secretary of Health and Human Services); allows states to voluntarily provide Social Security and Medicare or 

Medicare-only coverage for the services of state and local government employees. The Section 218 Agreements cover positions, 

not individuals; if the position is covered under the agreement, then any employee filling that position is subject to FICA taxes.

Self-Employment Contributions Act (SECA) – (IRC Sections 1401-1403) Federal statute imposing tax on the net earnings of 

self-employed individuals to fund Social Security and Medicare.

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

Social Security Administration (SSA) – An independent agency in the executive branch of the federal government 

responsible for administering the OASDI insurance program and for determining eligibility for Medicare benefits.

Social Security Statement – Annual statement issued by SSA to workers, with information about their individual Social 

Security and Medicare earnings as reported by employers, with estimates of the different types of benefits for which they and their 

family may qualify.
81

Social Security Number (SSN) – The identification number assigned by the SSA to individuals. It must always be used in 

reporting an individual’s earnings and in correspondence regarding specific employees. Each individual’s earnings record is 

maintained under this number.

State – For purposes of a Section 218 Agreement, one of the 50 states, Puerto Rico, the Virgin Islands and interstate 

instrumentalities. The term, for this purpose, does not include the District of Columbia, Guam or American Samoa.

State Social Security Administrator (SSSA) – The principal state official authorized by state law to administer the Section 

218 Agreement with the SSA, responsible for all other activities associated with applicable federal and state laws addressing 

Social Security and Medicare by state and local public employers in the state.

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

purposes.

Wage Base – The maximum amount of wages of each worker that is subject to OASDI tax in any calendar year. This is also 

referred to as the Social Security wage base and is adjusted annually. There has been no wage base limit for Medicare since 1994.

Wholly-Owned Instrumentality – An entity created by or pursuant to state statute to carry on a governmental function of a 

state or political subdivision. It is an independent legal entity with the power to hire, supervise and discharge its employees and, 

generally, it may sue and be sued, may enter into contracts and may hold or transfer property in its own name. Normally a whollyowned instrumentality of a state or political subdivision does not exercise governmental powers, for example, the police power, the 

taxing power and the power of eminent domain. An instrumentality can also be created by a state and a political subdivision, by 

more than one political subdivision, or by more than one state. See “Interstate Instrumentality.”

Windfall Elimination Provision (WEP) – A Social Security benefit formula that may be applied to workers who receive both a 

Social Security retirement or disability benefit and a pension based on work not covered under Social Security. The WEP benefit 

formula produces a lower Social Security retirement or disability insurance benefit.
82

n Appendix

The following pages contain important documents referred to in the text. Many other related documents may be found at 

www.IRS.gov and www.SSA.gov.
83

Amended Section 530 of the Revenue Act of 1978

(a) Termination of Certain Employment Tax Liability.

(1) In general.

- If -

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

and

(B) in the case of periods after December 31, 1978, all federal tax returns (including information returns) 

required to be filed by the taxpayer with respect to such individual for such period are filed on a basis 

consistent with the taxpayer’s treatment of such individual as not being an employee, then, for purposes of 

applying such taxes for such period with respect to the taxpayer, the individual shall be deemed not to be 

an employee unless the taxpayer had no reasonable basis for not treating such individual as an employee.

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

- For purposes of paragraph (1), a taxpayer shall in any case be treated as having a reasonable basis for not 

treating an individual as an employee for a period if the taxpayer’s treatment of such individual for such period was 

in reasonable reliance on any of the following:

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

taxpayer;

(B) a past Internal Revenue Service audit of the taxpayer in which there was no assessment attributable to 

the treatment (for employment tax purposes) of the individuals holding positions substantially similar to the 

position held by this individual; or

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

engaged.

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

- Paragraph (1) shall not apply with respect to the treatment of any individual for employment tax purposes for 

any period ending after December 31, 1978, if the taxpayer (or a predecessor) has treated any individual holding 

a substantially similar position as an employee for purposes of the employment taxes for any period beginning 

after December 31, 1977.

(4) Refund or credit of overpayment.

- If refund or credit of any overpayment of an employment tax resulting from the application of paragraph (1) is 

not barred on the date of the enactment of this Act (Nov. 6, 1978) by any law or rule of law, the period for filing a 

claim for refund or credit of such overpayment (to the extent attributable to the application of paragraph (1)) shall 

not expire before the date 1 year after the date of the enactment of this Act (Nov. 6, 1978).

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

- No regulation or Revenue Ruling shall be published on or after the date of the enactment of this Act (Nov. 6, 

1978) and before the effective date of any law hereafter enacted clarifying the employment status of individuals for 

purposes of the employment taxes by the Department of the Treasury (including the Internal Revenue Service) with 

respect to the employment status of any individual for purposes of the employment taxes.

(c) Definitions.

- For purposes of this section -

(1) Employment tax. - The term ‘employment tax’ means any tax imposed by subtitle C of the Internal Revenue 

Code of 1986 (formerly I.R.C. 1954, section 3101 et seq. of this title).
84

(2) Employment status. - The term ‘employment status’ means the status of an individual, under the usual 

common law rules applicable in determining the employer-employee relationship, as an employee or as an 

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

(d) Exception.

- This section shall not apply in the case of an individual who, pursuant to an arrangement between the 

taxpayer and another person, provides services for such other person as an engineer, designer, drafter, 

computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work.

(e) Special Rules For Application of Section.

(1) NOTICE OF AVAILABILITY OF SECTION

- An officer or employee of the Internal Revenue Service shall, before or at the commencement of any audit 

inquiry relating to the employment status of one or more individuals who perform services for the taxpayer, 

provide the taxpayer with a written notice of the provisions of this section.

(2) RULES RELATING TO STATUTORY STANDARDS

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

(A) a taxpayer may not rely on an audit commenced after December 31, 1996, for purposes of subparagraph 

(B) thereof unless such audit included an examination for employment tax purposes of whether the 

individual involved (or any individual holding a position substantially similar to the position held by the 

individual involved) should be treated as an employee of the taxpayer,

(B) in no event shall the significant segment requirement of subparagraph (C) thereof be construed to require 

a reasonable showing of the practice of more than 25 percent of the industry (determined by not taking 

into account the taxpayer), and

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

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

10 years, and

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

1978.

(3) AVAILABILITY OF SAFE HARBORS

- Nothing in this section shall be construed to provide that subsection (a) only applies where the individual 

involved is otherwise an employee of the taxpayer. 

(4) BURDEN OF PROOF-

(A) IN GENERAL

- If-

(i) a taxpayer establishes a prima facie case that it was reasonable not to treat an individual as an 

employee for purposes of this section, and

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

his delegate,

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

(B) EXCEPTION FOR OTHER REASONABLE BASIS

- In the case of any issue involving whether the taxpayer had a reasonable basis not to treat an individual 

as an employee for purposes of this section, subparagraph (A) shall only apply for purposes of determining 

whether the taxpayer meets the requirements of subparagraph (A), (B), or (C) of subsection (a)

(2).
85

(5) PRESERVATION OF PRIOR PERIOD SAFE HARBOR

- If -

(A) an individual would (but for the treatment referred to in subparagraph (B)) be deemed not to be an 

employee of the taxpayer under subsection (a) for any prior period, and

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

subsequent period, then, for purposes of applying such taxes for such prior period with respect to the 

taxpayer, the individual shall be deemed not to be an employee. 

(6) SUBSTANTIALLY SIMILAR POSITION

- For purposes of this section, the determination as to whether an individual holds a position substantially 

similar to a position held by another individual shall include consideration of the relationship between the 

taxpayer and such individuals.
86

Revenue Procedure 85-18

SECTION 1. PURPOSE

The purpose of this revenue procedure is to amplify and supersede Rev. Proc. 81-43, 1981-2 C.B. 616, which provides 

instructions for implementing the provisions of section 530 of the Revenue Act of 1978, 1978-3 (Vol. 1) C.B. xi, 119 (the 

Act), relating to the employment tax status of independent contractors and employees.

SEC. 2. BACKGROUND

.1 Rev. Proc. 81-43 is superseded to reflect changes made to section 530 of the Act by section 269(c) of the Tax 

Equity and Fiscal Responsibility Act of 1982, 1982-2 C.B. 462, 536, which extends the provisions of section 530 

indefinitely.

Section 530(a)(1) of the Act, as amended, provides that if, for purposes of the employment taxes under subtitle C 

of the Internal Revenue Code, a taxpayer did not treat an individual as an employee for any period, then the individual 

will be deemed not to be an employee for that period, unless the taxpayer had no reasonable basis for not treating the 

individual as an employee. For any period after December 31, 1978, the relief applies only if (1) all federal tax returns 

(including information returns) required to be filed by the taxpayer with respect to the individual for the period are filed 

on a basis consistent with the taxpayer’s treatment of the individual as not being an employee, and (2) the treatment is 

consistent with the treatment for periods beginning after December 31, 1977.

.2 A new section 3.02 titled “Filing of Returns” has been added stating that relief under section 530(a)(1) of the Act 

will not be granted if a Form 1099 has not been timely filed for each worker for any period after December 31, 1978.

.3 Section 3.05 (relating to refunds, credits, and abatements) is clarified to state that it does not apply to periods in 

which a taxpayer “treated” an individual as an employee.

SEC. 3. APPLICATION

.1 “Safe Haven” Rules

There are several alternative standards that constitute “safe havens” in determining whether a taxpayer has a 

“reasonable basis” for not treating an individual as an employee. Reasonable reliance on any one of the following “safe 

havens” is sufficient:

(A) judicial precedent or published rulings, whether or not relating to the particular industry or business in which the 

taxpayer is engaged, or technical advice, a letter ruling, or a determination letter pertaining to the taxpayer; or

(B) a past Internal Revenue Service audit (not necessarily for employment tax purposes) of the taxpayer, if the 

audit entailed to assessment attributable to the taxpayer’s employment tax treatment of individuals holding positions 

substantially similar to the position held by the individual whose status is at issue (a taxpayer does not meet this test 

if, in the conduct of a prior audit, an assessment attributable to the taxpayer’s treatment of the individual was offset by 

other claims asserted by the taxpayer); or

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

practice need not be uniform throughout an entire industry).

A taxpayer who fails to meet any of the three “safe havens” may nevertheless be entitled to relief if the taxpayer can 

demonstrate, in some other manner, a reasonable basis for not treating the individual as an employee. In H.R. Rep. No. 

95-1748, 95th Cong., 2d Sess. 5 (1978), 1978-3 (Vol. 1) C.B. 629, 633, it is indicated that “reasonable basis” should be 

construed liberally in favor of the taxpayer.

.2 Filing of Returns.

For any period after December 31, 1978, the relief under section 530(a)(1) will not apply, even if the taxpayer has met 

the “safe haven” rules of paragraph 3.01 of this revenue procedure, if the appropriate Form 1099 has not been timely filed 

with respect to the workers involved. See Rev. Rul. 81-224, 1981-2 C.B. 197.

.3 Interpreting the Word “Treat”

In determining whether a taxpayer did not “treat” an individual as an employee for any period within the meaning of 

section 530(a)(1) of the Act, the following guidelines should be followed:

(A) The withholding of income tax or the Federal Insurance Contributions Act (FICA) tax from an individual’s wages 

is “treatment” of the individual as an employee, whether or not the tax is paid over to the Government.
87

(B) Except as provided in paragraph (C) and (E) below, the filing of an employment tax return (including Forms 

940 (Employer’s Annual Federal Unemployment Tax Return), 941 (Employer’s Quarterly Federal Tax Return), 942 

(Employer’s Quarterly Tax Return for Household Employees), 943 (Employer’s Annual Tax Return for Agricultural 

Employees), and W-2 (Wage and Tax Statement)) for a period with respect to an individual, whether or not tax was 

withheld from the individual, is “treatment” of the individual as an employee for that period.

(C) The filing of a delinquent or amended employment tax return for a particular tax period with respect to an individual 

as a result of Service compliance procedures is not “treatment” of the individual as an employee for that period. For this 

purpose, Collection or Examination activities constitute compliance procedures. For example, if the Service determines 

as a result of an audit that a taxpayer’s workers are common law employees, that determination is not “treatment” of 

the workers as employees for the period under audit. However, if the taxpayer withholds employment taxes or files 

employment tax returns with respect to those workers for the periods following the period under audit, the action is 

“treatment” of the workers as employees for those later periods.

(D) Internal Revenue Service Center notices that merely advise the taxpayer that no return has been filed and request 

information from the taxpayer are not compliance procedures.

(E) A return prepared by the Service under section 6020(b) of the Code is not “treatment” of an individual as an 

employee; nor is the signing of an audit Form 2504 (Agreement to Assessment and Collection of Additional Tax and 

Acceptance of Overassessment).

.4 Consistency in prior periods

The relief under section 530(a)(1) of the Act, as amended, does not apply to the employment tax treatment of any 

individual for any period ending after December 31, 1978, if the taxpayer (or a predecessor) treated any individual holding 

a substantially similar position as an employee for employment tax purposes for any period beginning after December 

31, 1977. However, relief will not be denied under the consistency provision for any periods prior to the period in which 

the individuals were treated as employees. For example, a taxpayer did not treat an individual as an employee in 1978 

and 1979. In 1980, the taxpayer began treating individuals holding substantially similar positions as employees. This 

subsequent treatment does not prevent the taxpayer from receiving relief under section 530(a)(1) for 1978 and 1979. The 

application of the consistency rule prevents taxpayers from changing the way they treat workers solely to take advantage 

of the relief provisions. The application of this provision to predecessors is intended to prevent evasion of this rule, for 

example, by reincorporations.

.5 Refunds, Credits, and Abatements

Relief under section 530(a)(1) of the Act is available to taxpayers who are under audit by the Service or who are 

involved in administrative (including Appellate) or judicial processes with respect to assessments based on employment 

status reclassifications. Relief also is extended to any claim for a refund or credit of any overpayment of an employment 

tax resulting from the termination of liability under section 530(a)(1), provided the claim is not barred on the date of 

enactment of this provision (November 6, 1978) by any law or rule of law.

Taxpayers who have entered into final closing agreements under section 7121 of the Code or compromises under 

section 7122 with respect to employment status controversies are ineligible for relief under the Act, unless they have 

not completely paid their liability. Thus, for example, a taxpayer who has agreed to or compromised a liability for an 

amount which is to be paid in installments, but who still has one or more installments to pay, is relieved of liability for 

such outstanding installments. Taxpayers who settled employment status controversies administratively with the Service 

on any basis other than section 7121 or 7122 of the Code or who unsuccessfully litigated such cases also are eligible 

for relief, provided their claims are not barred by the statute of limitations or by the application of the doctrine of res 

judicata. However, unpaid judgments will be abated if section 530(a)(1) of the Act applies. Thus, an unsuccessful litigant 

in an employment status case who fulfills the Act’s requirements can avoid collection of any unpaid employment tax 

liabilities, regardless of the doctrine of res judicata.

The application of the doctrine of res judicata will prevent a refund based on section 530(a)(1) of the Act if a taxpayer 

paid a judgment in an action relating to the same issue as to the same taxpayer. Thus, if the specific matter was 

judicially decided and the judgment paid, relief under section 530(a)(1) is not available.

This subsection will not apply to those periods in which a taxpayer “treated” an individual as an employee within the 

meaning of subsection .03 of this section.

.6 Handling of Claims

Relief under section 530(a)(1) of the Act applies to the taxes imposed on an employer by sections 3111 or 3301 of the 
88

Code. It also applies to an employer’s liability under section 3102 and 3403 to withhold and pay the taxes imposed by 

sections 3101 and 3402. Therefore, an unpaid assessment of those taxes against an employer who qualifies for relief 

under section 530(a)(1) of the Act should be abated. Timely claims for refund of such taxes paid by a taxpayer who 

qualifies for relief will be honored.

.7 Interest and Penalties

If a taxpayer is relieved of liability under section 530(a)(1) of the Act, any liability for interest or penalties attributable to 

that liability is forgiven automatically. This relief from interest and penalties applies whether charged directly against the 

taxpayer or personally against a corporate taxpayer’s officers.

.8 Status of Workers

Section 530 of the Act does not change in any way the status, liabilities, and rights of the worker whose status is 

at issue. Section 530(a)(1) terminates the liability of the employer for the employment taxes but has no effect on the 

workers. It does not convert individuals from the status of employee to the status of self-employed.

Section 31.3102-1(c) of the regulations provides, with respect to the collection and payment of the employee’s share 

of the FICA tax, that “until collected from him [by [*10] the employer] the employee is also liable for the employee tax 

with respect to all wages received by him.” Therefore, if an employer’s liability under section 3102 of the Code for the 

employee’s share of the tax imposed by section 3101 is terminated under section 530(a)(1) of the Act, the employee 

remains liable for that tax. Employees who incorrectly paid the self-employment tax (section 1401 of the Code) may file 

a claim for refund; however, the amount of the self-employment tax refund will be offset by the amount of the employee’s 

share of the tax imposed on the employee as a result of the application of section 31.3102-1(c) of the regulations.

.9 Definition of Employee

For purposes of section 530(a) of the Act, the term employee means employees under sections 3121(d), 3306(i), and 

3401(c) of the Code.

SEC. 4.EFFECT ON OTHER DOCUMENTS

Rev. Proc. 81-43 is amplified and superseded.
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Revenue Ruling 2003-46

Section 3121.--Definitions

Federal Insurance Contributions Act (FICA); Medicare. This ruling provides that for the continuing employment exception 

to the Medicare portion of the Federal Insurance Contributions Act tax to apply to service performed by an employee of a 

state, political subdivision, or instrumentality thereof, such employee must be a member of a retirement system pursuant to 

Internal Revenue Code section 3121(b)(7)(F). Rev. Ruls. 86-88 and 88-36 supplemented.

The Federal Insurance Contributions Act (FICA) tax consists of an old age, survivors, and disability insurance (“OASDI”) 

portion and a hospital insurance (“Medicare”) portion. This revenue ruling provides guidance concerning the applicability of 

the Medicare portion of FICA tax under Internal Revenue Code § 3121(u)(2) to employees of state and local governments. 

Specifically, this revenue ruling considers the interaction between § 3121(u)(2)(C) and 3121(b)(7)(F) in the context of the 

continuing employment exception. Section 3121(u)(2) generally extends the Medicare portion of FICA tax to wages for 

service performed by employees of states, political subdivisions, and wholly owned instrumentalities thereof hired after 

March 31, 1986. Section 3121(b)(7)(F), enacted by section 11332(b) of the Omnibus Budget Reconciliation Act of 1990 

(OBRA ‘90), Pub. L. 101-508, 104 Stat. 1388, expands the definition of employment for FICA tax purposes to include 

service performed after July 1, 1991, by state or local government employees who are not members of a retirement 

system.

This revenue ruling supplements Rev. Rul. 86-88, 1986-2 C.B. 172, and Rev. Rul. 88-36, 1988-1 C.B. 343, both of which 

provide guidelines concerning the application of § 3121(u)(2) in a question and answer format. This revenue ruling also 

provides guidelines in a question and answer format. In this revenue ruling, the terms “state,” “political subdivision,” “state 

employer,” “political subdivision employer,” and “continuing employment exception” have the same meanings as in Rev. Rul. 

86-88.

SERVICE ELIGIBLE FOR THE CONTINUING EMPLOYMENT EXCEPTION

Q1. Is the continuing employment exception to the Medicare portion of FICA tax available for service performed by 

an employee for a state employer or political subdivision employer who is not a member of a retirement system 

within the meaning of § 3121(b)(7)(F)?

A1. No. Under § 3121(u)(2)(C)(i), the continuing employment exception applies only to service that is otherwise 

excluded from employment under § 3121(b)(7). Section 3121(b)(7) excepts from employment service in the 

employ of a state employer or political subdivision employer for FICA tax purposes. However, § 3121(b)(7)(F) 

expands the definition of employment for FICA tax purposes to include service by an employee who is not a 

member of a retirement system. See § 31.3121(b)(7)-2 of the Employment Tax Regulations. The House-Senate 

Conference Report to OBRA ‘90 provides that] “the conference agreement extends Medicare coverage to, and 

applies the HI [(Medicare)] tax with respect to wages of, those employees (otherwise not already subject to 

the HI tax) who become subject to OASDI by reason of this provision.” H.R. Rep. No. 101-964, at 1105 (1990). 

Consequently, wages paid for service performed by an employee who is not a member of a retirement system 

for the state employer or political subdivision employer are subject to the OASDI and Medicare portions of 

FICA tax regardless of when the employee became employed.

Q2. Is the continuing employment exception available for service performed by an employee for a state employer or 

political subdivision employer who is subject to the Medicare portion of FICA tax solely because the employee 

is not a member of a retirement system (i.e., the employee meets all the requirements of § 3121(u)(2)(C), 

and the employee’s service is not covered by a voluntary agreement with the Secretary of Health and Human 

Services pursuant to § 218 of the Social Security Act, 42 U.S.C. § 418), but who becomes a member of a 

retirement system after July 1, 1991?

A2. Yes. If an employee’s wages are subject to FICA tax solely because the employee is not a member of a 

retirement system within the meaning of § 3121(b)(7)(F), and the employee subsequently becomes a member 
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of a retirement system, then the employee’s wages will cease to be subject to the OASDI and Medicare 

portions of FICA tax.

EFFECT ON OTHER REVENUE RULINGS:

This revenue ruling supplements Rev. Rul. 86-88, 1986-2 C.B. 172, and Rev. Rul. 88-36, 1988-1 C.B. 343.

 [*5] 

DRAFTING INFORMATION

The principal author of this revenue ruling is Patricia P. Holdsworth of the Office of the Division Counsel/Associate 

Chief Counsel (Tax Exempt and Government Entities). For further information regarding this revenue ruling, contact Ms. 

Holdsworth at (202) 622-6040 (not a toll-free call).
92

Revenue Ruling 86-88

FICA; HOSPITAL INSURANCE; EXTENSION TO STATE AND POLITICAL SUBDIVISION 

EMPLOYEES

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

political subdivisions.

For purposes of this revenue ruling, the term ‘state’ includes the Commonwealth of Puerto Rico, the Virgin Islands, and the 

District of Columbia.

For purposes of this revenue ruling, the term ‘political subdivision’ has the same meaning that it has under section 218(b)

(2) of the Social Security Act, 42 U.S.C. section 418(b)(2). Thus, ‘political subdivision’ ordinarily includes a county, city, 

town, village, or school district. In many states, depending upon the manner in which such entities are created under 

state law, ‘political subdivision’ includes a sanitation, utility, reclamation, improvement, drainage, irrigation, flood control, or 

similar district.

For purposes of this revenue ruling, the term ‘state employer’ of a state includes the state and any agency or instrumentality 

of that state that is a separate employer for purposes of withholding, paying, and reporting the federal income taxes of 

employees. The term ‘political subdivision employer’ of a political subdivision includes the political subdivision and any 

agency or instrumentality of that political subdivision that is a separate employer for purposes of withholding, reporting, 

and paying the federal income taxes of employees.

SERVICES SUBJECT TO THE MEDICARE TAX

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

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

hired by the state employer or political subdivision employer after March 31, 1986, are subject to the Medicare 

tax. The following services, however, are NOT subject to the Medicare tax even though the services are 

performed by an employee hired after March 31, 1986:

(1) services covered by an agreement between the state and the Secretary of Health and Human Services 

entered into pursuant to section 218 of the Social Security Act, 42 U.S.C. section 418 (218 agreement) 

providing for social security coverage including Medicare,

(2) services excluded from the definition of employment under any provision of sections 3121(b) of the Code 

other than sections 3121(b)(7),

(3) services performed by an individual who is employed by a state employer (except for a District of Columbia 

employer) or a political subdivision employer to relieve the individual of unemployment,

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

a state employer or a political subdivision employer,

(5) services performed by an individual as an employee of a state employer or a political subdivision employer 

serving on a temporary basis in case of fire, storm, snow, earthquake, flood, or other similar emergency, or

(6) services performed by any individual as an employee included under section 5351(2) of title 5, United States 

Code (relating to certain interns, student nurses, and other student employees of the District of Columbia 

government), other than as a medical or dental intern or a medical or dental resident in training.

THE CONTINUING EMPLOYMENT EXCEPTION

Q2. If an employee was hired before April 1, 1986, by a state employer or a political subdivision employer and 

services are performed for the state employer or political subdivision employer by that employee after March 

31, 1986, are those services subject to the Medicare tax?

A2. Services are not subject to the tax if they are performed after March 31, 1986, for a state employer or political 

subdivision employer by an employee who was hired by the state employer or the political subdivision employer 

before April 1, 1986, and if the employee meets the following requirements:
93

(i) the employee was performing regular and substantial services for remuneration for the state employer or 

political subdivision employer before April 1, 1986,

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

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

Medicare tax, and

(iv) the employment relationship of the employee with that employer has not been terminated after March 

31, 1986 (other than as provided in the rules described in Q&A8 below, which concern employees who 

transfer from one state employer, or one political subdivision employer, to another).

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

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

Q3. An employee signed an employment contract before April 1, 1986, but did not begin to perform services until 

after March 31, 1986. Does the employee qualify for the continuing employment exception?

A3. No. The employee does not qualify for the continuing employment exception because the employee was not 

performing regular and substantial services for remuneration before April 1, 1986. Section 3121(u)(2)(C)(ii)(I) 

of the Code.

Q4. Before April 1, 1986, an individual was performing services for remuneration as a substitute teacher on an ‘as 

needed’ basis for a state employer or a political subdivision employer, and the individual continued performing 

those services on that basis after March 31, 1986. Does the individual qualify for the continuing employment 

exception?

A4. No. The individual does not qualify for the continuing employment exception. Even though the services 

performed may have been substantial, the services were not regular because they were performed on an ‘as 

needed’ basis. Section 3121(u)(2)(C)(ii)(I) of the Code.

Q5. A was a state employee performing regular and substantial services for remuneration prior to April 1, 1986. A’s 

employment relationship with the state employer was terminated after March 31, 1986. but A was later rehired 

by the state employer. Does the continuing employment exception apply to A?

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

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

A6. The question of whether an employment relationship has terminated is a question of fact that must be 

determined on the basis of all the relevant facts and circumstances.

Great weight, however, will be given to the personnel rules of the state employer or political subdivision 

employer to determine whether an employment relationship has been terminated.

Q7. An employee who was hired before April 1, 1986, by a state employer transferred after March 31, 1986, to 

another state employer of that state. The transfer was made without a termination of the employee’s overall 

employment relationship with that state. Does the employee qualify for the continuing employment exception?

A7. Yes. An employee hired before April 1, 1986, by a state employer who transfers after March 31, 1986, to 

another state employer of that state may qualify for the continuing employment exception, provided the transfer 

was made without a termination of the employee’s overall employment relationship with that state. The same 

rule applies to an employee hired before April 1, 1986, by a political subdivision employer, who transfers after 

March 31, 1986, to another political subdivision employer of that political subdivision.

On the other hand, an employee hired before April 1, 1986, does not qualify for the continuing employment 

exception if after March 31, 1986, the employee transfers from a state employer to a political subdivision 

employer or from a political subdivision employer to a state employer. Likewise, an employee does not qualify 
94

for the exception if the employee transfers from a political subdivision employer in one political subdivision to a 

political subdivision employer in a different political subdivision, or from a state employer in one state to a state 

employer in a different state. Section 3121(u)(2)(D) of the Code.

Different rules, however, control whether a transfer affects an employee’s status for purposes of the Medicare 

tax wage base. In the case of an employee who is subject to the Medicare tax, even if the employee transfers 

from one state employer to another state employer of that state or from one political subdivision employer to 

another political subdivision employer of that political subdivision, a new Medicare tax wage base applies to 

wages received from the second employer. Thus, the rules that determine whether there is a new Medicare tax 

wage base are the same as those applicable to employees of private employers.

SERVICES EXCLUDED FROM EMPLOYMENT

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

A8. See sections 3121(b)(1)-(6), (8)-(20) of the Code for a list of services that are excluded from the definition of 

employment for purposes of the social security taxes, including the Medicare portion of the taxes.

Q9. A 218 agreement may contain terms optionally excluding from social security coverage certain types of 

employment. 42 U.S.C. section 418(c)(3). If employment is optionally excluded from coverage under the terms 

of a 218 agreement, is that employment subject to the Medicare tax if services are performed by an 

individual otherwise subject to the Medicare tax under the rules of Q&A1 and Q&A2?

A9. Yes. The optionally excluded services are subject to the Medicare tax if they are performed by an individual 

otherwise subject to the tax under the rules of Q&A1 and Q&A2 above.

Q10. A student is hired by a school, college, or university after March 31, 1986, to perform services for the school, 

college, or university. The student is in a group optionally excluded from coverage under the terms of an 

applicable 218 agreement. Are the services performed by the student subject to the Medicare tax?

A10. Services performed by a student employed by a school, college, or university are not subject to the Medicare 

tax if the student is enrolled and regularly attending classes at the school, college, or university. Section 

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

continue to be subject to such contributions.

DEFINITION OF WAGES

Q11. Is the definition of wages for Medicare tax purposes the same as the definition of wages for making social 

security contributions under 218 agreements?

A11. No, not in all cases. The term ‘wages’ for purposes of paying Medicare tax is defined by section 3121(a) of the 

Code. The term ‘wages’ for purposes of making contributions under a 218 agreement is defined by section 

209 of the Social Security Act. 42 U.S.C. section 409. Questions concerning the definition of wages (and 

employment) for purposes of paying Medicare tax should be directed to the Service. Questions concerning 

the definition of wages (and employment) for purposes of making 218 contributions should be directed to the 

Social Security Administration (SSA).

RULES FOR REPORTING AND PAYMENT OF MEDICARE TAX

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

A12. The Medicare tax is reported and paid to the Service (1) by a state employer of a state if on April 7, 1986, 

NO employee of any state employer of that state was covered under a 218 agreement, and (2) by a political 

subdivision employer of a political subdivision if on April 7, 1986, NO employee of any political subdivision 

employer of that political subdivision was covered under a 218 agreement.
95

The Medicare tax is reported to the State Social Security Administrator (1) by a state employer of a state if on 

Q13. A 218 agreement was in effect with state X on or before April 7, 1986. The agreement provided for coverage of 

employees of a political subdivision employer of political subdivision A but not for coverage of any employee 

of any political subdivision employer of political subdivision B. After April 7, 1986, a modification of the 218 

agreement was executed providing for coverage of some, but not all, employees of a political subdivision 

employer of political subdivision B. The effective date of the new coverage was April 1, 1986. When that political 

subdivision employer of political subdivision B reports and pays the Medicare tax on wages for services 

performed by those of its employees who are not subject to the modification, is the tax reported and paid to the 

State Social Security Administrator or to the Internal Revenue Service?

A13. The tax is reported and paid to the Internal Revenue Service. Modifying a 218 agreement after April 7, 1986, 

to extend coverage on a retroactive basis does not change the agency to which the employer must report and 

pay the Medicare tax for services performed by employees who are subject to the Medicare tax.

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

A14. Taxable wages must be reported on line 6 of Form 941E, Quarterly Return of Withheld Federal Income Tax 

and Hospital Insurance (Medicare) Tax. The reporting, depositing, and paying of the Medicare tax are subject 

to the same rules applicable to private employers. These rules are similar to those applicable to income tax 

withholding.

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

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

and paid to the SSA.

Q16. Will all penalties for failure to pay the Medicare tax and failure to make timely deposits of that tax be assessed 

against state and political subdivision employers?

A16. The Service will waive penalties for failure to pay and for failure to make timely deposits of the Medicare tax 

with respect to services performed through the fourth quarter of 1986, so long as all payments due for April 

through December of 1986 are paid by February 2, 1987. If all payments due for April through December 1986 

are not paid by February 2, 1987, this automatic waiver of penalties is not applicable, even with respect to 

amounts paid by February 2, 1987. Penalties may be waived, however, if the employer shows reasonable cause 

for failure to pay and failure to make timely deposits of the tax. See sections 6651 and 6656 of the Code. A 

state employer or political subdivision employer should not report any Medicare tax wages on line 6 of Form 

941E for the second or third quarter unless appropriate deposits and/or payments are made for that quarter.

Q17. If a state employer or a political subdivision employer has federal employees on the state or political 

subdivision payroll, how should that employer report the full social security tax or the Medicare portion of the 

social security tax, whichever is applicable?

A17. The state employer or political subdivision employer should use Form 941E to report the full social security 

taxes and or the Medicare portion of the taxes. For those federal employees subject to the FULL social 

security taxes, the tax must be included with the withheld federal income tax on line 3 of Form 941E, with an 

attached supporting statement showing the amount of wages subject to the social security taxes, the amount 

of the taxes withheld, and the employer’s share of the taxes. For those federal employees subject ONLY to the 

Medicare portion of the social security taxes, the Medicare tax must be reported on line 6 of Form 941E.
96

Q18. If a state employer or a political subdivision employer must report and pay the Medicare tax to the Service as 

explained in Q&A12, how should the employer transmit Copy A of Forms W-2 for newly hired employees who 

are subject to the Medicare tax?

A18. For newly hired employees subject to the Medicare tax, the employer should transmit Copy A of Forms W-2 

with a Form W-3, Transmittal of Income and Tax Statements, and should check the ‘Medicare Fed. emp.’ 

checkbox in Box 2 on the Form W-3. This checkbox will be changed to ‘Medicare government employee’ on 

the 1987 Form W-3 to reflect the extension of the Medicare tax to state and political subdivision employees. 

For employees not subject to the Medicare tax, the employers should follow the current practice of transmitting 

Copy A of Forms W-2 with a Form W-3, checking the '941/941r' checkbox in Box 2 on the Form W-3.

Q19. If a state employer or a political subdivision employer must report and pay the Medicare tax to the State Social 

Security Administrator as explained in Q&A12, how should the employer transmit Copy A of Forms W-2 for 

newly hired employees subject to the Medicare tax?

A19. For newly hired employees subject to the Medicare tax, the employer should transmit Copy A of Forms W-2 

with a Form W-3 S&L, Transmittal of Income and Tax Statements for State and Local Governmental Employers, 

and should check the ‘Medicare Government Employee’ checkbox on the Form W-3 S&L IN ADDITION TO 

the ‘Section 218’ checkbox. For those employees covered under a 218 agreement, the state employer or the 

political subdivision employer should follow the current practice of transmitting the Forms W-2 with a Form W-3 

S&L, checking the ‘Section 218’ checkbox in Box 2 on the Form W-3 S&L. If the employer also has employees 

who are not covered under the 218 agreement and who were hired before April 1, 1986, then for those 

employees, the employer should transmit Forms W-2 with a Form W-3 and should check the '941/941u' box on 

the Form W-3.
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98

Revenue Ruling 88-36

FICA, HOSPITAL INSURANCE; STATE AND POLITICAL SUBDIVISION EMPLOYEES

SECTION 3121. - DEFINITIONS

FICA, hospital insurance; state and political subdivision employees. Guidance is provided, in question and answer form, 

concerning the application of the hospital insurance (medicare) tax portion of the Federal Insurance Contributions Act 

(FICA) by section 3121(u) of the Code, to wages for services performed by state and political subdivision employees hired 

after March 31, 1986. Rev. Rul. 86-88 supplemented.

The Service has issued Rev. Rul. 88-36, supplementing Rev. Rul. 86-88, 1986-2 C.B. 172, in question and answer format, 

which provides guidelines concerning the 1985 amendment to section 3121(u), which extended Medicare (the hospital 

portion of FICA) to wages for services rendered by state and political subdivision employees hired after March 31, 1986. 

The ruling addresses such areas as the types of services which are subject to the medicare tax and the continuing 

employment exception. In general, an individual, who was employed by a state or political subdivision before March 31, 

1986 and who was performing regular and substantial services for remuneration, will not be subject to the tax on services 

performed after that date. This rule applies only if the employment was not terminated after April 1.

This revenue ruling supplements Rev. Rul. 86-88, 1986-2 C.B. 172, which provides guidelines, in question and answer 

form, concerning the 1985 amendment of section 3121(u) of the Internal Revenue Code. In general, the amendment 

extends the hospital insurance (medicare) tax portion of the Federal Insurance Contributions Act (FICA) to wages for 

services rendered by state and political subdivision employees hired after March 31, 1986.

In this revenue ruling, the terms ‘state,’ ‘political subdivision,’ ‘state employer,’ ‘political subdivision employer,’ and ‘continuing 

employment exception’ have the same meanings as in Rev. Rul. 86-88.

SERVICES SUBJECT TO THE MEDICARE TAX

Q1. If an individual receiving social security retirement insurance benefits was hired as an employee of a state or 

political subdivision after March 31, 1986, are the services performed by the individual for the state or political 

subdivision subject to the medicare tax?

A1. Yes. The fact that an employee is receiving social security retirement insurance benefits does not affect the 

employee’s liability for the medicare tax.

Q2. Are services performed by an election official or election worker for a state employer or political subdivision 

employer subject to the medicare tax?

A2. Yes, unless the remuneration paid in a calendar year for such service is less than $100. Section 3121(u)(2)(B)

(ii)(V) of the Code, added by section 1895(b)(18)(A) of the Tax Reform Act of 1986, 1986-3 (Vol. 1) C.B. 852. 

This amendment is effective for services rendered after March 31, 1986.

Q3. A township has a small number of regularly employed fire fighters. To assist these fire fighters, certain residents 

of the township have volunteered their services in cases of emergency. The township alerts these residents to 

emergencies by sounding a siren. The township keeps a record of the residents who respond to the emergency 

calls and periodically pays each such resident a nominal amount for each emergency for which the resident 

performed services. Are the payments made to the residents by the township subject to the medicare tax?

A3. No. The services are considered to be performed by an employee of a state or political subdivision on a 

temporary basis in case of fire, storm, snow, earthquake, flood, or other similar emergency and thus are not 

subject to the medicare tax. See Section 3121(u)(2)(B)(ii)(III) of the Code.
99

THE CONTINUING EMPLOYMENT EXCEPTION

Q4. An individual was hired in September 1984 as a part-time cook by a state hospital to perform two hours of paid 

service each Sunday preparing the evening meal. The individual is not a patient or inmate of the hospital and 

has worked two hours each week as an employee of the hospital continuously since September 1984. Are the 

individual’s services performed after March 31, 1986, subject to the medicare tax?

A4. No. The continuing employment exception applies here if the individual was performing regular and substantial 

services for remuneration for the state employer or political subdivision employer before April 1, 1986. Whether 

this requirement is met is a question of fact. On these facts, the individual’s services are determined to be 

regular and substantial, and the exception applies.

Q5. In November 1982, an individual was elected to a state public office for a four-year term beginning in January 

1983, making the individual an employee of the state. In November 1986, the individual was re-elected. Are the 

individual’s services performed in the second term that begins in January 1987 subject to the medicare tax?

A5. No. The continuing employment exception applies here if the employment relationship has not been terminated 

after March 31, 1986. The individual was re-elected before the first term expired, so there was no break in the 

employment relationship.

Q6. B, a school district employee, performed regular and substantial services for remuneration for a political 

subdivision employer during the school year beginning in September 1985 and ending in May 1986. In May 

1986, the school district notified B that B’s employment would be terminated as of the end of May 1986 

because the school district might not receive sufficient funding. B continued to be covered under the school 

district’s health insurance program through August 1986 on the same basis as before May 1986. Sufficient 

funding was provided, and in September 1986 B began working on the same basis as before. Are B’s services 

performed after August 31, 1986, subject to the medicare tax?

A6. No. In fact, B’s employment with the school district was continuous because the school district received 

sufficient funding. The school district’s personnel policies indicate that the employment relationship continued 

because B retained health insurance coverage. See Q&A6 of Rev. Rul. 86-88.

Q7. C, a professor at a state university, performed regular and substantial services for remuneration for the 

university from September 1985 to June 1986. C was granted a leave of absence for the 1986-1987 school 

year, with the right to return to the same position at the end of the leave. In September 1987, C returned from 

the leave and resumed the same position with the university. Are C’s services performed after returning from 

the leave of absence subject to the medicare tax?

A7. No. The leave of absence was granted by the university and did not terminate the employment relationship. The 

university’s personnel policies indicate that the employment relationship continued because C was given the 

right to return to the same position. See Q&A6 of Rev. Rul. 86-88.

Q8. D taught a two-hour photography course twice a week at a local community college in the spring semester, 

which began on March 1, 1986. D then signed a three-year agreement with the college that he would teach the 

same course every spring. When D returned in the spring of 1987, were his services subject to the medicare 

tax?

A8. No. D was performing regular and substantial services for remuneration prior to April 1, 1986. The employment 

relationship was not terminated, as D had a commitment to return to the same position each spring.

Q9. Each summer, a Township Parks Department advertises for workers to cut grass. E was hired by the township 

in May 1985 to cut grass during that summer. E stopped performing services for the township at the end of 

that summer. In May 1986, E was again hired by the township to cut grass. Are E’s services performed when E 

returned in
100

A9. Yes. E’s employment relationship was terminated after April 1, 1986, as E had no commitment to perform 

services for the township each summer.

Q10. A part-time police officer has been paid on a weekly basis since March 10, 1986, to be ‘on call’ for a set 

schedule of hours each week. When the officer is ‘on call,’ he must stay at his residence and be available 

to provide assistance in the case of an emergency or to handle any police business that may arise. Are the 

services performed by the officer after April 1, 1986 subject to the medicare tax?

A10. No. Although the officer responds to calls on an ‘as needed’ basis, he has a set schedule of hours during which 

he is performing the service of being available to respond to such calls. Based on the above facts, the officer 

was performing regular and substantial services for remuneration prior to April 1, 1986 and thus, qualifies for 

the continuing employment exception to the medicare tax.
101

Revenue Procedure 91-40

SECTION 1. PURPOSE

This revenue procedure sets forth rules relating to the minimum retirement benefit requirement prescribed under section 

31.3121(b)(7)-2 of the Employment Tax Regulations.

SECTION 2. BACKGROUND

Section 3121(b)(7)(F), added to the Internal Revenue Code by section 11332(b) of the Omnibus Budget Reconciliation 

Act of 1990, Public Law No. 101-508, 104 Stat. 1388, generally expands the definition of employment, for purposes of the 

Federal Insurance Contributions Act (FICA), to include service as an employee for a state or local government entity unless 

the employee is a “member of a retirement system” of such entity. Section 3121(b)(7)(F) is effective with respect to service 

performed after July 1, 1991. Thus, wages for services performed after July 1, 1991, received by an employee of a state or 

local government entity who is not a member of a retirement system of such entity will generally be subject to FICA taxes, 

and will also be taken into account in determining the employee’s eligibility for Social Security and Medicare benefits. Under 

section 31.3121(b)(7)-2(e) of the regulations, a retirement system generally includes any pension, annuity, retirement or 

similar fund or system within the meaning of section 218 of the Social Security Act that is maintained by a state, political 

subdivision or instrumentality thereof to provide retirement benefits to its employees who are participants. However, the 

definition of retirement system is limited in order to carry out the purposes of section 3121(b)(7)(F) of the Code and the 

corresponding provisions of the Social Security Act. Under the regulations, in order for service in the employ of a state or local 

government entity to qualify for the exception from employment under section 3121(b)(7), the employee must be a member 

of a retirement system that provides certain minimum retirement benefits to that employee. To meet this minimum retirement 

benefit requirement with respect to an employee, section 31.3121(b)(7)-2(e)(2)(i) of the regulations generally requires that 

a retirement system provide benefits to the employee that are comparable to those provided in the Old-Age portion of the 

Old-Age, Survivor, Disability Insurance program under Social Security. Section 31.3121(b)(7)-2(e)(2)(vi) of the regulations 

provides that the Commissioner may, through guidance of general applicability, promulgate additional testing methods to 

determine whether, a retirement system meets the minimum retirement benefit requirement. This revenue procedure is an 

exercise of this authority. It outlines a set of safe harbor formulas for defined benefit retirement systems. Benefits calculated 

under one of these formulas are deemed to meet the minimum retirement benefit requirement. In addition, procedures are 

set out by which an employer may determine whether retirement benefits calculated under other formulas meet the minimum 

retirement benefit requirement of the regulations with respect to an employee.

SECTION 3. DEFINED BENEFIT RETIREMENT SYSTEM SAFE HARBOR FORMULAS

.01 Final and highest average pay formulas.

(1) Periods of 36 months or less. A defined benefit retirement system that calculates benefits by reference to a 

participant’s average compensation meets the minimum retirement benefit requirement with respect to an 

employee if it makes available to the employee a single life annuity payable beginning no later than age 65 that 

is at least 1.5 percent of average compensation for each year (or fraction thereof) of credited service. For this 

purpose, average compensation may be defined as the average of the employee’s compensation over the 36 

(or fewer) consecutive or non-consecutive months that provides the highest such average, the average of the 

employee’s compensation for his or her last 36 (or fewer) months of service with the employer, or the average of 

the employee’s compensation for his or her high consecutive or nonconsecutive or final 3 (or fewer) calendar or 

plan years of service.

(2) Periods of more than 36 months. A defined benefit retirement system that calculates benefits by reference 

to a participant’s average compensation over a period of more than 36 months meets the minimum benefit 

requirement in the same manner as a retirement system described in section 3.01(l) except that the

Averaging period Factor

37-48 months 1.55 percent

49-60 months 1.60 percent

61-120 months 1.75 percent

Over 120 months 2.00 percent
102

.02 Formulas using fractional accrual rule.

A defined benefit retirement system that calculates benefits based on a pro rata accrual towards a projected normal 

retirement benefit may meet the minimum retirement benefit requirement in the same manner as provided in section 

3.01(l) provided the projected normal retirement benefit under the plan formula is greater than or equal to the benefit 

described in such section.

.03 Additional requirements for defined benefit plan formulas to meet safe harbors.

(1) Calculation of compensation.

(a) To meet the requirements of any of the defined benefit safe harbor formulas for plan years beginning after 

July 1, 1991, a retirement system must calculate benefits based on a definition of compensation that meets 

the requirements of section 31.3121(b)(7)- 2(e)(2)(iii)(B) of the regulations.

(b) In the event that the definition of compensation under the retirement system is less inclusive than the 

definition otherwise permitted under this section, the applicable benefit percentage in the safe harbor 

formula of section 3.01 must be increased to account for the lower compensation base. The benefit 

percentage for employees in a retirement system whose benefits are computed using this definition must be 

multiplied by the ratio of (i) aggregate compensation (defined as under section 3.03(l)(a) and assuming that 

compensation considered in determining retirement benefits is limited to the contribution base described in 

section 3121(x)(1)) of these employees to (ii) aggregate compensation (as defined under the plan) of these 

employees. This ratio may be determined based upon the compensation during the immediately preceding 

plan year. In the case of a retirement system sponsored by more than one employer, this ratio must be 

calculated separately with respect to the employees of each employer whose benefits are computed 

using this definition. The rule in this section 3.03(l)(b) is illustrated by the following example: Example. A 

defined benefit retirement system maintained by a political subdivision provides a retirement benefit equal 

to 2.5 percent of a participant’s average compensation during his or her last calendar year of service. 

The compensation used for this purpose satisfies section 3.03(l)(a), except that it caps the compensation 

taken into account at $30,000. Assume that the ratio under section 3.03(t)(b) is 150 percent. This figure 

is derived by comparing the total compensation of employees in the plan (using the plan definition but 

capping compensation at the FICA contribution base (rather than at $30,000)) to the total compensation 

(using only the plan definition of compensation) of employees in the plan. The retirement system meets the 

requirements of 3.03(l) because the plan benefit percentage of 2.5 percent is more than 150 percent of the 

applicable safe harbor benefit percentage of 1.5 percent.

(2) Credited service.

(a) In order to meet the requirements of any of the defined benefit safe harbor formulas, a formula must 

generally include in credited service the employee’s entire period of actual service with the employer since 

commencing participation in the retirement system, plus any past service credited under the retirement 

system. A formula may, however, exclude any periods of actual service for the employer that are treated 

as employment under section 3121(b) of the Code, provided that during such periods the employee did 

not participate in the retirement system. A retirement system subject to paragraph (f)(2)(i)(B) of section 

31.3121(b)(7)-2 of the regulations (relating to the treatment of benefits accrued in plan years beginning prior 

to January 1, 1993) may also limit service consistent with the rules contained in that paragraph.

(b) A formula may limit the maximum period of service that is credited for accrual purposes under this rule. If 

this limit is less than 30 years in the case of formulas described in section 3.01(l) or (2), or 35 years in the 

case of formulas described in section 3.02, however, the benefit formula must be increased by the ratio of 

30 (or 35) years to such lower limit.

(c) Except as provided in section 3.03(4) with respect to part-time and other classes of employees, a formula 

may limit the periods of actual service actually credited for accrual purposes under this rule to whole years 

or similar periods, provided the periods are reasonable.

(d) The rules in this subsection are illustrated by the following example:

Example. In 1995, an employee is a participant in a retirement system with 5 years of credited service. 

Assume that the retirement system provides benefits under a formula described in section 3.01. In January 

1996, the employee moves to a position that is not covered by the retirement system. Assume that service 

in the new position constitutes covered employment under section 3121(b) of the Code for purposes of the 
103

FICA (e.g., because a section 218 voluntary agreement is in effect with regard to such position). In January 

1998, the employee returns to the old position and recommences participation under the retirement system. 

The employee must be treated as being in the employee’s sixth year of credited service in determining 

whether the benefit under the retirement system meets the minimum retirement benefit requirement. This 

is because the retirement system may generally disregard the service of an employee that constitutes 

employment under section 3121(b) for purposes of the FICA.

(3) Treatment of prior distributions from the retirement system.

In determining whether the requirements of any of the defined benefit safe harbor formulas are met, prior 

distributions may continue to be considered as part of the benefit accrued under the retirement system unless 

they were distributed by the employer without any election by the employee. In addition, if a retirement system 

gives a former employee credit for benefit determination purposes for periods of prior service with respect to 

which a prior distribution was made only if the employee contributes to the system an amount equal to all or 

a portion of the prior distribution (with or without interest), and this option is provided on reasonable terms, 

such prior service is not required to be taken into account in determining whether the requirements of any of 

the defined benefit safe harbors are met until the required contribution is actually made. If prior service is not 

taken into account under this rule, the prior distribution may not be taken into account either. The rules of this 

paragraph is illustrated by the following example:

Example. An employee retires under the early retirement option under a retirement system maintained by a 

state government. The employee elects to receive a single sum distribution representing the entire accrued 

benefit under the plan. Subsequently, the employee is rehired by the same employer. The plan does not provide 

for any recontribution of the prior distribution. Whether the employee is a member of the retirement system from 

which the employee received the distribution is determined without regard to the single sum distribution. That 

is, a single life annuity that is the actuarial equivalent of the single sum may be treated as part of the accrued 

benefit under the plan. Similarly, all periods of service credited under the plan during the employee’s previous 

service must be considered.

(4) Credited service for part-time, seasonal, and temporary employees.

To meet the requirements of any of the defined benefit safe harbor formulas with respect to a part-time, 

seasonal or temporary employee for plan years beginning after December 31, 1992, a safe harbor formula may 

not permit double proration of the employee’s benefits under the retirement system. See 29 CFR §2530.204-

2(d) for a description of double proration of benefit accruals. Under this rule, the benefit under the retirement 

system may be prorated either on the basis of full-time service or on the basis of full-time compensation, but 

may not be prorated based on both service and compensation. In addition, a safe harbor formula may not 

subject the crediting of service used in calculating the benefit of any part-time, seasonal or temporary employee 

to any conditions, such as a requirement that the employee attain a minimum age, perform a minimum period 

of service, be credited with a minimum number of hours of service, make an election in order to participate, or 

be present at the end of the plan year. The requirements of this section 3.03(4) will be deemed met with respect 

to an employee, however, if the requirements of section 31.3121(b)(7)-2(d)(2)(ii) of the regulations relating to 

amounts distributable upon certain events are met with respect to such employee. See section 31.3121(b)(7)-

2(d)(2)(iii) of the regulations for the definitions of part-time, seasonal, and temporary employee for this purpose.

.04 Examples of application of safe harbor formulas.

The application of the defined benefit safe harbors are illustrated in the following examples:

Example 1. An employee has been a participant in a state retirement system for 9 years and several months at the 

beginning of a plan year of the system. The employee has only 9 years of credited service under the system at the 

beginning of the plan year, however, because the retirement system calculates service for accrual purposes on the 

basis of whole years of actual service. Under the retirement system, each participant is credited with a retirement 

benefit based upon the participant’s highest average compensation over 36 consecutive months times his or her years 

of service (as so determined). Assume the retirement system imposes no other conditions on the accrual of benefits 

and meets the service crediting requirements of section 3.03(2). If at all times during the plan year prior to being 

credited with a tenth year of service the employee has a total accrued benefit of at least 13.5 percent of his or her 

highest average compensation (1.5 percent times 9 years), and at all times during the plan year after being credited 
104

with the tenth year of service the employee has a total accrued benefit of at least 15 percent of his or her highest 

average compensation (1.5 percent times 10 years), and the retirement otherwise meets the requirements of this 

revenue procedure and the regulations, the employee will be treated as a qualified participant throughout the plan year. 

This analysis applies without regard to whether the participant actually accrues a benefit in the plan year or is credited 

with an additional year of service for accrual purposes (e.g., if future accruals under the plan have been frozen or if the 

participant has obtained the maximum level of benefits under the plan).

Example 2. Assume the same facts as in Example 1, except that the plan grants 1 month of credited service for 

every whole month of actual service, and that the employee had 111 months of service (9 years and 3 months) at 

the beginning of the plan year. If at all times during the first month of the plan year prior to being credited with the 

112th month of service the employee has a total accrued benefit of at least 13.875 percent of his highest average 

compensation (1.5 percent times 111 months, divided by 12), and at all times during the first month of the plan year 

after being credited with the 112th month of service the employee has a total accrued benefit of at least 14 percent 

of his highest average compensation (1.5 percent times 112 months, divided by 12), and the retirement system 

otherwise meets the requirements of this revenue procedure and section 31.3121(b)(7)-2(e) of the regulations, the 

participant is a qualified participant in the plan within the meaning of section 31.3121(b)(7)-2(d)(1) for the entire first 

month of the plan year.

Example 3. Assume the same facts as in Example 1, except that, instead of crediting only whole years of participation 

for accrual purposes, the retirement system credits only service during plan years in which a participant has at least 

1,000 hours of service. Thus, as in Example 1, the participant has 9 years of credited service at the beginning of the 

plan year. If at all times during the plan year prior to meeting the 1,000-hour requirement the employee has a total 

accrued benefit of at least 13.5 percent of his or her highest average compensation (1.5 percent times 9 years), and 

at all times during the plan year after meeting the 1,000-hour requirement the employee has a total accrued benefit 

of at least 15 percent of his or her highest average compensation (1.5 percent times 10 years), the employee will be 

treated as a qualified participant in the retirement system within the meaning of section 31.3121(b)(7)-2(d)(1) of the 

regulations throughout the plan year.

SECTION 4. DEFINED BENEFIT RETIREMENT SYSTEMS WITH BENEFIT FORMULAS 

NOT DESCRIBED IN THE SAFE HARBORS OF SECTION 3

.01 In general.

A defined benefit retirement system that calculates benefits under a formula that does not meet one of the safe 

harbor formulas described in section 3 of this revenue procedure meets the minimum retirement benefit requirement 

with respect to an employee if the employee’s accrued benefit as of the date of the determination is at least as great 

as the accrued benefit the employee would have if his or her accrued benefit had been calculated under the safe 

harbor formula in section 3.01(l). In determining whether this requirement is satisfied, the additional requirements set 

forth in section 3.03 must be taken into account. The rules in this paragraph are illustrated by the following example: 

Example. A defined benefit plan maintained by a political subdivision and described in section 457(b) of the Code 

provides only for single sum distributions and thus does not meet the requirements of any of the defined benefit safe 

harbor formulas. The plan may still meet the minimum retirement benefit requirement with respect to an employee 

if it provides a single sum with respect to such employee that is the actuarial equivalent (using reasonable actuarial 

assumptions) of a single life annuity meeting the requirements of section 3.01(1).

.02 Treatment of past service credit.

In determining whether an employee’s accrued benefit under a defined benefit retirement system that calculates 

benefits under a formula that does not meet one of the defined benefit safe harbor formulas is at least as great as 

the accrued benefit the employee would have if his or her accrued benefit had been calculated under the safe harbor 

formula in section 3.01(1), a retirement system may ignore periods of service by an employee with the employer prior 

to his or her commencement of participation in the retirement system, notwithstanding the additional rules relating to 

credited service in section 3.03(2). If such periods of service are ignored, however, any accrued benefits attributable 

to such period of service must also be ignored. The rule in this paragraph is illustrated by the following example:

Example: An employee begins to participate in a retirement system in the employee’s fifth year of service. The 
105

retirement system provides credit for all past service with the employer. Assume the retirement system does not 

provide benefits under a formula that meets the requirements of any of the safe harbors. The employee must be 

treated as being in the employee’s fifth year of credited service if benefits attributable to the past service are to be 

taken into account in comparing the benefit under the retirement system to the benefit the employee would have 

under the safe harbor formula of section 3.01(1) to determine whether the minimum retirement benefit requirement 

is met.

SECTION 5. EMPLOYEES WITH MULTIPLE POSITIONS OR WHO PARTICPATE IN CERTAIN 

RETIREMENT SYSTEMS

See section 31.3121(b)(7)-2(e)(2)(iv) and (v) of the regulations for rules to be used in determining the service, 

compensation and benefits taken into account for purposes of this revenue procedure in the case of employees who 

are employed in more than one position with the employer, and employees who are participants in retirement systems 

maintained by more than one employer, respectively.

SECTION 6. EFFECTIVE DATE

This revenue procedure is effective with respect to service performed after July 1, 1991.
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107

Guide to the Citations in this Publication

Citation Source Example Purpose

Internal Revenue 

Code IRC Section 132(a)(1) Title 26 of the United States Code, the primary statutory authority for laws dealing with federal tax.

Treasury 

Regulation

Treas. Reg. 

Section 1.162-2(a)(2)

Provides guidance for new legislation or to address 

issues that arise with respect to existing Internal 

Revenue Code sections. Regulations interpret and give 

directions on complying with the law.

Treasury 

Proposed 

Regulation

Prop. Reg. 106897-08 Generally, regulations are first published in proposed 

form in a Notice of Proposed Rulemaking (NPRM).

Treasury 

Decision TD 9696 Document that contains the text of a final or temporary regulation

Revenue 

Procedure Rev. Proc. 2020-1

An official statement of a procedure that affects the 

rights or duties of taxpayers or other members of the 

public under the IRC, related statutes, tax treaties 

and regulations and that should be a matter of public 

knowledge.

Revenue Ruling Rev. Rul. 2012-25

An official interpretation by the IRS of the IRC, related 

statutes, tax treaties and regulations. It is the IRS 

conclusion on how the law is applied to a specific set of 

facts.

Notice Notice 98-03

A public pronouncement that may contain guidance that 

involves substantive interpretations of the IRC or other 

provisions of the law.

Announcement Ann. 85-113 A public pronouncement that has only immediate or 

short-term value.

Private Letter 

Ruling PLR 200437030

A written statement issued to a taxpayer that interprets 

and applies tax laws to the taxpayer’s specific set of 

facts. It may not be relied on as precedent by other 

taxpayers or IRS personnel.

Technical Advice 

Memorandum TAM 200222003

Guidance furnished by the Office of Chief Counsel 

to IRS personnel in response to an internal request 

concerning technical or procedural questions that 

develop during a proceeding.

Supreme Court 

Decision 269 U.S. 514 (1926) Final decision on tax matter presented to Supreme 

Court from lower courts.

Social Security 

Act 42 U.S.C. Section 418 Original 1935 legislation establishing Social Security; 

now Title 42 of the United States Code.
108

Statutory Citations for State Enabling Laws

As of April 2020

State or U.S. 

Territory Citation

Alabama Code of Alabama, Title 36. Public Officers and Employees, Chapter 28, Social Security for 

State, Municipal, Etc., Employees, § 36-28-1, et seq.

Alaska

Alaska Statutes Annotated, Title 39, Public Officers and Employees, Chapter 30. Insurance 

and Supplemental Employee Benefits, Article 1, Old Age and Survivors Insurance, 

§ 39.30.010, et seq.

Arizona

Arizona Revised Statutes Annotated, Title 38. Public Officers and Employees, Chapter 5. 

Social Security and Retirement, Article 1, Social Security for Public Officers and Employees, 

§ 38-701 et seq.

Arkansas Arkansas Code Annotated, Title 24. Retirement and Pensions, Chapter 1. General 

Provisions, Subchapter 2. Public Employees’ Social Security, § 24-1- 201, et seq.

California

Annotated California Codes, Government Code, Title 2. Government of the State of 

California, Division 5. Personnel, Part 4. Federal Old Age and Survivors’ Insurance, 

Chapter 1. General Provisions, Definitions, Designation of Special Groups, Article 1. 

General Provisions and Definitions, § 22000, et seq.

Colorado Colorado Revised Statutes Annotated, Title 24. Government—State Public Employees’ 

Retirement Systems, Article 53. Public Employees’ Social Security, § 24-53-101, et seq.

Connecticut Connecticut General Statutes Annotated, Title 5. State Employees, Chapter 66. State 

Employees Retirement Act, Part I. General Provisions, § 5-152 et seq.

Delaware Delaware Code Annotated, Title 29. State Government, Part V. Public Officers and 

Employees, Chapter 57. Social Security, § 5701, et seq.

Florida Florida Statutes Annotated, Title XXXVII. Insurance (Chapters 624-651), Chapter 650. 

Social Security for Public Employees 650.01, et seq.

Georgia

Code of Georgia Annotated, Title 47. Retirement and Pensions, Chapter 18. Social 

Security Coverage for Employees of the State and Political Subdivisions of the State, 

Article 1. General Provisions § 47-18-1, et seq.

Hawaii

Hawai‘i Revised Statutes Annotated, Division 1. Government, Title 7. Public Officers 

and Employees, Chapter 88. Pension and Retirement Systems, Part VI. Federal Social 

Security for Public Employees, § 88-211, et seq.

Idaho Idaho Code Annotated, Title 59. Public Officers in General, Chapter 11. Social Security 

Benefits, § 59-1101, et seq.

Illinois Smith-Hurd Illinois Compiled Statutes Annotated, Chapter 40. Pensions, Act 5. Illinois 

Pension Code, Article 21, Social Security Enabling Act 5/21-101, et seq.

Indiana Annotated Indiana Code, Title 5. State and Local Administration, Article 10.1. Social 

Security Coverage for Public Employees, Chapter 1. Definitions, 5-10.1-1- 1, et seq.

Iowa

Iowa Code Annotated, Title III. Public Services and Regulation [Chs. 80-122C], Subtitle 3. 

Retirement Systems [Chs. 97-98A], Chapter 97C. Federal Social Security Enabling Act, 

97C.1, et seq.
109

Statutory Citations for State Enabling Laws

As of April 2020

State or U.S. 

Territory Citation

Kansas Kansas Statutes Annotated, Chapter 40. Insurance, Article 23. Old-Age and Survivors 

Insurance for Public Employees, 40-2301.

Kentucky

Baldwin’s Kentucky Revised Statutes Annotated, Title VIII. Offices and Officers, Chapter 

61, General Provisions as to Offices and Officers; Social Security for Public Employees; 

Employees Retirement System, General Provisions, Social Security for Public Employees, 

61.410, et seq.

Louisiana Louisiana Statutes Annotated, Louisiana Revised Statutes, Title 42. Public Officers and 

Employees, Chapter 13. Old Age, Survivors, Disability, and Health Insurance, § 1001, et seq.

Maine

Maine Revised Statutes Annotated, Title 5. Administrative Procedures and Services, Part 

21. Social Security for State and Municipal Employees, Chapter 431. Social Security for 

State and Municipal Employees, § 19001, et seq.

Maryland

Annotated Code of Maryland, State Personnel and Pensions, Division III. Other 

Retirement and Pension Provisions [Titles 35-End], Title 36. Social Security Benefits, 

§ 36-101, et seq.

Massachusetts

Massachusetts General Laws Annotated, Part I. Administration of the Government (Ch. 

1-182), Title XVII. Public Welfare (Ch. 115-123B), Chapter 118C. Coverage of Certain 

Employees Under the Federal Social Security Act, § 1, et seq.

Michigan Michigan Compiled Laws Annotated, Chapter 38. Civil Service and Retirement, Social 

Security for Public Employees, 38.851, et seq.

Minnesota Minnesota Statutes Annotated, Retirement (Ch. 352-356B), Chapter 355. Social Security 

Coverage, State and Local Government Employees, § 355.01, et seq.

Mississippi

West’s Annotated Mississippi Code, Title 25. Public Officers and Employees; Public 

Records, Chapter 11. Social Security and Public Employees’ Retirement and Disability 

Benefits, Article 1. Social Security Benefits, § 25-11-1, et seq.

Missouri

Vernon’s Annotated Missouri Statutes, Title VIII. Public Officers and Employees, Bonds 

and Records, Chapter 105. Public Officers and Employees--Miscellaneous Provisions 

Generally, § 105.005, et seq.

Montana Montana Code Annotated, Title 19. Public Retirement Systems, Chapter 1. Social Security, 

Part 1. General Provisions, § 19-1-101, et seq.

Nebraska Revised Statutes of Nebraska Annotated, Chapter 68. Public Assistance, Article 6. Social 

Security, §68-601, et seq.

Nevada

Nevada Revised Statutes Annotated , Title 23. Public Officers and Employees (Chapters 

281-289), Chapter 287. Programs for Public Employees, Participation of Employees of 

State and Its Political Subdivisions in Federal Old-Age and Survivors’ Insurance, §287.050, 

et seq.

New 

Hampshire

Revised Statutes Annotated of the State of New Hampshire, Title VI. Public Officers and 

Employees (Ch. 91 to 103), Chapter 101. Old Age and Survivors’ Insurance, §101:1, et seq.

New Jersey

New Jersey Statutes, TITLE 43. Pensions and Retirement and Unemployment 

Compensation, Subtitle 9 Social Security, Chapter 22, Old Age and Survivors Insurance 

for Public Employees, § 43:22-1, et seq.
110

Statutory Citations for State Enabling Laws

As of April 2020

State or U.S. 

Territory Citation

New Mexico New Mexico Statutes Annotated, Chapter 10. Public Officers and Employees, Article 14. 

Social Security Coverage § 10-14-1, et seq.

New York

McKinney’s Consolidated Laws of New York Annotated, Retirement and Social Security 

Law, Chapter 51-A of the Consolidated Laws, Article 1. Short Title § 1. Short title of 

chapter, Article 3. Federal Old-Age and Survivors Insurance Coverage for Certain Public 

Employees § 130, et seq.

North Carolina

North Carolina General Statutes Annotated, Chapter 135. Retirement System for 

Teachers and State Employees; Social Security; State Health Plan for Teachers and State 

Employees, Article 2. Coverage of Governmental Employees Under Title II of the Social 

Security Act § 135-19, et seq.

North Dakota North Dakota Century Code Annotated, Title 52. Social Security, Chapter 52-10. Public 

Employees Under Federal Social Security § 52-10-01, et seq.

Ohio Baldwin’s Ohio Revised Code Annotated, Title I. State Government, Chapter 144. Old Age 

and Survivors Insurance--Municipal Employees 144.01, et seq.

Oklahoma Oklahoma Statutes Annotated, Title 51. Officers, Chapter 4. Old Age and Survivors 

Insurance Under Federal Act, § 121, et seq.

Oregon Oregon Revised Statutes Annotated, Title 22. Public Officers and Employees, Chapter 237. 

Public Employee Retirement Generally, Social Security Act Coverage, 237.410, et seq.

Pennsylvania Purdon’s Pennsylvania Statutes and Consolidated Statutes, Title 65 P.S. Public Officers, 

Chapter 10. Public Officer and Employee Social Security Contribution Law § 201, et seq.

Puerto Rico Laws of Puerto Rico Annotated, Title Three. Executive, Chapter 33. Retirement of 

Government Personnel Federal social security for Puerto Rico § 813, et seq.

Rhode Island General Laws of Rhode Island Annotated, Title 36. Public Officers and Employees, 

Chapter 7. Federal Old-Age and Survivors’ Insurance, § 36-7-1, et seq.

South Carolina

Code of Laws of South Carolina 1976 Annotated, Title 9. Retirement Systems, Chapter 3. 

Coverage of Public Officers and Employees, Under Federal Social Security Act, Article 1. 

General Provisions § 9-3-10, et seq.

South Dakota South Dakota Codified Laws, Title 3. Public Officers and Employees, Chapter 3-11. Social 

Security Coverage 3-11-1, et seq.

Tennessee West’s Tennessee Code Annotated, Title 8. Public Officers and Employees, Chapter 38. 

Social Security § 8-38-101, et seq.

Texas

Vernon’s Texas Statutes and Codes Annotated, Government Code, Title 6. Public Officers and 

Employees, Subtitle A. Provisions Generally Applicable to Public Officers and Employees, 

Chapter 606. Social Security, Subchapter A. General Provisions § 606.001, et seq.

Utah Utah Code Annotated, Title 67. State Officers and Employees, Chapter 11. Federal Social 

Security § 67-11-1, et seq.

Vermont Vermont Statutes Annotated, Title Three. Executive, Part 1. Generally, Chapter 19. Social 

Security for State and Municipal Employees § 571, et seq.
111

Statutory Citations for State Enabling Laws

As of April 2020

State or U.S. 

Territory Citation

Virginia Annotated Code of Virginia, Title 51.1. Pensions, Benefits, and Retirement, Chapter 7. 

Federal Social Security for State and Local Employees § 51.1-700, et seq.

Virgin Islands Bill Number 10, Sixteenth Session, 1951.

Washington Revised Code of Washington Annotated, Title 41. Public Employment, Civil Service, and 

Pensions, Chapter 41.48. Federal Social Security for Public Employees 41.48.010, et seq.

West Virginia

Annotated Code of West Virginia, Chapter 5. General Powers and Authority of the 

Governor, Secretary of State and Attorney General; Board of Public Works; Miscellaneous 

Agencies, Commissions, Offices, Programs, Etc., Article 7. Social Security Agency, § 5-7-1, 

et seq.

Wisconsin Wisconsin Statutes Annotated, Public Employee Trust Fund (Ch. 40), Chapter 40. Public 

Employee Trust Fund, Subchapter III. Social Security for Public Employees 40.40, et seq.

Wyoming Wyoming Statutes Annotated, Title 9. Administration of the Government, Chapter 3. 

Compensation and Benefits, Article 3. Social Security § 9-3-301, et seq.
112
113

n Index

Absolute Coverage Group 39, 41

Accountable Plan 18, 34

Additional Medicare Tax 15, 21

Alternative lookback rule, retirement system 57

Appointed officials 27, 33, 34, 51

Back Pay 17, 73

Board members 27

Catch-up contributions

403(b) 19

457(b) 19, 20

Clothing provided by employer 18, 21

COBRA 49

Common-law employee 28, 29, 34, 35, 36, 37, 48, 61

Commuting rule 18

Conservation district 11

Continuation of Coverage 41

Continuing employment exception 4, 5, 49, 51, 59, 78, 90, 92, 93, 98, 99, 100

Correcting Wage Reports 67

Coverage group

absolute 39, 41, 78

retirement system 40, 41, 43, 44, 78, 80

Coverage under Section 218 38, 39, 42, 43, 44, 46, 60

Deceased employee wages 16, 17, 68

defined benefit plan 53, 54, 55, 56, 58, 78, 101, 102, 103, 104

Defined contribution plan 53, 54, 55, 56, 59, 78

Deposit rules 24, 27, 61, 95

Disclosure of tax information 72, 74, 75, 76

Divided retirement system 7, 11, 40, 41, 47

Earnings record 6, 17, 52, 61, 70, 78

Elected Officials 33, 43

Election workers/officials 2, 7, 23, 43, 45, 46, 50, 98

Elective positions 33, 43, 51

Electronic Federal Tax Payment System (EFTPS) 24

Emergency workers 27, 35, 42, 45, 47, 50, 98, 100

Employer Identification Number (EIN) 20, 34, 68, 73, 78

Employer pick-up contributions 19

Employment tax returns 6, 27, 28, 87

Federal government, authority 1, 9, 10

Federal income tax withholding 14, 16, 22, 24, 28

Federal State and Local Governments (FSLG) 38, 53, 71, 72

Fee-based public officials 43, 46, 79

FICA (Federal Insurance Contributions Act) 1, 6, 14, 24, 27, 79, 80

FICA replacement plan. See Public retirement system 2, 3, 4, 6, 7, 14, 28, 40, 44, 47, 51, 53, 58

Fire associations 11, 12

Firefighters 1, 2, 17, 27, 29, 34, 36, 46, 47
114

Firefighters social security coverage 2, 46, 47

Foreign workers 42, 45, 47, 73, 74

Form

941 6, 21, 24, 27, 34, 69, 73, 74

941X 22, 74

943 74

944 6, 21, 22, 27, 74

1099-MISC 6, 17, 22, 23, 36, 68, 73, 74

2848 74, 75

8821 72, 74, 75, 77

I-9 67

SS-8 33, 37

SSA-7004 66

W-2 6, 7, 16, 17, 20, 21, 22, 23, 31, 37, 46, 47, 66, 67, 68, 69, 70, 73, 80, 96

W-3 6, 20, 21, 22, 23, 67, 68, 69, 73, 96

W-4 16, 20, 24, 25, 73

W-9 23, 36, 73

Former participants retirement plan 58

Fringe benefits 17, 18, 21, 73, 74

FSLG (Federal State and Local Governments) 72

Full retirement age 61, 62

FUTA (unemployment tax) 12, 14, 16, 25, 28, 35, 79

Government Pension Offset (GPO) 2, 62, 63, 64, 65, 79

Health benefits 18, 65

Income tax withholding 13, 14, 16, 18, 19, 20, 21, 22, 23, 24, 26, 28, 29, 33, 35, 36, 37, 73

Independent contractor 6, 28, 29, 30, 31, 32, 33, 36, 37, 69, 74

defined 28, 29

tax responsibilites 36

Indian Tribal Governments i, 7, 9, 12, 13, 28, 49, 71, 72, 73

information reporting 23, 24, 26, 28, 36, 60, 72

Information reporting penalties 25, 26

requirements 26

Information return reporting 23, 37, 67, 72, 73

Inmates 27, 42, 44, 45

Instrumentality defined 3, 7, 10, 11, 12, 13, 53, 78, 79, 81

Interest on tax due 25, 26

Internal Revenue Service i, 2, 6, 66, 71, 73

Interstate instrumentalities 1, 9, 10, 11, 40, 47, 79, 81

Leased workers 35, 48

Local government i, 1, 2, 3, 4, 5, 9, 10, 14, 38, 39, 41, 42, 44, 49, 51, 53, 58, 59, 70, 72, 74

Mandatory Medicare coverage 3, 4, 22, 49, 50, 51, 79

continuing employment exception 4, 5, 49, 50, 51, 52, 59, 78, 90, 92, 93, 98, 99, 100

Mandatory social security coverage 2, 3, 4, 5, 6, 7, 10, 23, 38, 42, 43, 44, 45, 46, 47, 48, 50, 51, 53, 

55, 56, 57, 58, 59, 65, 78, 79, 80

Mandatory social security coverage exclusions 44, 45

Meals furnished by employer 18

Medicaid 50, 65, 66

Medicare benefits 61, 80, 101

coverage rules 2, 4, 5, 7, 8, 27, 28, 38, 39, 40, 41, 47, 49, 50, 51, 58, 74, 76

services not covered 1, 2, 3, 4, 7, 8, 11, 13, 14, 19, 20, 27, 28, 37

voluntary 50, 52, 61, 65
115

Medicare Qualified Government Employment (MQGE) 22, 49, 79

Military differential pay 16

Modification Section 218 Agreement 3, 6, 7, 38, 39, 41, 43, 45, 46, 47, 50, 52, 60, 70, 76, 78, 79

Multiple positions employee 57, 59

National Conference of State Social

Security Administrators (NCSSSA i, 3, 7, 50, 77, 79

Noncash payments 17, 21, 38

Nonpayroll withholding 22, 24

Nonqualified plan 19, 20, 21, 53

Optional exclusions

Section 218 coverage 3, 5, 7, 38, 39, 42, 43, 44, 50, 77, 80, 94, 95

Parallel Social Security Office (PSSO) 76

Part-time employees 30, 31, 32, 34, 35, 43, 44, 54, 56, 57, 59, 65, 99, 100, 103

Penalties 17, 25, 26, 36, 37, 66, 68, 88, 95, 96

information reporting 26, 66, 68

trust fund recovery penalty 26

Pick-up contributions 19

Police officers social security coverage 1, 2, 17, 27, 41, 46, 47

Prisoners. See Inmates 27, 42, 44, 45, 50, 92

Public Officials 33, 34, 43, 45, 46, 48, 79

Public retirement system i, 2, 3, 4, 5, 6, 7, 11, 14, 22, 27, 28, 38, 40, 42, 43, 44, 46, 47, 49, 50, 51, 

53, 54, 56, 58, 59, 62, 78, 79, 80

alternative lookback rule 57, 78

definition 53

qualified participant 3, 11, 27, 43, 46, 50, 53, 54, 55, 56, 57, 58, 59, 78, 80, 104

Qualified participant retirement plan 11, 31, 51, 53, 54, 55, 56, 57, 58, 59, 78, 80

Qualified retirement plan income tax withholding 11, 19

Referendum (Social Security coverage) divided system 7, 11, 40, 41, 46, 47, 76, 80

majority vote 11, 40, 41, 47

Regional Commissioner SSA 60

Rehired annuitants 58, 59

Reimbursements business expenses 18, 29, 30, 34, 35, 37, 47

Required exclusions 42, 50, 80

Section 218 coverage 42, 80

Retirement plans 19, 22, 65, 71, 72, 74

Retirement system coverage group 39, 40, 41, 43, 44, 47, 78, 80

Retirement system.See Public retirement system 38, 39, 40, 42, 80

Seasonal employees 31, 32, 43, 54, 56, 57, 59, 103, 104

Section 115 Internal Revenue Code 9, 13, 79

Section 218 Agreement i, 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 14, 19, 23, 27, 28, 33, 35, 36, 37, 38, 39, 

40, 41, 42, 43, 44, 45, 46, 47, 48, 49, 50, 51, 52, 53, 56, 57, 58, 59, 60, 65, 70, 72, 74, 75, 76, 

77, 78, 79, 80, 81, 92, 96, 101, 103

modification(s) 3, 6, 7, 38, 39, 41, 42, 43, 45, 46, 47, 52, 60, 70, 76, 78, 79

required exclusions 41, 42, 50, 80

Section 403(b) plan 19, 22, 31, 54, 73

Section 457 plan 19, 20, 22, 53, 54, 104

Section 530 (Revenue Act of 1978) i, 36, 37, 73, 83, 86, 87, 88

Sick pay 16, 54

Social security
116

benefits 6, 17, 20, 61, 62, 63, 66, 67, 70, 79, 81

coverage 1, 2, 3, 6, 7, 13, 14, 17, 19, 27, 28, 38, 41, 42, 43, 44, 45, 47, 48, 50, 

53, 55, 56, 57, 58, 60, 63, 65, 72, 74, 75, 76, 77, 79, 92, 94, 95

earnings record 6, 7, 17, 52, 61, 69, 70, 78, 81

exclusions 3, 5, 27, 34, 35, 38, 42, 43, 44, 45, 46, 47, 50, 51, 69, 77, 79, 80

key dates 2

optional exclusions 3, 5, 38, 42, 44, 50, 80

Social Security Administration i, 6, 14, 17, 20, 45, 60, 65, 66, 69, 73, 80, 94, 95

Social Security and Medicare wages defined 14

Social Security coverage exclusions 42, 43, 44, 45, 46, 50

Social Security number 7, 61, 66, 67, 68, 69, 81

Social Security number verification service 66, 67, 69

Social Security Statement 66, 67, 70, 80

Social Security wage base 14, 21, 22, 35, 54, 61, 68, 69, 81, 94

Soil conservation district 11

State Social Security Administrator 2, 3, 5, 6, 7, 8, 10, 28, 33, 38, 41, 46, 48, 50, 51, 52, 56, 60, 70, 72, 

74, 75, 76, 77, 79, 81

Tax sheltered annuity 19, 73

Temporary employees 56, 59, 103

Temporary workers 32, 35, 59

Third-party sick pay 16

Trust fund recovery penalty 26

Vacation pay 16, 29

Vesting requirements 55, 56, 57, 59

Voluntary Medicare 50, 52

Volunteer firefighters 34, 35

Wages

deceased employee 16, 17, 68

noncash 17, 21, 38

Water conservation district 10, 11

Wholly-owned instrumentality 10, 11, 12, 13, 78, 81, 90, 92, 101

Withholding

qualified plans 19

Withholding income tax 13, 14, 16, 18, 19, 20, 21, 22, 23, 24, 25, 26, 28, 29, 33, 35, 

36, 37, 73, 86, 87, 92

Worker classification 6, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 73