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1110.5 Earnings Defined

For determining work deductions, a person's earnings for a taxable year consists of the 

sum of his remuneration for services rendered as an employee during the year and his 

net self-employment (SE) earnings for the year, MINUS any net loss from SE for the 

year. Earnings are counted for the period in which they are earned, regardless of when 

they are paid; however, net earnings from SE are generally counted as earnings for the 

taxable year in which they are received. 

Earnings, for work deduction purposes, include amounts "deducted" from the annuitants 

pay for health insurance premiums, income tax withholding, employee contributions to a 

retirement plan (i.e. 401(k) plan), union dues, etc.

Example: If the employee's gross pay in a given month is $2,000, with deductions of 

$25.00 for health insurance, $300.00 for income tax withholding, and $200.00 for a 

401(k) retirement account, his earnings for work deduction purposes is $2,000 for that 

month.

This section gives general guidelines for determining when earnings count for deduction 

purposes.

1110.5.1 Wages for Services as an Employee

Unless specifically excluded from "wages" under the Social Security (SS) Act, earnings 

for persons who are in service for hire normally include the following:

A. All remuneration for services in employment, whether covered or not covered 

under the Railroad Retirement Act or the Social Security Act. Pay for work not 

covered for social security contribution and benefit purposes may be counted as 

earnings for the annual earnings test;

B. Employment outside the U.S. covered by the SS Act;

C. All cash wages from agricultural labor, even though less than $150.00 a year;

D. All cash wages from domestic service in a private home, service as an industrial 

home worker and service not in the employer's trade or business, even though 

less than $50.00 a quarter; and

E. Cash tips of $20.00 or more per month for one employer.

FOM1 1110.10 and 1110.15 have more specific information on which earnings should 

be included or excluded for deduction purposes.
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1110.5.2 Wages in Kind

Wages in kind are considered earnings unless they are specifically excluded from 

wages by the SS Act.

If an oral or written agreement between a person and his employer states the value of 

the gratuity furnished, that value is the amount of remuneration if it is considered 

reasonable by the standards at the time of payment. It is immaterial whether the 

agreement was reached before, during or after the gratuity was furnished.

When the employer and the person have not agreed on the value of the gratuity 

furnished in lieu of cash payments, the reasonable value of the gratuity is determined on 

the basis of the benefit to the person rather than the cost to the employer. For example, 

the price a restaurant charges a customer for a meal is not necessarily the value of the 

same meal furnished an employee of the restaurant, since employees do not usually get 

the same services as the customer.

1110.5.3 Self-Employment

Self-employment earnings are net earnings, regardless of the amount, from SE inside 

the U.S. (whether or not covered by the SS Act) and from SE outside the U.S., if 

covered by the SS Act. The net loss from SE is subtracted from the sum of any net 

earnings from other trades, businesses or total remuneration from employment. This 

means that if the SE business had a total loss for the taxable year, no work deductions 

for SE would be applied. Services performed in the U.S. by U.S. citizens employed by 

foreign governments, by wholly-owned instrumentalities of foreign governments, or by 

certain international organizations are included as self-employment earnings.

Deferred income received in a year after the year in which entitlement begins may be 

excluded in determining the individual's excess earnings, if it is based on services 

performed before entitlement begins. This applies to years after 1977 for an annuity or 

overall minimum (O/M) share payable for months after December 1977, but not for a 

disabled employee or child.

Detailed information on SE earnings and deferred income is in FOM1 1110.20 and

FOM1 1110.45. 

1110.5.4 Military Service

After 1956, earnings for deduction purposes include a serviceman's basic pay from the 

U.S. armed forces while on active duty or active duty for training, either within or outside 

the U.S.

Active duty is extended full-time duty; active duty for training is, generally, full-time duty 

for periods of 14 days or more. Attendance at weekly drills by the serviceman is 

assumed to be inactive duty for training. Earnings from inactive duty should be treated 

as follows: 
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• Inactive duty performed prior to January 1, 1988 - Earnings from inactive duty are 

not subject to work deductions.

• Inactive duty performed January 1, 1988 or later - Earnings from inactive duty are 

subject to work deductions.

1110.5.5 Earnings From Federal Government Employment

Earnings from employment for the Federal government are the gross earnings that the 

annuitant receives for services performed for the Federal government after the annuity 

beginning date (ABD).

Earnings, for work deduction purposes, include amounts "deducted" from the annuitants 

pay for health insurance premiums, income tax withholding, employee contributions to a 

retirement thrift plan, union dues, etc.

Example - If the employee's gross pay in a given month is $2,000, with deductions of 

$25.00 for health insurance, $300.00 for income tax withholding, and $200.00 for thrift 

plan account, his earnings for work deduction purposes is $2,000 for that month.

1110.5.6 Earnings of Homeworkers

Homeworkers are employees earning wages if they:

• Work away from the employer's place of business; and,

• Work in accordance with the employer's specifications; and,

• Work on material or goods furnished by the employer; and,

• Return the finished product to the employer or to someone whom the employer 

designates. It is immaterial whether the employer calls for the work or the worker 

delivers it to the employer. 

This group includes people who make quilts, buttons, gloves, clothing, needlecraft 

products, typing, etc., for an employer. The work is done away from the employer's 

place of business, usually, in the workers home, the home of another, or in a home 

workshop. Usually, the specifications given are simple and consist of following patterns 

or samples furnished by the employer.

The pay received from any one employer by homeworkers in this category is not 

counted for Social Security benefit entitlement purposes when that employer pays the 

homeworker cash wages of less than $100 in a calendar year. However, all pay, cash 

and/or payments-in-kind, is counted in applying the earnings test for work deductions to 

a beneficiary, even if the cash-pay test is not met.
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1110.5.7 Vacation Pay or Other Accrued Payments

A. Based on Service Before the ABD Year

Accrued payments from a railroad or non-railroad employer based on service 

performed before the annuity beginning date (ABD) year are not subject to work 

deductions. Accrued payments for the ABD year are subject to work deductions. 

When crediting a payment of accrued vacation pay or (annual leave), in lieu of 

taking the vacation, the RRB follows the guidelines established by SSA. Accrued 

vacation pay (or annual leave) paid in a lump sum at retirement relates to service 

performed prior to the date the employment relationship terminated.

B. Based on Service in the ABD Year or Later

If vacation pay or annual leave is based on service performed in the ABD year or 

later, these earnings are included in the total yearly earnings from that employer 

and are subject to work deductions. However, the non-work months for the 

grace year explained in FOM1 1105.40 may apply.

1110.5.8 Back Pay or Deferred Earnings

A. Based on Service Before the ABD Year

If the annuitant receives back pay from either a railroad employer or a nonrailroad employer, and the actual date last worked for that employer is in a year 

before the ABD year, the back pay is credited to the month that the employee 

performed the service for that pay for that employer. The payments are not 

subject to work deductions.

Example 1 - The annuitant's date last worked is 12-31-1991. His ABD is 1-1-92. 

He received back pay on 2-5-92, from a railroad employer for the months of 

September 1991 through November 1991. For work deduction purposes, the 

back pay is considered earned in 1991 and does not cause work deductions.

Example 2 - Same facts as example 1, but the annuitant is also paying $200.00 

per month from his wages in 1991 into a 401(k) retirement plan. The amounts 

paid into the 401(k) account are considered earned in 1991, and do not cause 

work deductions.

B. Based on Service in the ABD Year or Later

For work deduction purposes, back pay or deferred earnings for services to a 

railroad or non-railroad employer performed in the ABD year or later are 

considered to have been paid in the month in which they were earned. These 

earnings are included in the total yearly earnings from that employer and are 

subject to work deductions.
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Example 1 - The annuitant has an annuity beginning date of January 1, 1990. He 

continues to work for his non-railroad employer in 1991 and 1992. On January 2, 

1993, he receives back pay for months in 1991. The back pay is used to 

determine the work deductions that apply to the annuity for benefits paid for 

1991.

Example 2 - Same facts as example 1, but the annuitant is also paying $200.00 

per month from his wages in 1991 into a 401(k) retirement plan. The amounts 

paid into the 401(k) account are considered earned in 1991 and are used to 

determine the work deductions that apply in 1991.

. . 

1110.5.9 Sick Pay

A. Based on Service Before the ABD Year

If the annuitant receives sick pay "under a plan or agreement," for up to six 

months after the actual date last worked, from either a railroad employer or a 

non-railroad employer, and the actual date last worked for that employer is in a 

year before the ABD year, the "sick pay" is credited to tier 1 only to the actual 

date last worked for that employer. The payments are not subject to work 

deductions. This type of Sick Pay from a railroad employer is indicated on the 

Employment Data Maintenance (EDM) record as "Miscellaneous Compensation." 

It is also referred to as "Tier 1 Sick Pay." 

Example - The annuitant's date last worked is 9-30-1991. His ABD is 1-1-92. He 

received "Tier 1 Sick Pay" from a railroad employer for the months of September 

1991 through February 1992. For work deduction purposes, the total amount of 

the "Tier 1 Sick Pay" is credited to 9-30-1991. The "Tier 1 Sick Pay" does not 

cause work deductions.

B. Based on Service in the ABD Year or Later

If the annuitant is carried on the payroll in the year of the annuity beginning date, 

the "sick pay" is subject to the annual earnings test for work deductions.

If the annuitant performs service for a non-railroad employer after the annuity 

beginning date and then receives sick pay under a "plan or agreement" for a 

period (up to six months) after the actual date last worked for the non-railroad 

employer, these payments are credited to the date last worked for the nonrailroad employer and are included in the total yearly earnings used in the annual 

earnings test for work deductions.

Example - The annuitant's actual date last worked is 2-28-1992. His ABD is 3-1-

92. He received "Sick Pay" from a non-railroad employer for the months of 

March 1992 through August 1992. For work deduction purposes, the total 

amount of the "Sick Pay" is credited to 2-28-1992. The "Sick Pay" is included in 
FOM1 1110

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the annuitant's yearly earnings. However, "non-work" months will probably apply 

after the ABD. 

1110.5.10 Payment to School Employees during Non-Work Months

If the annuitant was a school employee who received payments during "non-work" 

months, use the guidelines as shown below:

1. Nature of Payments to School Employees - School teachers are usually engaged 

in a seasonal job with employment contracts requiring the performance of a 

specified number of days, weeks, or months of teaching (or similar) services 

during the school term in return for a specific salary. Frequently, the agreedupon salary is paid out in 12 monthly installments for the convenience of both the 

employer and the employee. In such cases, the wages are earned when the 

personal services stipulated in the contract are performed and not during the offseason months.

2. Imposing Work Deductions - Do not impose a work deduction because of excess 

earnings for a "Non-Work" month in the "Grace Year" (i.e., one in which no 

services of any kind were rendered) falling between school years even though a 

wage or salary payment is made to the teacher (or janitor, clerk, etc.) for that 

month. In such cases, the payments made during the period between school 

terms are presumed to be part of the total earnings for the contract year and 

should be allocated to the months in which they actually were earned. However, 

if the school employee performs any additional service for additional 

remuneration between the school years (such as teaching summer school) for 

the same employer on a full or part-time basis, that month should not be 

considered a "non-work" month.

3. Sabbatical Leave - Do not apply work deductions because of sabbatical leave 

payments for the normal "non-work" summer months where the school system 

makes regular salary payments to teachers in 12 monthly payments (even 

though the school year is of only 9 or 10 months' duration), unless the payments 

are for research and study actually performed during the summer months.

1110.5.11 Dismissal or Separation Payments

Dismissal or separation pay usually refers to payments made by an employer to an 

employee whose employment is terminated independently of his or her wishes. 

Normally, the employment is terminated because of economic conditions which result in 

a reduction of force or a shutdown of a plant. The payment is made to provide income 

to a terminated employee while he is seeking other employment. These payments are 

subject to the annual earnings test.

The dismissal or separation pay is deemed to have been paid on the actual date last 

worked, regardless of when paid. (This presumption may be rebutted if there is proof 

that the payments are for services rendered at an earlier time.)
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Example 1 - The annuitant received a regular salary of $2,000, per month for 1-1-1991 

through 3-31-1991. The annuitant receives dismissal pay of $25,000 which was paid in 

monthly installments of $2,500 per month for ten months effective from 4-1-1991. His

actual date last worked was 3-31-1991. His ABD is 9-1-1991. The total amount of the 

separation pay is credited to 3-31-1991. The annuitant's total earnings for the year is 

$31,000. The annuitant has non-work months from 9-1-1991 through 12-31-1991.

Example 2 - The annuitant received a regular salary of $2,000, per month for 1-1-1991 

through 3-31-1991. The annuitant receives separation pay of $25,000 which was paid 

in a lump sum on 7-5-1991. His actual date last worked was 3-31-1991. His ABD is 9-

1-1991. The total amount of the separation pay is credited to 3-31-1991. The 

annuitant's total earnings for the year are $31,000. The annuitant has non-work months 

from 9-1-1991 through 12-31-1991.

1110.5.12 Earnings from Investments

Earnings from investments are not based on service to an employer or "substantial 

service" in self-employment. These earnings are not subject to work deductions. Some 

examples of these types of payments are:

• Rentals from real estate that cannot be counted as earnings from self-employment 

because, for instance, the beneficiary did not materially participate in production 

work on a farm, the annuitant was not a real estate dealer, etc.

• Interest and dividends from stocks and bonds (unless they are received by a dealer 

in securities in the course of business).

• Gain or loss from the sale of capital assets, or sale, exchange, or conversion of 

other property which are not stock in trade, nor includable in inventory.

• Payments from an Individual Retirement Account (401(k) plan.

1110.5.13 Earnings from Employment Outside the United States

If the annuitant is performing service to an employer or self-employment outside the 

United States and the annual earnings test applies, the earnings must be converted to 

U.S. dollars to determine the amount of the reduction to the annuity on account of work. 

The annuity applications and reporting forms specify that only U.S. dollars are to be 

shown. To convert the foreign earnings amount to U.S. dollars, complete Form G-310, 

Conversion of Foreign Currency, and forward it to your lead or supervisor. (S)he will 

obtain the exchange rate for the period in question and return the form to you. 

1110.5.14 Earnings while Incarcerated

If the annuitant is performing service to an employer while confined in a jail, prison, or 

other penal institution or correctional facility in accordance with FOM1 150.15 for 

retirement and survivor annuities, the annual earnings test applies for the purpose of 

work deductions. 
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Example:

An EE’s ABD is 03/01/18, but has been incarcerated since 11/07/2013. While 

imprisoned, the EE took a position in the prison as a Suicide Prevention Companion 

that pays $60/month during 2013 and continues to make earnings after their ABD. 

Earnings are paid by the State of Indiana, however the EE does not receive any W-2 or 

tax form to report this income to the IRS each year. Monthly $30 work deductions are 

applicable to the $60 LPE/LPS earnings and the annuity is to be reduced accordingly. 

Note: The lack of IRS reporting of the earnings is an area that makes this 

example a tricky area to monitor because the earnings would never be seen on 

DEQY/EDMA.

1110.5.15 Earnings from In-Home Support Services Programs

In-home supportive services programs vary from state to state. Therefore, no general 

answer can be given to determine if the payment should be subject to work deduction. 

Determinations will need to be made on a case by case basis. The case should be 

forwarded to Policy and Systems (P&S) - RRA Application and Calculation Unit (RAC). 

P&S-RAC will evaluate and determine if the case should be forwarded to the Office of 

General Counsel to obtain a legal opinion. 

1110.10 Income Included As Earnings

Certain kinds of income are not included as earnings for work deduction purposes. The 

charts in this section and in FOM1 1110.15 indicate the major kinds of income and how 

they are treated in the annual earnings test. The charts are not all inclusive. Check both 

sections to see if the information you need is covered. This information is furnished to 

give you guidelines in answering inquiries. In many cases, the nature of the payment 

must be determined and a final determination made by the examiner in Operations. If 

you cannot reconcile the payment with this list or the list in FOM1 1110.15, send the 

inquiry to Policy and Systems, RRA Application and Calculation (P&S-RAC) section for 

a formal determination. P&S-RAC may need to submit a request for legal opinion to the 

RRB’s Office of General Counsel for a final decision. 

The kinds of income listed in this section are included as earnings for deduction 

purposes.

Type of Income Count as Earnings for Deductions

1. Advances Count advances in period the services are 

performed unless the advances are paid against 

future commissions. If the advances are paid 

against future commissions, count in the period 

paid.
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2. Agreements Not to 

Compete

If the agreement calls for services to be performed, 

count as earned in the period the services are 

performed.

3. Back Pay Count back pay in the period for which paid unless 

not under a statute, court order, agency ruling, etc.

If the back pay in to paid under a statue, court order, 

agency ruling, etc., count when paid; but no later 

than the last month of employment.

4. Bonuses a. Occasional Bonus

Count occasional bonuses in the month of 

payment. A bonus is considered occasional if 

both the payment and the amount are 

determined at the sole discretion of the 

employer at or near the time of payment.

b. Regular Bonus

Count regular bonuses in the month for which 

paid. A regular bonus is considered as part 

of the employee’s pay.

Note: Bonuses paid by a third party are not 

considered as earnings for work deduction 

purposes.

5. Cafeteria Plan 

Payments

Count cafeteria plan payments if the payment meet 

the definition of wages and the plan has not meet 

IRS requirements, i.e.is not a “qualified benefit 

under section 125.”

Note: The IRS determines whether a plan is a 

cafeteria plan under section 125 of the Code and 

whether any benefit under the plan is a qualified 

benefit. The W2 form normally indicates whether 

the plan is covered under section 125.

6. Cash Remuneration Covered employment under the SS Act or noncovered employment, without regard to minimum 

and maximum limitations.
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7. Clergymen’s Income 

(Ministers)

Count remuneration for services rendered in the 

exercise of the ministry, regardless of whether or not 

coverage was elected and whether self-employed or 

an employee. Include salary, allowances for 

parsonage, rent, travel, etc. 

Note: If the allowance for parsonage or housing is 

included in retirement pay, it should not be counted.

SSA has specific procedure for controlling the 

income reported for ministers. As such, only the 

posted SEI amount should be used for work 

deduction purposes. For more information, refer to 

POMS RS 02505.120.

8. Clerical Orders Under A 

Vow of Poverty

Count reported wages of clerical orders under a vow 

of poverty if the order has filed a certificate of 

election of Social Security coverage. If no certificate 

has been filed, do not count.

9. Commissions If self-employed, count net earnings from SE. If an 

employee, count gross commissions and advances 

against commissions to be paid in the future. Also 

see FOM1 1110.45 for deferred earnings.

10. Consultants Count wages in period consultant performed 

services if an employee. If self-employed, count 

remuneration when received.

Container Royalty 

Payments

Container royalty payments are special payments to 

compensate longshoremen for decreased 

employment opportunities resulting from the use of 

containerized shipping. These payments are 

counted as earnings for work deduction purposes.

11. Deferred Compensation Count in last month of employment (or in period 

actually earned when benefits are affected) if 

payments are from a nonqualified deferred 

compensation plan.
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12. Director's Fees A director attending board meetings is not an 

employee of a corporation, since the board of 

directors is the governing body of the corporation 

and is not subject to its control. A director who does 

no work for the corporation, but attends the 

meetings of the board of directors, is deemed to be 

self-employed. The fees are included as SE income 

for deductions.

13

.

Dismissal, 

Severance or 

Termination Pay

Dismissal, severance or termination pay refers to 

payments made by employer to an employee whose 

employment is terminated independently of the 

employee's wishes. Normally, the employment is 

terminated because of economic conditions which 

result in the shutdown of a plant or other similar 

action taken by an employer. The dismissal or 

severance payment is made to provide income to a 

terminated employee while seeking other 

employment. The true nature of the payment must 

be determined.

Dismissal pay is counted as earnings for deduction 

purposes.

14. Election Workers Any payment to election judges or workers for 

services rendered.

15. Employer Payments for 

Educational Assistance

Count employer payments for educational 

expenses.

16. Federal Annual and 

Sick Leave Payments

Federal annual and sick leave payments are 

considered a continuation of salary. If employment 

continues, count in the months of absence. If 

physical services are performed after May 1990 and 

the employment relationship then terminates, count 

in las month of services (or period earned if benefits 

are affected.

Consider leave donated to a recipient, as earned by 

the recipient, i.e., the same as the recipient’s other 

sick leave.
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17. Federally Sponsored 

Economic and Human 

Development Programs

Generally, the head of the agency administering a 

program determines if remuneration is wages. 

Wages count as earnings for deductions when an 

employer-employee relationship exists, or the 

employing agency has determined payments to be 

wages.

a

.

CETA(Comprehensive 

Training Act)

Count any compensation received for work which is 

substantial and necessary, if it is gainful and fills a 

public need.

b

.

Domestic and 

Volunteer Service Act 

of1973 (includes Vista 

and Title I Special 

Volunteer Programs)

No remuneration received by volunteers is counted. 

The Act covers the following programs:

National Volunteer Anti-Poverty Programs

Part A Volunteers in Service to America (VISTA)

Part B Service-Learning Programs

Part C Special Volunteer Programs

Title II National Older American Volunteer 

Programs

Part A Retired Senior Volunteer Program

Part B Foster Grandparent Program and Older 

American Community Service Programs

Title III National Volunteer Programs to Assist 

Small Business and Promote Volunteer 

Service by Persons with Business 

Experience.

18. Fiduciary Fees Count earnings of professional fiduciaries and nonprofessional fiduciaries carrying on a trade or 

business under certain conditions.
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19. Fringe Benefits Generally, low value awards, gifts (watches, pins, 

etc.) are not wages and, therefore, are not counted. 

However, some fringe benefits may be wages and 

therefore, counted, e.g., the value of have a 

company car for personal use. Development is 

needed in these cases.

20. Health Savings 

Accounts (HSAs)

Count employee contributions to HSAs as wages for 

work deduction purposes. Do not count employer

contributions to HSAs as wages for work deduction 

purposes.

21. Holiday Pay Count holiday pay. If the holiday pay is in excess of 

the regular salary, treat as a bonus.

22. Idle Time, Standby, and 

Non-work Payments

Payments through the month age 62 is attained are 

counted as earnings.

Beginning January l, 1984, include payments made 

to an annuitant after the month age 62 is attained, if 

no work was done in the period for which paid. Also 

beginning January 1, 1984, sick leave payments 

made to Federal employees after the month age 62 

is attained are counted.

Before January 1, 1984, these payments were 

excluded from earnings after the month age 62 was 

attained.

23. Incentive Awards Incentive awards under a supplemental 

compensation plan are counted as earnings.
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24. Insurance 

Commissions

A. Life Insurance – Agent Is An Employee

Count original commission plus all anticipated 

renewal commissions on the sale of life insurance, 

in the month the employee performed the last act to 

be entitled to the commissions.

B. Life Insurance – Agent Is Self-employed

Count each original commission on the sale of life 

insurance, in the year actually received. 

Renewal commissions are excluded from earnings 

for work deduction purposes if the annuitant did not 

perform any service in the year of the payment.

C. Casualty Insurance – Agent Is An Employee

Count commissions for casualty insurance in the 

year sold. If renewed, count in the year renewed.

D. Casualty Insurance – Agent Is Self-employed

Count in the year the agent receives the commission 

for selling a casualty insurance policy. If the policy 

is renewed, count the “repeat commission” in the 

year it is received only if the agent performed 

services in the year in question.

25. Legislators Count wages reported by the State.

26. Life Insurance Paid By 

Employer

Count as wages, the employer’s cost of premiums 

for group term life insurance that exceeds $50,000 

for the beneficiary. If the employment relationship 

has terminated, count in the last month of 

employment.

27. Members of Congress Count remuneration for services in Congress that 

are reported as wages.
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28. Military Service Count military pay in the period for which it is paid, 

whether for active or inactive duty and including pay 

for inactive duty training of a member of a reserve 

component.

Do not count the value of or allowances provided for 

food, clothing, shelter, etc., or special or incentive 

pay (e.g., flight pay, hazardous duty pay, etc.)

29. Net Earnings from SE Count all net earnings from SE derive from all trades 

or businesses as computed under the Internal 

Revenue Service (IRS) code. The legality of a 

business or trade is immaterial. Covered or noncovered under social security is immaterial.

30. Nonteaching School 

Employees

Count in the period in which services by the 

nonteaching employee were performed (even if paid 

on a 12-month schedule).

31. Partnerships Count the NESE derived from a valid business 

partnership.

32. Peace Corps Count both current and termination Peace Corps 

payments.

33. Prizes, Awards and 

Gratuities

Count prizes, awards and gratuities only if they are 

part of the salesperson’ wage structure.

34. Public Officers Other 

Than Congressmen or 

Legislators

Count wages reported for holders of a public office.

35. Railroad Employment Railroad compensation is only counted for work 

deduction purposes in the ABD year if the employee 

also has non-railroad earnings in the ABD month or 

later which are subject to work deductions. Refer to 

FOM1 
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36. Royalties and Patents Royalties paid prior to the year the annuitant attains 

full retirement age are counted as earnings for work 

deduction purposes.

Example: 

An employee becomes entitled to an annuity in 

March 2002 at age 62. He receives $75,000 per 

year in royalties from books written and copyrighted 

in 2000. His annuity will be subject to work 

deductions for 2002, 2003, and 2004 because he 

has not attained full retirement age. 

Refer to FOM1 1110.15 for information on royalties 

that are not counted for work deduction purposes.

For Patents, the annuitant, in order to provide a 

more accurate assessment, would need to submit 

additional information to the RRB regarding the 

patent such as when the patent was created, 

earnings information, tax records, etc.

37. Sabbatical Leave 

Payments

Count sabbatical leave payments only if wages. 

Reference POMS RS 01402.220 and RS 

01402.265.

38. Scholarships and 

Grants

Count scholarships and grants only if wages. 

Reference POMS RS 01401.408 and RS 

01402.265.

39. Service Charge/Fee 

(Tips)

Count service charge/tips as wages in the period 

paid to the employee.

40. Sick Pay Refer to FOM1 1110.15

41. Stand-By Payments Payments received for an employee to be on call 

are considered as earnings for work deduction 

purposes.
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42. State and Local “Pickup” PlansMany retirement systems for employees of State 

and local governments provide for contributions by 

both employer and employees. Sometimes the 

employer will “pick-up”; i.e., pay the contribution that 

is required of the employee under a salary reduction 

agreement. In such cases, the amount of the 

“picked-up” portion is counted as wages to the 

employee in the year it is picked up.

If the contributions are paid only by the employer 

with the employer’s own funds; i.e., there is no 

salary reduction agreement, do not count the 

payments as wages.

43. Statutory Employee Although independent contractors, under common 

law rules, may be treated as statutory employees for 

certain employment tax purposes, they do not 

qualify as employees. Due to similar working 

conditions, IRS provided for their coverage as 

employees rather than self-employed persons. 

However, their earnings are treated as net earnings 

from self-employment and must be included when 

applying the earnings test.

44. Stock Bonus Plan Count the fair market value of the stock if not tax 

exempt. Reference POMS RS 01401.340 and RS 

01402.125.

45. Stock Option Plan Count as wages the difference between the fair 

market value of stock at the time the option is 

exercised and the option price. Count these in the 

period the option was granted. (IRS Ruling 56-

452).
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45a Exercising Stock Options 

Prior to 2002

A stock option is the right to purchase specific 

numbers of shares of a company’s stocks at a future 

date at a pre-set price.

Before tax year 2002, when the employee exercised 

a stock option, the difference between the stock 

price paid under the option and the fair market value 

of the stock (also referred to as the “spread”) was 

counted as wages for work deduction purposes, if 

the income from the “spread,” was reported in the 

same year as when the employee sold the stock. 

See FOM1 1110.15, Income Excluded From 

Earnings, for additional information on the years 

when stock options were excluded as wages for 

work deduction purposes.

46. Subchapter S 

Coorporations

Taxable distribution from a Subchapter S 

corporation may be considered wages where they 

represent remuneration for services as opposed to a 

return on an investment. (Decisions on whether 

taxable income from a Subchapter S corporation is 

considered earnings are made on a case-by-case 

basis.)

47. Taxes Owed by 

Employee

Count any taxes owed by the employee that are 

withheld from wages by the employer.

48. Television, Radio, 

Motion Picture 

Residuals

Count remuneration from television, radio and 

motion picture residuals in the period the performer 

provided the original services if the performer was 

an employee.

49. Tips Count tips amounting to $20 or more per calendar 

month from each employer. When a customer's bill 

includes an additional amount which is for 

distribution to employees by an employer, such 

amounts are not tips or gratuities but are considered 

wages.

Tips received in a medium other than cash are not 

counted as wages.

50. Trial Work Period 

Earnings

Count trial work period earnings in year the disability 

annuitant becomes entitled to an age and service 

annuity but consider if the monthly earnings test can 

apply.
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51. Vacation Pay, Pay in 

Lieu of Vacation, and 

Annual Leave 

Payments

Count as earnings. Vacation pay should be credited 

to the period in which the individual took the 

vacation. If the individual receives a lump sum in 

lieu of vacation pay Payments at the time of 

retirement, the vacation pay should be considered 

earned in the last month worked.

52. Earnings while 

Incarcerated

Count as earnings. Annual earnings test(s) apply if

categorized as LPE or Regular.

1110.15_Income Excluded From Earnings

The kinds of income listed in this section are not included as earnings for work 

deduction purposes. The list is not all-inclusive. This information is furnished to give 

you guidelines in answering inquiries. If you receive an inquiry regarding a “special 

payment” and cannot reconcile it with this list or the list in FOM1 1110.10, send the 

inquiry to Policy and Systems, RRA Application and Calculation section for a formal 

determination. P&S-RAC may need to submit a request for legal opinion to the RRB’s 

Office of General Counsel for a final decision. 

TYPE OF PAYMENT DO NOT COUNT AS EARNINGS

Annuity Plan or Systems 

Payments

Payments made by an employer under a plan or 

system to a former employee who has reached a 

specified age and whose employment relationship 

has terminated because of retirement.

Awards a. Employee Achievement

Do not count employee achievement 

awards.

b. Length of Service

Do not count length of service awards.

c. Employee Suggestion Awards – See FOM1 

1110.10.

d. Outstanding Work – See FOM1 1110.10.

BUY OUTS A buy out is a payment made on account of 

retirement and should not be counted as earnings 

for work deduction purposes.
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Cafeteria Plans Payments received from cafeteria plans are not 

counted as wages for work deduction purposes if 

the plan meets the requirements of section 125 of 

the Internal Revenue Code. IRS makes this 

determination.

A copy of the plan with a description of the 

payments should be submitted as proof.

Capital Gains All capital gains, including income received from 

the sale of farm animals, provided they were held 

for work, dairy or breeding purposes.

Damages, Attorney’s Fees, 

Interest or Legal Penalty 

Payments

If the payment was made under a court judgment 

or by compromise settlement with the employer, 

based on a legal action for wages. Back pay 

recovered in the proceedings is counted as 

earnings.

Dividends and Interest Do not count dividends and interest as earning for 

work deduction purposes.

EXCEPTION: If dividends or interest are 

received by a dealer in stocks and securities 

while they are in inventory for resale, those 

dividends or interest would be counted.

Employer Payments for 

Dependent Care

Do not count employer payments for dependent 

care programs as earnings.

Engineer Reserve Pool 

Payments to Canadian 

Residents

Legal opinion L-2003-13 ruled that these payments 

are not earnings for work deduction purposes.

Expenses Deductible for 

Hiring A Substitute or 

Assistance

Do not count as wages to the principal employee, 

the amount of wages paid by the principal 

employee to a substitute or assistance.

Farm Rental Income Income received by a landowner in cash or as his 

share of a crop produced on his land is considered 

rental income. This is excluded from net SE 

income if the owner did not materially participate in 

the production of the crop. 

Federal Agricultural Program 

Payments (FAPP) Made to 

Farmers

Do not count FAPP payments such as deficiency 

payments, conservation reserve payments, whole 
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herd dairy buyout program payments, PIK 

payments, etc.

These payments are usually shown in item 6a on 

Schedule F.

Fiduciary Fees Do not count fees paid to a non-professional 

fiduciary who is not carrying on a trade or 

business, but who merely directs and gathers the 

assets of an estate in isolated cases. Do count 

fees of professional fiduciaries.

Flexicredits Flexicredits are a type of employer contribution 

towards insurance benefits and are not counted as 

earnings.

Foster Care Payments Foster care payments are not considered as 

earnings for work deduction purposes.

Guaranteed Annual Income 

Payments (New York Shipping 

Association)

Do not count guaranteed annual income payments 

made pursuant to union agreement with the NY 

Shipping Association.

Health Savings Accounts 

(HSAs)

Do not count employer contributions to HSAs as 

wages for work deduction purposes.

Higher Education Act Payments received under Title IV of the Higher 

Education Act are excluded from income as 

earnings.

Hobby Income Do not count the amount of income that is derived 

from a hobby that is not a business or trade.

In-Kind Wages Exclude income received for domestic or farm 

work, or from services not in the course of the 

employer’s trade or business or for services by 

certain homeworkers whose cash pay in a 

calendar year is less than $100.00.

Exclude meals or lodging furnished as 

remuneration for employment if furnished on the 

business premises of the employer and for the 

convenience of the employer.

Insurance Policy Proceeds Proceeds from insurance policies are not counted 

as earnings.
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Insurance Premiums Paid By 

The Employer

Do not include for work deduction purposes.

Investment Income Exclude from earnings, income not attributable to 

the performance of personal services (e.g., rentals 

from real estate). Do not count dividends received 

on stocks and interest on bonds, provided it is not 

received in the course of a trade or business as a 

deal in stocks and bonds.

Judgment or Judicial Award Do not count a judgment or judicial award as 

earnings for work deduction purposes.

Jury Duty Fees Compensation received for jury duty, including 

meals and lodging are not counted as earnings.

Loans of a Personal Nature Loans of a personal nature are not counted as 

wages for work deduction purposes unless the 

employee repays the loan by working in covered 

employment for employer.

Meals and Lodging Do not count the value of meals and lodging if 

furnished for the convenience of the employer on 

the employer’s premises and the employee is 

required to accept as a condition of employment.

Medical and Hospital 

Expenses

Do not count employer payments made under a 

medical plan or system, or payments made later 

than 6 months after the employee last worked if 

not under a plan or system.

Moving Expenses Payments as reimbursement or allowance for 

moving expenses are not counted as earnings if 

the annuitant incurred the moving expenses in 

reporting to a new place of employment, and the 

expenses would be deductible for income tax 

purposes.

Non-Covered Remuneration 

For Services Outside the U.S.

When services are performed outside of the U.S. 

and the annuitant does not work more than 45 

hours in a month, the earnings are not counted for 

work deduction purposes.

Payments Under a Plan Certain payments or series of payments paid by an 

employer to an employee or to any of his 

dependents on or after the employment 
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FOM1 1110.15 Earnings Revised May 16, 2022 Page 23 of 36

relationship has terminated because of death, 

retirement for disability or retirement for age and 

paid under a plan established by the employer.

Payments Upon or After 

Retirement

Do not count payments statutorily excluded such 

as “because of retirement” or “on account of 

retirement”. If not thus excluded, count in the last 

month of employment (or prior period earned if 

benefits are affected.

Pension and Retirement 

Payments

Special payments made on account of retirement 

are not included as earnings.

Pre-Tax Medical Insurance 

Premiums

Do not count as earning for work deduction 

purposes.

Note: These cases normally involve disability 

annuitants working for a school district. If there is 

a discrepancy between the earnings information 

on form RL-231f and the earnings posted by SSA, 

secure a copy of the annuitant’s W-2. The pre-tax 

medical insurance premiums are normally through 

some type of cafeteria plan.

Prizes and Gratuities Not counted as earnings unless the payment is an 

integral part of the salesperson’s wage structure. 

Prize winnings from contests are not counted as 

earnings unless the person enters a contest as a 

trade or business.

Profit Sharing Payment From 

a Plan

Not counted if the plan is financed by a trust fund. 

(NOTE: If the trust fund is not tax exempt, count 

the payment as earnings.)

Qualified Native American

entity income from fishingrights related activity

If a tribe member makes income through fishing 

rights-related activities, directly or indirectly 

through a qualified Native American entity, that 

income is not counted as earnings. Fishing rightsrelated activity is any activity directly related to 

harvesting, processing, transporting, or selling fish 

(with conditions) while exercising the recognized 

fishing rights of the tribe.

Redwood National Park Act 

Payments

Do not count Redwood National Park Act 

payments for work deduction purposes.
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Release Payments Payments to secure release of an unexpired 

contract of employment are not counted as 

earnings.

Relief Payments Relief from unemployment and similar programs 

providing assistant to the needy should not be 

counted as earnings.

Rental Income Do not count rental income as earnings unless 

payment is received by real estate dealers from 

property held for sale or substantial service activity 

is provided.

Example:

An employee rents rooms through AIRBNB.

Income from Air BNB is not considered 

earnings. Earnings from investments are not 

based on service to an employer or "substantial 

service" in self-employment. If the individual is 

providing services beyond renting the property, i.e. 

changing the tenant bed linens or providing meals 

each day then a self-employment determination 

would need to be made to see if the employee is 

providing "substantial service".

Retired Partnership Payments Retirement payments received by a retired partner 

are not counted as earnings provided the 

payments are made under a written plan and the 

retirement partner renders no services to the 

partnership.

Royalties For an annuitant who has attained full retirement 

age, royalties, to the extent that they flow from 

property created by the annuitant prior to the 

taxable year in which he or she attained full 

retirement age are not counted as earnings for 

work deduction purposes.

Example:

An employee becomes entitled to an annuity in 

March 2002 at age 62. He receives $75,000 per 

year in royalties from books written and 

copyrighted in 2000. His annuity will be subject to 

work deductions for 2002, 2003, and 2004 
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because he has not attained full retirement age. 

Royalties received in 2005 (the year he attains full 

retirement age) may be excluded.

Section 125 Plan This is another plan involving employer 

contributions to the employee’s insurance benefits 

and should not be counted as earnings for work 

deduction purposes.

Sick Leave Payments to 

Government Employees

Most Federal agencies report sick leave as wages 

since Federal agencies have determined that 

payments for sick leave are continuing payments 

of salary and are not made on account of sickness 

or accident disability. Before January 1, 1984, sick 

leave payments made to Federal employees after 

age 62 was attained may be excluded if the 

employee did not work in the pay period.

All state and local government sick leave 

payments are counted as earnings, unless it is 

established that there is a separate plan for 

payments on account of sickness or accident 

disability, that are not just continued salary 

payments.

Sick Pay Before January 1, 

1982

Prior to January 1, 1982, sick pay was not counted 

as earnings if it was paid under a plan or system.

Sick Pay Beginning January 1, 

1982 

Effective January 1, 1982, sick pay is not counted 

as earnings if it is paid after the expiration of six 

full calendar months after the month last worked.

Stock Options A stock option is the right to purchase specific 

numbers of shares of a company’s stocks at a 

future date at a pre-set price. The “spread” is 

defined as the difference between the option price 

and the fair market value of the stock.

Prior to tax year 2002, if the income from the 

“spread” when exercising stock options can be 

attributable to the period when the employee was 

granted the options, but was actually paid in a later 

year, the income is not counted as wages for work 

deduction purposes. 

For tax year 2002 and later, see FOM1 1110.10.
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Strike Benefits Not counted as earnings provided that the 

payment is not based on walking a picket line or 

performance of any other service as an employee 

of the union.

Subchapter S Corporation Undistributed taxable income from a subchapter S 

corporation which is not available for use will 

generally not be counted as earnings for services, 

except where the corporation has been set up for 

the primary purpose of avoidance of earnings 

restrictions. Decisions on whether income from a 

Subchapter S corporation should be considered as 

earnings are made on a case-by-case basis.

Supplemental Unemployment 

Benefits

Do not count supplemental unemployment benefits 

unless FICA taxable under IRS rules.

Tax Sheltered Annuities The amount of the annuity purchased from the 

employer’s funds are not counted as earnings to 

the employee. The amount of the annuity 

purchased from the employee’s fund is considered 

to be earnings.

Tips Tips paid to an employee which are less than $20 

a month, or are not paid in cash, are not counted 

as earnings for work deduction purposes.

Traveling and Business 

Expenses

Payments made by an employer which are 

reimbursement specifically for travel expenses of 

the employee and which are so identified by the 

employer at the time of the payment are not 

counted as earnings.

Trust Payments If the payments are made under an employer’s 

plan or system or to a trust fund that is tax exempt, 

the payments are not counted as earnings.

Unemployment Compensation Railroad unemployment insurance payments and 

unemployment compensation paid by States are 

not counted for work deduction purposes.

Veteran’s Training Pay and 

Allowances

Do not consider veteran’s training pay subsistence 

or dependency allowance paid by the VA to an 

individual while in school or while engaged in 0n-
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the-job training as an apprentice or trainee as 

earnings for deduction purposes. Any additional 

payments made to the veteran by an employer 

may be wages depending on the type of work 

program.

Worker’s Compensation Worker’s compensation is not counted as Earnings 

for work deduction purposes.

1110.20 Self-Employment Income

Self-employment (SEI) is remuneration for "substantial services" performed for an 

unincorporated trade or business which the person owns.

Form AA-4, "Self-Employment and Substantial Service Questionnaire," is usually 

completed by an employee or spouse applicant who indicates on the annuity application 

that he or she is or was recently self-employed. It is also completed in cases where the 

employee claims S/E at any time after leaving railroad service and a S/E vs. LPE 

decision is needed for a C/C determination or for work deduction purposes. 

Occasionally, individuals complete the questionnaire, at their request, before filing an 

annuity application, to have the SEI determination made in advance.

Earnings from SEI for work deduction purposes are the "net earnings from selfemployment (NESE) ". The NESE amount is subject to work deductions, if it exceeds 

the annual exempt amount.

The NESE amount is the amount of the wages for the earnings year normally displayed 

on the Employment Data Maintenance screen (EDMID104, Creditable Service and 

Earnings Yearly Totals) or in item 4 of Form G-90.

If this amount is not available from these sources, request the RRB field office to obtain 

a copy of the annuitant's income tax Form 1040, Schedule SE, filed with the Internal 

Revenue Service to pay the Self-Employment Contributions Act (SECA) tax for the 

earnings posted to his social security wage record based on his SEI. 

Also obtain copies of the Form 1040, Schedule C or Form 1040, Schedule F for the 

computation of the net profit or net loss from SEI. The Form 1040, Schedule SE, (either 

the short form or the long form) combines the net earnings from all SEI trades or 

businesses carried on by the self-employed person in the earnings year. 

A net loss from SEI would be subtracted from a profit from other SEI in the same year. 

The net SEI earnings are then multiplied by .9235. The result is the NESE. 

If the individual is filing a joint income tax return, the Form 1040 Schedule SE should 

include his earnings only. The spouse files a separate Form 1040, Schedule SE on her 

own social security number to report her SEI to her own wage record. Use that amount 

for the spouse annuity work deductions for the spouse's own earnings.
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Example: The employee (DOB 2-10-25), for the earnings year 1991, filed a Form 1040 

Schedule C with a net profit of $15,000 as a self-employed insurance agent and Form 

1040 Schedule F with a net loss of $1,000 from a farm he owns and operates as SEI. 

The Form 1040 Schedule SE indicates that his total SEI earnings for the earnings year 

1991 are $14,000. This amount is multiplied by .9235. The resulting NESE of $12,929 

is posted to his wage record and is displayed in item 4 of Form G-90. Since this amount 

exceeds his annual exempt amount of $9,720, and his tier 1 is not reduced for SSA 

benefits, his tier 1 is subject to work deductions.

Where an individual sells his business, the amount received for inventory or stock in 

trade or business is included in gross receipts in determining the net SEI on Form 1040 

Schedule C. However, the earnings from the sale of the inventory will not be counted 

as earnings for work deduction purposes if the employee is no longer engaged in the 

business or the business is closed. 

Where an individual sells his business and retains ownership of accounts receivable:

• Collections are included in computing the net SEI on Form 1040 Schedule C in the 

year received when a cash basis method of accounting is used; or,

• Collections are not included when using accrual method of accounting because they 

were included in the net SEI on Form 1040 Schedule C in the years in which the 

sales were made.

For the purpose of determining work deductions, a person's earnings for a taxable year 

consists of the sum of his remuneration for services rendered as an employee during 

the year and his net self-employment (SE) earnings for the year, MINUS any net loss 

from SE for the year.

The "optional" method of computing net earnings from SE is available to any individual 

who is regularly self-employed or a member of a partnership, when the actual earnings 

from non-farm SE are less than $1,600.00 and less than two-thirds of the gross nonfarm income. When both non-farm and farm businesses are involved, the non-farm 

option may be used only if the individual's actual net earnings from both non-farm and 

farm SE are less than $1600.00.

Beginning 1-1-78, it must be determined if the monthly earnings test may be used in a 

given year. If the monthly earnings test does not apply, work deductions are based on 

the annuitant's net self-employment income for the year.

If the monthly earnings test applies, work deductions do not apply for any month in 

which the annuitant both does not earn over the monthly exempt amount in wages and 

does not render substantial services in self-employment, regardless of his total earnings 

for the year.
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1110.25 Meaning Of Substantial Services

A self-employed person's monthly work activity cannot be gauged accurately in terms of 

the amount of monthly earnings, as is done with employed workers. The self-employed 

person's monthly services, therefore, are measured by considering whether they are 

substantial. A substantial service determination is made only if the monthly earnings 

test applies. Once the monthly earnings test has been applied in a particular year, work 

deductions in subsequent years will be assessed based on the total yearly earnings, 

regardless of the time spent in substantial services.

The general test of whether services are substantial is whether, in view of the particular 

services rendered and the surrounding circumstances, the person can reasonably be 

considered retired in a particular month. If he can be considered retired in a month, his 

services in that month are not substantial. In considering whether services in SE are 

substantial in a month, the factors in the following sections may be pertinent. The 

determination of substantial services is judgmental, and is based on the facts 

presented. The final determination is made by BRC; these guidelines are furnished for 

your information.

There is not necessarily any connection between earnings from SE and substantial 

services. For example, earnings from SE may come after the month services were 

rendered, or may represent profits based solely on investment or past service. Thus, 

services may be substantial in a month in which no income is realized, or services may 

not be substantial in a month in which a large amount of income is realized. On the 

other hand, to the extent that earnings from SE reflect the kind and amount of services 

rendered in a month, consideration of earnings could be helpful in making 

determinations of substantial services.

1110.25.1 The Amount of Time Devoted to SE

Time is a major consideration in deciding whether a person can reasonably be 

considered retired. Thus, certain assumptions are based on the amount of time 

devoted to the business. More than 45 hours of services in a month is usually 

considered substantial. However, if the individual submits evidence establishing that he 

can reasonably be considered retired in a month in which services amount to more than 

45 hours, the services may not be found substantial.

Services of 45 hours or less in a month would not usually be considered substantial. 

However, services of 15 through 45 hours in a month could be regarded as substantial 

if, for example, they were spent in the management of a large business or in a highly 

skilled occupation. 

When time devoted to a business in a month is less than 15 hours, it is assumed that 

services are not substantial, regardless of their nature.

Time devoted to SE includes all time devoted by a self-employed person to any trades 

or businesses from which the net earnings or losses are includable in his earnings for 
FOM1 1110

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annual earnings test purposes. Time devoted to such businesses includes all time 

spent by the self-employed person in any activity, whether physical or mental, at the 

place of business or elsewhere, which relates to the operation of the business. This 

includes, among other things, advising and planning, making business contacts and 

attending meetings, and preparing and maintaining the facilities of the business.

If a self-employed annuitant is idle during a calendar month because he is on vacation, 

sick or chooses not to work, he did not render substantial services during that month.

The fact that an annuitant owns an operating business is not controlling. Such an 

annuitant may have his business affairs so arranged that he is not required to, and does 

not perform substantial services in one or more months.

1110.25.2 The Nature of the Services Rendered

A decision may be made whether services were or were not substantial based only on 

consideration of time devoted to the business. However, when this is not the case, the 

nature of services rendered is considered with the amount of time devoted to business.

Some services may be substantial even though performed for less than 45 hours in a 

month. Such services could be managerial and technical services by an owner or 

partner in a large business, highly skilled services such as those rendered by 

professional persons, or any services to which high earnings are directly attributable.

In evaluating the services of an annuitant, both the nature of the services and the 

amount of time devoted to the business are considered. When services are less than 

15 hours in a month, they are not substantial regardless of their nature. The closer 

services are to 45 hours in a month, the less skilled and valuable they would have to be 

in order to be substantial. Services performed regularly as one of the key functions of a 

business are more likely to be substantial than those performed temporarily due to an 

unexpected absence of an employee.

1110.25.3 How Services Compare with Services in Past Years

Consideration of the time spent and nature of services rendered may be enough to 

determine that services were or were not substantial. However, when the decision 

cannot be based on these facts alone, the relationship of present services to services 

rendered in the past becomes significant.

If there has been a significant reduction in a person's participation in his business (and 

especially when there has also been an accompanying reduction in the scope of the 

business itself), this factor is given considerable weight toward finding that the reduced 

services are not substantial. A sharp curtailment is not always necessary; a tapering off 

over a period of years might also result in a significant reduction. Conversely, an 

absence of any significant change in the amount and kind of services rendered would 

weigh in favor of holding the services to be substantial.
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Sometimes an owner of a business may continue to designate his position in the 

business by the same title he used when working full time. However, his former 

functions may be largely assumed by other workers in the business and the efforts of 

the owner are greatly reduced in significance. Such a situation would weigh strongly in 

favor of holding services amounting to less than 45 hours in a month not substantial.

1110.25.4 Setting in Which the Services Were Performed

The presence or absence of a manager may be significant in evaluating the importance 

of the person's role in the business operations. In some cases the person may share 

the responsibility of management, while in others he may turn it over completely to a 

manager.

The kind and size of business and amount of capital invested also affect the 

significance of services the person may be performing. If, for example, the person 

renders services in a business being conducted on a limited scale with little capital 

invested (in the nature of a sideline to retirement), his services would less likely be 

substantial than if they were spent in a larger and more profitable business in which 

considerable capital was invested, or which required considerable management or other 

skilled services.

The fact that a business is seasonal may also have a bearing. In the off-season, 

services may be unimportant and are less likely to be substantial.

1110.30 Guide for Developing Substantial Services

When full development is required, all information about monthly services and the 

circumstances under which the services were rendered will be requested by BRC. The 

following questions may prove helpful in getting complete factual development. The 

annuitant must submit a signed statement including the pertinent information.

A. In what type of trade or business were the services rendered?

B. What was the annuitant's status in the business (sole owner, partner, etc.)?

C. What was the approximate value of the business and what percentage did the 

annuitant own?

D. How many full and part-time employees worked in the business?

E. Was there a manager? If so, what was his name and address and what was the 

extent of his responsibility?

F. Did the annuitant share the responsibility of management?

G. If any of the employees are related to the annuitant, what is the relationship of 

each?
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H. What were the regular business hours? If the regular business hours varied 

during certain months of the year, what were the variances and what was the 

reason for them?

I. What were the annuitant's duties and responsibilities?

J. How much skill did the annuitant's work require?

K. Were high earnings derived from the business based on the annuitant's personal 

services? 

L. To what extent were the earnings of the business based on the capital invested 

in it?

M. Did the annuitant regularly go to the place of business and, if so, how long did he 

usually spend there each day?

N. How much time did the annuitant devote to the business while away from the 

place of business?

O. What were the total number of hours devoted to the business by the annuitant 

during each month that he alleges that services were not substantial? 

P. If the annuitant was away on vacation, on what dates did the vacation begin and 

end?

Q. If the annuitant was off work because of illness or injury, on what date did he 

become unable to work and on what date was he able to return to work?

R. How do the services in question compare with services rendered by the annuitant 

in prior years?

1110.35 Disclosure of Guides To The Public

The guides used in making substantial service determinations may be disclosed to the 

public. However, take special care to avoid disclosing any one guide to the exclusion of 

the others. All four tests should be explained. Avoid any misunderstanding that only a 

straight hourly test is applied.

1110.40 Allocating Earnings

The information in this section does not apply to employee disability annuitants. Special 

rules apply in allocating earnings when there is a question regarding disability and when 

services were performed. See FOM1 1125.20. 
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1110.40.1 Earnings from Employment

Earnings from employment (wages) are counted as earnings for the taxable year in 

which the services are rendered. However, the SS Act provides that wages paid to an 

individual during a taxable year are presumed to have been earned in that year. 

Therefore, unless an individual claims otherwise, earnings are counted in the year they 

are paid. Also see FOM1 1110.40.3. 

1110.40.2 Earnings from Self-Employment

Net earnings from self-employment are generally counted as earnings for the taxable 

year in which they are received, regardless of when they are earned. FOM1 1110.45

explains when certain deferred SE income should be counted.

1110.40.3 Special Payments

When special wage payments are received, an annuitant may allege that payments are 

either not earnings or are wages for a period different than that in which paid. Special 

payments include vacation pay, sick pay, bonuses, back pay and severance pay. The 

question is usually material only when payment is made close to retirement or during a 

prolonged absence from work. In those circumstances, first determine if the earnings 

should be counted for deduction purposes (FOM1 1110.10 and 1110.15).

If a special payment is material to the amount of work deductions, it may be allocated to 

a period other than when payment is made if:

A. Special payment made before employment relationship terminates - For work 

deduction purposes, an employment relationship is considered terminated when 

the individual last performed physical services, unless the individual is expected 

to return to work or is subject to call to render additional services.

When a special payment is paid before the employment relationship terminates, 

it is credited as follows:

1. Credited to the month of absence 

a. Federal, state or local annual and sick leave payments;

b. Holiday pay;

c. Sick pay, if it is included as earnings;

d. Vacation pay.

2. Credited to the month of payment, unless proven otherwise (see B)

a. Advances against commissions;

b. Occasional bonuses (payment is at sole discretion of employer);
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c. Payment in lieu of vacation.

3. Credited to the month for which paid

a. Back pay;

b. Bonuses which are a regular part of the individual's pay;

c. Deferred wages;

d. Idle-time, standby or subject-to-call payments;

e. Payments to school teachers during non-work months (when paid 

in 12 installments for 9 or 10 months work).

B. Special payment made after employment relationship terminates - A special 

wage payment made at the time of or after the termination of an employment 

relationship is credited as earnings in the last month the employee worked.

EXCEPTION: Any special wage payment, except bonuses, may be credited to a 

different period if there is a written plan which shows that the special payment 

was for services rendered in a different period.

1110.40.4 Payments to School Employees During Non-Work Months

If the monthly earnings test applies during a given year, special guidelines are required 

for school employees. School teachers are usually engaged in a seasonal job with 

employment contracts requiring the performance of teaching (or similar) services during 

the school term in return for a specific salary. Frequently, the salary is paid out in 12 

monthly installments for the convenience of both the employer and the employee. In 

such cases, the wages are earned when the personal services stipulated in the contract 

are performed, and not during the off-season month.

A deduction because of excess earnings is not imposed for a non-work month (i.e., one 

in which no services of any kind were rendered) falling between school years, even 

though a wage or salary payment is made to the teacher (or janitor, clerk, etc.) for that 

month. In such cases, the payments made during the period between school terms are 

presumed to be part of the total earnings for the contract year and are allocated to the 

months in which they actually were earned if allocation would be material.

1110.40.5 Charging Of Earnings Of Corporate Directors

Effective January 1, 1991, for purposes of excess earnings deductions, corporate 

director's earnings are to be treated as received in the year that the relevant services 

are performed. For years before 1991, corporate director's earnings are to be treated 

as earnings for the year in which the earnings are received.
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1110.45 Deferred Self-Employment Earnings

Deferred self-employment income that is received after the year of entitlement to an 

annuity, is not included in earnings for deduction purposes if the income is not 

attributable to services performed after the month in which the annuity began. This 

provision is effective for taxable years beginning January 1, 1978; it may also be 

referred to as the "special self-employment income tax exclusion."

The SE income exclusion rule does not apply to wages from regular employment. 

Wages are still counted as earnings for the year in which they are earned.

When deferred SE income is excluded, it is not considered for an earlier period; it is 

treated as if it did not exist for work deduction purposes. The SE earnings excluded 

from the year received are not then added to the total yearly earnings of the year in 

which the services resulting in the income were performed.

EXAMPLE: A self-employed insurance salesman retired from all work in November 

1994. His annuity beginning date is 12-1-94. In 1995, he received $10,000.00 in 

renewal commissions for policies sold prior to 1995. He has no net income for work 

deductions in 1995 because the $10,000.00 received after the year his annuity began is 

SE income attributable to services performed prior to his month of entitlement. He 

performed no substantial services as an insurance salesman in 1995. The $10,000.00 is 

also not added to his 1994 earnings. 

For the purpose of the exclusion provision, "services" means any regular service 

performed in the ongoing operation or management of a trade, profession, or business 

which can be related to the income received.

1110.45.1 Field Office Development

When an individual reports self-employment that is similar to the kinds listed in the 

preceding section, explain the deferred income exclusion provision. If the annuitant 

alleges that some or all of the SE earnings should be excluded, a signed statement 

explaining the facts in the case is required.

Unless there is good reason to doubt a credible explanation of SE income that should 

be excluded, the allegation will be accepted without further development. Operations 

will notify you if verification is required.
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