Rev. Rul. 54-309

Advice is requested concerning the circumstances under which a life insurance salesman fails to qualify as an `employee' within the meaning of that term as defined in the Federal Insurance Contributions Act (subchapter A, chapter 9, Internal Revenue Code), as amended by the Social Security Act Amendments of 1950. Advice also is requested whether the commissions, including deferred or renewal commissions, paid to a life insurance salesman who is not an `employee,' constitute self-employment income within the meaning of section 481(b) of the Self-Employment Contributions Act (subchapter E, chapter 1, Internal Revenue Code).

The M Life Insurance Company engaged B as a life insurance salesman to solicit applications for life insurance, annuities, and accident and health insurance. B performs his services pursuant to the terms of a written agreement designated `Agents Contract.' The contract provides, among other things, that B shall, on a part-time basis and within a specified territory, solicit applications for contracts of insurance for the M Life Insurance Company exclusively, under such policy forms as the company may direct; that B shall be free to exercise his own judgment as to the persons from whom he will solicit applications for insurance as well as the time and place of solicitation; and that B shall collect he initial premium for each sale of insurance consummated by him. The contract further provides that the company may from time to time prescribe rules and regulations respecting the conduct of the business covered by the contract, which rules and regulations shall be observed by B. These rules and regulations may not, however, interfere with B's freedom of action in his solicitation of applications for insurance.

As compensation for the services here under consideration, the contract provides that B shall receive certain commissions for each sale of insurance consummated by him; that a portion of the total commissions attributable to each sale of insurance by B for the company shall be paid to him at the time the sale is consummated and the remainder shall be paid as and when the policy holder pays his periodic premiums; that both the initial commissions and the deferred or renewal commissions are to be paid in accordance with schedules set forth in the contract; and that the deferred or renewal commissions specified therein will be payable to B on contracts of insurance sold by him for a period of X years, provided the policyholders continue to pay the periodic premiums. The contract further provides that, if the contract between the parties is terminated, the company will continue to pay the deferred or renewal commissions in accordance with the provisions of the contract.

The arrangements between the M. Life Insurance Company and B contemplated (1) that B would defray all expenses incurred by him in the performance of his duties and functions under the contract; (2) that substantially the services to which the contract relates would be performed personally by B; (3) that B would not be required to make a substantial investment in facilities for use in connection with the performance of his services (other than in facilities for transportation); (4) that B's services would be part of a continuing relationship and not in the nature of a single transaction; (5) that the solicitation of applications for insurance pursuant to the terms of his contract would not be B's principal business activity; and (6) that B would be a part-time life insurance salesman.

Section 1426(d) of the Federal Insurance Contributions Act, in effect prior to January 1, 1951, provides that the term `employee' includes an officer of a corporation, but such term does not include (1) any individual who, under the usual common-law rules applicable in determining the employer-employee relationship, has the status of an independent contractor, or (2) any individual (except an officer of a corporation) who is not an employee under such common-law rules.

Effective with respect to services performed after 1950, section 1426(d) of the Federal Insurance Contributions Act is amended by the Social Security Act Amendments of 1950 to read, in part, as follows:

EMPLOYEE.-The term `employee' means-

(1) any officer of a corporation; or

(2) any individual who, under the usual common-law rules applicable in determining the employer-employee relationship, has the status of an employee; or

(3) any individual (other than an individual who is an employee under paragraph (1) or (2) of this subsection) who performs services for remuneration for any person-

*

(B) as a full-time life insurance salesman;

* if the contract of service contemplates that substantially all of such services are to be performed personally by such individuals; except that an individual shall not be included in the term `employee' under the provisions of this paragraph if such individual has a substantial investment in facilities used in connection with the performance of such services (other than in facilities for transportation), or if the services are in the nature of a single transaction not part of a continuing relationship with the person for whom the services are performed. (For description of full-time life insurance salesmen see Rev. Rul. 54-312, p. 327, this Bulletin).

The initial question to be decided is whether B has such independence in his operations that, under the usual common-law rules applicable in determining the employer-employee relationship, he should be classed as an independent contractor rather than an employee; also, whether B qualifies as a `full-time life insurance salesman' within the meaning of section 1426(d)(3)(B) of the Federal Insurance Contributions Act, as added by the Social Security Act Amendments of 1950.

It is evident that the M Life Insurance Company does not exercise, or have the right to exercise, the degree of direction and control over the services performed by B that is prescribed by the applicable laws and regulations as necessary to establish the relationship of employer and employee under the usual common-law rules. Furthermore, B has not been engaged by the M Life Insurance Company to solicit applications for insurance on a full time basis. Under these circumstances, it is concluded that B is not an `employee' of the M. Life Insurance Company within the meaning of that term as defined in section 1426(d)(3)(B) of the Federal Insurance Contributions Act, as added by the Social Security Act Amendments of 1950. Accordingly, B's compensation for the sale of insurance is not wages and, therefore, is not subject to the taxes imposed by the Federal employment tax statutes, including the income tax withholding under section 1622 of the Internal Revenue Code.

Section 480 of the Self-Employment Contributions Act (Subchapter E, chapter 1, Internal Revenue Code) imposes a tax on the self-employment income of every individual. With certain exceptions not here material, self-employment income means the net earnings from self-employment derived by such individual during any taxable year beginning after December 31, 1950. Net earnings from self-employment generally include the gross income derived from a trade or business carried on by the individual, less deductions allowable under chapter 1 of the Code (the income tax chapter), which are attributable to such trade or business.

In the instant case, B is regarded as carrying on a trade or business and, accordingly, the commissions (including deferred or renewal commissions) paid to him constitute earnings from self-employment for purposes of the self-employment tax.