Wage Employment

vs.
Self-Employment
February 2008

Introduction
It is not uncommon for WIPA personnel to encounter individuals who receive some form of
income, but who are unclear about whether or not this income counts as “wages” for Social
Security purposes. Furthermore, in some instances, it is difficult to determine if the income a
person gets is from wage employment (i.e.: an employer-employee relationship exists) or if the
person is actually self-employed. This is further complicated by the fact that some businesses
pay workers as if they were self-employed (i.e.: independent contractors), when, based on U.S.
Department of Labor wage and hour laws, they actually meet the definition of employees.

Determinations about whether income is “earned” as opposed to “unearned” and subsequent

decisions about whether earned income represents “wages” or should be counted as “net earnings
from self-employment” can get very complicated. To make matters worse, these issues do not
fall simply under the jurisdiction of the Social Security Administration. Both the U. S.
Department of Labor (DOL) and the Internal Revenue Service (IRS) have a stake in these
matters and often have overlapping laws and regulations. These determinations are critically
important, since the DI/SSI programs treat various forms of income in drastically different ways.
There can also be legal ramifications for beneficiaries and their employers if the Federal tax and
wage & hour laws are not complied with. If CWICs are not clear about what a form of income is
and how it is treated by SSA, incorrect advice will be provided which may cause the beneficiary
to make a series of poor choices about work.

The purpose of this document is NOT to make CWICs experts in determinations of wage
employment or self-employment. There are literally hundreds of POMS citations covering this
topic and the issues involve complex legal interpretations. This document was written to provide
a general understanding of how wage employment and self-employment differ, and how SSA
decides which situation applies to a beneficiary with earned income.

Employer-Employee Relationship
When SSA personnel look at income a beneficiary receives the first decision to be made is
whether the income is “earned” or “unearned”. Basically, if an employer-employee relationship

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exists, or the individual meets the definition of being self-employed, the income will be counted
as earned. There are four basic types of employment relationship that may exist and each has
specific criteria. Individuals with earned income may be classified as being: 1.) Employees; 2.)
Independent contractors (a specific type of self-employment); 3.) Statutory employees; or 4.)
Statutory non-employees. With only minor exceptions, these classifications virtually are the
same across the SSA, IRS and DOL.

1. Employees

The general law governing employer-employee relationships is deceptively simple:

“In general, under the common-law rules an individual is an employee if he is subject to

the right of direction and control by the person for whom his services are performed as to
the details and means by which the result is accomplished.” (POMS RS 02101.005)

In other words, in wage employment situations, the employer has the right to determine how,
where, and when the employee performs the assigned work. In addition, when an employer-
employee relationship exists, the employer is subject to DOL wage and hour laws and is required
to withhold taxes and FICA contributions from employees’ wages per IRS and SSA rules. At the
end of each year, the employer provides an IRS W-2 form to each employee to document wages
paid and wages withheld. If wages are paid which are below minimum wage, the services must
be in food service or the employer must have an approved sub-minimum wage waiver.

To help Claims Representatives make decisions about when a beneficiary is an employee, Social
Security provides a list of the principle indicators of wage employment in POMS RS 02101.149
– RS 02101.252. These factors vary from profession to profession, but the main indicators are as
follows:

• Integration of the services into another business

• A restriction against working for others in competition with the employer

• A continuing relationship

• Payment for the services on a time basis

• Control over the beneficiary’s order of services

• A restriction against hiring helpers or substitutes

• No opportunity for profit or risk of loss on the part of the beneficiary

• The right of either party to end the relationship at any time

Social Security has identified a number of additional criteria to help determine when an
employer-employee relationship exists in circumstances where it is not readily apparent. To
develop this situation further, the Claims Representative will ask the beneficiary if the following
characteristics apply:

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1. You are required to comply with where, when and how to work.
2. You have been given training by the employer on how to do the job.
3. Your services are integrated into the normal operation of the business.
4. You have to personally perform the services (no substitutes allowed).
5. The employer hires assistants or coworkers.
6. The arrangement is for continuing or ongoing work, even if the work is sporadic.
7. The employer determines the hours of work.
8. The work is full time. Full time in this case does not mean 40 hours. It means that the
person is restricted from doing other gainful work because of the hours or agreement.
9. The work is required by the employer to be done on site if it could be done elsewhere.
10. The employer specifies in what order the tasks are to be done.
11. You give regular oral or written reports are required by the employer.
12. You receive regular (weekly, bi-weekly, monthly) payments for services or guaranteed
minimum salary or draw account.
13. The employer pays your travel and business expenses.
14. You do not have an investment in necessary tools, facilities or equipment.
15. You do not have a loss potential.
16. You do not have the capability of working for multiple employers.
17. Your services are not available to the public.
18. The employer has the right to fire you at any time.
19. You have the right to quit at any time.

Not all of these criteria need to apply in order for SSA to determine that a beneficiary meets the
test of an employee. However, simply meeting one of these criteria would generally not be
sufficient to determine that an employer-employee relationship exists. The weight to be given
these factors is not always constant. Their degree of importance may vary somewhat depending
on the occupation being considered and the reasons for their existence. Some of the factors listed
above would not apply at all to particular occupations. SSA personnel must use judgment and
discretion when applying these guides.

Special Rules for Officers and Directors of Corporations

Generally, SSA considers an officer of a corporation to be an employee of the

corporation. A corporate officer is deemed to be in “employment” even if he/she
performs no services for the corporation, as long as remuneration is received for holding
corporate office. However, an officer of a corporation who as such does not perform any
services, or performs only minor services, and who neither receives nor is entitled to
receive, directly or indirectly, any remuneration for serving as an officer is not considered
to be an employee of the corporation.

Although a corporate officer is generally an employee, payments made to the officer do

not constitute “wages” unless such payments are made for performing services for the
corporation or for holding corporate office. Payments by a corporation to an officer for
reasons other than the holding of a corporate office are not wages. Examples of such
payments would include payment of dividends, repayment of loans, or fees for services
performed in other capacities of a non-employment nature. Corporations often make
payments of this type to “honorary” or inactive corporate officers.
The board of directors is the governing body of the corporation and therefore is not
subject to control by the corporation. Therefore, a director who attends and participates in

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 board meetings would not meet the common law test for an employee, but would be
deemed to be in self-employment. A director who does work for the corporation, other
than attending and participating in the meetings of the board of directors, may be an
employee with respect to such work if it is non-directorial in nature.

CWICs need to recognize that beneficiaries who are “officers” of relatively small
companies that have been incorporated may think they are self-employed when, in fact,
SSA considers them to be employees! It is a good practice to check with the local SSA
Field Office whenever dealing with a beneficiary who is a corporate officer to verify
employment status before offering advice. Remember that the difference between being
an employee and being self-employed can have a significant impact on how benefits are
affected – particularly in the SSI program.

2. Independent Contractors

Independent contractors are not employees, but rather constitute a specific type of self-
employment. In determining whether an individual is an employee or an independent contractor
under the common law rule, all evidence of control and independence must be considered. The
facts fall into three main categories:

• does the entity have the right to direct and control how the worker performs the specific
task for which the worker is hired;

• does the entity have the right to direct and control the business and financial aspects of
the worker’s activities; and

• the relationship of the parties. A written contract is a very important piece of evidence
showing the type of relationship the parties intended to create. A written agreement
describing the worker as an independent contractor is evidence of the parties’ intent. The
substance of the relationship, not the label, governs the worker’s 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.

It is not uncommon for employers to incorrectly treat workers as independent contractors when
they actually meet the test for being classified as “employees”. This mis-classification is
sometimes done out of ignorance of the DOL laws, but is occasionally willful in nature.
Employees are sometimes treated as independent contracts to avoid paying minimum wage or
avoid paying the employer taxes associated with employees. If the IRS determines that an
employer has incorrectly treated a worker as an independent contractor rather than an employee,
it can assess the employer for all unpaid taxes, with respect to that worker and other workers
performing similar services.

3. Statutory Employees

A statutory employee is a special class of worker which actually meets all the tests for an
independent contractor, but may be treated as an employee for Social Security withholding
purposes (FICA and Medicare taxes). Some workers, who would be otherwise be considered
independent contractors (i.e., self-employed) under the common-law rules for determining

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employer-employee relationships, are specifically defined as employees in section 210 of the
Social Security Act. There are only four categories of “statutory employees” as this is a very
limited class of worker.

• A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery
products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent
or is paid on commission.

• A full-time life insurance sales agent whose principal business activity is selling life
insurance or annuity contracts, or both, primarily for one life insurance company.

• An individual who works at home on materials or goods that you supply and that must be
returned to you or to a person you name, if you also furnish specifications for the work to
be done.

• A full-time traveling or city salesperson that works on your behalf and turns in orders to
you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other
similar establishments. The goods sold must be merchandise for resale or supplies for use
in the buyer s business operation. The work performed for you must be the salesperson s
principal business activity.

Statutory employees are provided a W-2 from the employer with the amount of Social Security
wages in box 3. If an individual is considered a statutory employee, the employer should check
the “statutory employee” block on the W-2 to indicate his or her status. When filing tax returns,
the statutory employee may be able to deduct trade or business expenses from the wages shown
on the W-2 by filing a Schedule C or C-EZ. However, SSA uses the Social Security wages
(reported on the W-2) as the gross income for SGA purposes for DI beneficiaries.

4. Statutory Non-Employees

There are two categories of statutory non-employees: direct sellers and licensed real estate
agents. They are treated as self-employed for all Federal tax purposes, including income and
employment taxes, if:

• Substantially all payments for their services as direct sellers or real estate agents are
directly related to sales or other output, rather than to the number of hours worked, and

• Their services are performed under a written contract providing that they will not be
treated as employees for Federal tax purposes.

Self-Employment Determinations
In order to be covered by Social Security, a self-employed individual must be engaged in a trade
or business and have net earnings from self-employment (NESE). Net Earnings from Self-
Employment (NESE) is the gross income derived by an individual from any trade or business
carried on by that individual less the allowable deductions which are attributable to that trade or

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business. Effective with taxable years beginning after 12/31/89, a new deduction of 7.65% is
required when computing NESE.
Net earnings from self- employment (NESE) must be at least $400 for a taxable year before it
will be taxable and creditable as self-employment income (SEI). If NESE is less than $400 for
the taxable year, there is:

• no self-employment income (SEI)

• no self-employment tax payable for that year and, and,
• no earnings credited to the earnings record.

Normally, Social Security considers an individual to be self-employed when an employer-

employee relationship is not in evidence, and the person in question is determined to be engaging
in “trade or business”. Section 211(c) of the Social Security Act provides that the phrase “trade
or business” shall have the same meaning as when used in section 162 of the Internal Revenue
Code (IRC). Although the IRC does not specifically define the term “trade or business” in
detail, certain criteria have been set forth in court decisions and IRS rulings for determining
whether a trade or business exists.

Factors Indicating the Existence of a Business or Trade

Social Security’s general policy is to consider the following issues when determining the
existence of a trade or business:

• Is there a good faith intention of making a profit or producing income?

• Is there continuity of operations, repetition of transactions, or regularity of activities?

• Are the functions being performed a regular occupation or profession?

• Is the individual holding him/herself out to others as being engaged in the selling of
goods or services?

SSA typically considers an individual to be engaged in a trade or business as a self-employed

person when he/she is regularly engaged in an occupation or profession for the purpose of
deriving a livelihood, whether in whole or in part. The factors of continuity of work and profit
motive indicate the existence of a trade or business even though there may be no “holding out”
of the goods or services as available to the general public. Some other factors that come into
play when considering the existence of a trade or business include:

1. Personal Services - The fact that an individual derives his/her income from a trade or
business is the controlling issue - not the nature or extent of the services.

2. Seasonal - Although length of time is usually an important factor, certain activities that are
considered to be a trade or business are seasonal (e.g. selling ice cream during the summer
months, plowing snow during the winter).

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 3. Illegality – Even though an activity is illegal, it may still constitute a trade or business.
Individuals engaged in such activities are required by SSA to report their income and pay
self employment taxes.

4. Multiple Enterprises - An individual may have more than one trade or business at the same
time. On the other hand, an individual may have more than one business enterprise, but
one or more may be excluded from the definition of “trade or business”.

5. Hobbies - The buying and selling involved with a hobby is generally done for the purpose
of improving or otherwise furthering the hobby. In these cases, the activities do not
constitute a trade or business.

Development of a Questionable Trade or Business

Self-employed individuals generally report net earnings from self-employment (NESE) and self
employment income (SEI) on their Federal income tax returns. When this is the case, there is
typically no need for SSA to question the existence of the trade or business as it is obvious. In
some instances, however, the individual has NOT reported income to the IRS and it is not clear
how the income should be treated. If the IRS has issued a ruling to the individual regarding the
existence of a trade or business and the ruling can be verified as bone fide, SSA will accept it
without question. When no such ruling is available, the following list of questions is used by
SSA personnel to gather the information necessary to determine whether or not a trade or
business is in evidence. Again – not all of these questions need to be answered in the affirmative
in order to determine that a trade or business exists, nor is a single affirmative answer generally
sufficient to make such a determination.

• What documents has the individual executed? (e.g., SS-4, tax reports or returns, etc.)

• Does the individual feel the activities constitute a trade or business – why or why not?

• Is the individual associating with other individuals in the performance of the activities in
question? If so, in what capacity? (i.e. partner, helper etc.)

• What business firms or other organizations does the individual deal with?

• Was income reported on a tax return? If so, how was it reported?

• Are there business licenses, permits, registrations in place?

• Is there a regular place of business?

• Are there indications of availability to others for transacting business?

• Is the individual a member of a business or trade association?

Self-employment determinations can be extremely complex. When in doubt about whether a

beneficiary is in wage employment or self-employment, or how a type of income should be

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counted, refer the beneficiary to the local SSA field office for a formal determination. In some
cases, it is a good idea to refer the beneficiary to a competent tax advisor before reporting the
income to the SSA. It is critically important for CWICs to have a basic understanding of the
differences between wage employment and self-employment since the income derived from
these activities affect DI/SSI benefits in different ways. However, CWICs are not authorized to
make determinations of what is or is not self-employment income, but must defer to SSA
personnel on these matters.

Conducting Independent Research

POMS RS 02101.000 -- Employer-Employee Relationship – Policies and Procedures –
Subchapter Table of Contents
POMS RS 01804.000 -- Self-Employment Income – Subchapter Table of Contents
POMS RS 02101.016 -- Officer of a Corporation
POMS RS 01802.010 – Development of Questionable Trade or Business
POM RS 01802.002 -- Factors Indicating the Existence of a Trade or Business

Acknowledgements
Contributing Authors and Editors: Lucy Miller and Terri Uttermohlen

The development of this paper was funded by the Social Security Administration under Contract
Number: SS00-07-60050, Training and Technical Assistance for the Work Incentive Planning
and Assistance (WIPA) Program.