Category: Individuals; Compensation & Employee Benefits
Subject: Self-Employment Tax; SEP
Title: Director Fees
IRC Sections: 1402, 408(k)(7)(B)
Filename: 1146a.html
Date Produced: 3/96

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Issue
Corporate officer/employee also serves in the capacity of corporate director and receives a fee for such services. Are director fees subject to self-employment tax? Can the director establish an SEP based on this income?

Answer
Director fees are subject to self-employment tax. I see nothing to prohibit establishment of a SEP based on this income.

Discussion
The tax treatment of director fees is explicitly spelled out in several published IRS rulings which hold that for purposes of the self-employment tax rules, corporate directors are deemed to be engaging in a trade or business. Thus, the income derived therefrom, not being excluded from the definition of self-employment income by any other provision, is subject to self-employment tax. See Revenue Ruling 58-5, 1958-1 CB 322; Revenue Ruling 72-86, 1972-1 CB 273; and Revenue Ruling 68-595, 1968-2 CB 378.

The regulations at Sections 31.3121(d)-1(b), 31.3306(i)-1(e), and 31.3401(c)-1(f) [FICA, FUTA, and income tax withholding, respectively] provide that corporate directors, in their capacity as such, are not corporate employees. Accordingly, it seems clear that notwithstanding the status of the taxpayer as a corporate officer/employee, his duties as a director are a separate activity for purposes of the self-employment tax rules.

As to the SEP question, I see nothing that explicitly allows or disallows an SEP with respect to director fee income. In order to establish an SEP, one must be A) an employee of a business for which an SEP has been set up; B) self-employed as a sole proprietor of one's own trade or business; or C) a partner in a partnership.

It seems to me that the issue here is whether the activities of a corporate director constitute a trade or business for this purpose. In general, the determination of whether an activity constitutes a trade or business exists is based on facts and circumstances. In the case of an SEP, one must have earned income. Earned income, for SEP purposes is defined by Sections 408(k)(7)(B), 414(s), 415(c)(3)(B), and 401(c)(2) as income from self employment as defined under Section 1402.

I would argue that Congress chose for purposes of the SEP rules to look to the self-employment rules in order to determine whether the requisite income exists for SEP purposes. Since the IRS has ruled that the activities of corporate director constitute a trade or business for purposes of the self-employment tax rules, it then follows that an SEP is available with respect to such income.