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

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Issue
Taxpayer received insurance commissions with respect to sales generated before retirement. Is this income subject to self-employment tax? Can the taxpayer establish an SEP based on this income?

Answer/Discussion
The fees in question are subject to self-employment tax. This issue is explicitly addressed in Notice 90-72, 1990-2 CB 353.

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.