SSR 71-22: SECTION 203. -- WORK DEDUCTIONS -- RENEWAL COMMISSIONS OF LIFE INSURANCE AGENTS
This ruling supersedes SSR 64-57, C.B. 1964, pg. 68
SSR 71-22
- For purposes of work deductions under section 203, the employment status of a life insurance salesman determines the classification of the original and renewal commissions then or later received on individual life insurance policies sold. Held, (a) if a salesman was an employee at the time of the sale of the original policy both the original and renewal commissions are wages earned at the time of the sale;[1] (b) if a salesman was self-employed when the policy was sold, original and renewal commissions are earnings for the year in which the salesman actually receives commissions (or, in the rare case of an accrual-basis taxpayer, in the year in which they accrue regardless of when they are received).
The purpose of this ruling is to update SSR 64-57, C.B. 1964, p. 68, restating the position set forth therein under the current provisions of section 302 of the Social Security Act (42 U.S.C. 403).
Section 203 of the Act provides that an old-age insurance beneficiary may have earnings of as much as $1,680 in a 12-month taxable year ending after December 31, 1967, and still receive all his benefits for that year. A deduction of $1 may be required from benefits for $2 of earnings over $1,680 (in a 12-month taxable year) up to and including $2,880 and a deduction of $1 in benefits for each $1 of earnings over $2,880. However, no deduction may be made under this provision for any month in which a beneficiary is age 72 or over or in which he neither rendered services for wages of more than $140 nor rendered substantial services in self-employment.
Section 203 further provides that an individual's earnings for a taxable year shall be the sum of his wages for services rendered in that year and his net earnings from self-employment for that year -- minus any net loss from self-employment for that year.
All commissions from the sale of individual life insurance policies are earnings of a salesman because they are remuneration for the performance of personal services in employment or self-employment. The effect of the foregoing provision of the Act is that, for purposes of work deductions, wages earned by an employee must be related to the period in which they were earned but net earnings from self-employment must be related to the taxable year for which the earnings are reportable for income tax purposes.
Where a life insurance agent was an employee when he sold an individual life insurance policy, all first-year (original) and renewal commissions flowing from that policy normally are wages earned in the month and taxable year in which the policy was sold. The wages a beneficiary earns in a period, not the wages he is paid in that period, form the basis for determining whether work deductions are required because of his employment. Ordinarily, commissions which are wages are earned in the month in which the insurance agent completes the last act required to entitle him to fist-year commissions. Thus, when a beneficiary completes his annual report of earnings to the Social Security Administration, he must include both his first-year commissions and his anticipated renewal commissions n policies sold as an employee during the taxable year. Those same renewal commissions are not earnings (for retirement test purposes) for the subsequent years in which they are actually received by him and therefore, should not be included in his report of earnings to the Social Security Administration for such subsequent years. If the anticipated renewal commissions are not realized, the agent-beneficiary should submit evidence of that fact to obtain payment of any benefits due.
An employed agent-beneficiary may receive a benefit payment for any month in which he does not earn wages of more than $140 in employment even if his first-year (original) and anticipated renewal commissions total more than $1,680 in a 12-month taxable year. Even though he sells one or more policies in a month, he may receive his benefit payment for that month if his total commissions (original and anticipated renewals) from those sales plus any wages he may have earned in other employment in that month do not exceed $140. If, however, in one month he sells a policy on which the first year commission is $80 and the anticipated renewal commissions amount to $75, his earnings for the month would be $155 and a deduction might be required if his annual earnings exceeding $1,680.
Where a life insurance agent has the status of a self-employed individual when he sold an individual life insurance policy, all first-year and renewal commissions from that policy normally are earnings from self-employment. In such cases both the first-year and the renewal commissions are earnings for the taxable year in which they are reportable for income tax purposes. In the usual case (to which we shall confine attention in the remainder of this ruling) where the taxpayer-beneficiary has elected the cash accounting method (rather than the accrual method) for reporting his income for tax purposes, the commissions are earnings for the year in which they are received. Thus, where an agent was self-employed when he sold a policy, he would not report any commission from that policy as earnings until he received it and in determining his net earnings from self-employment for the year he would deduct all allowable self-employment business expenses.
Although renewal commissions from life insurance sales which are income from self-employment must be reported as earnings for the taxable year in which they are received, receipt of such renewal commissions in any month does not necessarily mean that deductions are required. Where a self-employed individual's total earnings for the year exceed the allowable amount, deductions depend on whether he has rendered substantial services in self-employment in one or more months of the year. The standard rule applicable to substantial services applies. This rule is discussed in SSR 61-38 (C.B. 1960-1961, p. 80) and in §§ 404.446 and 404.447 of the Social Security Administration Regulations.
The following two hypothetical cases illustrate the application of the rules outlined above:
Example I -- Agent-Beneficiary Currently Self-Employed. -- J was awarded an old-age insurance benefit of $150 a month beginning January 1968, the month in which he attained age 65. Before 1961, J had worked as a part-time life insurance salesman and had had the status of a self-employed individual under the Social Security Act. On January 1, 1961, he became a full-time life insurance agent for the R Life Insurance Company and was then an employee within the meaning of the Act. In January 1968 J became ill and relinquished his full-time contract with the R Company. He entered into a part-time contract and resumed the status of a self-employed agent under the Act.
In 1968 J received, after deducting allowable business expenses, $3,500 in renewal commissions on life insurance policies he had sold before 1961 as a self-employed agent and $1,000 in first-year (original) commissions on policies which he sold in 1968 also as a self-employed agent. He also received $4,000 in renewal commissions on individual life insurance policies sold during 1961 through 1966 while he was an employee-agent. J has no wage commissions which are 1968 earnings for work deduction purposes. The $4,000 he received in renewal commissions is wages for services he performed during 1961 through 1966 while he was an employee and, therefore, for deduction purposes, is considered as earned in those years. His 1968 earnings for purposes of work deductions under section 203 include the net amounts of $1,000 in first-year commissions on policies sold in 1968 while he was self-employed and the renewal commissions of $3,500 received in 1968 on policies sold before 1961 while he was self-employed. Thus, his 1968 total earnings for deduction purposes were $4,500.
Since his earnings exceeded $1,680 for 1968, deductions are applicable for months during which J was under age 72 and either rendered services for wages of more than $140 or rendered substantial services in self-employment. Since J was not an employee in 1968, he did not render services for wages of more than $140 during any month. Thus, deductions are applicable only with respect to J's benefits for those months in which he rendered substantial services in self-employment. (SSR 61-38; §§ 404.446 and 404.447 of the Social Security Administration Regulations, supra.)
In 1968 J worked in self-employment for 80 hours a month in May and June, 60 hours a month in October and November, 10 hours a month in March, April, July, and August and none at all in January, February, September, and December. His health restricted him to this limited single activity. After considering the time spent in the activity, the type of service being rendered, and other pertinent factors as discussed in SSR 61-38, a determination was made that J rendered substantial services in self-employment only in May, June, October, and November, and deductions must be made from benefits for those months.
Example II -- Agent-Beneficiary Currently Employed. -- S was awarded an old-age insurance benefit of $150 a month beginning January 1968, the month in which he attained age 65. Before 1961 he had worked as a general agent and had the status of a self-employed individual under the Social Security Act with respect to the insurance policies he sold. On January 1, 1961, he relinquished his position as a general agent and entered into a contract providing for full-time services as a life insurance agent for the B Life Insurance Company pursuant to which he had the status of an employee within the meaning of the Act.
In 1968 while an employee, S received $5,000 in renewal commissions on individual life insurance policies which he had sold prior to 1961 (while he was self-employed) and $6,000 in renewal commissions on policies he had sold during 1961 through 1966 (while he was an employee). In addition, he sold new individual policies in March through August 1968 on which his first-year (original) commissions were $1,600 and his anticipated renewal commissions were $1,400 making his combined first-year and renewal commissions amount to $3,000 for the year and to more than $140 in each of the months March through August 1968.
In August 1968 S became ill and unable to work for the balance of 1968. During 1968, S did not earn or receive any other fees or commissions from the sale of life insurance policies and did not engage in any other business activity.
S's 1968 earnings for purposes of work deductions under section 203 were $8,000. This is the total of the renewal commissions of $5,000 he received in 1968 from the policies he sold while he was self-employed prior to 1961 and $3,000 in combined first-year and anticipated renewal commissions on the policies he sold in 1968 while he was an employee. Although the $5,000 commissions S received in 1968 from policies sold prior to 1961 are gross income from self-employment, no business expenses are deductible therefrom in figuring S's net earnings from self-employment since S was not carrying on a trade or business in 1968. The $6,000 renewal commissions paid on policies sold during the years 1961 through 1966 were earned in those years and were not current earnings. Since S rendered services for wages of more than $140 in March through August 1968, no benefits are payable to him for those 6 months. Benefits are payable for January, February, and September through December 1968 because S neither rendered services for wages of more than $140 nor rendered substantial services in self-employment in those months.
[1] This ruling does not apply to service fees, efficiency income, veteran's fees, persistency bonuses, collection fees, commissions from the sale of other types of insurance, or the like.