Deferred director fees and sec. 3121(v)(2).

Many corporate directors would like to "take advantage" of Sec. 3121(v)(2) (i.e., report and pay payroll taxes on deferred director fees in the later of the year in which they are earned or no longer subject to a substantial risk of forfeiture). Such treatment could be advantageous, in that it could reduce the overall amount taxed as FICA wages. For directors who are actually employees of a company and on the board of directors, because of their job descriptions, the director fees are generally considered wages; any deferred fees would be subject to Sec. 3121(v)(2). However, many directors are not employees, or at least are not treated as employees with respect to their services as board members. If these independent directors are given the opportunity to defer their fee, are they subject to FICA, or are their fees considered self-employment income within the meaning of the Self-Employment Contributions Act (SECA)?

Background

Sec. 451 provides that the amount of any item of gross income shall be included in gross income for the tax year in which it is received by the taxpayer. Regs. Sec. 1.451-2 provides that the amount is included in gross income when there are no longer substantial limitations or restrictions on receiving the amount (constructive receipt).

Regs. Secs. 31.3121(d)-1(b) and 31.3306(i)-1(e) provide that a director of a corporation, in his capacity as a director, is not a corporate employee.

Sec. 1401 imposes taxes on "self employment income" for each tax year. Sec. 1402(b) defines the term "self-employment income" as the net earning from self-employment derived by an individual during any tax year. The term "net earnings from self-employment" means the gross income derived by an individual from any trade or business carried on by such individual, with some adjustments. Unlike Sec. 3121(v), there is no statutory section allowing or requiring a self-employed individual to take deferred compensation into account for SECA purposes before the compensation is taken into income for income tax purposes.

Between 1988 and 1990, Sec. 1402(a) specifically provided:

any income of an individual which results from, or is attributable to the performance of services by such individual as a director of a corporation during any taxable year shall be deemed to have been derived (and received) by such individual in that year, at the time the services were performed, regardless of when the income is actually paid.

This language was effective for tax years beginning after 1987, but was repealed for income received for services performed in tax years beginning after 1990. Therefore, for three years, directors were permitted to take into account deferred director fees when earned, rather than when paid. It would be hard to argue, given the repeal of explicit language permitting a director to take these amounts into SECA early, that deferred income can be taken into account for SECA purposes before it is received.

Thus, other than amounts attributable to deferrals in 1988, 1989 and 1990, a director will generally pay SECA on deferred compensation as it is distributed. The company will generally report this amount on a Form 1099.

FROM DONNA PRESTIA, WASHINGTON, DC