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

• Author: Prestia, Donna
• Position: IRC section 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...