Off-duty officer pay is subject to self-employment tax.

• Author: Chambers, Valrie

The applicability of self-employment tax to amounts paid to off-duty police officers continues to create questions for CPAs. A recent example is a Tax Court decision from December (Specks, T.C. Memo. 2012-343). A number of cases and some older revenue rulings provide valuable insight into the factors that determine whether the off-duty officer is performing services as an employee or independent contractor and, if deemed an employee, which entity is the employer--the police department or the third-party entity.

Carnell Specks was employed as a police officer for the Houston Police Department (HPD) and worked almost 2,200 hours for HPD during 2008. He also provided security services for several third-party businesses during off-duty hours. While providing security services to these third parties, Specks wore an HPD uniform and carried his personal firearm. The third parties did not train, supply, or equip Specks, and his relationship with each of the third parties was at-will. Further, each third parry paid Specks directly on an hourly basis and did not withhold employment taxes or provide any fringe benefits. Specks's compensation from the third parties was reported on Forms 1099-MISC, Miscellaneous Income.

At trial, Specks contended that he was an employee of the third parties and thus amounts paid to him were not subject to self-employment tax (initially the taxpayer treated the amounts received as additional compensation as an HPD officer). A tax is imposed on a taxpayer's self-employment income (Sec. 1401); however, self-employment tax does not apply to compensation paid to an employee (Sec. 1402(c)(2)).

Whether an individual is an employee or an independent contractor is a question of fact determined by applying common law principles. Relevant factors include (1) the degree of control exercised by the principal over the details of the work, (2) which party invests in the facilities (equipment) used in the work, (3) the individual's opportunity for profit and loss, (4) whether the principal has the right to discharge the individual, (5) whether the work is part of the principal's regular business, (6) the permanency of the relationship, and (7) the relationship the parties believed they created (see, e.g., Weber, 103 T.C. 378 (1994), aff'd, 60 F.3d 1104 (4th Cir. 1995); and Rosato, T.C. Memo. 2010-39).

The court recognized that the relationship between Specks and the third parties had some aspects that are characteristic of an...