20 CFR 404.1026 and 404.1201 et seq
The State of Pennsylvania timely requested a review pursuant to section 218(s) of the Social Security Act of an assessment of contributions due. The Secretary of Health, Education, and Welfare has delegated to the Commissioner of Social Security authority to make reviews and findings and give notice of his findings as required by section 218(s). The assessment made was based on the Administration's determination that: (1) the services performed by a justice of the peace in Jefferson Borough were performed as a State employee and covered under the Federal-State section 218 agreement, and (2) that his reportable wages should be computed by deducting the expenses incurred in the performance of such services from his gross fees. The first issue was disposed of upon reconsideration by the Administration with a determination that the justice of the peace was an employee of Jefferson Borough rather than the State. It is agreed that the services were covered and that his fees constitute wages. The State disagrees solely with the decision concerning the amount of the reportable wages.
The facts in this matter establish that a justice of the peace in Jefferson Borough was compensated solely by fees from third parties and he paid certain business expenses from his gross fees. Specifically, these expense items were costs for postage, printing, travel, judiciary association dues, utilities, and telephone.
The Administration initially determined that his services as a justice of the peace were performed as an officer (employee) of the State of Pennsylvania and covered under the section 218 agreement. Based on his personal record of fees and business expenses for the period in question, reportable wages were computed by deducting business expenses from his gross fees and the related assessment was issued. As a result of a request by the State for review of the assessment, it was established on reconsideration that the justice of the peace was an employee of Jefferson Borough. The reconsideration determination did not affect his coverage under section 218 nor the computation of his reportable wages.
The pertinent provisions of the Social Security Act, as amended, are:
Subpart K of the Social Security Regulations No. 4, in pertinent part, provides as follows:
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Purdon's Pennsylvania Statues Annotated, Title 42, Chapter 2, provide in pertinent part:
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It is the State's position that "wages" of an individual in a justice of the peace position is the statutory fee. The gross fee should not be reduced by the amount of business expenses incurred by the employee. A primary concern is the difficulty local reporting officials would encounter in ascertaining the net fees. The administrative problem was given legislative consideration in the passage of Public Law 90-248, Social Security Amendments of 1967.
It is the position of the Social Security Administration that only the net amount remaining after subtraction of business expenses from the gross fees constitutes reportable wages under section 218 Federal-State agreements. Only the remuneration for an individual's service is wages. The law of Pennsylvania specifically recognizes that a justice of the peace will incur expenses in connection with the performing of his duties and authorizes him to pay them. Specifically, Title 42, Chapter 2, Sections 217 and 219, of the State Statutes set out that the gross fees are intended not only to compensate the justice of the peace for services but also to pay necessary expenses arising in connection with the criminal or civil proceeding. In the absence of a State law requiring an accounting of fees or business expenses, receipts and expenditures will be documented by the employee's records for Federal income tax purposes.
Amounts paid specifically for ordinary and necessary expenses incurred or reasonably expected to be incurred in the business of the employer are not wages (Section 209 of the Social Security Act and Regulations No. 4, Section 404.1026(a)(2) and (8)). Regulations No. 4, Section 404.1026, specifically pertains only to direct employer-employee wage payment cases where amounts are paid by the employer to cover wages and expenses for a specific time period. The provision cannot be applied literally when the wage payments are made in the form of fees by third persons who are not concerned with the nature of the payments or appropriation of wage and expense amounts. However, the amount of wages and allowable expenses is always a matter of concern between the employer and employee. The fact that the employer is not aware of the amounts at the time of the fee payments in a third party situation has no bearing on their status as wages.
Before 1968, fee basis employees, life other State and local government employees, could acquire Social Security coverage only under a State coverage agreement, but could not obtain coverage if the fee basis exclusion was exercised. Because of the difficulties encountered by States in establishing and reporting fee payments where the positions were not excluded and the inequity involved where the positions were excluded, Congress provided in Public Law 90-248 that State and local employees compensated solely on a fee basis, not covered under a State coverage agreement, would be covered under the self-employment provisions of the law.
Individuals in justice of the peace positions in Pennsylvania have substantially the same type of fee income and expenses. Since 1968, services of persons in these positions are covered under section 211 or 218 of the Act. The only exception would be an individual who was eligible for self-employment coverage under the 1967 amendment but elected against coverage before the due date for his 1968 tax return.
Where coverage is established under section 218, creditable wages are "remuneration . . . for employment" per section 209. Where coverage is established under section 211(c), only the "net earnings" are creditable as self-employment income per section 211(b). Gross fee payments do not represent remuneration for employment or net earnings from self-employment. In either case the actual business expenses incurred by the justice of the peace in performing his official duties must be deducted from his gross fees in computing the amount of his reportable income for Social Security purposes. The Social Security Act contains no provisions which would justify inconsistent earnings record postings for individuals performing the same work and having substantially the same type of income.
The Commissioner found on review pursuant to the State's request that the wages of the justice of the peace should be computed by deducting the actual and substantiated expenses incurred in performing his official functions from the gross amounts of fee payments. On the basis of this finding, the Commissioner affirmed the assessment.
 In accordance with a subsequent amendment to the Pennsylvania Constitution, newly elected justices of the peace are now officers (employees) of the Commonwealth of Pennsylvania.
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