Government Accounting Advisor: Defining Public Officials, Elected Officials and Public Officers as Employees: Have You Made the Correct Determination?

Generally, directors of a private-sector corporation (i.e. members of the governing board) are defined by statute as non-employees. This is due to the fact that a board member’s responsibility for the fulfillment of an organization’s mission and legal accountability for its operations typically dictate that the board be comprised of individuals from outside of the organization. While it is possible for a board member to also be an employee of the organization, the services they perform in their role as board member will be reported separately from the services they perform as an employee.

In contrast, officials of states and their political subdivisions and instrumentalities may or may not be classified as an employee, depending on state statute and/or common-law rules. The term “public official” refers to someone who has authority to exercise the power of the government and does so as an agent and employee of the government. Unfortunately, the Internal Revenue Code does not define the term “public official” but rather refers to their tax status in IRC Regulation Section 1.1402(c)-2(b) by indicating that holders of “public office” are not in a trade or business and therefore not subject to self-employment tax (implying that an employee-employer relationship exists instead of an independent contractor).

Current case law has made it clear that elected public officials are classified as employees since they are subject to a degree of control that is characteristic of an employer-employee relationship. Elected officials are considered responsible to the public, which has the power to vote them out of office. In addition, Internal Revenue code Section 3401(c) indicates that an “officer, employee, or elected official” of government is an employee for income tax withholding purposes. This includes any official who administers or enforces public laws whether the public elected the individual or they were appointed. Examples of public officials include: governor, mayor, secretary of state, a legislator or elected representative, county commissioners, city council members, judge or justice of the peace, county or city attorney, marshal, sheriff, constable, a registrar of deeds, tax collector or assessor, road commissioner and board members, including members of advisory boards and committees like boards of education, water boards and other boards and commissions.

The following facts indicate that an office is a public office:

  • The constitution, legislation or a municipality or other body with authority conferred by the legislature created the office.
  • The office was delegated a portion of the powers of a government body.
  • Legislative authority or law defined, either directly or indirectly, the powers conferred and the duties to be discharged by the office.

If a Section 218 Agreement covers a position, the individual holding that position is an employee for purposes of Social Security and/or Medicare taxes (FICA). A Section 218 Agreement is the voluntary agreement between a state and local government with the federal government to participate in Social Security or Medicare. Although it does not supersede Federal Law, the designation of a position as that of an employee under statue of jurisdiction is a strong indication that the position is employment. Generally, an employee for FICA is also an employee for income tax purposes. There is a limited exception from income tax withholding for fees paid to public officials such as notaries and amounts paid to precinct workers. In addition, individuals hired on a temporary basis in case of fire, storm, snow, earthquake, flood or other emergencies are excluded from social security and Medicare under IRC 3121(b)(7)(F)(iii).

Section 218 Agreement Common-law rules:

  • Government Worker Classification
  • The office performs its duties independently and without control of a superior power other than the law.
  • The office has some permanency and continuity.
  • The officer takes an official oath.

When a board member is an employee, the organization that employs them must withhold and pay employment taxes (i.e. Social Security, Medicare, federal and state withholding, etc.) on the “taxable compensation” they receive. It is important to note that taxable compensation can include both cash and non-cash remuneration. Taxable compensation also includes any fringe benefit the organization provides which must be included in the recipient’s annual Form W-2 unless the law specifically excludes it. Typical examples of fringe benefits that may or may not be taxable, depending on the structure of the payment and the policies in place for reimbursements (i.e. written accountable business substantiation plan) include:

  1. automobile allowances
  2. employer provided cell phones
  3. transportation (commuting) benefits
  4. employer provided credit cards
  5. use of company cars
  6. parking
  7. spousal travel
  8. various other items

Governmental entities should consider performing a benefits review which specifically addresses the board members total cash and non-cash compensation packages. Written policies should be in place for the following reasons:

  1. To ensure that there are no gaps in the public’s understanding.
  2. To provide clear, concise guidance on the distinction between business and personal use. Accountability issues will arise when detailed standards are inaccurate or outdated.
  3. Review the requirements for business use of the “benefit” and how to record and report the business use. Policies that do not sufficiently document processes can create varying degrees of inconsistency among the board members.