If you are a retired State Farm Agent, and retired under the AA3, or AA4 contract, you receive Termination Payments, or Extended Termination Payments. The question arises whether those payments are subject to Self Employment Contribution Act (SECA) Tax.
They are not.
Specifically the U.S. Tax code provides:
26 U.S.C.A. ยง 1402, Definitions
(a) Net earnings from self-employment
--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, less the deductions allowed by this subtitle which are attributable to such trade or business, plus his distributive share (whether or not distributed) of income or loss described in
section 702(a)(8) from any trade or business carried on by a partnership of which he is a member; except that in computing such gross income and deductions and such distributive share of partnership ordinary income or loss-
* * *
(k) Codification of treatment of certain termination payments received by former insurance salesmen
--Nothing in subsection (a) shall be construed as including in the net earnings from self-employment of an individual any amount received during the taxable year from an insurance company on account of services performed by such individual as an insurance salesman for such company if--
(1)
such amount is received after termination of such individual's agreement to perform such services for such company,
(2)
such individual performs no services for such company after such termination and before the close of such taxable year,
(3)
such individual enters into a covenant not to compete against such company which applies to at least the 1-year period beginning on the date of such termination, and
(4)
the amount of such payment--
(A)
depends primarily on policies sold by or credited to the account of such individual during the last year of such agreement or the extent to which such policies remain in force for some period after such termination, or both, and
(B)
does not depend to any extent on length of service or overall earnings from services performed for such company (without regard to whether eligibility for payment depends on length of service).
All of the conditions for exemption, set forth above, are met by the State Farm Termination Payment, and Extended Termination payment sections of your AA3 or AA4 Agent's Agreement. Those Termination and Extended Termination payments are not entitled to treatment as a capital gain.
The SECA Tax Exemption is the result of many hard years of work by NASFA on behalf of all agents. In the years that this fight with the IRS was going on there were only the AA3/4 contracts and all agents were entitled, after qualification, to Termination Payments. NASFA, supported and won several lawsuits on the SECA Tax issue. Then, armed with those victories, NASFA sponsored Federal Legislation to codify the Court recognized exemption. This process took many years and NASFA poured hundreds of thousands of dollars into the effort.
The codification of the SECA Tax Exemption is one of NASFA's proudest moments.
