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Lewis v. Robertson

United States District Court, Fifth Circuit

October 17, 2013



TOM S. LEE, District Judge.

This cause is before the court on the motion of defendant Pat Robertson to dismiss pursuant to Rule 12(b)(1) and (6) of the Federal Rules of Civil Procedure. Plaintiffs Jon C. Lewis, John Brown, Brad Patridge, Barry Bean and Tim Gardner have responded to the motion, and have further moved for leave to amend their complaint "as an extra precautionary measure" in order to more fully set forth their position and cure any pleading deficiencies. The court, having considered the parties' memoranda in support of and in opposition to these motions, concludes that the motion to amend should be denied and that Robertson's motion to dismiss should be granted.

Plaintiffs Lewis and Brown are elected constables in Hinds County, Mississippi, and plaintiffs Partridge, Bean and Gardner are elected constables in Rankin County, Mississippi. Their complaint in this cause relates to defendants Hinds and Rankin Counties allegedly incorrectly classifying them as "independent contractors" rather than as "employees" for fee-based income plaintiffs receive for services they render to members of the public. They complain that as a result of this improper classification, they have suffered and continue to suffer adverse tax consequences. In addition to suing Hinds and Rankin Counties, plaintiffs have named as a defendant Pat Robertson, in her official capacity as State Social Security Administrator. In her motion to dismiss, Robertson argues that plaintiffs lack standing to pursue any claim against her as the relief they seek is beyond the scope of her responsibilities or duties as State Social Security Administrator, and further that the injunctive relief they seek against her does not fall within the Ex Parte Young exception to Eleventh Amendment immunity since plaintiffs have not identified any ongoing violation of federal law by Robertson. In the court's opinion, Robertson is correct on both points.

Under Mississippi law, constables derive their income from two sources: a direct payment of $1, 800 from their respective counties, see Miss. Code Ann. § 25-7-27(1)(f)[1], and fees received from the public which pass through the county treasury, § 25-7-27(1)(a-e).[2] According to the complaint, while Hinds County and Rankin County classify plaintiffs as county employees for purposes of the $1, 800 direct payment and issue plaintiffs a Form W-2 for this income, they treat plaintiffs as self-employed and issue a Form 1099-MISC for purposes of plaintiffs' fee-based income. Plaintiffs contend that their fee-based income meets the definition of "wages" under the Federal Insurance Contributions Act (FICA), 26 U.S.C. § 3103 et seq., and the Internal Revenue Code, 26 U.S.C. § 1 et seq., [3] and that Hinds and Rankin Counties' failure to report this income as "wages" and instead classifying plaintiffs as independent contractors and issuing them 1099-MISCs for this income, [4] has resulted in an increased tax burden on them.

A basic understanding of FICA, and its applicability to State and local government employees, is needed to place plaintiffs' claims in context. FICA is a taxing statute, designed to fund the government's overall obligations in the areas of old-age, disability, survivors, and Medicare insurance. Salazar v. Brown , 940 F.Supp. 160, 163 (W.D. Mich. 1996). In Salazar, the court explained that

[FICA] is but one part of the immensely complicated and interrelated system of statutes and regulations that make up the federal social welfare program. The Social Security Act, 42 U.S.C. §§ 401, et seq., establishes a federal insurance scheme for the benefit of the aged, blind and disabled and their dependents. FICA is one of the taxing statutes designed to fund the program set up by the Social Security Act. Pursuant to the requirements of FICA, employees and their employers are liable for certain employment taxes to support the Social Security and the Medicare systems....

940 F.Supp. at 162-163.

[T]he FICA tax consists of two components: a tax to fund "[o]ld age, survivors, and disability insurance" (commonly known as Social Security) and a tax to fund "hospital insurance, " (commonly known as Medicare). 26 U.S.C. § 3101(a); id. § 3101(b)(1); see United States v. Cleveland Indians Baseball Co. , 532 U.S. 200, 205, 121 S.Ct. 1433, 149 L.Ed.2d 401 (2001). Both components of the tax are imposed only on "wages" received by a taxpayer "with respect to employment." 26 U.S.C. § 3101(a); id. § 3101(b)(1). The Code defines "wages" for this purpose as "all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash." Id . § 3121(a).

Gerstenbluth v. Credit Suisse Securities (USA) LLC, Docket No. 12-4125-cv, 2013 WL 4516660, 2 (2d Cir. 2013). The Tenth Circuit has summarized the FICA tax scheme, as it applies to employees, as follows:

The federal Social Security and Medicare systems are funded by excise taxes, separate and distinct from federal income taxes, imposed on employees, employers, and self-employed individuals. See 26 U.S.C. §§ 1401, 3101, 3111. In the case of employees and employers, FICA imposes the excise tax on the "wages" paid by an employer to an employee with respect to "employment." See 26 U.S.C. § 3101(a)-(b), § 3111(a)-(b). FICA taxes are paid in equal shares by employer and employee. See id. In general, all payments of remuneration by an employer for services performed by an employee are subject to FICA taxes, unless the payments are specifically excepted from the term "wages, " or the services are specifically excepted from the term "employment."

Public Employees' Retirement Bd. v. Shalala , 153 F.3d 1160, 1161 (10th Cir. 1998). Thus, the employer is required to withhold and remit the employee tax and to remit an equal amount as an employer excise tax on the covered wages of all persons who qualify as "employees, " as that term is defined by FICA.

While wages paid to employees are subject to FICA taxes which must be paid by the employer, independent contractors are not subject to the FICA tax but are instead covered by the Self-Employment Contributions Act (SECA), 26 U.S.C. §§ 1401 et seq., which requires that they pay self-employment taxes on their income to cover their own Social Security and Medicare costs. Gifford v. Meda, No. 09-cv-13486 , 2010 WL 1875096, 11 (E.D. Mich. May 10, 2010). "The SECA tax is a different tax from the FICA tax, though the SECA tax contains the same two components as the FICA tax. The SECA rate is equal to the sum of the employer and employee tax rates under FICA." Jones v. C.I.R., No. 18719-05, 2007 WL 2417271, 2 (U.S. Tax Ct. Aug. 27, 2007).[5] Thus, in effect, a self-employed person pays both the employer and employee portions of the tax (but only on his net income from self-employment). United States v. Bailey , 789 F.Supp. 788, 805 (N.D. Tex. 1992) (citing 26 U.S.C. §§ 1401(a), 1402). See also Umland v. PLANCO Financial Servs., Inc. , 542 F.3d 59, 61 (3d Cir. 2008) (explaining that SECA imposes the equivalent of the sum of the employee and employer FICA taxes for employees); Walker v. United States , 202 F.3d 1290, 1291 (10th Cir. 2000) (explaining that the SECA tax "is designed to finance social security benefits paid to self-employed individuals, " and complements the FICA tax imposed pursuant to 26 U.S.C. §§ 3101(a) and 3121(a) on wages earned by an employee) (quoting Schelble v. Comm'r , 130 F.3d 1388, 1391 (10th Cir. 1997)).

When the Social Security Act was originally enacted in the 1930s, state and local government employees were excluded from Social Security coverage because there was a question as to whether Congress could constitutionally compel the States and their political subdivisions to include their employees in the Social Security system. Bowen v. Public Agencies Opposed To Social Sec. Entrapment , 477 U.S. 41, 44, 106 S.Ct. 2390, 91 L.Ed.2d 35 (1986). However, since many governmental employees did not have their own retirement system, the Social Security Act was amended in 1950 to add Section 218, codified at 42 U.S.C. § 418, which allowed States and local governments to enter into agreements with the Social Security Administration (SSA) to voluntarily extend Social Security coverage to designated state and local government employees who were not covered by a retirement system.[6] In 1954, the Act was amended to allow States to extend coverage even to public employees who were covered by a public retirement system, if the employees voted to have coverage.

In 1986, Medicare coverage became mandatory for all State and local government employees hired or rehired after March 31, 1986, whether or not such employees were covered by a Section 218 Agreement.[7] And beginning July 2, 1991, Social Security and Medicare coverage became mandatory for all State and local government employees who are not members of a public retirement system and who are not covered under a Section 218 agreement.

Therefore, even where a 218 Agreement between a state or local government and the Social Security Administration does not cover services performed by an employee of the governmental unit, such employees are still generally entitled to full coverage under the Social Security Act, i.e., Social Security and Medicare coverage, and subject to compliance with FICA if the employee is not a member of the governmental entity's retirement system. 26 U.S.C. § 3121(b)(7)(F); 20 C.F.R. § 404.1020.[8] In contrast to Social Security coverage, Medicare coverage extends to all employees, including State and local government employees, whether or not such employees are covered by a Section 218 Agreement and whether or not part of a public retirement system. Thus, employees of a state or local government who are not covered by a 218 Agreement but who are members of a public retirement system, are not covered by Social Security but they are entitled to Medicare coverage.

Here, although both Hinds County and Rankin County have executed Section 218 Agreements, each county specifically elected to exclude constables from the Agreement and subsequent coverage of Social Security by way of "Order(s) Excluding Justices of the Peace and Constables from Social Security coverage through the Public Employees' Retirement System of Mississippi." Furthermore, as plaintiffs, with regard to their fee-derived income, are regarded by their respective counties as independent contractors and not employees, the counties are not remitting to the IRS the employers' portion of the ...

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