Tax Law Alert: Director Fees Subject to Oregon Unemployment Insurance
10/23/2007

The court’s decision was based on a legal conclusion that the Oregon statutory definitions of "wages" and "employment" are broader than the definitions of those terms for federal tax purposes. There was no dispute as to the facts of the case. The Company paid out $18,000 in director fees during 2003 and did not pay UI with respect to the fees. After reviewing Oregon statutes and case law, the court concluded that taxable "wages" for purposes of UI include remuneration for "any service for an employer." The Company did not dispute that it was an "employer," at least with respect to other individuals. The court held that the director fees were paid in exchange for "service" to the Company, within the plain meaning of that term. Accordingly, the court concluded that the director fees were "wages" for Oregon UI purposes.

The Internal Revenue Service has long taken the position that corporate directors are not employees of the corporation, and that fees paid for services of directors are self-employment income, not wages for service as employees. The Company raised this point and argued that a director’s services are inherently not those of an employee because of the director’s role in corporate governance. The Oregon Court of Appeals rejected those arguments, however, holding that "service" performed by the directors did not fit within Oregon’s specific definition of services of an "independent contractor" or within any other exception to the general definition of "employment" for UI purposes.

UI is, in effect, a state payroll tax that is required to be reported and paid quarterly, together with Oregon personal income tax withholding. UI is not, however, withheld from wages; rather, it is imposed only on the employer. Rates of UI tax vary depending on the employer’s "experience rating," which depends largely on claims for unemployment benefits against the employer. Rates presently range from 1 percent to 5.4 percent. The maximum amount of remuneration that can be taxed for a particular year is capped at an indexed amount known as the wage base. For 2007, the wage base is $29,000. Therefore the maximum amount of UI that can be imposed on fees paid to any one director during 2007 is $1,566. The decision does not address the treatment of director fees for any other Oregon payroll tax purposes.

UI is enforced by the Oregon Employment Department, which has stated informally that it has long assessed UI on director fees in audits of employers. Under the statute of limitations, the Employment Department may assert liability for an underpayment at any time within the four-year period beginning one month after the close of any calendar quarter.

The Company has asked the Oregon Supreme Court to review the decision of the Court of Appeals. The Supreme Court is not required to do so, and it is unclear whether it will.

If you have any questions about this alert or if you would like our assistance in connection with this matter, please contact:

Robert T. Manicke at (503) 294-9664 or rtmanicke@stoel.com, or any of your Stoel Rives Tax attorneys.