CPEOs provide peace of mind around payroll services

Transcription

1 CPEOs provide peace of mind around payroll services The creation of these new IRS-certified service providers for small businesses clarifies some issues around traditional professional employer organizations. IMAGES BY OZALP/ISTOCK Sponsored by Bloomberg BNA AccountantsWorld Paychex ADP

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3 SPONSORED REPORT On June 1, 2017, the IRS approved 84 RUJDQL]DWLRQVDV&HUWLÀHG3URIHVVLRQ- DO(PSOR\HU2UJDQL]DWLRQV&3(2V WKHÀUVWJURXSHYHUWREHVRFHUWLÀHG$&3(2 LVDVSHFLDOW\SHRISURIHVVLRQDOHPSOR\HU RUJDQL]DWLRQ3(23(2VDOORZEXVLQHVVHV WRRXWVRXUFHWKHLUSD\UROOWD[DQGRWKHUWD[ UHVSRQVLELOLWLHVDVZHOODVRWKHUREOLJDWLRQV LQFOXGLQJSD\LQJZDJHVDQGSURYLGLQJ)RUPV W-2, Wage and Tax Statement7KHFOLHQW EXVLQHVVNHHSVGD\WRGD\VXSHUYLVLRQRI HPSOR\HHV PEOs, which are sometimes referred to as employee leasing companies, are favored by businesses that do not have the expertise necessary to manage payroll, taxes, benefits, and/or hiring or to navigate compliance with laws such as the Fair Labor Standards Act and the Family and Medical Leave Act. In an era of escalating health, disability, and workers compensation insurance costs, many smaller companies view PEOs as economically attractive because PEOs representing many companies can capture the volume discounts given to larger organizations. Under legislation enacted in late 2014, the IRS established a voluntary certification program for PEOs. A PEO that becomes certified under this IRS program is referred to as a CPEO. The certification was welcomed by some as a means for providing more stability and confidence in the PEO marketplace. The CPEO rules lay to rest certain issues that have arisen with PEOs, giving businesses that use them more assurance that they will not be liable for employment taxes. TYPICAL TERMS OF A PEO The terms of a PEO arrangement typically provide that the PEO is the employer of a client s employees and is responsible for paying the employees and for the related employment tax compliance. The client typically pays the PEO a fee based on payroll costs plus an additional amount. PEOs may also provide employees with certain benefits coverage, such as a retirement plan or a health plan, even if the client does not maintain such a plan. In some cases, the employees provided by a PEO to work in a client s business are legally the employees of the client, and the client is legally responsible for employment tax compliance. In other cases, clients rely on the PEO for employment tax compliance and treat the employees as employees of the PEO. TAX ISSUES AND THE USE OF PEOs One of the more important issues involving the use of PEOs revolves around liability for employment taxes. For example, if a client pays its employment tax liability to a PEO for a pay period and the PEO doesn t pay those taxes to the IRS, who is liable to the IRS for the taxes and penalties due? Employment tax responsibility generally rests with the person who is the employer of an employee under a common law test that has been incorporated into regulations under Internal Revenue Code Secs. 3121, 3306, and Under the regulations, an employer-employee relationship generally exists if the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work, but also as to the details and means by which that result is accomplished (Rev. Rul ). Whether the requisite control exists is determined on the basis of all the relevant facts and circumstances. A PEO and a client company may be found jointly liable for employment taxes. A case in point is Total Employment Co., 305 B.R. 333 (M.D. Fla. 2004), in which an employee leasing company/peo filed for bankruptcy and argued that it was not the employer of the leased employees it provided to its clients and thus was not responsible for employment tax withholdings. According REQUIREMENTS TO BECOME A CPEO Fairly strict rules must be met for a PEO to become a CPEO. The PEO must: Q Demonstrate that it meets such requirements as the IRS establishes, including requirements relating to tax status, background, experience, business location, and annual financial audits; Q Agree to satisfy certain bond and financial review requirements (see the sidebar, Bond and Financial Requirements ); Q Agree to satisfy reporting requirements imposed by the IRS; Q Compute its taxable income using an accrual method of accounting unless the IRS approves another method; Q Agree to verify on such periodic basis as the IRS may prescribe that it continues to meet the certification requirements; and Q Agree to notify the IRS in writing of any change that materially affects the continuing accuracy of any agreement or information that was previously made or provided to the IRS in order to meet the certification requirements. journalofaccountancy.com September

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5 SPONSORED REPORT to the employee leasing company, the client companies were the statutory employers responsible for the unpaid employment taxes. The court held that, based on Florida law, the client company was the common law employer of the leased employees and the employee leasing company was the statutory employer. Both, the court said, were responsible for withholding tax from employee income and for collecting and paying payroll taxes. The court noted that In re Earthmovers, Inc., 199 B.R. 62 (Bankr. M.D. Fla.1996), involved a similar employee leasing situation, and that the court in that case concluded that the IRS could look to both the employee leasing company and the client company for the payment of payroll taxes, although it could collect only once. The court in that case called the companies co-employers of the workers. More recently, in Chief Counsel Advice , the IRS Chief Counsel s Office advised that a PEO that an S corporation contracted with to perform its employment tax obligations was not the statutory employer of the S corporation s employees because the PEO did not control payment of and had not assumed legal responsibility for the S corporation s employees wages. Thus, the S corporation was still responsible for the employment taxes even though it had paid them to the PEO and the PEO had failed to pay the taxes to the IRS. FICA AND FUTA Another problematic area for PEOs and their clients involves the ceiling on the annual wage base subject to Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes. The annual wage base applies on an employer-by-employer basis, and, thus, only wages received during any calendar year by an employee from the same employer are considered when applying the annual wage bases for purposes of the wages paid by that employer. If during a calendar year the employee receives wages from more than one employer, generally, both the annual wage base and withholding threshold apply separately to the wages that the employee received during that calendar year from each employer. Consequently, if an employee works for multiple employers during a year, a separate annual wage base and withholding threshold generally applies in determining each employer s tax liability with respect to wages paid to the employee. However, if during any calendar year an employer (the successor employer ) acquires substantially all of the property used in a trade or business of another employer (the predecessor employer ), then, for purposes of the annual wage base, any wages with respect to employment paid to an employee by the predecessor employer during the calendar year and prior to the acquisition is considered as having been paid by the successor employer if certain rules are met. As a result, there is no restart of the annual wage base for payroll tax purposes by the successor employer. Still another tax matter confronting PEOs and their client companies is the issue of who is entitled to tax credits that are based on wages or based on taxes paid with respect to an employee. For example, the amount of an employer s work opportunity tax credit is based journalofaccountancy.com September

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7 SPONSORED REPORT BOND AND FINANCIAL REQUIREMENTS With respect to the bond and financial review standards, the following requirements must be satisfied: Q The CPEO must post a bond for the payment of federal employment taxes that is in an amount at least equal to the greater of 5% of the CPEO s liability in the preceding calendar year (but not more than $1,000,000) or $50,000. Q The CPEO must provide the IRS with its audited financial statement prepared by an independent CPA in accordance with GAAP. Q The CPEO must provide to the IRS an assertion that the CPEO has withheld and made deposits of all applicable federal employment taxes, an examination-level attestation from an independent CPA that states this assertion is fairly stated in all material respects, and a statement verifying the CPEO has positive working capital. on a portion of FUTA wages paid by the employer to employees who are members of certain targeted groups. In addition, the credit for employer FICA taxes paid on tips is based on the employer s share of FICA taxes paid with respect to cash tips treated as wages for FICA purposes. ADVANTAGES OF A CPEO The advantage of a CPEO is that it clarifies the tax treatment of the issues discussed here. When a PEO has obtained CPEO status, only the CPEO not the client will be liable for federal employment taxes on wages it pays to its clients employees. This means the IRS cannot come knocking on the door of a CPEO s client looking for unpaid employment taxes. On entering into a CPEO contract with a client with respect to an employee, the CPEO is treated as a successor employer and the client is treated as a predecessor employer during the term of the CPEO contract. On termination of the CPEO contract, the client is treated as a successor employer and the CPEO is treated as a predecessor employer. This means that the taxable wage base does not restart for FICA and FUTA purposes. In addition, any specified credit with respect to an employee performing services for a client company belongs to the client company, not to the CPEO. Consequently, in determining the amount of a credit, the client, and not the CPEO, takes into account wages and federal employment taxes paid by the CPEO with respect to the employee and for which the CPEO receives payment from the client. However, a CPEO must maintain a separate annual wage base and withholding threshold with respect to each client company for which a covered employee performs services during a calendar year. Consequently, in the case of an employee performing services for more than one client of a CPEO during a calendar year, each client for which the employee performs services takes into account wages and federal employment taxes paid by the CPEO only with respect to services performed by the employee for that client in determining the treatment of credits by that client. 7KH&3(2SURYLVLRQVGRQRWDSSO\LQWKHFDVHRID FOLHQWZKRLVUHODWHGWRWKH&3(2 While the requirements to become a CPEO are quite rigid (see the sidebars Requirements to Become a CPEO and Bond and Financial Requirements ) and using a CPEO may be more expensive than using a PEO, the peace of mind a CPEO can offer definitely makes it worth considering. Q journalofaccountancy.com September

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