T.D. 9768, “Certified Professional Employer Organizations; Final and Temporary Regulations.”
Proposed Regs [REG-127561-15], “Certified Professional Employer Organizations; Notice of Proposed Rulemaking and Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations.”
IRS has issued final and temporary regs implementing a new voluntary certification program for professional employer organizations (PEOs), which was authorized by the Tax Increase Prevention Act of 2014 (TIPA). Among other things, the regs explain the requirements a person must satisfy in order to become and remain a certified PEO. IRS has also issued proposed regs that set forth the Federal employment tax liabilities and other obligations of persons certified by the IRS as certified PEOs. And, in an accompanying news release, IRS announced that the application process will open on July 1 and that forthcoming guidance will be issued explaining that process.
Background. Small businesses often contract with PEOs, also known as employee leasing companies, to ensure compliance with workplace laws and regulations. In the typical contract, the PEO computes the FICA, withholding tax, worker’s compensation, and 401(k) contributions of each employee and bills the client for the amount. The contract requires the PEO to pay the employees and make the clients’ tax deposits. Some PEOs file their client companies’ employment tax returns under the PEO’s name and list the PEO as the employer of the client companies’ employees.
Under pre-TIPA law, when a business contracted with a PEO to administer its payroll functions, the business customer remained responsible for all withholding taxes with respect to its employees. Thus, even though the PEO paid the employees, the customer remained liable if the PEO failed to withhold or remit the taxes or otherwise comply with related reporting requirements.
Effective for wages for services performed on or after Jan. 1, 2016, Code Sec. 3511, TIPA, allows a “certified PEO” to be treated as the sole employer of the employees.
A certified PEO is an organization that has been certified by the IRS as meeting certain requirements, which are intended to ensure that the PEO properly remits wages and employment taxes. As part of the certification program, which is voluntary, TIPA requires IRS to:
- Complete background, credit, and tax compliance checks of PEOs;
- Verify that the PEO has an active and approved surety bond;
- Verify that the PEO satisfies the service agreement and financial review requirements (including the requirement to submit audited financial statements);
- Collect a user fee of $1,000; and
- Provide public disclosure of certified PEOs and certified PEOs whose certification has been suspended or revoked.
The certification was initially required under TIPA to be established by July 1, 2015, but IRS needed additional time to set it up and delayed the date that it would begin accepting applications for PEO certification until July 1, 2016.
New regs issued. IRS has issued final, temporary, and proposed regs on the voluntary certification program for PEOs.
The regs, which will affect persons that apply to be certified PEOs and are certified by IRS as meeting the applicable requirements, will be covered in greater detail in a forthcoming article.
Application guidance coming soon. IRS also indicated that a revenue procedure detailing the application process will be released in the next few weeks.