If your firm uses a payroll service provider, professional employer organization or an employee leasing company, you’ll want to take note of proposed regulations (REG-102966-10) issued by the IRS late last month. They focus on the liability of these agents when it comes to submitting employment taxes on behalf of their client companies.
As the regulations note, employers generally are the ones required to deduct and withhold federal income, FICA and FUTA taxes. (These obligations may vary slightly for railroad employees.) However, some employers use third parties to pay their employees and handle their employment tax withholding, reporting and payment obligations.
As the summary information in the proposal states, “employment tax liability cannot be altered by private agreement between an employer and a third-party payer.” However, the proposed regulations state that a payer can be designated as an agent of an employer when it comes to employment taxes, when they’ve entered into a written or oral agreement to perform the employer’s employment tax obligation. The agreement refers to one in which the payer asserts it is the employer or co-employer of individuals performing services for the client; compensates the individuals for services they performed for the company; and assumes responsibility to collect, report and pay employment taxes.
One exception to the designation of the third-party payer as agent occurs when the payer is filing employment taxes for the employer under the employer’s EIN. So, a reporting agent or PSP that prepares returns using the employer’s EIN isn’t covered under the proposal.
The designation of a payer as an agent required to perform acts of an employer is provided solely to determine liability for employment taxes under IRS Code Section 3504, as this summary of the proposal from KPMG points out. That is, it can’t be inferred that the same rules would apply for other Code provisions.
In addition, when a payer is designated as an agent to perform the acts of an employer, all provisions of law (including penalties) applicable with respect to an employer are applicable to that payer, KPMG notes.
The IRS is seeking comments on its proposal. Specifically, it would like input on several issues, including whether the application of the definition of service agreement inappropriately results in a payer being designated an agent under section 3504, or inappropriately results in a payer failing to be designated an agent under section 3504; and whether additional exceptions are warranted.
Comments are due by April 29, 2013. More information on submitting comments is available in the Federal Register.
The final regulations would be effective once they are published in the Federal Register.
Companies that use third-party payroll providers need to choose them wisely, of course. This blog post from Employment Tax Specialists offers guidelines to follow when selecting third-party providers.