Obama 2011 Budget - Potential Impacts for Employers and PEOs

Commentary from StaffMarket Services - February 2010

Obamas Budget Proposal for 2011 contains major items for employers and PEOs. If the 2011 budget gets approved as proposed, PEOs will need to expand their offering to assist business owners with significant changes to their employment and accounting practices. Employer related subjects will include the following areas.

Employee Leasing

Provisions have been proposed that hold employee leasing companies joint and severally liable with their clients for federal employment taxes starting with wages paid after December 31, 2010. Standards would also be provided for holding employee leasing companies solely liable for such taxes if they meet specified requirements.

Per the General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals: Page 105

IMPLEMENT STANDARDS CLARIFYING WHEN EMPLOYEE LEASING COMPANIES CAN BE HELD LIABLE FOR THEIR CLIENTS’ FEDERAL EMPLOYMENT TAXES

Current Law
Employers are required to withhold and pay Federal Insurance Contribution Act (FICA) taxes and to withhold and remit income taxes, and are required to pay Federal Unemployment Tax Act (FUTA) taxes (collectively “Federal employment taxes”) with respect to wages paid to their employees. Liability for Federal employment taxes generally lies with the taxpayer that is determined to be the employer under a multi-factor common law test or under specific statutory provisions. For example, a third party that is not the common law employer can be a statutory employer if the third party has control over the payment of wages. In addition, certain designated agents are jointly and severally liable with their principals for employment taxes with respect to wages paid to the principals’ employees. These designated agents prepare and file employment tax returns using their own name and employer identification number. In contrast, reporting agents (often referred to as payroll service providers) are generally not liable for the employment taxes reported on their clients’ returns. Reporting agents prepare and file employment tax returns for their clients using the client’s name and employer identification number.

Employee leasing is the practice of contracting with an outside business to handle certain administrative, personnel, and payroll matters for a taxpayer’s employees. Employee leasing companies (often referred to as professional employer organizations) typically prepare and file employment tax returns for their clients using the leasing company’s name and employer identification number, often taking the position that the leasing company is the statutory or common law employer of their clients’ workers.

Reasons for Change
Under present law, there is often uncertainty as to whether the employee leasing company or its client is liable for unpaid Federal employment taxes arising with respect to wages paid to the client’s workers. Thus, when an employee leasing company files employment tax returns using its own name and employer identification number, but fails to pay some or all of the taxes due, or when no returns are filed with respect to wages paid by a taxpayer that uses an employee leasing company, there can be uncertainty as to how the Federal employment taxes are assessed and collected. Providing standards for when an employee leasing company and its clients will be held liable for Federal employment taxes will facilitate the assessment, payment and collection of those taxes and will preclude taxpayers who have control over withholding and payment of those taxes from denying liability when the taxes are not paid.

Proposal
The proposal would set forth standards for holding employee leasing companies jointly and severally liable with their clients for Federal employment taxes. The proposal would also provide standards for holding employee leasing companies solely liable for such taxes if they meet specified requirements. The provision would be effective for employment tax returns required to be filed with respect to wages paid after December 31, 2010.

Potential Impacts for Employers
None anticipated
Potential Impacts for PEOs
This provision will need further definition of the terms for “specified requirements”.

Reference Links
http://www.treas.gov/offices/tax-policy/library/greenbk10.pdf (Page 105)
http://www.irs.gov/pub/irs-pdf/n1036.pdf
http://www.irs.gov/newsroom/article/0,,id=204447,00.html
http://www.irs.gov/newsroom/article/0,,id=204521,00.html
 

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