Final Rules Permit Agents to Withhold FUTA for Home Care Service Recipients

The IRS on Wednesday issued final regulations permitting an agent authorized by the IRS under Sec. 3504 to perform certain acts normally required of employers to withhold Federal Unemployment Tax Act (FUTA) taxes owed by home care service recipients (T.D. 9649). Under prior regulations, agents that paid wages to home health care workers were permitted to withhold income, Federal Insurance Contributions Act (FICA), and Railroad Retirement Tax Act taxes, but not FUTA taxes.

Recipients of home care services are usually elderly or physically or mentally disabled, but they are nonetheless considered to be the employer of their home health care aides, with the result that they are responsible for withholding employment taxes from the aides’ wages, even though the wages are paid in whole or in part by a government agency. The rules finalized today fully relieve the recipients of this burden.

These rules adopt with a few minor changes proposed regulations issued in 2010 (REG-137036-08). A number of the comments on the proposed regulations were concerned with different procedural issues beyond the regulations’ scope, which the IRS addressed in a revenue procedure also released on Wednesday (Rev. Proc. 2013-39). The revenue procedure updates the rules that apply to authorize a person to act as a service recipients’ agent.

Most of the comments on the proposed rules were addressed by further explanation in the preamble to the final regulations. One clarification was to the rules to qualify as a home care recipient. Because these rules require recipients to receive federal, state, or local government funds to pay for these services in whole or in part, the preamble clarified that a service recipient could pay for the services out of his or her own pocket, but must be reimbursed in whole or in part to qualify under the rules.

The only change made in response to comments was to the definition of home care services, which were proposed to include health care and personal attendant care services rendered in the recipient’s home or local community. The regulations are intended to apply to services provided in the recipient’s home as well as to services provided outside the home, without any geographical limitation. Therefore, the final regulations eliminate the phrase, “rendered in the home care service recipient’s home or local community.”

The rules will be published as final in the Federal Register on Dec. 12 and apply to wages paid on or after Jan. 1, 2014. Agents that have a valid authorization in effect do not have to file another application to be authorized to collect FUTA tax.