The IRS finalized regulations governing certified professional employer organizations (CPEOs), which allow employee leasing companies and other professional employer organizations to be solely liable for payroll taxes on wages they pay to their customers’ employees (T.D. 9860). The rules allow a CPEO to, in effect, be the employer for employment tax and payroll obligations, while the customer provides direction to and control over the employees and remains the common law employer for other purposes.
CPEOs were created by the Tax Increase Prevention Act of 2014, P.L. 113-295, which added new Secs. 3511 and 7705 that contain certification requirements for, and the federal employment tax consequences of, being a CPEO.
Sec. 7705(a) defines a CPEO as a person who applies to be treated as a CPEO for Sec. 3511 purposes and whom the IRS has certified as meeting the Sec. 7705(b) requirements, which include tax status and background requirements, and satisfying certain bond, financial review, and quarterly reporting requirements in Sec. 7705(c). The CPEO must also notify the IRS of any change that materially affects the continuing accuracy of information the CPEO provides.
Sec. 7705(d) authorizes the IRS to suspend or revoke the certification of any person for Sec. 3511 purposes if the IRS determines that the person is not satisfying the agreements or requirements of Sec. 7705(b) or (c), or fails to satisfy the accounting, reporting, payment, or deposit requirements.
Under Sec. 7705(f), the IRS must make available to the public the name and address of each person certified as a CPEO and each person whose certification is suspended or revoked.
Under Secs. 3511(a)(1) and (c)(1), for purposes of federal employment taxes and other obligations under the federal employment tax rules, a CPEO is generally treated as the employer of any individual performing services for a customer of the CPEO and covered by a contract meeting the requirements of Sec. 7705(e)(2) (the CPEO contract) between the CPEO and the customer, but only with respect to remuneration remitted to the employee by the CPEO.
With respect to an individual covered by a CPEO contract who performs services for a customer at a work site that meets the coverage requirements of Sec. 7705(e)(3) (a work site employee), Sec. 3511(a)(1) specifies that no person other than the CPEO is treated as the employer for federal employment tax purposes with respect to remuneration remitted by the CPEO to that individual.
On May 6, 2016, the IRS issued final and temporary regulations governing the process of applying for and remaining a CPEO under Sec. 7705 (T.D. 9768, as corrected July 12, 2016, at 81 Fed. Reg. 45012) and also issued proposed regulations (REG-127561-15) under Sec. 3511 that explain the federal employment tax consequences for CPEOs and their customers. In addition, the IRS has issued a number of revenue procedures providing interim guidance on the CPEO program.
The just-issued regulations finalize the proposed Sec. 3511 regulations. The IRS received seven comments on the proposed regulations. The only comment that was adopted was a suggestion that the Sec. 45S credit for paid family and medical leave be added to the list of specified credits in the regulations, and specifically provide that the CPEO’s customer, not the CPEO, is permitted to take the credit.
Most of the other comments address how to apply the maximum wage base for Federal Insurance Contributions Act taxes when an employee is paid wages by a CPEO. The IRS explained that because Sec. 3511 treats a CPEO as an employer separate and apart from the CPEO’s customer for whom the employees are performing services, employees receiving remuneration from both the CPEO and the CPEO’s customer in a calendar year must be treated as receiving remuneration from two different employers, and the annual wage base therefore applies separately, unless the Sec. 3511(b) successor and predecessor rules apply. If an employee performs services for multiple customers of a CPEO, the annual wage base is applied on a customer-by-customer basis.
The rules also address how to apply the Federal Unemployment Tax Act taxes in the CPEO context.
The rules are effective the date they are published as final in the Federal Register (they are scheduled to be published May 28, 2019).
— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.