Employee Leasing Companies May Become Singularly Liable for Wages Based Taxes

Bush 2009 Budget - Employee Leasing Provisions

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (P.L. 107-16) has some provisions that sunset on December 31, 2010. In President Bush's proposed 2009 budget, these provisions would be permanently extended. Also, provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) (P.L. 108-27) set to automatically expire on December 31, 2010, would also be permanently extended.

Employee Leasing Companies and Professional Employer Organization Provisions

Standards would be established that make employee leasing companies jointly and severally liable with their clients for federal employment taxes. On or after January 1, 2009, standards for holding employee leasing companies solely liable for such taxes would also be provided for employment tax returns required to be filed for wages paid.

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) and 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
Under the proposal, standards would be set forth 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 on or after January 1, 2008.

For more information see page 73 of the Department of Treasury Employee Leasing Provisions

Federal Unemployment Tax Surtax - FUTA surtax

The proposals will extend the 0.2% percent FUTA surtax through December 31, 2009.

IRS Access to National New-hire directory

The Social Security Act would be amended to expand IRS access to National Directory of New Hires (NDNH) data for general tax administration purposes including : Data matching, Verification of taxpayer claims during return processing, Preparation of substitute returns for non-compliant taxpayers, Identification of levy sources. Once enacted, information obtained by the IRS from the NDNH would be protected by existing taxpayer privacy law, including civil and criminal sanctions. Employers would be required to new hire start dates to the NDNH for all new hires

Health coverage reporting

Under the new rules, employers providing health coverage to employees would be required to report value of the health coverage on the Form W-2 provided to employees. Coverage under multiple plans requires the employer to report the aggregate value (excluding the value of a Flexible Spending Arrangement - FSA). Thus, an employee receiving coverage under a major medical plan, a dental plan, and a vision plan would only have the total amount reported. Contributions to Archer Medical Savings Accounts and Healthcare Savings Accounts, which are already separately reported, would not be included in the amount reported as health coverage.

Unemployment insurance - SUTA

Incentives would be increased for the recovery of state unemployment benefit overpayments and delinquent employer taxes. This proposal allows states to redirect up to 5% of overpayment recoveries to additional enforcement activity. States would be required to impose a penalty of at least 15% on recipients of fraudulent overpayments, and penalty revenue would be used exclusively for additional enforcement activity. States would be prohibited from relieving an employer of benefit charges due to a benefit overpayment if the employer had caused the overpayment. In certain circumstances relating to fraudulent overpayment of delinquent employer taxes, states would be allowed to permit private collection agencies to retain a portion (up to 25%) of any amounts collected. States would be allowed to deposit up to 5% of moneys recovered in the course of an unemployment insurance tax investigation into a special fund dedicated to implementing the State Unemployment Tax Act (SUTA) Dumping Prevention Act of 2004 or enforcing state laws relating to employer fraud or tax evasion.

Employer-based pensions

Three types of current IRAs would be consolidated into a single account called a Retirement Savings Account (RSA). RSAs would be dedicated solely to retirement savings. Other withdrawals would be subject to tax and penalties, effective January 1, 2007. Defined-contribution accounts that permit employee deferrals or employee after-tax contributions, including Code Sec. 401(k), SIMPLE 401(k), Thrift, Code Sec. 403(b), and governmental Code Sec. 457(b) plans, as well as SIMPLE IRAs and SARSEPs, would be consolidated into Employer Retirement Savings Accounts (ERSAs), available to all employers and have simplified qualification requirements, effective for years beginning after December 31, 2008. ERSAs would follow the existing rules for Code Sec. 401(k) plans, subject to the plan qualification simplifications described below. Thus, employees could defer wages of up to $15,500 (as adjusted for inflation) annually, with employees aged 50 and older able to defer an additional $5,000 (as adjusted for inflation). The maximum total contribution (including employer contributions) to ERSAs would be the lesser of 100% of compensation or $46,000 (as adjusted for inflation). The taxability of contributions and distributions from an ERSA would be the same as contributions and distributions from the plans that the ERSA would be replacing. Thus, contributions could be pre-tax deferrals or after-tax employee contributions or Roth contributions, depending on the design of the plan. Distributions of Roth and non-Roth after-tax employee contributions and qualified distributions of earnings on Roth contributions would not be included in income. All other distributions would be included in the participants’ income. Existing Code Sec. 401(k) and Thrift plans would be renamed ERSAs and could continue to operate as before, subject to the simplification described below. Existing SIMPLE 401(k) plans, SIMPLE IRAs, SARSEPs, 403(b) plans, and governmental 457(b) plans could be renamed ERSAs and be subject to ERSA rules, or could continue to be held separately, but if held separately could not accept any new contributions after December 31, 2009, with a special transition for collectively bargained plans and plans sponsored by state and local governments.






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