In May, the IRS issued temporary regulations to implement a new voluntary certification program for professional employer organizations (PEOs). The IRS will begin accepting applications on July 1. The IRS also issued proposed regulations that would not only adopt the temporary regulations but also would contain separate provisions governing employment tax obligations of certified PEOs (CPEOS). On June 3, the IRS released Revenue Procedure 2016-33, which provides further details on the certification program.
PEOs, sometimes referred to as employee leasing companies, enter into agreements with their clients to perform some or all of the federal employment tax withholding, reporting, and payment functions related to workers performing services for the client. The terms of a PEO arrangement typically provide that the PEO is the employer (or "coemployer") of its client’s employees. The PEO is responsible for paying these employees and for the related federal employment tax compliance. These employees are still the common law employees of the client for federal tax purposes, and the client is therefore legally responsible for federal employment tax compliance.
The Tax Increase Prevention Act of 2014 (TIPA, Pub. L. No. 113-295) added §3511 and §7705 to the Internal Revenue Code to allow PEOs to elect to be treated as the employer of its clients’ employees for employment tax purposes. TIPA required the program to be in place by July 1, 2015, but the IRS needed additional time to develop the procedures to implement the program.
Regulations and Revenue Procedures
The temporary regulations, along with Revenue Procedure 2016-33, define terms, outline the application procedures, and establish the requirements a PEO must satisfy to become certified. Generally, a PEO applicant must:
- Submit a complete online application, including the required forms and documentation. A paper application will not be accepted.
- Pay a non-returnable $1,000 user-fee upon submission of the application.
- Provide a letter stating that a surety bond will be issued. Once the application is accepted, the CPEO has 30 days to submit Form 14751 to indicate that the bond has been issued.
- Submit annual financial statements.
- Submit an opinion letter from a CPA stating that the PEO’s financial statements are in accordance with generally accepted accounting principles and reflect positive working capital (or meet the exception for a CPEO that experiences fluctuating capital).
- Submit quarterly attestations that it has withheld and made deposits of all federal employment taxes for which it is liable.
The IRS will inform applicants once they have been accepted. If the application is not accepted, the IRS will issue a notice of proposed denial that offers applicants an opportunity to request a review of the denial or, in certain situations, will issue a notice of final denial. If accepted, the effective date of the certification is generally the first day of the first calendar quarter following the notice of certification. However, the effective date of certification for a CPEO applicant that submits a complete and accurate application before September 1, 2016, and is certified, will be January 1, 2017, even if the date of its notice of certification is after January 1, 2017.
For a detailed description of the temporary and proposed regulations, see PAYROLL CURRENTLY, Issue No. 6, Vol. 24. Additional information about the CPEO application process, outlined in the recent IRS revenue ruling, will appear in the July edition of PAYROLL CURRENTLY.