Tax Intelligence: The Practice of “Payrolling” (Supplement)
Based on feedback received from employers regarding our October 2014 issue of Tax Intelligence on The Practice of “Payrolling,” we are issuing this supplement to provide additional insights into the practice. There appears to be some confusion, and rightfully so, among employers between illegal payrolling practices and legitimate services offered by temporary staffing firms and professional employer organizations (“PEOs”). A distinction must be made between the two, which is the primary focus of this supplement.
Payrolling, as generally defined by the U.S. Department of Labor (“DOL”) and state workforce agencies, involves situations whereby one employer reports the wages of another employer under its own state unemployment insurance (“SUI”) tax accounts. The same definition can be applied to other federal and state employment taxes as well. Although payrolling can impact all employment tax types, it is of particular concern to state workforce agencies because each employer is assigned a tax rate based on its own employees’ unemployment experience. Because altering the “employer of record” can significantly impact assigned SUI tax rates, payrolling arrangements that result in the improper payment of SUI tax may be unlawful.
This, of course, is not to suggest that there is anything improper with third-party arrangements as long as they adhere to applicable federal, state, and local employment tax laws. In our October 2014 issue of Tax Intelligence, we stated “[t]he common law employer is typically responsible for reporting, remitting, and calculating employment taxes under its own accounts.” While this statement is true, there are circumstances where an employer that is not the common law employer is permitted to report, remit, and calculate employment taxes. The following are examples:
- Statutory Employers. For federal employment tax purposes, “…if the person for whom the individual performs or performed the services does not have control of the payment of the wages for such services, the term ‘employer’ means the person having control of the payment of such wages…” [Internal Revenue Code §3401(d)(1)]. The “statutory employer” referenced in the foregoing federal statute relates to the organization responsible for reporting, withholding, and remitting federal employment taxes. It is still incumbent upon the statutory employer to determine the amount of tax to be reported and remitted based on the common law employer (typically the employer directing and controlling the workers day-to-day activities). For SUI tax purposes, however, the common law employer is typically the employer of record, with limited exceptions, as noted below.
- Professional Employer Organizations. For federal employment tax purposes, PEOs are generally considered statutory employers (or agents/fiduciaries acting on behalf of their clients). Although a PEO reports and remits federal employment taxes to the IRS, the amounts being reported and remitted are calculated based on the common law employer (i.e., each client of the PEO). For SUI tax purposes, however, each state has its own statutory requirement. The provisions vary widely. Some states deem the PEO to be the employer for SUI tax purposes; other states deem each client of the PEO to be the employer; while others allow the PEO to elect. It is therefore important to seek expert guidance on how the SUI tax provisions apply in each state.
- Temporary Staffing Firms. For both federal and state employment tax purposes (except in Alaska where staffing firms are not recognized as employers for SUI tax purposes), temporary staffing firms are recognized as the common law employer because of the nature and extent of the services provided to their clients (e.g., recruitment and placement services).
As long as an employment arrangement involves services other than just the reporting, remittance, and calculation of wages and taxes under their own accounts, the arrangement should pass muster with the taxing jurisdictions. Without the provision of additional services (e.g., recruitment, placement, co-employment, etc.), the service providers may be deemed nothing more than payroll administrators, which are required to report wages and taxes under the employment tax accounts of their common law employer clients, not their own accounts.
Organizations that use the term “payrolling” to advertise and market their services should understand that such designation may bring added scrutiny from taxing jurisdictions to ensure that they are operating in compliance with applicable laws, especially in the area of SUI taxation. For more information, please contact Pete Krieshok at (314) 214-7325 or via e-mail at email@example.com. You can also visit our corporate blog at https://insight.equifax.com/ for information on other employment tax matters that might impact your organization.
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