Alvarez & Marsal, Taxand USA, provides a breakdown of PEO employment tax compliance.
In Chief Counsel Advice Memorandum 201724025, the IRS considered an employer’s liability for employment taxes where the staffing agency that provided employees to the employer failed to pay the taxes.
The employer/taxpayer entered into a contract with a professional employer organisation (PEO) to staff its workforce. Under the agreement, the taxpayer assumed the responsibility for the day-to-day supervision and control of the employees. The taxpayer was also required to deposit, one day prior to each payroll date, an amount equal to all wages, salaries and other amounts to be paid to or with respect to the employees. The PEO was obligated to administer the payroll and to file all payroll tax returns.
As is typical in the industry, the PEO contract stated that the workers were “co-employees” of the PEO and taxpayer. However, the taxpayer did not dispute that the workers were its common-law employees.
In the years at issue, the taxpayer did not file any employment tax returns because the PEO was responsible for administering the payroll and filing the returns. On audit, the taxpayer learned that the PEO, in fact, had not filed the employment tax returns, nor had it paid the related taxes. The taxpayer asserted, however, that it should not be liable for the taxes because it had paid the taxes over to the PEO, which was responsible for paying them over to the government.
If your company is party to a contract with a PEO covering any portion of your workforce, a review of the PEO agreements for terms and conditions similar to those at issue in this ruling is warranted. Even if the agreements do not contain such terms, the company should nevertheless require periodic documentation from the PEO to verify that the employment tax returns have been filed and the related taxes paid.