IRS Contemplates New Rules For Employment Tax ‘Agent’

Calculator Keyboard The Internal Revenue Service recently announced a set of new proposed regulations regarding the circumstances in which third parties may be come become liable for paying an employer’s employment taxes. The IRS has requested comments on these new regulations, with that period running through April 29, 2013.

The new regulations the IRS proposed relate to employment taxes, including Federal Insurance Contributions Act (FICA) taxes, Federal Unemployment Tax Act (FUTA) taxes, and Railroad Retirement Tax Act (RRTA), and employers who use third party entities to handle their payroll. In general, the person or entity for which the worker performs his/her work is the “employer” for purposes of handling employment tax issue.

However, under Section 3401(d)(1) that status shifts if the employer retains a third party and hands over total legal control for payment of wages to that third party. In those situations, the third party becomes the employer for purposed of Section 3401 and is solely responsible for all employment tax withholding, reporting and payment responsibilities. If the employer retains any degree of control over the payment of wages, then the third party does not take on statutory employer status and does not become responsible for employment tax matters.

This sort of arrangement, where an employer cedes complete control to a third party, is relatively less common. What occurs more commonly, and what the newly proposed regulations intend to address, are situations where employers retains the services of a payroll service provider, professional employer organization or an employee leasing agency. The new proposed regulations would allow employers, in the absence of special circumstances, to designate a third party as its agent under Sec. 3504. The third party would become legally liable for carrying out all duties required of an employer regarding wages and employment taxes. If the new regulations take effect, the IRS said that it would attempt to recover unpaid employment taxes and penalties from the third party or the employer, but not both, the Journal of Accountancy reported. This designation of an agent would occur through the employer and third party signing a service agreement, which the proposed regulations define as an arrangement, entered into by the employer and the third party, where the third party claims that “(1) it is the employer (or “co-employer”) of the individuals performing services for the employer; (2) pays wages or compensation to the individuals; and (3) assumes responsibility to collect, report, and pay, or assumes liability for, any employment taxes applicable for wages or compensation the payer pays to the individuals performing services for the employer.”

Business people face a wide range of responsibilities, including those related to tax reporting and payment. These rules can be extremely complex and change periodically. To make sure your business is in compliance with all federal and state tax rules, consult the experienced tax attorneys at Samuel C. Berger, P.C. and CPAs at S.C. Berger, P.C., who have years of experience helping business people throughout New York and New Jersey. To consult our attorneys and CPAs, contact us online or call (201) 587-1500 or (212) 380-8117.

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