The Treasury Department and IRS today released for publication in the Federal Register temporary regulations (T.D. 9768) and, by cross-reference, proposed regulations (REG-127561-15) concerning the requirements for a certification program for professional employer organizations—“certified professional employer organizations” or CPEOs.
The regulations will be published in the Federal Register on May 6, 2016. Comments and requests for a public hearing concerning the proposed regulations must be received by a date that is 90 days after May 6, 2016.
The preamble to the regulations explains that a professional employer organization (PEO)—sometimes referred to as an employee leasing company—enters into an agreement with a client 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 “co-employer”) of the client’s employees and is responsible for paying the employees and for the related federal employment tax compliance.
A PEO also may manage human resources, employee benefits, workers compensation claims, and unemployment insurance claims for the client. The client typically pays the PEO a fee based on payroll costs plus an additional amount. In most cases, however, the employees working in the client’s business are the common law employees of the client for federal tax purposes, and the client is therefore legally responsible for federal employment tax compliance.
As noted in a related IRS release [PDF 18 KB], the temporary and proposed regulations implement a new voluntary certification program for professional employer organizations (PEOs).
The regulations implement the 2014 legislative mandate requiring the IRS to establish a voluntary certification program for these organizations. To become and remain certified under the new program, PEOs must meet tax status, background, experience, business location, financial reporting, bonding and other requirements described in the regulations. The application process will open on July 1, 2016.
The IRS release also states that a revenue procedure further detailing the application process will be released “in coming weeks” and that the IRS will publish lists of CPEOs and those whose certification has been revoked or suspended.
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