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Final regulations: Certified professional employer organizations (employee leasing companies)

Certified professional employer organizations

The U.S. Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9860) concerning the requirements for a certification program for professional employer organizations—“certified professional employer organizations” or CPEOs.

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With these final regulations [PDF 376 KB], regulations that were proposed in May 2016 are finalized, and corresponding temporary regulations are withdrawn. The final regulations are scheduled to be published in the Federal Register on May 28, 2019.

Background

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 situations, 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.

Legislation enacted in 2014 included a mandate for Treasury and the IRS to establish a voluntary certification program for PEOs. Accordingly, Treasury and the IRS in 2016 issued proposed and temporary regulations relating to a certified PEO program.

Also in 2016, the IRS issued Rev. Proc. 2016-33 that listed in detail the procedures for applying for a CPEO. In response to that revenue procedure, the IRS and Treasury received comments that concerned the proposed and temporary regulations as well as Rev. Proc. 2016-33. To address these comments, the IRS issued Notice 2016-49 that provided interim guidance and that described changes to some of the CPEO certification requirements.

Lastly, the IRS issued Rev. Proc. 2017-14 to address the requirements for a CPEO to remain certified and the procedures relating to the suspension and revocation of CPEO certification.

The preamble to today’s final regulations states that the IRS has certified 120 CPEOs, to date.

Final regulations

The preamble to the final regulations reports that seven written comments were received in response to the proposed and temporary regulations. Comments were also received with regard to certain IRS forms related to CPEO procedures—topics beyond the scope of the regulations.

The final regulations reflect that the credit under section 45S for the recently enacted employer credit for paid family and medical leave is added to the list of specified credits in the regulations.

As noted in the preamble, the final regulations also reflect that for purposes of the employee retention credit, qualified wages paid by a CPEO to eligible employees of an eligible employer are considered qualified wages incurred by the eligible employer. The employee retention credit for disaster relief is substantially similar to the credit provided for in section 1400R (employee retention credit for employers affected by Hurricane Katrina). The final regulations add statutory employee retention credits that are similar to the employee retention credits in section 1400R and that provide disaster relief to employers in designated disaster areas.

Among the comments received and rejected or otherwise addressed in today’s final regulations are those concerning:

  • The annual wage base and withholding threshold rules for covered employees
  • A customer-by-customer treatment of the annual wage base
  • Reliance by the CPEO on a wage report provided by the customer
  • The treatment of tax credits under section 3511(d) with respect to non-work site covered employees
  • Reporting of payments by CPEOs to self-employed individuals

The final regulations generally retain the reporting requirements as provided in the 2016 proposed regulations.

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