Standards Clarifying When Federal Employment Taxes Are Paid By Employee Leasing Companies Or By The Employer
California’s employers as well as employers throughout the U.S. are required to withhold and pay Federal employment taxes (consisting of Federal Insurance Contribution Act –FICA- taxes and Federal Unemployment Tax Act –FUTA- taxes with respect to wages paid to their employees.
The one determined to be the employer under a multi-factor common law test or under specific statutory provisions generally has the obligation for Federal employment taxes. For example, a third party that is not the common law employer can be a statutory employer if the third party has control over the payment of wages.
In addition, certain designated agents who prepare and file employment tax returns using their own name and employer identification number are jointly and severally liable with their principals for employment taxes with respect to wages paid to the principals’ employees.
In comparison, reporting agents who prepare and file employment tax returns for their clients using the client’s name and employer identification number payroll service providers acting are usually not liable for the employment taxes reported on their clients’ returns.
Employee leasing companies often prepare and file employment tax returns for their clients using the leasing company’s employer identification number and name, often taking the position that the leasing company is the statutory or common law employer of their clients’ workers. Employee leasing is the practice of contracting with an outside business to handle certain administrative, personnel, and payroll matters for a taxpayer’s employees. Some employers use leasing companies to avoid employment taxes.
Reasons for Change
Is the employee leasing company or its client is liable for unpaid Federal employment taxes arising with respect to wages paid to the client’s workers? When an employee leasing company files employment tax returns using its own name and employer identification number, or when no returns are filed with respect to wages paid by a taxpayer that uses an employee leasing company or when no one pays the taxes due, there can be uncertainty as to how the Federal employment taxes are assessed and collected. Providing standards for when an employee leasing company and its clients will be held liable for Federal employment taxes will facilitate the assessment, payment and collection of those taxes and will preclude taxpayers who have control over withholding and payment of those taxes from denying liability when the taxes are not paid.
The new budget proposal provides standards for holding employee leasing companies jointly and severally liable with their clients for Federal employment taxes. The proposal would also provide standards for holding employee leasing companies solely liable for such taxes if they meet specified requirements. The provision would be effective for employment tax returns required to be filed with respect to wages paid after December 31, 2011.