Final regulations - Payor designated to perform acts required of an employer 

March 28: The Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9662) addressing circumstances when an employer can designate a payor to perform the acts required of the employer (client) in cases when the parties enter into a service agreement.

For this purpose, a service agreement means a written or oral agreement in which the payor asserts it is the employer (or “co-employer”) of individuals performing services for the client; pays wages to such individuals; and assumes responsibility to collect, report, and pay, or assumes liability for, any employment taxes with respect to the wages paid.


These regulations address arrangements with a professional employer organization (PEO) and certain other third-party payors.

Final regulations

Today’s final regulations [PDF 33 KB] provide that a payor may implicitly or explicitly assert it is the employer—which would include agreeing to: (1) recruit and hire employees for the client; (2) hire the client’s employees as its own and then provide them back to the client to perform services for the client; and (3) file employment tax returns using its own EIN that includes wages paid to the individuals performing services for the client.


These final regulations generally adopt rules that were proposed in January 2013, and address the designation of a payor to perform the acts of an employer when the formal IRS administrative procedures to designate an agent (i.e., filing Form 2678) are not followed. These rules address all federal employment taxes (FICA, FUTA, and income tax withholding).


The final regulations also clarify that:


  • A third-party payor of sick pay that is treated as an employer will not be designated under these regulations to perform the acts of an employer with regard to sick pay, with an additional exception at Reg. section 31.3504-2(d)(4) for payors treated as employers under section 3121(a)(2)(A) and
  • There is an exception for a section 3401(d)(1) employer (commonly referred to as a “statutory employer,” as discussed in the preamble to the proposed regulations)

Examples are provided illustrating the application, or non-application, of the rules to various fact patterns.


A designation of a payor required to perform acts of an employer is provided solely for purposes of determining liability for employment taxes under section 3504 (i.e., there is no inference that the same rules would apply for any other Code provision).

KPMG observation

The regulations do not change the underlying common law employment rules. An entity that is a PEO or other third party acting under a service agreement does not automatically become the common law employer for non-payroll purposes. For example, a PEO cannot be treated as the common law employer of its client’s employees for purposes of retirement plan discrimination testing.


If a payor is designated to perform the acts of an employer, all provisions of law (including penalties) applicable with respect to an employer are applicable to that payor, and each employer for whom the payor is designated to act remains subject to all provisions of law (including penalties) applicable to an employer.


Consistent with the IRS's position on administering the section 6672 trust fund recovery penalty, the employment tax liability of an employer will be collected only once—whether from the payor or the employer.




©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.


The KPMG logo and name are trademarks of KPMG International.


KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever.


The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


Direct comments, including requests for subscriptions, to us-kpmgwnt@kpmg.com.
For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at:

+ 1 202 533 4366

1801 K Street NW
Washington, DC 20006.

Share this

Share this

Subscribe

Current and future KPMG clients may subscribe to TaxNewsFlash email alerts.


Email your contact information.

TaxNewsFlash-United States by year