Read the proposed regulations [PDF 242 KB]
The proposed regulations provide rules regarding employment tax obligations in certain three-party arrangements—i.e., when the employer enters into an agreement with a third-party payor under which the payor performs the employment tax obligations of the client with regard to wages or compensation paid by the payor to individuals performing services for the client, but the payor:
- Does not meet the legal conditions necessary to be a section 3401(d)(1) employer
- Does not obtain an approved Form 2678, and
- Is not a payroll service provider (PSP) or reporting agent
The proposed regulations state that unless one of the exceptions provided in the regulations applies, a payor is designated as an agent under section 3504 to perform the acts required of an employer with respect to wages or compensation paid by the payor to any individual performing services for any client pursuant to a service agreement between the payor and the client. Eight examples are provided in the proposed regluations illustrating the application, or non-application, of the rules to various fact patterns.
The designation of a payor as an agent to perform acts of an employer under the proposed regulations addresses all federal employment taxes, and the proposed regulations define applicable terms.
- The term “wages” includes wages as defined for purposes of FICA and FUTA taxes and federal income tax withholding.
- The term “compensation” means compensation as defined for purposes of the RRTA tax.
The release clarifies that a designation of a payor as an agent 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).
The proposed regulations further provide that if a payor is designated as an agent 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 that 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, under the proposed regulations, the employment tax liability of an employer will be collected only once—whether from the payor or the employer.
Effective date, comments due date
The regulations are proposed to be effective the date the final regulations are published in the Federal Register and are applicable to wages or compensation paid by a payor in quarters beginning on or after the effective date to individuals performing services for its client pursuant to a service agreement.
Comments and/or a request for a public hearing concerning the proposed regulations are due by a date that is 90 days after publication in the Federal Register—scheduled for Tuesday, January 29, 2013.
Treasury and the IRS specifically have requested comments on the following issues:
- Whether the application of the definition of service agreement inappropriately results in a payor being designated an agent under section 3504, or inappropriately results in a payor failing to be designated an agent under section 3504?
- Whether additional exceptions are warranted?
- Whether additional examples are needed?