Federal Circuit - Payroll service company not entitled to refunds of employer share of employment taxes 

September 10:  The U.S. Court of Appeals for the Federal Circuit today affirmed a decision of the Court of Federal Claims that rejected the claims of payroll service companies for refunds of employment taxes based solely on the employer share of FUTA and FICA tax obligations. Cencast Services, L.P. v. United States, 12-5142
(Fed. Cir. September 10, 2013)

Read the Federal Circuit’s decision [PDF 182 KB]

Overview

The payroll service provider (in consolidated tax refund cases) was an entity that remitted payroll and employment taxes—i.e., FUTA and FICA taxes—on behalf of motion picture and television production companies. In this role, the payroll service provider was the statutory employer of the workers. When the payroll service company filed its FUTA and FICA employment tax returns, it treated each employee as being in an “employment” relationship with it, rather than with the production company that was the worker’s common law employer. This treatment reduced the overall tax payments because of statutory caps on both FUTA and FICA taxes.


The Federal Circuit agreed with the federal claims court that the liability for employment taxes is determined by reference to the worker’s common law employer. The production company (the common law employer) could not decrease its liability by retaining a payroll service provider (statutory employer) to make the wage payments to its employees.


The Federal Circuit also held that, based on procedural grounds, the payroll service provider was barred from raising a theory that it overpaid the FUTA and FICA taxes because some of the individuals should have been classified as independent contractors.




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