House-passed ABLE bill contains a payroll provision

The House-passed the Achieving a Better Life Experience (ABLE) Act of 2014 (HR 647) on December 3. The bill would create tax-exempt accounts for use by individuals to pay qualified disability expenses. These would include the costs of education and personal support. In addition, the bill contains several revenue raising provisions, one of which is payroll-related.

Current law
Under current law, when a business contracts with a professional employer organization (PEO) to administer its payroll functions, the business customer remains responsible for all withholding taxes with respect to its employees. Even though the PEO pays the employees, the customer remains liable if the PEO fails to withhold or remit the taxes or otherwise comply with related reporting requirements.

The provision would authorize the IRS to certify qualifying PEOs, which would allow the PEO to become solely responsible for the customer’s employment taxes. To be certified by the IRS, a PEO would have to satisfy various requirements , such as reporting obligations, posting a bond in case the PEO fails to satisfy its employment tax withholding and payment obligations, and submitting audited financial statements. The requirements are intended to ensure that the PEO properly remits wages and employment taxes. The PEO would also be subject to an annual fee of $1,000. The provision generally would be effective for wages paid by a PEO for services performed by an employee after 2015, and the IRS would be required to establish the PEO certification program by July 1, 2015. Some of the specific provisions are explained below.

Professional Employer Organizations (PEO)
A PEO would be treated as the employer of any work site employee performing services for any customer of such organization, but only for remuneration remitted by the PRO to the work site employee. No other person would be treated as the employer.

Successor employer
For employment tax law purposes a PEO entering into a service contract with a customer for a work site employee would be treated as a successor employer and the customer would be treated as a predecessor employer during the term of the service contract. A customer whose service contract with a PEO is terminated for a work site employee would be treated as a successor employer and the PEO would be treated as a predecessor employer.

A PEO would be treated as the employer of any individual who is performing services covered by a contract meeting the requirements of the law, but only with respect to remuneration remitted by the PEO to the individual.

Tax credits
The customer, not the PEO gets to take any available tax credits. This includes the credit for increasing research activity, the Indian employment credit, the credit for portion of employer social security taxes paid with respect to employee cash tips, the clinical testing expenses for certain drugs for rare diseases or conditions, the employee health insurance expenses of small employers, the work opportunity credit, the empowerment zone employment credit, any other allowable credits.

Related parties
The provision would not l not apply in the case of a customer who has a relationship to the PEO. Usually, related ownership requires “more than 50%” of various items, stock, etc. But this provision would lower the percentage to 10%.

Independent contractors
Individuals with net earnings from self-employment derived from the customer’s trade or business, including a partner in a partnership that is a customer, is not a work site employee for purposes of remuneration paid by a PEO.

The provision requires the Secretary to issue regulations on reporting and recordkeeping.

Certification requirements
A PEO would meet the certification requirements if the PEO:

  • demonstrates that it (and any owner, officer, and other persons) meets the all requirements, including those related to status, background, experience, business location, and annual financial audits,
  • agrees that it would satisfy any bond and independent financial review requirements on an ongoing basis,
  • agrees that it would satisfy any required reporting obligations,
  • computes its taxable income using an accrual method of accounting unless the Secretary approves another method,
  • agrees to verify on such periodic basis as the Secretary may prescribe that it continues to meet the requirements of the law, and
  • agrees to notify the Secretary in writing within such time as the Secretary may prescribe of any change that materially affects the continuing accuracy of any agreement or information that was previously made or provided.

Bonding requirement
A PEO would have to post a bond for the payment of taxes. For the period April 1 of any calendar year through March 31 of the following calendar year, the amount of the bond required would be equal to the greater of 5% of the organization’s liability under Code sec. 3511 for taxes imposed by subtitle C of the Internal Revenue Code during the preceding calendar year (but not to exceed $1,000,000), or $50,000.

Independent financial review
A PEO would have to prepare and provided to the Secretary an opinion of an independent certified public accountant as to whether the PEO’s financial statements are presented fairly in accordance with generally accepted accounting principles. In addition, the PEO would have to provide an assertion regarding federal employment tax payments and an examination level attestation on such assertion from an independent certified public accountant not later than the last day of the second month beginning after the end of each calendar quarter. The assertion would have to state that the organization has withheld and made deposits of all required taxes for the calendar quarter.

For more information on this and other topics, consult the Visit our News Library.