[Federal Register Volume 78, Number 19 (Tuesday, January 29, 2013)]
[Proposed Rules]
[Pages 6056-6062]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-01857]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 31

[REG-102966-10]
RIN 1545-BJ31


Designation of Payor as Agent To Perform Acts Required of an 
Employer

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations under section 3504 
of the Internal Revenue Code (Code) providing circumstances under which 
a person (payor) is designated as an agent to perform the acts required 
of an employer and is liable for employment taxes with respect to wages 
or compensation paid by the payor to individuals performing services 
for the payor's client pursuant to a service agreement between the 
payor and the client.

DATES: Written or electronic comments must be received by April 29, 
2013.

[[Page 6057]]


ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-102966-10), room 
5203, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday, between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
102966-10), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC. Additionally, taxpayers may submit comments 
electronically via the Federal eRulemaking Portal at 
www.regulations.gov. (Indicate IRS and REG-102966-10.)

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
contact Jeanne Royal Singley at (202) 622-0047; concerning the 
submission of comments or requests for a hearing, contact 
Oluwafunmilayo (Fumni) Taylor at (202) 622-7180 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION:

Background

Employment Taxes in General

    Employers generally are required to deduct and withhold federal 
income tax and Federal Insurance Contributions Act (FICA) taxes from 
wages paid to their employees under sections 3402(a) and 3102(a), and 
are separately liable for the employer's share of FICA taxes under 
section 3111 and Federal Unemployment Tax Act (FUTA) taxes under 
section 3301. Instead of FICA taxes, railroad employers are required to 
deduct and withhold Railroad Retirement Tax Act (RRTA) taxes from their 
employees' compensation under section 3202, and are separately liable 
for the employer's share of RRTA tax under section 3221. These taxes 
are collectively referred to for purposes of these proposed regulations 
as employment taxes. Sections 31.3102-1(d), 31.3202-1(e) and 31.3403-1 
establish that the employer is the person liable for the withholding 
and payment of employment taxes, whether or not amounts are actually 
withheld.
    When an individual performs services for another person, an 
employer-employee relationship may exist. Generally, the Code 
determines the existence of an employer-employee relationship by 
applying the common law test to the particular facts and circumstances 
of each case. See section 3121(d)(2). The Code, however, also provides 
for other categories of employees, such as corporate officers in 
section 3121(d)(1).
    Under the common law test, an employment relationship exists when 
the person for whom the services are performed has the right to control 
and direct the individual who performs the services, not only as to the 
result to be accomplished by the work but also as to the details and 
means by which that result is accomplished. An employment relationship 
exists if an employee is subject to the will and control of the 
employer not only as to what shall be done but how it shall be done. In 
this connection, it is not necessary that the employer actually direct 
or control the manner in which the services are performed; it is 
sufficient if the employer has the right to do so. See Sec. Sec.  
31.3121(d)-1(c), 31.3231(b)-1(a)(2), 31.3306(i)-1(b), and 31.3401(c)-
1(b). This test is also applicable in determining which of two parties 
in a three-party arrangement is the employer. See for example, 
Professional and Executive Leasing, Inc. v. Commissioner, 89 T.C. 225 
(1987), aff'd, 862 F.2d 751 (9th Cir. 1988).
    While other factors are helpful in analyzing the common law test, 
the critical factor in determining whether a person is the common law 
employer of an individual who performs services is whether the 
individual is subject to the will and control of the person receiving 
the services both as to the work to be done and how it is to be done. 
Thus, the person's control of the individual's actual job performance, 
rather than merely control of certain administrative functions related 
to the individual performing services at the worksite, is paramount 
under the common law analysis. In unique circumstances, an individual 
may be an employee of more than one employer (concurrent employment) 
with regard to the same services. See Rev. Rul. 66-162, 1966-1 C.B. 234 
(citing Rest. 2d Agency, Sec.  226). However, in order for an 
individual to be concurrently employed by two entities, each entity 
must separately satisfy the common law control test.
    An employer must file an employment tax return reporting employment 
taxes for each employment tax return period. Generally, an employer 
files Form 941, Employer's Quarterly Federal Tax Return to report wages 
the employer paid--during a quarter of a calendar year--that are 
subject to federal income tax withholding and FICA taxes. Wages an 
employer pays that are subject to FUTA tax are reported annually on 
Form 940, Employer's Annual Federal Unemployment Tax (FUTA) Return. 
Employers that pay compensation subject to the RRTA file Form CT-1, 
Employer's Annual Railroad Retirement Tax Return, as well as Form 941 
to report federal income tax withholding. All employers that pay wages 
or compensation subject to federal income tax withholding, FICA tax, or 
RRTA tax must file Forms W-2, Wage and Tax Statement, and a Form W-3, 
Transmittal of Wage and Tax Statements, with the Social Security 
Administration (SSA) and furnish a Form W-2 to each employee. The 
employer must obtain an employer identification number (EIN) using Form 
SS-4, Application for Employer Identification Number, for use in filing 
the forms. An EIN is a nine-digit number used by the Internal Revenue 
Service (IRS) to identify an employer's tax account. See section 6109.
    For various reasons, an employer may choose to enter into an 
agreement with a third party (such as a payroll service provider or a 
professional employer organization (PEO)), sometimes referred to as a 
third-party payor. Under the agreement the third-party payor remits the 
wages to employees and takes steps to ensure the employer's employment 
tax withholding, reporting, and payment obligations are satisfied. 
However, employment tax liability cannot be altered by private 
agreement between an employer and a third-party payor. See In re 
Professional Security Services, Inc., 162 B.R. 901 (Bankr. M.D. Fla. 
1993). Rather the liability of the employer and/or the third-party 
payor for employment taxes is determined under the Code and depends on 
all of the facts and circumstances, including the terms and substance 
of the arrangement between the employer and the third-party payor. 
There are limited circumstances in a three-party arrangement when the 
third-party payor may be considered the person responsible for the 
withholding and payment of employment taxes in addition to, or in lieu 
of, the common law employer. A description of some common three-party 
arrangements follows.

Section 3401(d)(1) Employers

    Section 3401(d)(1) provides that for purposes of federal income tax 
withholding, the term employer means the person for whom an individual 
performs or performed any service, of whatever nature, as an employee 
of such person, except that, if the person for whom the individual 
performs or performed the services does not have control of the payment 
of wages for such services, the term employer means the person having 
control of the payment of such wages. For purposes of section 
3401(d)(1), the term control means legal control. See Sec.  31.3401(d)-
1(f). Thus, when one person is the common law employer of an individual 
because it controls the day-to-day performance of services by the 
individual, another

[[Page 6058]]

person may be the employer liable to collect, report, and pay 
employment taxes because it is the entity solely in control of the 
payment of wages to the individual. See Winstead v. United States, 109 
F.3d 989 (4th Cir. 1997). Whether an entity is in control of the 
payment of wages is determined by considering the facts and 
circumstances related to each payment of wages. Thus, an entity can be 
in control of the payment of wages for one employment tax return 
period, but not in control of the payment of wages for a prior or 
subsequent employment tax return period.
    The legislative history to section 3401(d)(1) specifies that 
section 3401(d)(1) was intended solely to meet unusual situations and 
was not intended as a departure from the basic structure of 
centralizing employment tax obligations with the common law employer. 
See S. Rep. No. 221, 78th Cong. 1st Sess., May 10, 1943. Accordingly, 
an entity is not in control of the payment of wages if the payment of 
wages is contingent upon, or proximately related to, the entity having 
first received funds from its clients.
    The FICA, FUTA, and RRTA do not contain a definition of the term 
employer similar to the definition contained in section 3401(d)(1); 
however, courts have applied the section 3401(d)(1) definition to 
determine liability for the payment of FICA tax under sections 3102 and 
3111 and FUTA tax under section 3301. See Otte v. United States, 419 
U.S. 43, 95 S. Ct. 247, 42 L. Ed. 2d 212 (1974); In re Armadillo Corp., 
410 F. Supp. 407 (D. Colo. 1976), aff'd, 561 F. 2d 1382 (10th Cir. 
1977). Due to the similarity between the purpose and scope of the RRTA 
and the purpose and scope of the FICA, the same definition also applies 
to the RRTA. Accordingly, section 3401(d)(1) shifts the liability for 
all the employment taxes due on wages or compensation from the common 
law employer to the third-party payor with control of the payment of 
those wages or compensation.

Section 3504--Agents

    Under section 3504, if a payor pays wages or compensation to 
employees who are employed by one or more employers, the Secretary is 
authorized, in accordance with regulations prescribed by the Secretary, 
to designate such payor to perform acts required of employers under the 
Code. Section 3504 further provides that, except as otherwise 
prescribed by the Secretary, all provisions of law (including 
penalties) applicable with respect to an employer are applicable to the 
person so designated, but the employer for whom the person acts remains 
subject to the provisions of law (including penalties) applicable with 
respect to employers. Accordingly, both an employer and the payor 
designated in accordance with regulations under section 3504 are liable 
for the employment taxes on wages or compensation paid by the payor.
    Current regulations issued under section 3504 permit district 
directors and service centers in the IRS to authorize a payor to 
perform acts required of employers with respect to chapters 21 (FICA 
tax), 22 (RRTA tax), and 24 (federal income tax withholding) of the 
Code if the payor applies for such authorization. See Treas. Reg. Sec.  
31.3504-1(a). The Treasury Department and the IRS have separately 
proposed updating these regulations to remove the references to the 
district director and service center and to provide that the 
application by the payor (referred to therein as an ``agent'') must be 
signed by both the payor and employer and made on the form prescribed 
by the IRS and according to the instructions provided by the IRS. See 
Proposed Regulations Sec.  31.3504-1(a), published in the Federal 
Register on January 13, 2010, (75 FR 1735-01).
    Pursuant to section 3504 and the regulations, the IRS has 
established administrative procedures under which a payor may request 
authorization to file employment tax returns and perform other acts for 
the employer. Specifically, Revenue Procedure 70-6, 1970-1 CB 420, 
provides the general procedures for a payor to request authorization to 
act as an agent under section 3504 for FICA, income tax withholding, 
and RRTA purposes, and describes the agent's resulting reporting and 
filing requirements. Each employer for whom the agent is to act 
provides the payor with a signed IRS Form 2678, Employer/Payer 
Appointment of Agent. A payor seeking to act as an agent under section 
3504 submits these Forms 2678 to the IRS. The IRS sends a letter to the 
agent once it has approved the application, and the appointment remains 
in effect until terminated by one of the parties. An agent with an 
approved Form 2678 files an aggregate Form 941 reporting FICA tax and 
income tax withholding for each tax return period using the agent's own 
EIN (regardless of the number of employers for whom the agent acts). 
Effective for periods on or after January 1, 2010, an agent with an 
approved Form 2678 must also complete and attach to the aggregate Form 
941 a Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 
Filers. The agent uses Schedule R (Form 941) to allocate the aggregate 
information reported on Form 941 to each employer. Schedule R (Form 
941) is attached to the Form 941 in every quarter for which the agent 
files an aggregate Form 941. See Sec.  601.601(d)(2)(ii)(b). If an 
agent with an approved Form 2678 is acting for employers under the 
RRTA, the agent must report for each employer the taxable compensation 
as determined under RRTA with respect to each employer on an aggregate 
Form CT-1.
    Consistent with the limitations in the current regulations, an 
agent with an approved Form 2678 is generally not authorized to perform 
the employment tax obligations of an employer with respect to the FUTA 
tax. Thus, an employer generally must continue to satisfy its FUTA tax 
obligations by filing a Form 940 using its own EIN. Proposed Regulation 
Sec.  31.3504-1(b), however, provides a limited exception to the 
general rule regarding FUTA, which employers may rely on for periods 
beginning on or after January 1, 2010. The proposed regulation allows 
agents acting on behalf of employers receiving home care services to 
perform the acts of an employer required under Chapter 23 (FUTA tax). 
An agent that files an aggregate Form 940 under the limited exception 
must complete and attach to the Form 940 a Schedule R (Form 940), 
Allocation Schedule for Aggregate Form 940 Filers.
    Generally, Forms W-2 filed with the SSA and furnished to employees 
must reflect the name and EIN of the agent with an approved Form 2678; 
however, special rules may apply if the agent is acting as an agent for 
two or more employers.

Payroll Service Providers (PSPs) and Reporting Agents

    An employer may enter into an agreement with a payroll service 
provider (PSP) to prepare employment tax returns (including Forms 940 
and 941) using the EIN of the employer for the signature of the 
employer. A PSP may also process the withholding, deposit, and payment 
of the associated employment taxes for the employer. A PSP is not 
liable under subtitle C of the Code as the employer, or as an agent of 
the employer, for the employer's employment taxes. An employer's use of 
a PSP does not relieve the employer of its employment tax obligations 
or liability for the taxes.
    Generally, a reporting agent is a PSP that is authorized to sign 
and file certain employment tax returns on behalf of the employer using 
the employer's EIN, including Forms 940 and 941. A reporting agent may 
also process the withholding, deposit, and payment of

[[Page 6059]]

the associated employment taxes for the employer. The IRS has 
prescribed Form 8655, Reporting Agent Authorization, as the appropriate 
authorization form for an employer to use to designate a PSP as a 
reporting agent. Additional information concerning reporting agent 
authorizations may be found in Rev. Proc. 2012-32, 2012-35 I.R.B. 1. A 
reporting agent is not liable under subtitle C of the Code as the 
employer, or as an agent of the employer, for the employer's employment 
taxes. An employer's use of a reporting agent does not relieve the 
employer of its employment tax obligations or liability for the taxes.

Analyzing Three-Party Arrangements

    In certain instances, an employer may mistakenly believe it is 
relieved of employment tax liabilities merely because it has entered 
into an agreement with a third-party payor (for example, a PEO or 
employee leasing company) for assistance in fulfilling its employment 
tax obligations. However, an employer remains liable for employment 
taxes irrespective of any agreement it may enter into that purports to 
place the employment tax obligations and liabilities with the payor, 
except in the limited circumstances when the payor satisfies the 
conditions to be liable under section 3401(d)(1). In this regard, 
status as the employer of the worker is determined based on all the 
facts and circumstances under the common law test (or under other 
specific Code provisions related to particular types of employees, such 
as corporate officers). Neither claims by a payor that it is the 
employer (or ``co-employer'') of the worker for federal employment tax 
or other purposes nor the fact that the payor may file employment tax 
returns under its own EIN are determinative under the Code for purposes 
of identifying the employer liable for employment taxes.
    The application of the employment tax obligations in a three-party 
arrangement often requires an analysis of complex facts and 
circumstances that can vary widely. Consequently, the parties to an 
arrangement may not always understand which party or parties will be 
liable for any unpaid employment taxes. Even when there is no 
underlying dispute about the status of the workers as employees or that 
employment taxes are due with respect to the wages paid to the 
employees, the IRS must expend substantial resources to develop the 
facts to determine the liabilities of the parties. The Treasury 
Department and the IRS intend that these proposed regulations assist 
taxpayers and the IRS in determining the parties' employment tax 
obligations in a three-party arrangement when a payor has represented 
to its client that it will pay the employment taxes with respect to 
wages or compensation it pays to employees for services performed by 
employees for the client.

Explanation of Provisions

In General

    The proposed regulations provide rules regarding employment tax 
obligations in certain three-party arrangements 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 PSP or reporting agent. More 
specifically, the proposed regulations provide that, unless one of the 
enumerated exceptions discussed below 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 (as defined in these proposed regulations) between the payor 
and the client.
    The designation of a payor as an agent to perform acts of an 
employer under the proposed regulations addresses all federal 
employment taxes. Thus, for purposes of the proposed regulations, the 
term wages includes wages as defined for purposes of Chapters 21 (FICA 
tax), 23 (FUTA tax), and 24 (federal income tax withholding) of the 
Code, and the term compensation means compensation as defined for 
purposes of Chapter 22 (RRTA tax) of the Code. The rules in the 
proposed regulations regarding the designation of a payor as an agent 
required to perform acts of an employer are provided solely for 
purposes of determining liability for employment taxes under section 
3504. No inference is intended that the same rules would apply for any 
other provision of the Code.
    As required by section 3504 and consistent with the rules relating 
to agents authorized under Sec.  31.3504-1(a), the proposed regulations 
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. 
However, 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.

Scope and Effect of Designation

    Subject to the exceptions set forth in the proposed regulations, a 
payor is designated as an agent under section 3504 to perform the acts 
of an employer in any case in which the payor entered into a service 
agreement with a client. For this purpose, the term service agreement 
means a written or oral agreement pursuant to which the payor: (1) 
Asserts it is the employer (or ``co-employer'') of individuals 
performing services for the client, (2) pays wages or compensation to 
the individuals for services the individuals performed for the client, 
and (3) assumes responsibility to collect, report, and pay, or assumes 
liability for, any employment taxes with respect to the wages or 
compensation paid by the payor to the individuals who performed 
services for the client.
    The first component of a service agreement is that the payor 
asserts it is the employer (or ``co-employer'') of individuals 
performing services for another individual or entity (the client). For 
purposes of these regulations, a payor may implicitly or explicitly 
assert it is the employer (or ``co-employer'') of individuals 
performing services for a client, including by agreeing to: (1) Recruit 
and hire employees or assign employees as permanent or temporary 
members of the client's workforce, or participate with the client in 
these actions; (2) hire the client's employees as its own and then 
provide them back to the client to perform services for the client; or 
(3) file employment tax returns using its own EIN that include wages or 
compensation paid to the individuals performing services for the 
client. A payor that is the common law employer of the individuals 
performing services for a client under all of the facts and 
circumstances, however, is not designated under the proposed 
regulations to perform the acts of an employer with respect to wages or 
compensation paid to such individuals (see ``Exceptions to 
Designation'') but is liable for employment taxes as the employer.
    The second component of a service agreement is that the payor pays 
wages or compensation to the individuals performing services for its 
client. A

[[Page 6060]]

payor with legal control of the payment of wages or compensation within 
the meaning of section 3401(d)(1), however, is not designated under the 
proposed regulations with respect to such wages or compensation (see 
``Exceptions to Designation'') but is liable for employment taxes as a 
section 3401(d)(1) employer.
    The third component of a service agreement is that the payor 
assumes responsibility for the collection, reporting, and payment of, 
or assumes liability for, any employment taxes with respect to the 
wages or compensation paid by the payor to the individuals performing 
services for the client. Under the proposed regulations, a payor 
assumes the responsibility to collect, report, and pay the applicable 
taxes if the payor represents to the client that it would make any or 
all of the federal employment tax deposits and other payments required 
by law. A payor that is a PSP or reporting agent, however, is not 
designated under the proposed regulations with respect to such wages or 
compensation (see ``Exceptions to Designation'') if the payor files the 
employment tax returns reporting such wages or compensation under the 
client's EIN.

Exceptions to Designation

    As mentioned above, the proposed regulations provide exceptions to 
when a payor is designated under section 3504 to perform the acts of an 
employer even if the payor has entered into an agreement that includes 
the components of a service agreement. The proposed regulations contain 
eight examples demonstrating the application or non-application of the 
proposed regulations to various factual scenarios.
    First, the proposed regulations do not apply to the extent that the 
payor files employment tax returns under the client's EIN, reporting 
the wages or compensation paid to individuals performing services for 
the client. Thus, a reporting agent or a PSP that prepares returns 
using the employer's EIN is not designated under the proposed 
regulations.
    Second, the proposed regulations do not affect the application of 
the common paymaster rules under sections 3121(s) and 3231(i). 
Therefore, a second exception provides that a common paymaster is not 
designated under the proposed regulations for wages or compensation it 
pays within the context of the concurrent employment arrangement 
described in section 3121(s) or 3231(i) and the related regulations.
    Third, a payor is not designated under the proposed regulations if 
the person is the employer of the employees under the common law test 
(because the person has the right to control and direct the individual 
with regard to the details and means of performing services for the 
client) or under one of the other section 3121(d) provisions, or is a 
section 3401(d)(1) employer. Thus, a third exception provides that if 
the payor is the employer of the individuals performing services for a 
client, it is not designated as an agent under section 3504. The payor 
remains liable for payment of employment taxes, however, as the 
employer. For example, if a consulting firm contracts to provide 
consulting services to a client and the consulting firm directs and 
controls the employees providing the consulting services under the 
contract with regard to how to perform those services, the consulting 
firm is liable for employment taxes as the common law employer of the 
employees, not as a payor designated under the proposed regulations.

Designation Under Proposed Regulations Is Not the Exclusive Remedy for 
the IRS

    The Treasury Department and the IRS recognize that the 
determination of the employer and the liabilities of the parties in a 
three-party arrangement is a factually and resource intensive 
undertaking involving multiple parties. The regulations as proposed 
will assist the IRS in cases in which a payor has represented to a 
client that the payor is liable for some or all of the client's 
employment tax obligations, but the payor has not received 
authorization to act as an agent through an approved Form 2678. 
However, the designation of a payor as an agent to perform the acts 
required of an employer under the proposed regulations will not 
preclude the IRS from asserting, in the alternative, that the payor is 
the common law employer (or an employer of an employee under one of the 
other section 3121(d) provisions) or the section 3401(d)(1) employer of 
individuals providing services for a client. Additionally, the fact 
that the IRS does not assert that a payor is designated as an agent to 
perform the acts required of an employer under the proposed regulations 
will not preclude the IRS from determining the payor's employment tax-
related liability under other Code provisions (for example, the section 
6672 trust fund recovery penalty).

Effective Applicability Date

    These 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.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to this regulation, and because the 
regulation does not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, this 
regulation has been submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written or electronic comments that 
are submitted timely to the IRS.
    The IRS and Treasury Department request comments on the proposed 
regulations and are particularly interested in comments on the 
following issues:
    (1) 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;
    (2) Whether additional exceptions are warranted; and
    (3) Potential additional examples.
    All comments will be available for public inspection and copying. A 
public hearing will be scheduled if requested in writing by any person 
that timely submits written comment. If a public hearing is scheduled, 
notice of the date, time, and place for the hearing will be published 
in the Federal Register.

Drafting Information

    The principal author of these proposed regulations is Jeanne Royal 
Singley, Office of Division Counsel/Associate Chief Counsel (Tax Exempt 
and Government Entities). However, personnel from other offices of the 
IRS and Treasury participated in their development.

[[Page 6061]]

List of Subjects in 26 CFR Part 31

    Employment taxes, Income taxes, Penalties, Pensions, Railroad 
retirement, Reporting and recordkeeping requirements, Social security, 
Unemployment compensation.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 31 is proposed to be amended as follows:

PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

0
Paragraph 1. The authority citation for part 31 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *

0
Par. 2. Section 31.3504-2 is added to read as follows:


Sec.  31.3504-2  Designation of Payor as Agent to Perform Acts of an 
Employer.

    (a) In general. A person (as defined in section 7701(a)(1)) that 
pays wages or compensation (``payor'') to the individual(s) performing 
services for any client pursuant to a service agreement, except as 
provided in paragraph (d) of this section, is designated as an agent to 
perform the acts required of an employer with respect to the wages or 
compensation paid. For purposes of this section the term wages has the 
same meaning as the term wages has for purposes of chapters 21, 23, and 
24, and the term compensation has the same meaning as the term 
compensation has for purposes of chapter 22. This section is not 
applicable if the payor has been authorized as an agent of the employer 
under Sec.  31.3504-1.
    (b) Definitions--(1) Client. The term client means an individual or 
entity that enters into a service agreement with the payor.
    (2) Service agreement. (i) The term service agreement means an 
agreement pursuant to which the payor:
    (A) Asserts it is the employer (or ``co-employer'') of the 
individual(s) performing services for the client;
    (B) Pays wages or compensation to the individual(s) for services 
the individual(s) perform for the client; and
    (C) Assumes responsibility to collect, report, and pay, or assumes 
liability for, any taxes applicable under subtitle C of the Code with 
respect to the wages or compensation paid by the payor to the 
individual(s) performing services for the client.
    (ii) For purposes of paragraph (b)(2)(i)(A) of this section, the 
payor may implicitly or explicitly assert it is the employer (or ``co-
employer'') of the individual(s) performing services for the client, 
including by agreeing to:
    (A) Recruit and hire employees for the client or assign employees 
as permanent or temporary members of the client's work force, or 
participate with the client in these actions;
    (B) Hire the client's employees as its own and then provide them 
back to the client to perform services for the client; or
    (C) File employment tax returns using its own EIN that include 
wages or compensation paid to the individual(s) performing services for 
the client.
    (c) Effects of designation. If a payor is designated as an agent to 
perform the acts required of an employer under this section--
    (1) A payor must perform the acts required of an employer under 
each applicable chapter of the Code and the relevant regulations with 
respect to the wages or compensation paid by such payor. All provisions 
of law (including penalties) and the regulations applicable to the 
employer are applicable to the payor so designated with respect to the 
wages or compensation paid by the payor; and
    (2) Each employer for whom the payor is designated as an agent 
remains subject to all provisions of law (including penalties) and of 
the regulations applicable to an employer.
    (d) Exceptions. A payor is not designated as an agent to perform 
the acts required of an employer under this section for any wages or 
compensation paid by the payor to the individual(s) performing services 
for a client to the extent that--
    (1) The wages or compensation are reported on a return filed under 
the client's employer identification number (as defined in section 6109 
and the applicable regulations);
    (2) The payor is a common paymaster under sections 3121(s) or 
3231(i); or
    (3) The payor is the employer of the individual(s).
    (e) Examples. The following examples illustrate the application of 
this section:

    (1) Example 1.  Corporation P enters into an agreement with 
Employer, effective January 1, 2013. Under the agreement, 
Corporation P hires the Employer's employees as its own employees 
and provides them back to Employer to perform services for Employer. 
Corporation P also assumes responsibility to make payment of the 
individuals' wages and for the collection, reporting, and payment of 
applicable taxes. For all pay periods in 2013, Employer provides 
Corporation P with an amount equal to the gross payroll (that is, 
wage and tax amounts) of the individuals, and Corporation P pays 
wages (less the applicable withholding) to the individuals 
performing services for Employer. Corporation P also reports the 
wage and tax amounts on Form 941, Employer's Quarterly Federal Tax 
Return, filed for each quarter of 2013 under Corporation P's 
employer identification number. Corporation P is not a common 
paymaster or the employer of the individuals. Corporation P is 
designated to perform the acts of an employer with respect to all of 
the wages Corporation P paid to the individuals performing services 
for Employer for all quarters of 2013. Employer and Corporation P 
are each subject to all provisions of law (including penalties) 
applicable in respect of employers for all quarters of 2013 with 
respect to such wages.
    (2) Example 2.  Same facts as Example 1, except that Corporation 
P only reports the wage and tax amounts on Form 941, Employer's 
Quarterly Federal Tax Return, filed for the 1st and 2nd quarters of 
2013. Neither Corporation P nor Employer files returns for the 3rd 
and 4th quarters of 2013. Corporation P is designated to perform the 
acts of an employer with respect to all of the wages Corporation P 
paid to the individuals performing services for Employer for all 
quarters of 2013. Employer and Corporation P are each subject to all 
provisions of law (including penalties) applicable in respect of 
employers for all quarters of 2013 with respect to such wages.
    (3) Example 3.  Same facts as Example 1, except that neither 
Corporation P nor Employer reports the wage and tax amounts on Form 
941, Employer's Quarterly Federal Tax Return for any quarter of 
2013. Corporation P is designated to perform the acts of an employer 
with respect to all of the wages Corporation P paid to the 
individuals performing services for Employer for all quarters of 
2013. Employer and Corporation P are each subject to all provisions 
of law (including penalties) applicable in respect of employers for 
all quarters of 2013 with respect to such wages.
    (4) Example 4.  Same facts as Example 1, except that Employer 
provides only net payroll (that is, wages less tax amounts) to 
Corporation P for each pay period. Corporation P is designated to 
perform the acts of an employer with respect to all of the wages 
Corporation P paid to the individuals performing services for 
Employer for all quarters of 2013. Employer and Corporation P are 
each subject to all provisions of law (including penalties) 
applicable in respect of employers for all quarters of 2013 with 
respect to such wages.
    (5) Example 5.  Same facts as Example 1, except that after 
Corporation P reports the wage and tax amounts on Form 941, 
Employer's Quarterly Federal Tax Return, filed for each quarter of 
2013 under Corporation P's employer identification number, 
Corporation P files a claim for refund of the employment taxes it 
paid for each quarter of 2013 that are related to wages Corporation 
P paid to the individuals performing services for Employer. The 
basis for Corporation P's refund claim is that Corporation P is not 
the employer of the individuals that performed services for 
Employer. Corporation P is designated to perform the acts of an 
employer with respect to all of the wages Corporation P paid to the

[[Page 6062]]

individuals performing services for Employer for all quarters of 
2013. Accordingly, Corporation P is not entitled to a refund. 
Employer and Corporation P are each subject to all provisions of law 
(including penalties) applicable in respect of employers for all 
quarters of 2013 with respect to such wages.
    (6) Example 6.  Corporation S enters into an agreement with 
Employer, effective January 1, 2013. Under the agreement, 
Corporation S provides payroll services, including payment of wages 
to individuals performing services for Employer, and assumes 
responsibility for the collection, reporting, and payment of 
applicable taxes. For all pay periods in 2013, Employer provides 
Corporation S with an amount equal to the gross payroll (that is, 
wage and tax amounts) of the individuals, and Corporation S pays 
wages (less the applicable withholding) to the individuals 
performing services for Employer. Corporation S also reports the 
wage and tax amounts on Form 941, Employer's Quarterly Federal Tax 
Return, filed for each quarter of 2013 under Employer's employer 
identification number. Corporation S is not designated to perform 
the acts of an employer with respect to all of the wages Corporation 
S paid to the individuals performing services for Employer for all 
quarters of 2013. Corporation S did not assert it was the employer 
and filed Forms 941 using Employer's employer identification number. 
Accordingly, Corporation S is not liable for the applicable 
employment taxes under this section. Employer remains subject to all 
provisions of law (including penalties) applicable in respect of 
employers for all quarters of 2013 with respect to such wages.
    (7) Example 7.  Corporation V enters into a consulting agreement 
with Manufacturer effective January 1, 2013, to provide consulting 
services to Manufacturer. Corporation V is responsible to pay wages 
to the individuals providing the consulting services to Manufacturer 
and to collect, report, and pay the applicable taxes. Corporation V 
has the right to direct and control the individuals as to when and 
how to perform the consulting services and, thus, is the common law 
employer of the individuals providing the consulting services. 
Corporation V is not designated to perform the acts of an employer 
with respect to all of the wages Corporation V paid to individuals 
providing consulting services to Manufacturer. However, as the 
common law employer of the individuals, Corporation V is subject to 
all provisions of law (including penalties) applicable in respect of 
employers with respect to such wages.
    (8) Example 8.  Corporation U and Employer execute and submit a 
Form 2678, Employer/Payer Appointment of Agent, to the Service, 
requesting approval to authorize Corporation U to report, deposit, 
and pay taxes with respect to wages it pays, as agent of Employer 
for purposes of Form 941, Employer's Quarterly Federal Tax Return. 
The Form 2678 is approved by the Service and effective for all 
quarters of 2013. Accordingly, Corporation U reports the wages it 
pays to individuals performing services for Employer and related tax 
amounts on Form 941 and Schedule R (Form 941), Allocation Schedule 
for Aggregate Form 941 Filers, filed for each quarter of 2013 under 
Corporation U's employer identification number. Corporation U is not 
designated under this section to perform the acts of an employer 
with respect to all of the wages Corporation U paid to the 
individuals performing services for Employer for all quarters of 
2013. However, as an agent authorized under Sec.  31.3504-1(a), 
Corporation U is subject to all provisions of law (including 
penalties) applicable in respect of employers for all quarters of 
2013 with respect to such wages. Employer also remains subject to 
all provisions of law (including penalties) applicable in respect of 
employers for all quarters of 2013 with respect to such wages.

    (f) Effective/applicability date. These regulations apply to wages 
or compensation paid by a payor in quarters beginning on or after the 
date of publication of the final regulations in the Federal Register to 
individuals performing services for the payor's client pursuant to a 
service agreement.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2013-01857 Filed 1-25-13; 8:45 am]
BILLING CODE 4830-01-P