[Federal Register Volume 79, Number 61 (Monday, March 31, 2014)]
[Rules and Regulations]
[Pages 17860-17863]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-07152]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 31
[TD 9662]
RIN 1545-BJ31
Designation of Payor To Perform Acts Required of an Employer
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations under section 3504 of
the Internal Revenue Code (Code) providing circumstances under which a
person (payor) is designated 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: Effective date: These final regulations are effective on March
31, 2014.
Applicability date: For dates of applicability, see Sec. 31.3504-
2(f) of these regulations.
FOR FURTHER INFORMATION CONTACT: Jeanne Royal Singley at (202) 317-6798
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to 26 CFR part 31 under section
3504 of the Code. On January 29, 2013, Treasury and the IRS published a
notice of proposed rulemaking (REG-102966-10, 78 FR 6056) (the proposed
regulations) in the Federal Register under section 3504 of the Code.
Treasury and the IRS received written and electronic comments
responding to the proposed regulations. All comments were considered
and are available for public inspection at http://www.regulations.gov
or upon request. After consideration of all the public comments, the
proposed regulations are adopted as amended by this Treasury decision.
The public comments and revisions are discussed in this preamble.
Explanation of Provisions
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
payor so designated, but the employer for whom the payor 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.
The IRS has established administrative procedures under which a
payor may request authorization on Form 2678, Employer/Payer
Appointment of Agent, to file employment tax returns and perform other
acts for the employer. The proposed regulations provide rules regarding
the employment tax obligations under certain three-party arrangements
in which a payor enters into an agreement with the employer (client) to
perform 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 use the established IRS
administrative procedures to request authorization to file employment
tax returns and performs other acts for the client.
Under the proposed regulations, a payor is designated under section
3504 to perform the acts of an employer in any case in which the payor
enters 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 perform
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 perform
services for the client.
The proposed regulations also 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
[[Page 17861]]
that includes all of the components of a service agreement. The
proposed regulations also include numerous examples to illustrate the
rules regarding designation.
Summary of Comments and Explanation of Revisions
The IRS received comments in response to the proposed regulations.
The majority of the comments expressed support for the regulations and
had no suggested changes. Other comments were outside the scope of
section 3504 and these regulations.
One commenter suggested deleting the term ``agent'' when describing
the third party payor that is designated to perform the acts of an
employer. The commenter indicated that many three-party arrangements
are not structured as common law agency relationships and that
designating the payor as an agent for purposes of these regulations may
raise implications for other unrelated issues. While the proposed
regulations state that the designation of a payor under the proposed
regulations has no impact in determining the payor's status for other
purposes of the Code, Treasury and the IRS agree that describing the
payor designated to perform the acts of an employer as an ``agent'' may
be unnecessary, given that section 3504 grants the Secretary authority
to designate a ``fiduciary, agent, or other person'' to perform such
acts. Accordingly, the final regulations adopt this change.
Another commenter asked for clarification of the application of
section 3504 to payors of group disability income benefits under an
administrative service contract (commonly referred to as an
administrative service only agreement or an ``ASO agreement'') with an
employer. The comment was in response to a specific request in the
notice of proposed rule-making asking whether the proposed definition
of service agreement inappropriately designates or fails to designate a
payor to perform acts of an employer. The commenter explained that
under an ASO agreement, an insurer that administers employee disability
claims may agree to withhold employment taxes on the taxable disability
payments and report and pay the employment taxes to the IRS under the
insurer's employer identification number. The commenter stated that in
recent years, some insurance companies have required that the employer
designate the insurer as an agent on Form 2678 when entering into new
ASO agreements. The commenter asked whether performing services under
an ASO agreement makes the insurer an agent under section 3504 that is
required to file Form 2678. The commenter also asked for an example to
be included in these final regulations to clarify whether filing Form
2678 is required to perform employment tax obligations under an ASO
agreement.
These regulations 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.
Accordingly, it is beyond the scope of these regulations to address
whether a Form 2678 must be filed in order to report and pay employment
taxes in any particular situation.
However, Sec. 32.1 of the Employment Tax Regulations provides
specific rules for reporting employment taxes with respect to payments
made by a third party on account of sickness or accident disability
(often called ``sick pay''). While those rules are unaffected by
section 3504 or these regulations, Treasury and the IRS agree a
clarification of the interaction of those rules and these regulations
would be helpful.
Specifically, under Sec. 32.1, a third-party payor of sick pay may
be treated as an employer or as an agent of the employer with regard to
the employment tax obligations, depending on the circumstances of the
arrangement. The proposed regulations contain an exception at Sec.
31.3504-2(d)(3) that a payor is not designated to perform the acts
required of an employer for any wages or compensation paid by the payor
to the individual(s) performing services for a client if the payor is
the employer. However, the proposed regulations are not clear whether
the Sec. 31.3504-2(d)(3) exception for payors that are employers
applies if the third-party payor of the sick pay is treated as an
employer under Sec. 32.1. To clarify that a third-party payor of sick
pay that is treated as an employer under Sec. 32.1 will not be
designated under these regulations to perform the acts of an employer
with regard to the sick pay, these final regulations add an additional
exception at Sec. 31.3504-2(d)(4) for payors treated as employers
under section 3121(a)(2)(A).
No changes were needed, however, to address situations where the
third-party payor of the sick pay is the agent of the employer under
Sec. 32.1. Under those circumstances, these regulations do not apply
because the payments are not made pursuant to a service agreement
within the meaning of these regulations. The first component of a
service agreement is that the payor asserts that it is the employer of
the individuals performing services for its client, such as by filing
employment tax returns using its own EIN that include wages paid to the
individuals performing services for the client. A third-party payor of
sick pay that is treated as an agent of the employer under Sec. 32.1
does not file employment tax returns under its own EIN to report and
pay the taxes on the sick pay or otherwise assert that it is the
employer. Thus, the arrangement under which the payor pays the sick pay
as an agent would not be a service agreement and these regulations
would not apply to designate the payor to perform the acts of the
employer.
Finally, although no comments were received with regard to the
exception at Sec. 31.3504-2(d)(3) for employers, these final
regulations revise that provision to clarify that the exception
includes a section 3401(d)(1) employer, also commonly referred to as a
statutory employer, as discussed in the preamble to the proposed
regulations. 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 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). An example is
added to these regulations at Sec. 31.3504-2(e)(8) to demonstrate the
application of the exception to a section 3401(d)(1) employer.
Special Analyses
It has been determined that this final rule is not a significant
regulatory action as defined in Executive Order 12866, as supplemented
by Executive Order 13563. 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
[[Page 17862]]
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, and no
comments were received.
Drafting Information
The principal author of these 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.
List of Subjects in 26 CFR Part 31
Employment taxes, Income taxes, Penalties, Pensions, Railroad
retirement, Reporting and recordkeeping requirements, Social security,
Unemployment compensation.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 31 is 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 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 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 employer
identification number that include wages or compensation paid to the
individual(s) performing services for the client.
(c) Effects of designation. If a payor is designated to perform the
acts required of an employer under this section then the following
rules apply--
(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 remains subject
to all provisions of law (including penalties) and of the regulations
applicable to an employer.
(d) Exceptions. A payor is not designated 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 if--
(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);
(3) The payor is the employer of the individual(s) (including an
employer within the meaning of section 3401(d)(1)); or
(4) The payor is treated as an employer under section
3121(a)(2)(A).
(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, 2015. 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 2015, 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 2015 under Corporation P's
employer identification number. Corporation P is not a common
paymaster, the employer of the individuals (including an employer
within the meaning of section 3401(d)(1)), or treated as the
employer of the individual under section 3121(a)(2)(A). 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 2015. Employer and
Corporation P are each subject to all provisions of law (including
penalties) applicable in respect of employers for all quarters of
2015 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
2015. Neither Corporation P nor Employer files returns for the 3rd
and 4th quarters of 2015. 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 2015. Employer and Corporation P are each subject to all
provisions of law (including penalties) applicable in respect of
employers for all quarters of 2015 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
2015. 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
2015. Employer and Corporation P are each subject to all provisions
of law (including penalties) applicable in respect of employers for
all quarters of 2015 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
[[Page 17863]]
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 2015. Employer and Corporation P are each subject to all
provisions of law (including penalties) applicable in respect of
employers for all quarters of 2015 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
2015 under Corporation P's employer identification number,
Corporation P files a claim for refund of the employment taxes it
paid for each quarter of 2015 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
individuals performing services for Employer for all quarters of
2015. 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 2015 with respect to such wages.
(6) Example 6. Corporation S enters into an agreement with
Employer, effective January 1, 2015. 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 2015, 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 2015 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 2015. 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 2015 with respect to such wages.
(7) Example 7. Corporation T enters into a consulting agreement
with Manufacturer effective January 1, 2015, to provide consulting
services to Manufacturer. Corporation T is responsible to pay wages
to the individuals providing the consulting services to Manufacturer
and to collect, report, and pay the applicable taxes. Corporation T
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 T is not designated to perform the acts of an employer
with respect to all of the wages Corporation T pays to individuals
providing consulting services to Manufacturer. However, as the
common law employer of the individuals, Corporation T is subject to
all provisions of law (including penalties) applicable in respect of
employers with respect to such wages.
(8) Example 8. On January 1, 2015, Corporation U enters into an
agreement with Employer for Employer to farm Corporation U's
property. Under the agreement, Corporation U and Employer agree to
split the proceeds of the sale of the products grown on the
property. Employer hires workers to assist it with the farming.
Employer has the right to direct and control the workers as to when
and how to perform the services and, thus, is the common law
employer of the workers. However, Employer is unable to pay the
workers until after the products are sold. Therefore, Corporation U
pays wages to the workers and deducts this amount from Employer's
share of the profits. Corporation U controls the payment of wages
within the meaning of section 3401(d)(1). Corporation U is not
designated to perform the acts of an employer with respect to all of
the wages Corporation U paid to workers providing services for
Employer. However, as the section 3401(d)(1) employer of the workers
performing services for Employer, Corporation U is subject to all
provisions of law (including penalties) applicable in respect of
employers with respect to such wages.
(9) Example 9. Corporation V 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 2015. Accordingly, Corporation V 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 2015 under
Corporation V's employer identification number. Corporation V is not
designated under this section to perform the acts of an employer
with respect to all of the wages Corporation V paid to the
individuals performing services for Employer for all quarters of
2015. However, as an agent authorized under Sec. 31.3504-1(a),
Corporation V is subject to all provisions of law (including
penalties) applicable in respect of employers for all quarters of
2015 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 2015 with respect to such wages.
(f) Effective/applicability date. These final regulations are
effective for wages or compensation paid by a payor in quarters
beginning on or after March 31, 2014.
John Dalrymple,
Deputy Commissioner for Services and Enforcement.
Approved: March 20, 2014.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2014-07152 Filed 3-28-14; 8:45 am]
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