United States

S Corporation required to pay employment taxes - twice

TAX BLOG


We see a growing trend where companies choose to ‘lease’ their employees through a Professional Employer Organization (PEO). Typical in this arrangement, workers are co-employed by the PEO and the company. The company pays the PEO a fee that covers the co-employee’s wages, the related employment taxes, and a mark-up. A PEO issues the pay checks, makes all deposits and prepares all necessary federal and state employment tax filings. All deposits and filings are generally made under the PEO’s federal and state employment tax identification numbers.  

But what happens if the PEO fails to remit the employment taxes to the IRS? Earlier this year the IRS reviewed this situation in CCA 201724025. The guidance concludes that, based upon specific language in the PEO contract at issue, the company was still responsible for the employment taxes. The effect—the Company was required to pay the employment taxes—once to the PEO and again to the IRS.

The PEO described in CCA 201724025 was not a “Certified Professional Employer Organization. The certification program is a voluntary program established by the Tax Increase Prevention Act of 2014. Payment of employment taxes to a Certified PEO absolve the company of future liability to the IRS if the Certified PEO does not remit the employment taxes to the IRS.

For companies that lease employees, it may be a good time to double check and verify that the company’s PEO is certified. If your PEO is not certified, then it is certainly time to have your attorney look over the PEO contract. An attorney can compare the language in a PEO existing contract with the contract language described in the CCA to determine whether the company may be liable to the IRS if employment taxes paid to the PEO are not remitted by the PEO to the IRS.

Taking steps now may avoid issues later. 

Related: PEO ruled statutory employer eligible for refund of overpaid FICA


Scott Ruby

Senior Director

Scott focuses on advising specialty finance companies on optimizing tax positions and preserving working capital. Contact him at scott.ruby@rsmus.com.

Areas of focus: Federal TaxSpecialty Finance