PEO ruled statutory employer eligible for refund of overpaid FICA
TAX ALERT |
In Paychex Business Solutions LLC et al. v. United States No. 8:2015cv01455 - Document 48 (M.D. Fla. 2017), the district court ruled that the professional employer organization (PEO) was the statutory employer, which gave it the right to a refund of overpaid FICA taxes. Of note in this case is not necessarily the FICA issue that led to a refund, but rather the understanding of a PEO and employer relationship.
PEOs contract with client businesses (employers) to provide administrative payroll and benefit services for the employer’s workers. Depending upon the contract between the PEO and the employer, the parties’ relationship can work somewhat differently. In the particular contract at issue in this case, the PEO assumed all responsibility for the reporting, collection and payment of payroll taxes and used its own bank account to make those payments. Further, the employer had no access to this bank account and the PEO initiated payments before it was able to confirm that the employer had sufficient funds with which to reimburse the PEO for the payments.
Under section 3111(a), Social Security taxes (the portion of FICA that led to the refund in the case) are imposed on every employer. Section 3401(d) defines 'employer' as:
“the person for whom an individual performs or performed any service, of whatever nature, as the 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 the wages for such services, the term “employer” (except for purposes of subsection (a)) means the person having control of the payment of such wages.”
Because the employer had no access to the PEO bank account from which payments were made, and citing a long history of related case law, the court ruled the PEO was the statutory employer responsible for submitting payroll taxes as it had sole control over the bank account that was used for the payments. Consequently, the PEO also then had a right to the refund from those overpaid taxes that were paid from funds in its control.
PEO services are quite common today with many employers desiring to outsource this administrative process. The case should not be interpreted to mean that using PEOs removes all responsibility from employers. In this case, the PEO properly complied with its correct responsibilities, except for an error in the amount of FICA taxes paid. However, the case should be a reminder to both PEOs and employers to understand the difference between statutory and common law employers. Statutory employers have reporting responsibility for certain items in circumstances in which they retain control over the payments, but ordinarily, common law employers are responsible for withholding and remitting payroll taxes. In addition, the common law employer is the party that is important for determining employment status as it relates to providing many employee benefits, applying certain nondiscrimination rules, and calculating total number of employees for certain rules, among others.
Determining the common law employer is not typically as easy as concluding who controls the payment. A mistaken assumption of who is the employer for applying a given rule can be quite costly if it leads to not providing benefits or failing to make payments that are your responsibility. Thus, parties entering PEO arrangements need to be keenly aware of who is responsible for what, both at the beginning of a relationship and throughout it.