Leased Employees and PEOs
- Payroll taxes and other issues
- Verifying employee SSNs
- What constitutes wages ?
- Who are employees ?
- 20 factors in determining employee or independent contractor status
- misclassified employees
- Updated views of the IRS 20 factors
- IRS web – Withholding for foreign athletes and entertainers
- Statutory employees
- Government employees
- Agricultural employees
- Ministers and religious organizations
- Leased employees and PEO organizations
- Family members
- Federal Insurance Contributions Act (FICA)
- Federal Unemployment Tax Act (FUTA)
- Self-Employment Tax (SECA)
- Deposit deadlines
- Trust fund recovery penalty, IRC § 6672
Under a typical employee leasing arrangement, a client company fires its employees, who are subsequently hired by an employee leasing company and leased back to the original employer by the employee leasing company.
There is a concern that employers may use PEOs, and employee leasing arrangements generally, to circumvent the tax rules requiring that employee benefits be provided in a nondiscriminatory manner (i.e., not preferring highly compensated employees).
PEOs assert that the employment relationship between the client-company and the work-site employees never terminates with the client company retaining the day-to-day control over the workers in carrying on the client-company's trade or business, and, PEO becomes a "co-employer", performing some functions typically associated with a common law employment relationship
- hiring and firing workers
- handling payroll
- providing employee benefits
- IRC § 414(n) creates a special class of employee termed a "leased employee," considered an employee of a client company for purposes of nondiscrimination testing even though the employee is a not a common law employee
The common law employer must be identified to determine whether a:
- welfare benefit may be provided to a work-site employee under an employer's plan and thus whether is excludable from gross income
- work-site employee must be considered for nondiscrimination testing
- tax-exempt entity may be used as a vehicle to provide welfare benefits
Authorities have mixed opinions on whether the PEO or the client company is the common law employer.
The service has not taken a formal position on who is the employer in employee leasing cases and has announced that it will not rule. However, in a 1998 Technical Advice Memorandum (TAM) the Service's position was that leased employees are not per se employees of either the client company or the PEO; and, the facts must be analyzed in each case.
Thus, assuming a worker is a common law employee, the realistic possibilities in a three-party employment arrangement involving a PEO and a client company with respect to who is the employer are the following:
- the PEO is the common law employer, and the client company is the special employer (borrowed servant relationship);
- the PEO and the client company are both concurrent general employers of the work-site employee (dual employment);
- the PEO is the common law employer and the client company does not have an employment relationship with the worker; or
- the client company is the common law employer and the worker does not have an employment relationship with the PEO.