We know that
Congress passed, and the President signed, the Tax Increase Prevention Act of
2014 at the end of last year. This is the tax bill that retroactively resurrected
certain tax deductions that many taxpayers have become used to, such as
deducting sales taxes (rather than state income taxes) should one live in Tennessee, Florida or Texas
or deducting (a certain amount of) tuition payments if one’s child is in
college.
There is
something else this bill did that was not as well publicized.
It has to do
with professional employer organizations, known as PEO’s. These are companies that
provide human resource (HR) functions, such as the paperwork involved in
hiring, as well as running payroll and depositing payroll taxes and other
withholdings.
There has
long been a hitch with PEOs and payroll taxes: the IRS considered the underlying
employer to still be liable for withholdings if the PEO failed to remit or failed
to do so timely. The IRS took the position that an employer could not delegate
its responsibility for those withholdings. To phrase it differently, the
employer could delegate the task but could not delegate the responsibility.
You can
guess what happened next. There were cases of PEO’s diverting withholdings for
their own use, then going out of business and leaving their employer-clients in
the lurch. If you were one of those employer-clients, the experience proved to
be very expensive. You had paid payroll taxes a first time to the PEO and then
a second time when the IRS held you responsible.
The answer was
to watch over the PEO like a hawk. The IRS encouraged employer-clients to
routinely go into the electronic payment system (EFTPS), for example, to be
certain that payroll taxes were being deposited.
That unfortunately
collided with many an employer’s reason to use a PEO in the first place: to
have someone else “take care of it.”
Back to the
tax bill. Stuck in with the tax extenders was something called the ABLE Act,
which is a Section-529-like-plan, but for disabled individuals rather than for
college expenses.
Stuck (in
turn) onto the ABLE Act was a brand-new Code section just for PEOs. The provision
requires the IRS to establish a PEO certification program by July 1, 2015. There
will be a $1,000 annual fee to participate, but – once approved – the IRS will
allow the PEO to be solely responsible for the employer-client’s payroll taxes.
You have to
admit, this is a marketing bonanza if you own a PEO. It will separate you from
a non-PEO who is bidding on the same prospective client.
The PEO will
have to post a bond in order to participate in the program. In addition the PEO
will have to be audited annually by a CPA. The PEO will have to submit that audited
financial statement to the IRS.
I do not
know the answer as of this writing, but I have a strong suspicion the AICPA was
in the room when that audit requirement was included. Why do I say that?
Because only CPAs are allowed to render an opinion that financial statements
are “presented fairly in accordance with generally accepted accounting
principles.”
NOTE: That would be CPAs who practice as auditors. There are CPAS
who do not. For example, I specialize in taxes.
There is –
by the way – risk to the PEO. This is not a one way street. The PEO will be
responsible for the payroll taxes, even
if the employer-client does not pay the PEO.
