Certified Professional Employer Organizations
| Published date | 28 May 2019 |
| Citation | 84 FR 24367 |
| Record Number | 2019-10856 |
| Section | Rules and Regulations |
| Court | Internal Revenue Service |
Federal Register, Volume 84 Issue 102 (Tuesday, May 28, 2019)
[Federal Register Volume 84, Number 102 (Tuesday, May 28, 2019)]
[Rules and Regulations]
[Pages 24367-24389]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-10856]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 31, 301, and 602
[TD 9860]
RIN 1545-BN19
Certified Professional Employer Organizations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
-----------------------------------------------------------------------
SUMMARY: This document sets forth final regulations relating to
certified professional employer organizations (CPEOs). The Stephen
Beck, Jr., Achieving a Better Life Experience Act of 2014, required the
IRS to establish a voluntary certification program for professional
employer organizations. These final regulations set forth the
requirements a person must satisfy in order to become and remain a CPEO
and the federal employment tax liabilities and other obligations of
persons certified by the IRS as CPEOs. These final regulations will
affect persons who apply to be treated as CPEOs and who are certified
by the IRS as meeting the applicable requirements. In certain
instances, the final regulations will also affect the federal
employment tax liabilities and other obligations of customers of the
CPEO.
DATES:
Effective date: These regulations are effective on May 28, 2019.
Applicability date: For dates of applicability see Sec. Sec.
31.3511-1(i), 301.7705-1(c), and 301.7705-2(o).
FOR FURTHER INFORMATION CONTACT: Nina Roca at (202) 317-6798 (this is
not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545-2266.
The collection of information in these regulations is in Sec.
31.3511-1(g), which provides that the Secretary shall develop such
reporting and recordkeeping rules, regulations, and procedures as the
Secretary determines necessary or appropriate to ensure compliance by
CPEOs with subtitle C of the Internal Revenue Code (Code), and in Sec.
301.7705-2, which relates to the requirements that a person must
satisfy to become and remain certified as a CPEO.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
return information are confidential, as required by 26 U.S.C. 6103.
Background
The Stephen Beck, Jr., Achieving a Better Life Experience Act of
2014 (the ABLE Act), enacted on December 19, 2014 (Pub. L. 113-295),
added new sections 3511 and 7705 to the Code relating to the
certification requirements for, and the federal employment tax
consequences of, being a ``certified professional employer
organization'' (CPEO). The ABLE Act required the
[[Page 24368]]
Internal Revenue Service (IRS) to establish a voluntary certification
program for persons to become CPEOs. Additionally, the ABLE Act made
conforming amendments to sections 3302, 3303(a), 6053(c), 6652, and
7528 relating to the obligations, requirements, and penalties
applicable to a CPEO.
Section 7705(a) defines a CPEO as a person who applies to be
treated as a CPEO for purposes of section 3511 and has been certified
by the Secretary as meeting the requirements of section 7705(b), which
include requirements related to tax status and background, satisfying
certain bond, financial review, and quarterly reporting requirements
(as provided for in section 7705(c)), and notifying the IRS of any
change that materially affects the continuing accuracy of information
provided by the CPEO.
Section 7705(d) gives the Secretary the authority to suspend or
revoke the certification of any person for purposes of section 3511 if
the Secretary determines that the person is not satisfying the
agreements or requirements of sections 7705(b) or (c), or fails to
satisfy applicable accounting, reporting, payment, or deposit
requirements. Section 7705(f) provides that the Secretary shall make
available to the public the name and address of each person certified
as a CPEO and each person whose certification is suspended or revoked.
Under sections 3511(a)(1) and (c)(1), for purposes of federal
employment taxes and other obligations under the federal employment tax
rules, a CPEO is generally treated as the employer of any individual
performing services for a customer of the CPEO and covered by a
contract meeting the requirements of section 7705(e)(2) (CPEO contract)
between the CPEO and the customer (covered employee), but only with
respect to remuneration remitted to the covered employee by the CPEO.
With respect to an individual covered by a CPEO contract who performs
services for a customer at a work site that meets the coverage
requirements of section 7705(e)(3) (a work site employee), section
3511(a)(1) specifies that no person other than the CPEO is treated as
the employer for federal employment tax purposes with respect to
remuneration remitted by the CPEO to such individual.
Under section 3511(g), the Secretary is directed to develop such
reporting and recordkeeping rules, regulations, and procedures as the
Secretary determines necessary or appropriate to ensure compliance with
the applicable federal employment tax provisions by CPEOs. In addition,
under section 3511(h), the Secretary is directed to prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of section 3511.
On May 6, 2016, the Department of the Treasury (Treasury
Department) and the IRS published final and temporary regulations under
section 7705 (TD 9768) in the Federal Register (81 FR 27315, as
corrected July 12, 2016 at 81 FR 45012) that describe the application
process and certification requirements necessary for a person to become
and remain a CPEO. On the same date, the Treasury Department and the
IRS published a notice of proposed rulemaking (REG-127561-15) in the
Federal Register (81 FR 27360) cross-referencing the temporary
regulations and proposing additional regulations under section 3511
that describe the federal employment tax consequences for CPEOs and
their customers. On June 3, 2016, Revenue Procedure 2016-33 (2016-25
I.R.B. 1034) was also issued, which set forth the detailed procedures
for applying to be certified as a CPEO. The IRS did not receive any
requests for a public hearing on the regulations, and therefore no
public hearing was held. Several comments responding to the proposed
and temporary regulations and the revenue procedure were received. The
Treasury Department and the IRS determined that it was important to
respond promptly to some of these comments and issued Notice 2016-49
(2016-34 I.R.B. 265) on August 5, 2016 in response. Notice 2016-49
provided interim guidance and described modifications to certain
certification requirements, which are reflected in these final
regulations. Finally, the Treasury Department and the IRS also issued
Revenue Procedure 2017-14 (2017-3 I.R.B. 426) on December 29, 2016,
which addressed the requirements for a CPEO to remain certified and the
procedures relating to suspension and revocation of CPEO certification.
The written comments received are available for public inspection and
copying at http://www.regulations.gov or upon request. After
consideration of all the comments, the proposed regulations are adopted
as amended by these final regulations.
Summary of Comments and Explanation of Revisions
The IRS received seven written comments in response to the proposed
and temporary regulations. Several of the points made in the comments
related to items specifically addressed in the online application for
certification, Rev. Proc. 2016-33, Notice 2016-49, Rev. Proc. 2017-14,
Form 8973 ``Certified Professional Employer Organization/Customer
Reporting Agreement'', Schedule R (Form 941) ``Allocation Schedule for
Aggregate Form 941 Filers'', and/or Form 14751 ``Certified Professional
Employer Organization Surety Bond''. Except to the extent that certain
of these comments also relate to issues covered by the regulations, the
comments are beyond the scope of the regulations and they are not
otherwise addressed herein. They are under further consideration for
future revisions of the revenue procedures and possible modifications
to the application program and applicable forms.
1. Annual Wage Base and Withholding Threshold for Covered Employees
Sections 3511(a) and (c), provide that, for federal employment tax
purposes, a CPEO is treated as the employer of covered employees that
are work site employees (section 3511(a)(1)) and covered employees that
are not work site employees (non-work site covered employees) (section
3511(c)(1)) with regard to remuneration it pays to these covered
employees. Remuneration paid by an employer to an employee within any
calendar year is not subject to the social security portions of Federal
Insurance Contributions Act (FICA) taxes, the equivalent portions of
tier 1 Railroad Retirement Tax Act (RRTA) taxes, or Federal
Unemployment Tax Act (FUTA) taxes to the extent it exceeds the
applicable annual wage base for these taxes (collectively referred to
in this Summary of Comments and Explanation of Revisions as the
``annual wage base''). See sections 3121(a), 3231(e), and 3306(b) for
FICA, RRTA, and FUTA taxes respectively. Under section 3102(f)(1),
employers are required to withhold Additional Medicare Tax (AdMT) from
an employee's wages only to the extent that those wages exceed $200,000
in a calendar year (referred to in this Summary of Comments and
Explanation of Revisions as the ``withholding threshold''). The annual
wage base applies on an employer-by-employer basis, unless the
predecessor-successor employer rule discussed below applies; thus, only
remuneration received during any calendar year by an employee from the
same employer is considered in applying the annual wage base for
purposes of the remuneration paid by that employer. See Sec. Sec.
31.3121(a)(1)-1(a)(3) and 31.3306(b)(1)-1(a)(3) for FICA and FUTA
taxes, respectively. Similarly, the AdMT withholding threshold applies
only with regard to remuneration received during any calendar year by
an employee from the same employer. See Sec. 31.3102-4(a).
[[Page 24369]]
By contrast, the annual wage base is not applied separately to
successor and predecessor employers. See section 3121(a)(1). In
accordance with section 3511(b), Sec. 31.3511-1(d) of the proposed
regulations provides that, for purposes of the annual wage base: (1) A
customer is considered a predecessor employer and a CPEO is considered
a successor employer upon entering into a CPEO contract with respect to
a work site employee who is performing services for the customer, and
(2) a CPEO is considered a predecessor employer and a customer is
considered a successor employer upon termination of the CPEO contract
between the CPEO and the customer with respect to a work site employee
who is performing services for the customer. The proposed regulations
also provide that, except as provided with respect to successor and
predecessor employers in Sec. 31.3511-1(d), remuneration received by a
covered employee from a CPEO for performing services for a customer of
the CPEO within any calendar year is subject to a separate annual wage
base and withholding threshold that are each computed with respect to
such remuneration, without regard to any remuneration received by the
covered employee during the calendar year from any other employer
(including, if applicable, remuneration received directly from the
customer receiving services from the employee). Thus, upon entering
into a CPEO contract with a customer with respect to a covered
employee, the CPEO starts a new annual wage base and withholding
threshold with respect to the covered employee (unless the CPEO is
treated as a successor employer under Sec. 31.3511-1(d)).
The proposed regulations also provide that if, during a calendar
year, a covered employee receives remuneration from a CPEO for services
performed by the covered employee for more than one customer of the
CPEO, the annual wage base and withholding threshold do not apply to
the aggregate remuneration received by the covered employee from the
CPEO for services performed for all such customers. Rather, the annual
wage base and withholding threshold apply separately to the
remuneration received by the covered employee from the CPEO with
respect to services performed for each customer.
The Treasury Department and the IRS received several comments on
the annual wage base and withholding threshold rules for covered
employees under the proposed regulations. One commenter recommended
that current law, unaffected by section 3511 and the regulations
thereunder, should apply for purposes of determining whether
remuneration paid by a CPEO to a non-work site covered employee is
subject to a separate annual wage base. The commenter asserted that the
statutory distinction between the tax treatment of work site employees
and the tax treatment of non-work site covered employees was intended
to address CPEO and customer liability only in each case, and was not
meant to otherwise change the federal employment tax treatment of wages
paid to work site employees versus non-work site covered employees.
The Treasury Department and the IRS disagree with that assertion.
Section 31.3121(a)(1)-1(a)(3) provides that if an employee receives
remuneration from more than one employer in a calendar year, the annual
wage base does not apply to the aggregate remuneration received from
all of such employers, but instead applies to the remuneration received
during that calendar year from each employer. Because section 3511
treats a CPEO as an employer separate and apart from the CPEO customer
for whom the employees are performing services, employees receiving
remuneration from both the CPEO and the CPEO customer in a calendar
year must be treated as receiving remuneration from two different
employers and the annual wage base therefore applies separately, unless
the successor and predecessor rules under section 3511(b) apply.
The same commenter also suggested that, if an employee performs
services for multiple customers of a CPEO, the annual wage base should
apply to the aggregate remuneration received by the employee from the
CPEO for services performed for all customers. The commenter argued
that the customer-by-customer treatment of the annual wage base in the
proposed regulations was contrary to the statutory language that treats
the CPEO as the sole employer of work site employees.
A customer-by-customer treatment of the annual wage base is
consistent with section 3511. Specifically, the maintenance of a
separate annual wage base and withholding threshold with respect to
each customer for which a covered employee performs services during a
calendar year is consistent with the statutory language of section
3511(a)(1) which provides that the CPEO will ``be treated as the
employer (and no other person will be treated as the employer) of any
work site employee performing services for any customer of such
organization, but only with respect to remuneration remitted by such
organization to such work site employee'' (emphasis added). This
language contemplates that the CPEO will have a separate annual wage
base under 3121(a), 3231(e), and 3306(b) (subject to the application of
the predecessor-successor employer rules on a customer-by-customer
basis). Furthermore, under section 3511(a)(2) (applicable to work site
employees) and section 3511(c)(2) (applicable to non-work site covered
employees), the exemptions, exclusions, definitions, and other rules,
which are based on the type of employer in most cases will be based on
the CPEO customer (assuming the typical situation in which the CPEO
customer is the common law employer of the covered employees). In these
instances, the attributes of the CPEO customer (e.g., tax-exempt or
not) will be used to determine the taxes on the remuneration paid by
the CPEO with respect to services performed for a customer. In
addition, section 3511(d)(1)(A) provides that, for purposes of certain
specified credits, with respect to services performed by a work site
employee for a CPEO customer, the credits apply to the CPEO customer,
not the CPEO. Thus, section 3511 requires, for both work site and non-
work site covered employees, the separate treatment of amounts paid by
the CPEO to one employee with respect to services performed by the
employee for two or more different customers. A separate annual wage
base and withholding threshold with respect to each customer for which
a covered employee performs services is needed for purposes of applying
some of the exemptions, exclusions, definitions, and other rules
addressed in section 3511(a)(2) and (c)(2) and the treatment of some of
the credits discussed in section 3511(d). Therefore, if a single
employee receives remuneration from a CPEO pursuant to multiple CPEO
contracts with different customers, the CPEO must maintain a separate
annual wage base and withholding threshold for the employee with
respect to each customer.
For instance, wages paid to employees for services performed in the
employ of a religious, charitable, educational, or other type of
organization described under section 501(c)(3) are not subject to FUTA
tax under section 3306(c)(8). Consequently, under sections 3511(a)(2)
and (c)(2), wages paid by a CPEO to covered employees for services
performed for a CPEO customer that is an organization described in
section 501(c)(3) are not subject to FUTA tax. Wages paid by a CPEO to
a covered employee for services performed for a CPEO customer that is a
section 501(c)(3) organization cannot be used in
[[Page 24370]]
determining FUTA tax liability for wages paid by the CPEO for services
performed by that same employee for a CPEO customer that is subject to
FUTA tax. The FUTA annual wage base must be applied separately to the
remuneration paid by the CPEO for services performed for the non-
section 501(c)(3) employer because under sections 3511(a)(2) and (c)(2)
the exemption from FUTA tax applies only to the CPEO customer that is a
501(c)(3) organization.
For these reasons, the commenter's proposed changes are not adopted
in these final regulations.
Finally, one commenter suggested that, because a CPEO that is
treated as a successor employer will need to determine the amount of
wages paid and applied toward the annual wage base by a customer that
is treated as the predecessor employer and in some cases that
information provided by a customer may be incorrect, the IRS should
issue guidance stating that a CPEO may rely on the wage report provided
by the customer. Whether, and to what extent, a CPEO relies on a wage
report from its customer is a business decision for the CPEO. The CPEO
still has the obligation to report accurate information. General
guidance on the procedures applicable to preparing and reporting wage
information in predecessor and successor employer situations is
addressed in the regulations under section 3121(a)(1) and in Revenue
Procedure 2004-53, 2004-34 I.R.B. 320, (the revenue procedure
specifically provides guidance on filing Forms 941, W-2, W-4, and W-5
in predecessor and successor employer situations). CPEOs that are
treated as successor employers should refer to those provisions for
guidance. For these reasons, the commenter's suggestion is not adopted
in these final regulations.
2. Treatment of Credits
a. Non-Work Site Covered Employees
Under section 3302(h), if a CPEO, or a customer of a CPEO, makes a
contribution to a state's unemployment fund with respect to wages paid
to a work site employee, the CPEO is eligible for the credits available
under section 3302 for purposes of calculating FUTA tax with respect to
that contribution. Similarly, under section 3303(a)(4), a CPEO is
allowed an additional credit under section 3302(b) with respect to any
reduced rate of contributions permitted by a state law if the Secretary
of Labor finds that under that law the CPEO is permitted to collect and
remit contributions during the taxable year to the state unemployment
fund with respect to a work site employee. Because section 3302(h) and
section 3303(a)(4) apply exclusively with respect to wages paid to work
site employees, the Treasury Department and the IRS requested comments
on the application of the credits in sections 3302(h) and 3303(a)(4)
with respect to wages paid to non-work site covered employees.
Under section 3511(d), for purposes of various tax credits
enumerated in section 3511(d)(2) under which the amount of the credit
is determined by reference to the amount of federal employment taxes or
the amount of wages subject to federal employment taxes, the credit
with respect to a work site employee performing services for a customer
applies to the customer, not to the CPEO. Consequently, in determining
the amount of the credit, the customer, and not the CPEO, takes into
account the federal employment taxes and wages paid by the CPEO with
respect to the work site employee and for which the CPEO receives
payment from the customer. Because the application of the specified tax
credits to the customer under section 3511(d) applies exclusively with
respect to work site employees, the Treasury Department and the IRS
requested comments on the treatment of tax credits with respect to non-
work site covered employees.
One commenter responded to these requests for comments. Concerning
the application of the FUTA tax credits in sections 3302(h) and
3303(a)(4) to non-work site covered employees, the commenter stated
that the application of the credits should be governed by current law
without regard to the statutory provisions related to the CPEO program.
But the commenter also suggested that ``it is equitable, consistent
with the intent of the law, and in the best interests of employment
administration efficiency (without regard to the application of
[section] 3511) to apply the application of the pass-through of the
FUTA tax credit to a CPEO with respect to wages paid to . . .
individuals covered by a CPEO contract that are not Work Site
Employees.'' In addition, this commenter requested that the preamble to
the final regulations note that ``as a general matter, the CPEO that is
liable for the FUTA taxes on remuneration it pays would be eligible for
the tax credits under sections 3302(h) and 3303(a)(4).''
The Treasury Department and the IRS have determined that, because
amendments to regulations under section 3302(h) and section 3303(a)(4)
were not included in the notice of proposed rulemaking, these final
regulations will not address the general application of the credits in
sections 3302(h) and 3303(a)(4) in connection with wages paid to non-
work site covered employees. The Treasury Department and the IRS will
continue to consider this issue.
Concerning the treatment of tax credits described in section
3511(d) with respect to non-work site covered employees, the commenter
suggested that, just as with the credits under sections 3302(h) and
3303(a)(4), the application of these credits should be governed by
current law. The commenter also added that there is ``no basis or
advantage'' to treating work site employees and non-work site covered
employees differently and therefore, as a general matter, the customer,
and not the CPEO, should be eligible for the tax credits listed in
section 3511(d). The Treasury Department and the IRS agree that current
law should govern the eligibility for the tax credits listed in section
3511(d) with respect to wages paid to non-work site covered employees.
For this reason, these final regulations do not include provisions
regarding the application of the tax credits in section 3511(d) to non-
work site covered employees. The Treasury Department and the IRS note
that, in computing these credits under current law, generally the
customer, and not the CPEO, will take into account wages and federal
employment taxes paid by the CPEO with respect to the covered employee
and for which the CPEO receives payment from the customer. This is the
same treatment accorded to tax credits listed in section 3511(d) for
work site employees.
b. Additional Credits
As discussed in the previous section, section 3511(d) governs the
treatment of various tax credits under which the amount of the credit
is determined by reference to the amount of wages or federal employment
taxes and section 3511(d)(2) specifies these credits. Under section
3511(d)(2)(H), the Secretary may specify other credits subject to the
treatment provided for under section 3511(d). Consistent with this
section, the Treasury Department and the IRS requested comments on
whether other credits should be specified in these regulations or in
other guidance.
One commenter requested that the recently enacted employer credit
for paid family and medical leave under section 45S be added to the
list of specified credits in the regulations. Section 45S was added to
the Code by the Tax Cuts and Jobs Act (Pub. L. 115-97) enacted December
22, 2017. Notice 2018-71, 2018-41 I.R.B. 548, published October 9,
2018, provides that, for
[[Page 24371]]
wages paid by a CPEO to qualifying employees for services performed for
an eligible employer, the eligible employer, not the CPEO, may take
into account wages paid to qualifying employees for services performed
for the eligible employer in determining the credit under section 45S.
The notice also announces the IRS's intention to publish proposed
regulations under section 45S. The Treasury Department and the IRS have
determined that, although the credit under section 45S does not apply
to wages paid in taxable years beginning after December 31, 2019
(unless extended), it is appropriate to add this credit to the list of
specified credits. Therefore, these final regulations include the
credit under section 45S in the list of specified credits under Sec.
31.3511-1(e)(2) (which provides a list of credits that apply to the
CPEO customer, and not the CPEO, with respect to services performed by
a work site employee for a CPEO customer). In addition, Sec. 31.3511-
1(e)(2)(ix) of these final regulations provides that the IRS may
specify any other section as a specified credit in further guidance.
No other comments on the proposed regulations were received
specifying additional credits to be included in the final regulations.
However, subsequent to the issuance of the proposed regulations, the
IRS did receive questions concerning whether wages paid by a CPEO to
employees for services performed for a customer can be used by the
customer in determining the employee retention credit in section 503 of
the Disaster Tax Relief and Airport and Airway Extension Act of 2017
(The Disaster Relief Act (Pub. L. 115-63)) (assuming that the customer
otherwise meets the requirements for the credit). In response to these
inquiries, the IRS provided, in Publication 976 ``Disaster Relief'',
and on irs.gov, that for purposes of the employee retention credit,
qualified wages paid by a CPEO to eligible employees of an eligible
employer are considered qualified wages incurred by the eligible
employer. The employee retention credit for disaster relief found in
The Disaster Relief Act is substantially similar to the credit provided
for in section 1400R, which provides an employee retention credit for
employers affected by Hurricane Katrina. In addition, several other
disaster relief acts have provided employee retention credits modeled
after the credit in section 1400R. Since future disaster relief acts
may continue to include employee retention credits similar to those
provided in section 1400R and in The Disaster Relief Act, these final
regulations add statutory employee retention credits that are similar
to the employee retention credit in section 1400R and that provide
disaster relief to employers in designated disaster areas to the list
in Sec. 31.3511-1(e)(2).
3.Treatment of Self-Employed Individuals
Consistent with section 3511(f), which provides that a self-
employed individual is not a work site employee with respect to
remuneration paid by a CPEO, and with section 3511(c), which provides
that a CPEO is not treated as an employer of a self-employed
individual, the proposed regulations provide that section 3511 does not
apply to any self-employed individual.
The proposed regulations define a ``self-employed individual'' as
an individual with net earnings from self-employment (as defined in
section 1402(a), without regard to the exceptions thereunder) derived
from providing services covered by a CPEO contract, whether such net
earnings are derived from providing services as a non-employee to a
customer of a CPEO, from the individual's own trade or business as a
sole proprietor customer of the CPEO, or as a partner in a partnership
that is a customer of the CPEO, but only with regard to such net
earnings.
In addition, the preamble discussion of the definition of ``work
site employee'' in the proposed regulations provides that a self-
employed individual, whether an independent contractor to the customer,
a sole proprietor customer of the CPEO, or a partner in a partnership
customer of the CPEO, is not considered to be a work site employee
under section 3511(f) with regard to those earnings, but also provides
that in the limited case in which a self-employed individual who is an
independent contractor of a customer is also paid wages by the CPEO
under a CPEO contract with the customer, the individual may
nevertheless be a work site employee with respect to those wages. This
latter language was intended to address the uncommon situation in which
one individual is receiving payments from the CPEO for services
provided to a customer in two separate capacities, i.e., for services
performed for the CPEO customer as a common law employee of the
customer and for completely separate and distinct services provided to
the customer as an independent contractor. The CPEO is treated as the
employer of the individual for federal employment tax purposes with
respect to the payments the CPEO makes to the individual for the
services the individual performs as a common law employee of the CPEO
customer, and these payments are reported as wages by the CPEO. The
payments for the services provided as an independent contractor are not
wages and must be reported as payments to a self-employed individual.
Further, any payment made by a CPEO to a partner in a partnership
under a contract between the partnership and the CPEO must always be
treated as a payment to a self-employed individual and reported as
such. Under Revenue Ruling 69-184 (1969-1 C.B. 256) ``[b]ona fide
members of a partnership are not employees of the partnership'' for
federal employment tax purposes. ``Such a partner who devotes . . .
time and energies in the conduct of the trade or business of the
partnership, or in providing services to the partnership as an
independent contractor, is, in either event, a self-employed individual
rather than an individual who, under the usual common law rules
applicable in determining the employer-employee relationship, has the
status of an employee.'' Thus, ``[r]emuneration received by a partner
from the partnership is not `wages' with respect to `employment.' ''
Instead, under the statutory framework of Subchapter K of the Code, an
allocation or distribution between a partnership and a partner for the
provision of services generally can be treated in one of three ways:
(1) A distributive share under section 704(b) (reported as such by the
partnership on Schedule K-1 (Form 1065), ``Partner's Share of Income,
Deductions, Credits, etc.''); (2) a guaranteed payment under section
707(c) (reported as such by the partnership on Schedule K-1 (Form
1065)); or (3) as a transaction in which a partner has rendered
services to the partnership in its capacity as other than a partner
under section 707(a) (reported by the partnership like a payment to an
independent contractor on Form 1099-MISC, ``Miscellaneous Income''). It
is irrelevant to the characterization of the payment whether a CPEO
pays the partner or the partnership pays the partner directly.
One commenter requested that the IRS permit reporting of payments
by CPEOs to self-employed individuals using Form W-2, ``Wage and Tax
Statement.'' However, the reporting of amounts paid to self-employed
individuals is outside of the scope of these regulations. For example,
under the section 6041 regulations, certain payments to self-employed
individuals are reported using information returns such as Form 1099-
MISC,
[[Page 24372]]
``Miscellaneous Income,'' and not on Form W-2. Payments (within the
meaning of section 6041 and the regulations thereunder) made to self-
employed individuals should be reported in accordance with the rules
under these and other applicable provisions.
4. Reporting to the IRS by CPEOs
a. Reporting Commencement or Termination of CPEO Contracts and Service
Agreements
Section 3511(g) sets forth the reporting requirements and
obligations that persons must satisfy in order to maintain
certification as a CPEO. The proposed regulations provide that a CPEO
must report information relating to the commencement or termination of
(1) any CPEO contract with a customer and (2) any service agreement
described in Sec. 31.3504-2(b)(2) with a client and the name and EIN
of such customer or client. The proposed regulations also provide that,
with any Form 940, ``Employer's Annual Federal Unemployment (FUTA) Tax
Return'', or Form 941, ``Employer's Quarterly Federal Tax Return'',
that a CPEO files, the CPEO must attach the applicable Schedule R (or
any successor form) including such information as the Commissioner may
require about each of its customers under a CPEO contract and any
clients under a service agreement described in Sec. 31.3504-2(b)(2).
The only comment the IRS received related to these reporting
requirements stated that they should be eliminated as they relate to
clients under a service agreement described in Sec. 31.3504-2(b)(2)
because they are unnecessarily burdensome, ineffective, and not
supported by statute. The commenter also stated that reporting
commencement or termination of CPEO contracts or service agreements
should be required only quarterly.
Section 3511(g) provides that the ``Secretary shall develop such
reporting and recordkeeping rules, regulations, and procedures as the
Secretary determines necessary or appropriate to ensure compliance with
this title by certified professional employer organizations.'' Because
a CPEO contract potentially affects the liability of CPEO customers
under such contracts, the proposed regulations provide that CPEOs must
report service agreements described in Sec. 31.3504-2(b)(2) with
clients so that the IRS has a record that explicitly provides which
CPEO clients are not under a CPEO contract, in the event that disputes
concerning liability arise. In addition, the instructions to Form 8973,
which is the form used to report a CPEO contract with a customer and a
service agreement described in Sec. 31.3504-2(b)(2) with a client,
require that customers and clients sign Form 8973 and that a copy of
this form be provided to the customers and clients to ensure the
customers and clients understand the nature of their relationship with
the CPEO. This requirement is in line with the statutory requirement in
section 7705(e)(2)(F) that a CPEO contract include a provision that the
CPEO agrees to be treated as a CPEO for purposes of 3511 with respect
to the CPEO customer's employees. Thus, requiring that CPEOs report
service agreements described in Sec. 31.3504-2(b)(2) with clients not
only facilitates the IRS's recordkeeping, but also provides a means for
the IRS to verify that the CPEO has properly represented to clients and
customers the nature of their contractual arrangement (i.e., whether
they are covered by a CPEO contract or not).
Similarly, the proposed regulations provide that CPEOs must include
information about clients under a service agreement described in Sec.
31.3504-2(b)(2) on Schedule R so that the IRS has a record of which
amounts reported on Forms 941 and 940 are not subject to the liability
provisions in sections 3511(a) and (c), in the event disputes
concerning liability arise, and so that the IRS can better reconcile
the total amounts of wages and taxes reported on Forms 940 and 941 with
the amounts of wages and taxes reported on Schedule R.
Because the proposed regulations' reporting requirements relating
to clients under a service agreement described in Sec. 31.3504-2(b)(2)
assist the IRS in ensuring CPEO compliance with rules governing federal
employment tax liability, consistent with section 3511(g), these final
regulations retain the reporting requirements as they were in the
proposed regulations.
The proposed regulations do not address the time and manner of
reporting the commencement or termination of CPEO contracts and service
agreements. Rather, this information is provided in Rev. Proc. 2017-14
and in the instructions to the Form 8973. Requirements relating to the
time and manner of reporting the commencement or termination of CPEO
contracts and service agreements are criteria for tax administration
that may need to be modified as processes or technology change or more
knowledge about administrative challenges is acquired. Therefore, these
requirements are more appropriately addressed in tax forms and
publications or revenue procedures.
b. Form 943--Attaching Schedule R and Reporting on Magnetic Media
The proposed regulations provide that, with every Form 940 and Form
941 it files, a CPEO must attach all required schedules, including, but
not limited to, the applicable Schedule R (or any successor form). The
proposed regulations also provide that a CPEO must file Forms 940 and
941, and all required accompanying schedules, on magnetic media unless
the CPEO is provided a waiver by the Commissioner. The proposed
regulations define magnetic media as electronic filing, as well as
other media specifically permitted under the applicable regulations,
revenue procedures, publications, forms, instructions, or other
guidance.
For certain agricultural employer clients and customers, CPEOs must
report federal employment taxes using Form 943, ``Employer's Annual
Federal Tax Return for Agricultural Employees.'' At the time the
proposed regulations were promulgated, a Schedule R was not available
for Form 943, and the form could not be filed electronically. However,
Schedule R (Form 943) is now available, and electronic filing has since
been made available for Form 943. For this reason, these final
regulations provide that, just like Forms 940 and 941, Form 943 must be
filed with all required schedules, including Schedule R, attached and
Form 943 must be filed on magnetic media unless the CPEO is provided a
waiver by the Commissioner.
c. Waivers of the Requirement To Report on Magnetic Media
The proposed regulations provide that the requirement to file Forms
940 and 941 on magnetic media can be waived in cases of undue economic
hardship. Since the promulgation of the proposed regulations, some
CPEOs experienced difficulties in electronic filing due to temporary
software and technological issues, and one commenter asked the IRS to
clarify that undue economic hardship can include economic hardships
resulting from software and technological issues. The IRS provided
these clarifications on irs.gov, and these final regulations also
clarify that undue economic hardship includes economic hardships
resulting from software and technological issues.
5. Applicable Definitions
a. Certified Public Accountant (CPA)
In connection with the financial statement and quarterly assertion
and
[[Page 24373]]
attestation requirements in the temporary regulations, the CPEO
applicant or CPEO must submit an opinion or an examination level
attestation, as applicable, from a CPA. The temporary regulations
define a CPA as an individual who is independent of the CPEO (as
prescribed by the American Institute of Certified Public Accountants'
(AICPA) Professional Standards, Code of Professional Conduct), and
among other things, files with the IRS a written declaration that he or
she is authorized to represent the CPEO applicant or CPEO before the
IRS. The Treasury Department and the IRS requested comments regarding
whether the CPA independence guidelines or requirements of other
governmental agencies or departments of industry self-regulatory bodies
(such as the Department of Labor's guidelines on the independence of
CPAs retained by employee benefit plans under 29 CFR 2509.75-9, the
Securities and Exchange Commission's (SEC) independence guidelines for
auditors reporting on financial statements included in SEC filings, and
the Government Accountability Office's auditor independence
requirements under Government Auditing Standards that cover federal
entities and organizations receiving federal funds), as adapted for a
CPA of a CPEO, would better ensure the impartiality of CPAs providing
opinions on a CPEO's financial statements. One commenter responded that
the AICPA's independence guidelines are the most appropriate for the
CPEO program, and that most CPAs are more familiar with those
guidelines than the other guidelines referenced in the preamble to the
temporary regulations. The Treasury Department and the IRS agree that
the AICPA's independence guidelines are the most appropriate for the
CPEO program. Therefore, these final regulations retain the reference
to the AICPA professional standards.
Several commenters also noted that the requirement that a CPA be
authorized to represent the CPEO applicant or CPEO before the IRS could
conflict with the CPA independence requirements of the AICPA.
Consistent with Notice 2016-49, and to ensure that the CPA may be
``independent'' within the meaning of the AICPA guidelines, these final
regulations omit the requirement that the CPA file with the IRS a
written declaration of authorization to represent the CPEO applicant or
CPEO before the IRS.
b. Responsible Individual
Section 7705(b)(1) provides that the Secretary may establish
requirements for certification that apply not only to the CPEO
applicant or CPEO, but also to ``any owner, officer, and other persons
as may be specified in regulations.'' Accordingly, the temporary
regulations include a number of requirements that apply to certain
owners, officers, and other individuals (referred to in the regulations
as ``responsible individuals''). The temporary regulations generally
define a responsible individual as an individual in any of the
following categories with respect to the CPEO applicant or CPEO: (1)
Certain owners; (2) directors and officers; (3) individuals with
ultimate responsibility for implementing the decisions of the
organization's governing body; (4) individuals with ultimate
responsibility for the organization's management and operations; (5)
individuals with ultimate responsibility for managing the
organization's finances; (6) managing members or general partners; (7)
the sole proprietor of a sole proprietorship; and (8) any other
individuals with primary responsibility for federal employment tax
compliance of the organization. With respect to determining whether an
individual is a responsible individual by reason of ownership, the
temporary regulations specify that a responsible individual includes
any individual who owns 33 percent or more of the total combined voting
power of all classes of stock of a corporation entitled to vote or the
total value of shares of all classes of stock of a corporation, or any
individual who owns 33 percent or more of the profits interest or
capital interest in a partnership.
The Treasury Department and the IRS requested comments regarding
the administrability of applying the definition of responsible
individual with respect to ownership of profits interests in a
partnership, the value of which may fluctuate over time. One commenter
indicated that, although there would be situations where a partner's
capital interest or profits interest will fluctuate, similar
fluctuations will likely occur with respect to changes in corporate
ownership. The commenter did not suggest revising the definition of
responsible individual with respect to ownership percentages, but the
commenter did suggest that the IRS require only annual reporting of
responsible individuals unless there is significant turnover in the
CPEO's responsible individuals. The temporary regulations require that
a CPEO applicant or CPEO notify the IRS, in the time and manner
prescribed by the Commissioner in further guidance (as defined in Sec.
301.7705-1(b)(8)), of any change that materially affects the continuing
accuracy of any agreement or information that was previously made or
provided to the IRS. A change in responsible individuals is an example
of a material change, and the time and manner for reporting this
information to the IRS is currently set forth in Rev. Proc. 2016-33 and
Rev. Proc. 2017-14. Accordingly, the final regulations do not adopt
this suggestion, but the Treasury Department and the IRS will consider
this comment in any future updates to these two revenue procedures.
Additionally, the final regulations adopt the definition of responsible
individuals from the temporary regulations, with additional language
regarding disregarded entities as described in paragraph 7(a) of this
Summary of Comments and Explanation of Revisions.
The temporary regulations also require the CPEO, and each of its
responsible individuals, to take such actions as are necessary to
authorize the IRS to investigate the accuracy of statements and
submissions made by the CPEO, including waiving confidentiality and
privilege when necessary and submitting fingerprints to conduct
comprehensive background checks, including, but not limited to, checks
on tax compliance and criminal background. With respect to suitability
requirements applicable to responsible individuals, the Treasury
Department and the IRS requested comments regarding the possible
expansion of the category of individuals who must authorize the IRS to
conduct comprehensive background checks and submit fingerprint cards to
include certain directors, officers, and owners of a CPEO applicant's
or CPEO's related entities. The Treasury Department and the IRS
received one comment in response. The commenter requested that the
category not be expanded because such an expansion would impose
additional paperwork burdens on professional employer organizations
(PEOs), responsible individuals, and the IRS without any meaningful
improvements in the program. The Treasury Department and the IRS
considered the likely impact on PEOs, responsible individuals, and the
IRS of expanding this category and the likely value of this additional
information to the IRS. As of the date of these final regulations, the
IRS has certified 120 CPEOs, and the information provided regarding
each CPEO applicant, its related entities, precursor entities, and
responsible individuals, coupled with the ongoing certification
requirements
[[Page 24374]]
applicable to CPEOs and responsible individuals, has been sufficient
for the IRS to make determinations regarding certification. Therefore,
these final regulations do not expand the category of individuals who
must authorize the IRS to conduct comprehensive background checks and
submit fingerprint cards beyond what was included in the temporary
regulations.
c. Provider of Employment-Related Services
The temporary regulations define a provider of employment-related
services as a person that provides employment tax administration,
payroll services, or other employment-related compliance services to
clients. One commenter suggested that the phrase ``or other employment-
related compliance services'' in the definition of provider of
employment-related services could be interpreted to include entities
that only provide (1) labor through a staffing service, or (2)
employment background screening services. The commenter suggested
revising the definition to refer to ``other similar employment-related
compliance services.'' The Treasury Department and the IRS agree with
the commenter that the phrase ``or other employment-related compliance
services'' could be construed to apply more broadly than was intended.
As noted in the preamble to the temporary regulations, the term is
intended to capture entities that provide payroll or other federal
employment tax administration and compliance services. Accordingly,
these regulations replace the term ``provider of employment-related
services'' with ``provider of payroll services'' and revise the
definition of this term to clarify that the entity must provide
payroll, federal employment tax administration, or other similar
federal employment tax-related compliance services.
d. Work Site
The proposed regulations define ``work site'' as a physical
location at which an individual regularly performs services for a
customer of a CPEO (except that a work site may not be the individual's
residence or a telework site unless the customer requires the
individual to work at that site) and if there is no such location, the
work site is the location from which the customer assigns work to the
individual. The proposed regulations also provide that, in applying the
term ``work site,'' contiguous locations are treated as a single
physical location and thus a single work site, and noncontiguous
locations that are not reasonably proximate are treated as separate
physical locations and thus separate work sites. A CPEO may treat
noncontiguous locations that are reasonably proximate as a single
physical location and thus a single work site, but any two work sites
that are separated by 35 or more miles or that operate in a different
industry or industries will not be treated as reasonably proximate.
Because the physical location at which an individual regularly performs
services can, at times, be difficult to ascertain, the Treasury
Department and the IRS requested comments on the definition of work
site and any additional clarifications that would facilitate a
determination of an individual's work site.
One commenter responded to this request for comments. The commenter
suggested that the definition focus on the physical location where an
individual ``primarily'' performs services and that, when appropriate,
various client locations should be considered one work site location
rather than providing for separate work sites for each location at
which the CPEO customer's workers perform services. The commenter also
suggested that work sites in different industries and work sites that
are maintained as a separate operation for bona fide business reasons
(based on facts and circumstances) are factors that should be taken
into account for purposes of determining whether two or more work sites
should be treated as one work site.
The definition of work site in the proposed regulations, as a
location where an individual regularly performs services, was intended
to take into account CPEO customers whose workers provide services in
multiple noncontiguous, non-proximate locations and/or locations that
operate in a different industry or industries. Under the proposed
regulations, the determination of whether a covered employee is a work
site employee is made separately with regard to each work site at which
the covered employee regularly provides services; under this standard,
a covered employee may be determined to be a work site employee at more
than one work site during a calendar quarter. Furthermore, the proposed
regulations provide that a covered employee will be considered a work
site employee for the entirety of a calendar quarter if the employee
qualifies as a work site employee at any time during that quarter.
Therefore, a covered employee that regularly performs services for a
customer at multiple sites need only qualify as a work site employee at
one of the sites in a calendar quarter to be considered a work site
employee for that entire quarter.
The use of the phrase ``primarily performs services'' instead of
the phrase ``regularly performs services'' would not provide the
customer this flexibility, but would instead require customers with
covered employees at multiple sites either to identify the site at
which covered employees ``primarily'' perform services or to make a
determination (with appropriate substantiation) that it maintains
separate work sites for a bona fide business reason such that these
sites can be treated as one work site. To avoid that result, these
final regulations do not adopt this suggested change.
However, the Treasury Department and the IRS recognize that certain
employers have employees regularly working at the location of clients
of varying industries, all doing work in the employer's industry rather
than the industry of the client. For example, an information technology
business might have employees regularly performing services related to
information technology at the locations of clients in a variety of
unrelated industries (factory, restaurant, museum, etc.). To address
this situation, these final regulations provide that the determination
of the industry of a work site is based on the nature of the CPEO
customer's work at that work site, irrespective of work performed by
other entities at the same site.
In addition, these final regulations provide that when treating
noncontiguous locations as a single physical location and thus a single
work site, one noncontiguous location cannot be included in more than
one work site. The final regulations contain an example illustrating
this rule. Finally, for clarification, non-substantive changes were
made to the language in the proposed regulations.
e. Work Site Employee
The proposed regulations, consistent with section 7705(a), provide
that a work site employee means, with respect to a customer, a covered
employee who performs services for the customer at a work site where at
least 85 percent of the individuals performing services for the
customer are covered employees of the customer. The proposed
regulations also provide that a covered employee will be considered a
work site employee for the entirety of a calendar quarter if he or she
qualifies as a work site employee at any time during that quarter.
Consequently, a covered employee can be a work site employee for one or
more calendar quarters of the year and a non-work site covered employee
for other calendar quarters
[[Page 24375]]
during the same year. One commenter suggested a safe harbor rule
providing that a covered employee who qualifies as a work site employee
at any time during a calendar quarter is considered a work site
employee for the entirety of that quarter and for the remainder of the
calendar year. Since the CPEO program began in 2016, the IRS has not
been made aware of any issues concerning the quarterly determination of
work site employees. For this reason, and because a quarter-by-quarter
work site employee determination coincides with a CPEO's quarterly
federal employment tax reporting, these final regulations do not adopt
this suggestion.
The same commenter also requested that the regulations clarify the
rules regarding excluded employees under section 414(q)(5). In
accordance with section 7705(e)(3), the proposed regulations provide
that, in determining whether the 85 percent threshold is met,
individuals who are excluded employees within the meaning of section
414(q)(5) (such as newly hired or part-time employees) are not taken
into account as either covered employees or individuals performing
services, although those individuals may otherwise be covered employees
and work site employees under the proposed regulations. The commenter
was concerned that this rule could be interpreted to mean that all
employees of a startup company would be excluded employees for purposes
of determining whether the 85 percent threshold is met. The commenter
suggested that the regulations incorporate the flush language from
section 414(q)(5), which provides that an employer may substitute a
shorter period of service, smaller number of hours or months, or lower
age for the period of service, number of hours or months, or age
specified in section 414(q)(5), though the commenter also suggested
that the regulations provide that any such modifications must be on a
consistent and uniform basis with respect to individuals performing
services at the work site.
Because the application of section 414(q)(5) is outside the scope
of these regulations, these final regulations do not provide for any
further explanation of the application of section 414(q)(5). Therefore,
employers should look to the language of section 414(q)(5) in
determining which employees should be excluded under section
7705(e)(3). However, the Treasury Department and the IRS agree that the
flush language from section 414(q)(5) can be applied in the context of
determining whether the 85 percent work site coverage requirement
threshold is met under section 7705(e)(3), such that an employer may
substitute a shorter period of service, smaller number of hours or
months, or lower age for the period of service, number of hours or
months, or age specified in section 414(q)(5).
Finally, this commenter suggested that the regulations provide that
reasonable good faith determinations concerning the application of the
85 percent coverage test in determining work site employees will be
respected unless there is a pattern of abuse of this rule by the CPEO
or its customer. The Treasury Department and the IRS agree that,
because applying the 85 percent coverage rules for determining work
site employees may be challenging in certain situations, a good faith
standard is appropriate. For this reason, these final regulations
provide that a CPEO's determination that a covered employee is a work
site employee will be respected if the CPEO has made a good faith
determination that the covered employee meets the requirements of
section 7705(e), the regulations, and further guidance.
6. Application Process
The temporary regulations provide that a CPEO applicant will be
notified by the IRS whether its application for certification has been
approved or denied, as well as the effective date of certification or
the reason(s) for the denial, each as applicable. One commenter noted
that the temporary regulations do not address the reapplication process
for CPEO applicants that are denied certification. The commenter
requested that the final regulations clarify that a CPEO applicant may
not reapply for certification for at least one year following a denial
of certification, unless the CPEO applicant has resolved the issues
identified by the IRS as the reason for the certification denial. The
commenter also suggested that the final regulations clarify that a CPEO
applicant that withdraws its application before the IRS makes a
decision regarding certification may reapply for certification at any
time. Rev. Proc. 2016-33 sets forth the detailed procedures for
applying to be certified, including the ability to withdraw an
application, but it does not address reapplication following a denial
of certification. The Treasury Department and the IRS agree that the
final regulations should address the ability to reapply after a denial
of certification or withdrawal. Accordingly, the final regulations
provide that a CPEO applicant may reapply for certification in such
time and manner, and must include such information, as the Commissioner
may prescribe in further guidance. Because procedural requirements
relating to the time and manner of applying for certification may need
to be modified as processes or technology change or more knowledge
about administrative challenges is acquired, the Treasury Department
and the IRS intend to address these requirements in a future revision
of Rev. Proc. 2016-33.
7. Suitability
a. Disregarded Entities and Sole Proprietorships
The temporary regulations provide that a CPEO may not be a business
entity that is disregarded as an entity separate from its owner for
federal tax purposes under Sec. Sec. 301.7701-2 and 301.7701-3
(without regard to the special rule in Sec. 301.7701-2(c)(2)(iv) that
provides that such entities are corporations for federal employment tax
purposes). Several commenters expressed concerns regarding the
prohibition against disregarded entities becoming CPEOs. The commenters
indicated that the temporary regulations may unnecessarily limit the
ability of persons to apply for certification. They explained that PEOs
may be structured as disregarded entities for legitimate business
reasons, such as to reduce the overall compliance burden associated
with filing state income tax returns. As a result of those comments,
the Treasury Department and the IRS announced in Notice 2016-49 the
expectation that the final regulations would not prohibit a business
entity that is disregarded as separate from its owner under Sec. Sec.
301.7701-2 and 301.7701-3 from becoming a CPEO, provided the
disregarded entity is (1) wholly owned directly (including through one
or more disregarded entities organized in the United States) by a
United States person (as defined in section 7701(a)(30)), and (2)
created or organized in the United States or under the law of the
United States or of any state (collectively, a domestic disregarded
entity). Consistent with Notice 2016-49, these final regulations allow
domestic disregarded entities to apply for certification as CPEOs. The
Treasury Department and the IRS requested comments on the
appropriateness of allowing a disregarded entity that is domestically
organized but not wholly owned directly by a United States person to
apply for certification as a CPEO, but no comments were received on
this issue. Accordingly, these final regulations require the
disregarded entity to be both
[[Page 24376]]
domestically organized and wholly owned directly by a United States
person.
As a result of the change permitting certain disregarded entities
to apply for certification as a CPEO, these final regulations also
revise the definition of ``responsible individual'' to include: (1) In
the case of a disregarded entity owned by a corporation or partnership,
the responsible individuals of that corporation or partnership, and (2)
in the case of a disregarded entity owned by an individual, the
individual owner. These final regulations also clarify that CPEO
applicants and CPEOs that, but for their status as disregarded
entities, would separately be members of a controlled group, are
treated as members of a controlled group for purposes of sections 3511
and 7705 and the regulations thereunder.
One commenter noted that the requirement that a CPEO must be a
business entity would preclude an individual operating a business
through a sole proprietorship from becoming a CPEO. As stated in Notice
2016-49, to ensure parity between sole proprietorships and disregarded
entities that are wholly owned by individuals, these final regulations
also expressly allow sole proprietorships to apply for certification as
CPEOs.
b. Fingerprint Cards and Background Checks
The temporary regulations provide that each responsible individual
must submit fingerprints in the time and manner and under the
circumstances prescribed by the Commissioner in further guidance.
Currently, the specific requirements regarding the time and manner of
fingerprint submissions, including whether a responsible individual
needs to submit multiple cards are included in Rev. Proc. 2016-33, the
CPEO application for certification, and in the Responsible Individual
Personal Attestation (RIPA) instructions. One commenter requested that
the temporary regulations be revised to clarify that a responsible
individual may submit a single fingerprint card that will be used for
background check purposes for all CPEO applicants in a controlled group
for which that person is a responsible individual. The final
regulations do not adopt this suggestion because the Treasury
Department and the IRS have determined that the regulations should
continue to provide the IRS with the flexibility to include specific
instructions regarding fingerprint cards in other guidance, such as
revenue procedures and the application for certification, as the
program develops and as changes in technology permit new procedures.
The Treasury Department and the IRS will consider this comment in any
future updates to Rev. Proc. 2016-33. However, the Treasury Department
and the IRS consider it appropriate to include a specific reference to
Federal Bureau of Investigations (FBI) background checks in order to
acknowledge the scope of the background check. Accordingly, these final
regulations expressly state that a CPEO or CPEO applicant, and each of
its responsible individuals must take such actions as are necessary to
authorize the IRS to conduct comprehensive background checks,
including, but not limited to, FBI or other similar criminal background
checks.
One commenter requested that responsible individuals who are
attorneys, CPAs, enrolled agents, and officers of publicly traded
companies be allowed to provide professional status information (e.g.,
credential number, state of jurisdiction, and date of expiration) in
lieu of submitting fingerprints. The commenter indicated that this
would be consistent with the IRS's e-file program. Under sections
3511(a)(1) and (c)(1), with respect to remuneration remitted to an
individual by a CPEO, for purposes of federal employment taxes and
other obligations under the federal employment tax rules, the CPEO is
treated as the employer of any individual performing services for a
customer of the CPEO and covered by a CPEO contract. This treatment and
the tax liability associated with it makes the CPEO program unlike
other contractual arrangements, including a relationship with an e-file
provider. The Treasury Department and the IRS continue to view the
criminal background of a CPEO applicant and its responsible individuals
as an important factor in determining whether the CPEO applicant's or
the CPEO's certification presents a material risk to the IRS's
collection of federal employment taxes. Accordingly, the final
regulations do not adopt the suggestion to rely on professional status
data in lieu of an FBI or other similar background check.
c. Waiving Confidentiality and Privilege
The temporary regulations require that CPEOs and responsible
individuals take such actions as are necessary to authorize the IRS to
investigate the accuracy of statements and submissions, including
waiving confidentiality and privilege when necessary. One commenter
noted that this requirement could be read to imply that responsible
individuals and CPEOs are required to provide a blanket waiver of
confidentiality and privilege on all issues. The temporary regulations
were not intended to require responsible individuals and CPEOs to
provide a blanket waiver. However, the Treasury Department and the IRS
recognize that the language in the temporary regulations could be read
more broadly than intended. Accordingly, and consistent with similar
provisions in Rev. Proc. 2016-33, the final regulations clarify that
the waiver will be required only in instances in which the IRS is
otherwise unable to obtain or confirm the information it needs to
evaluate a CPEO applicant's or CPEO's qualification for certification
(e.g., from relevant third parties, such as former employers, because
of the existence of confidentiality, non-disclosure, or similar
agreements).
d. Financial Institution
The temporary regulations require CPEO applicants and CPEOs to use
only financial institutions described in section 265(b)(5) to hold cash
and cash equivalents. One commenter stated that CPEOs may violate this
requirement by keeping small amounts of cash and cash equivalents on
their premises. The commenter noted that this is a common practice and
that certain cash equivalents are not ordinarily deposited in financial
institutions. To address this concern, the final regulations require
CPEO applicants and CPEOs to hold substantially all of their cash and
cash equivalents in financial institutions described in section
265(b)(5). This change is intended to allow CPEO applicants and CPEOs
to hold petty cash and cash equivalents (such as undeposited checks) on
their premises.
8. Working Capital Requirements
The temporary regulations provide that CPEO applicants and CPEOs
must cause to be prepared and provided to the IRS, by the same date
they must provide a copy of their annual audited financial statements,
an opinion of an independent CPA that the financial statements reflect
positive working capital for the fiscal year, unless an exception
applies. In addition, the temporary regulations require this opinion to
set forth in detail, a calculation of the CPEO applicant's or CPEO's
working capital and state that the financial statements are presented
fairly in accordance with generally accepted accounting principles
(GAAP). Two commenters suggested that the final regulations eliminate
the requirement that a CPEO applicant and CPEO have positive working
capital. The commenters maintained that because the specific
requirement of positive working capital is not included
[[Page 24377]]
in the language of section 7705, the IRS should not impose this
requirement on CPEOs. The commenters suggested that the IRS, instead,
make its decision regarding whether to certify (or suspend) a CPEO
applicant or CPEO, as applicable, based on the entity's financial
situation, experience, and other factors in their entirety.
Additionally, the commenters cautioned against the imposition of a
rigid and difficult-to-monitor requirement.
The Treasury Department and the IRS consider a CPEO with annual
audited financial statements that reflect positive working capital (as
determined in accordance with GAAP) to present a materially lower risk
to the IRS's collection of federal employment taxes than a CPEO without
positive working capital. Accordingly, pursuant to section 7705(b)(1)
and consistent with several state PEO certification and registration
laws, the final regulations have retained the positive working capital
requirement. The Treasury Department and the IRS recognize that working
capital may fluctuate over the course of a CPEO's fiscal year due to
normal business operations. To allow for some fluctuation in working
capital, the final regulations retain the exception to the positive
working capital requirement set forth in the temporary regulations.
This exception allows the CPEO applicant or CPEO to have negative
working capital for no more than two consecutive quarters, provided the
CPEO applicant or CPEO explains the reason it has negative working
capital and demonstrates that the failure to have positive working
capital does not present a material risk to the IRS's collection of
federal employment taxes.
Several commenters indicated that CPAs may be prevented from
including a statement on working capital in the CPA opinion due to
certain AICPA limitations on what can be included in a CPA opinion. As
stated in Notice 2016-49, to ensure consistency with the AICPA
guidelines applicable to CPA opinion letters, these final regulations
have been revised to require a CPEO applicant or CPEO to submit a copy
of its annual audited financial statements and an opinion of a CPA that
the annual audited financial statements are presented fairly in
accordance with GAAP, provided that the audited annual financial
statements covered by the opinion include a Note to the Financial
Statements that states that the financial statements reflect positive
working capital or that the CPEO applicant or CPEO satisfies the
positive working capital exception included in these final regulations.
The Treasury Department and the IRS anticipate making similar changes
in future revisions of Rev. Proc. 2016-33 and Rev. Proc. 2017-14.
The temporary regulations further require a responsible individual
of a CPEO applicant or CPEO to provide, by the last day of the second
month after the end of each calendar quarter and beginning with the
most recently completed quarter as of the date of the application for
certification, a statement verifying under penalties of perjury that
the CPEO applicant or CPEO has positive working capital with respect to
the most recently completed fiscal quarter. The temporary regulations
further provide that although CPEO applicants and CPEOs that are
members of a controlled group, within the meaning of sections 414(b)
and (c), and the regulations thereunder, will be treated as a single
CPEO applicant or CPEO for purposes of the annual audited financial
statements, quarterly assertion and attestation, and bond requirements,
the annual and quarterly requirements imposed with respect to positive
working capital apply to each CPEO applicant or CPEO on a separate
basis.
With respect to both the annual and quarterly requirements
regarding positive working capital, two commenters suggested that these
requirements should not apply on an individual CPEO basis. The
commenters noted that many PEOs have multiple related PEO entities that
maintain combined or consolidated financial statements, and these
entities should be permitted to demonstrate compliance with any
positive working capital requirement on an aggregate basis. The
commenters suggested that the IRS could impose a requirement that each
related entity guarantee the liabilities of its related CPEOs to the
IRS.
Under the CPEO program, the decision regarding whether to certify,
suspend, or revoke each CPEO applicant or CPEO (as applicable) is made
on an entity-by-entity basis. Although the suitability of related and
precursor entities is relevant when determining whether to certify a
CPEO applicant, the IRS makes a separate certification determination
with respect to each CPEO applicant. Accordingly, the final regulations
adopt without change the provisions in the temporary regulations that
the annual and quarterly requirements imposed with respect to positive
working capital apply to each CPEO applicant or CPEO on a separate
basis.
9. Examination Level Attestation
In accordance with section 7705(c)(3)(B), Sec. 301.7705-
2T(f)(1)(i) and (f)(3)(i) of the temporary regulations provide that
CPEOs and CPEO applicants must provide, on a quarterly basis, an
assertion, signed by a responsible individual under penalties of
perjury, stating that the CPEO has withheld and made deposits of all
federal employment taxes (other than taxes imposed by chapter 23 of the
Code) as required by subtitle C for such calendar quarter, and an
examination level attestation from a CPA stating that this assertion is
fairly stated in all material respects. One commenter suggested that
the final regulations provide the IRS with authority to provide an
agreed-upon procedural alternative to the examination level attestation
requirement because that option would provide uniformity, greater
certainty, and potential cost savings. The Treasury Department and the
IRS note that section 7705(c)(3)(B) specifically requires an
examination level attestation on a quarterly basis and does not provide
authority for other options. For this reason, these final regulations
do not adopt this suggestion.
10. Bond Requirements
Section 7705(c)(2) sets forth the bond requirements that a person
must satisfy in order to become and remain a CPEO. The temporary
regulations provide, among other things, that a CPEO must meet the bond
requirements without posting collateral. Two commenters suggested that
the final regulations remove the requirement that a CPEO meet the bond
requirements without posting collateral. The commenters suggested that
the ``no collateral'' requirement could limit access to CPEO
certification for ``small and medium sized PEOs,'' but the commenters
did not suggest what size entity would qualify as a small or medium
sized PEO. As an alternative to removing the requirement in its
entirety, one commenter suggested the IRS include the fact that a CPEO
has obtained a bond with collateral as a factor in evaluating the
application for certification. Alternatively, one commenter suggested
that a surety be permitted to request collateral for small CPEO
applicants (those with a required surety bond penal sum of under
$1,000,000). Finally, one commenter suggested that the IRS retain the
discretion to not automatically revoke a CPEO's certification merely
because the surety has sought collateralization of its risk after the
CPEO is certified. The commenter suggested that the request for
collateral be treated as a material change that must be reported and
explained to the IRS.
One commenter remarked that ``[a]s a general matter, a surety
prefers to provide bonds on an uncollateralized
[[Page 24378]]
basis.'' The commenter further noted that a surety may require
collateral if a bond applicant is qualified, but the obligation being
secured is ``particularly risky.'' The commenter noted that the
potential duration of the CPEO bond (which is the time during which the
IRS may make a claim and collect tax under sections 6501 and 6502) may
make the CPEO bond particularly risky, and indicated that this
increased risk could conceivably be addressed by a collateral
requirement.
As indicated in the preamble to the temporary regulations, one of
the main benefits of the bond requirement in section 7705(c) is that a
CPEO must submit to the bonding surety's financial underwriting process
to obtain the bond. This underwriting process provides the IRS with a
certain level of assurance concerning the financial condition of the
CPEO. As of the date of these final regulations, the IRS has certified
120 CPEOs. Each CPEO (or controlled group, where applicable) has
provided the IRS with a bond without posting collateral, including
several with bond amounts below the $1 million threshold. The Treasury
Department and the IRS view the surety's financial underwriting process
as a fundamental component of the bond requirement in section 7705(c),
and have determined that the purpose of the bond requirement is
substantially undermined if the CPEO obtains the bond by posting
collateral in the amount of the bond. However, the Treasury Department
and the IRS acknowledge that in certain limited circumstances, an
exception to the prohibition on posting collateral may be appropriate.
Accordingly, these final regulations state that the Commissioner may
provide exceptions to this rule in further guidance. The Treasury
Department and the IRS will continue to consider this issue in
connection with anticipated revisions to Rev. Proc. 2017-14. In
addition, the Treasury Department and the IRS recognize that in certain
situations, a surety may want to retain the right to request collateral
of a CPEO and that this right by itself does not violate the regulatory
requirement that a CPEO must meet the bond requirements without posting
collateral. For this reason, the final regulations provide that a
surety's retention of the right to request collateral does not violate
the rule against posting collateral, as long as no collateral is
actually required by the surety or posted by the CPEO. However, if a
surety later exercises this right and seeks collateral for a CPEO's
bond, this action qualifies as a material change that must be timely
reported to the IRS and will result in the revocation of the CPEO's
certification if the CPEO cannot obtain a bond from another surety that
does not require the CPEO to post collateral, subject to any exceptions
the Commissioner may provide, as described above.
The Treasury Department and the IRS also received comments
requesting that the regulations clarify whether a CPEO must provide a
separate bond for each year or adjust the penal sum of the bond based
on its liability for the applicable bond period. One commenter also
requested that the Treasury Department and the IRS define the terms
strengthening bond and superseding bond. Consistent with guidance
issued in Rev. Proc. 2017-14, these regulations clarify that the bond,
any riders thereto, and any strengthening bonds are one continuous
obligation from the effective date of the bond through the date the
bond is superseded or cancelled. These regulations also provide
definitions for riders, and for strengthening, superseding, and new
bonds, and incorporate other guidance from Rev. Proc. 2017-14.
11. Accrual Method of Accounting
Consistent with section 7705(b)(4) of the Code, the temporary
regulations provide that a CPEO must compute its taxable income using
an accrual method of accounting or, if applicable, another method that
the Commissioner provides for in further guidance. One commenter
requested that the IRS issue guidance approving the cash method of
accounting as long as the entity provides audited financial statements
using the accrual method. The final regulations do not adopt this
suggestion. Like the temporary regulations, however, the final
regulations allow the Commissioner to provide for other accounting
methods in further guidance, and the Treasury Department and the IRS
will continue to consider the issue of whether to allow CPEOs to use
the cash method of accounting.
12. Tip Reporting
The ABLE Act added section 6053(c)(8) to the Code regarding the
application of the reporting requirements relating to certain large
food or beverage establishments with respect to CPEOs and their
customers. Section 6053(c)(8) provides that the CPEO customer with
respect to whom a work site employee performs services is the employer
for purposes of reporting under section 6053(c), and the CPEO is
required to furnish to the customer and the IRS any information the IRS
prescribes as necessary to complete this reporting. One commenter
requested that these regulations clarify that the information required
to be provided by section 6053(c)(8) is limited to information
generated by the CPEO as a function of the services it performs as a
CPEO and that is not already available to the customer. The Treasury
Department and the IRS have determined that, because amendments to the
regulations under section 6053 were not included in the notice of
proposed rulemaking, these final regulations will not address
information that must be provided under section 6053(c)(8). However,
the Treasury Department and the IRS will continue to consider this
issue.
13. Maintain Employee Records
Under section 7705(e)(2)(E), a service contract must provide that a
CPEO will maintain employee records, and the proposed regulations
include the same requirement with respect to a CPEO contract. One
commenter asked for further guidance regarding this requirement to
maintain employee records. Although the statutory and regulatory
provisions regarding service agreements and CPEO contracts require that
the contract or agreement include certain provisions, including that
the CPEO maintain employee records, the CPEO and its customers and
client may choose to include additional provisions in their contracts.
To allow for some flexibility and business judgment in negotiating CPEO
contracts, the final regulations do not adopt the suggestion to expand
upon the statutory requirements concerning maintaining employee
records, and retain without modification the requirements for CPEO
contracts set forth in the proposed regulations.
14. Marketing as CPEOs
One commenter asked the Treasury Department and the IRS to clarify
that only CPEOs may market themselves as CPEOs. Section 7705(f) and
Sec. 301.7705-2(a)(3) and (n)(4)(ii) provide that the IRS will make
available the name and address of every person certified as a CPEO and
every CPEO whose certification is suspended or revoked. These
regulations impose rules and requirements on CPEO applicants and CPEOs,
but they do not apply to those entities that do not apply for or obtain
certification. Whether an entity other than a CPEO incorrectly
represents its classification in its business materials is not a matter
for IRS enforcement. Accordingly, the final regulations do not adopt
this suggestion, but the Treasury Department and the IRS encourage
customers and clients of entities claiming to be CPEOs to confirm that
[[Page 24379]]
those entities are listed and remain listed as CPEOs on www.irs.gov.
15. Confidentiality of Information
One commenter requested guidance indicating that information
submitted to the IRS will be kept confidential. This comment is beyond
the scope of these regulations, so no changes were made in these final
regulations. Generally, returns and return information, including CPEO
applications, are confidential and may only be disclosed as authorized
by the Internal Revenue Code. See section 6103. Section 7705(f)
provides for the public disclosure of the name and address of CPEOs and
whether a CPEO's certification was suspended or revoked.
16. No Inference Language
One commenter requested that the regulations reiterate language in
section 206(h) of the ABLE Act that nothing in section 206 of the ABLE
Act (which includes sections 3511 and 7705) shall be construed to
create any inference with respect to the determination of who is an
employee or employer (1) for federal tax purposes (other than the
purposes set forth in the amendments made by section 206), or (2) for
purposes of any other provision of law. This suggested addition to the
final regulations is not necessary. Section 7705(g) sufficiently
addresses the implications of the no inference provisions with respect
to the Code. It provides that except to the extent necessary for
purposes of section 3511, nothing in section 7705 shall be construed to
affect the determination of who is an employee or employer for purposes
of Title 26. Comments related to other laws are beyond the scope of
these regulations, and they are not addressed herein.
17. Other Changes
In addition to the changes discussed above, these final regulations
include non-substantive or clarifying changes to the text of the
proposed and temporary regulations.
Special Analyses
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Treasury Department and the Office of Management
and Budget regarding review of tax regulations. It is hereby certified
that the collection of information contained in these regulations will
not have a significant economic impact on a substantial number of small
entities. The collection of information is in Sec. Sec. 31.3511-1(g)
and 301.7705-2. The certification is based on the following:
The Treasury Department and the IRS anticipate that the
organizations that choose to apply for this voluntary certification
program are likely to be entities that already have many of the systems
and processes in place that are needed to comply with these
regulations. For example, it is expected that CPEOs will generally
maintain annual audited financial statements during the normal course
of their business, rather than solely as a result of Sec. 301.7705-
2(e). Moreover, the requirements in Sec. 301.7705-2(e) and (f) for
demonstrating positive working capital on an annual basis and for the
quarterly assertions regarding federal employment tax compliance build
upon requirements already reflected in many state PEO certification and
registration laws, thereby minimizing the economic impact on those CPEO
applicants already subject to the similar state law requirements.
In addition, many of the requirements in Sec. Sec. 31.3511-1(g)
and 301.7705-2 that impose a collection of information on CPEOs
constitute one-time notifications to the IRS, customers, or clients or
notifications that relate to events in the life cycle of a CPEO that
are less predictable and may be infrequent--such as transfers of
existing CPEO contracts, making material changes to agreements
previously provided to the IRS, suspension or revocation of the CPEO's
certification, or the reclassification of employees at a particular
work site as non-work site covered employees--and thus will have a
minimal economic impact on the CPEO. Moreover, the Treasury Department
and the IRS expect that CPEOs participating in this voluntary program
will be able to build upon pre-existing systems and processes through
which they already communicate with their clients.
For these reasons, pursuant to the Regulatory Flexibility Act (5
U.S.C. chapter 6) it is hereby certified that this rule will not have a
significant economic impact on a substantial number of small entities.
Pursuant to section 7805(f) of the Code, the NPRM preceding these
regulations was submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on their impact on small
business.
Drafting Information
The principal authors of these regulations are Melissa Duce, Andrew
Holubeck, Nina Roca, and Neil Shepherd of the Office of Associate Chief
Counsel (Employee Benefits, Exempt Organizations, and Employment
Taxes). However, other personnel from the Treasury Department and the
IRS participated in the development of these regulations.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings notices, and other guidance
cited in this document are published in the Internal Revenue Bulletin
(or Cumulative Bulletin) and are available from the Superintendent of
Documents, U.S. Government Printing Office, Washington, DC 20402, or by
visiting the IRS website at http://www.irs.gov.
List of Subjects
26 CFR Part 31
Employment taxes, Income taxes, Penalties, Pensions, Railroad
retirement, Reporting and recordkeeping requirements, Social Security,
Unemployment compensation.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 31, 301, and 602 are amended as follows:
PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT THE
SOURCE
0
Paragraph 1. The authority citation for part 31 is amended by adding an
entry for Sec. 31.3511-1 in numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 31.3511-1 is also issued under 26 U.S.C. 3511(h).
* * * * *
0
Par. 2. Section 31.3511-1 is added to subpart F to read as follows:
Sec. 31.3511-1 Certified professional employer organization.
(a) Treatment as employer--(1) In general. For purposes of the
federal employment taxes and other obligations imposed under chapters
21 through 25 of subtitle C of the Internal Revenue Code (federal
employment taxes), a certified professional employer organization
(CPEO) (as defined in Sec. 301.7705-1(b)(1) of this chapter) is
treated as the employer of any covered employee (as defined in Sec.
301.7705-
[[Page 24380]]
1(b)(5) of this chapter), but only with respect to remuneration
remitted by the CPEO to the covered employee.
(2) Work site employee. In the case of a covered employee who is a
work site employee (as defined in Sec. 301.7705-1(b)(17) of this
chapter) of the customer, no person other than the CPEO is treated as
the employer of the work site employee with respect to the customer for
purposes of federal employment taxes imposed on remuneration remitted
by the CPEO to the work site employee.
(3) Non-work site covered employee. In the case of a covered
employee who is not a work site employee, a person other than the CPEO
is also treated as an employer of the employee for purposes of federal
employment taxes imposed on remuneration remitted by the CPEO to the
employee if such person is determined to be an employer of the employee
without regard to the application of this paragraph (a) and section
3511.
(b) Exemptions, exclusions, definitions, and other rules--(1) In
general. Solely for purposes of federal employment taxes imposed on
remuneration remitted by a CPEO to a covered employee, the application
of exemptions, exclusions, definitions, and other rules that are based
on the type of employer is presumed to be based on the type of employer
of the customer of the CPEO for whom the covered employee performs
services. If a covered employee performs services for more than one
customer of the CPEO during the calendar year, the presumption
described in the previous sentence applies separately to remuneration
remitted by the CPEO to the covered employee for services performed
with respect to each such customer.
(2) Presumption rebutted. The presumption set forth in paragraph
(b)(1) of this section may be rebutted if either the Commissioner
determines, or the CPEO demonstrates by clear and convincing evidence,
that the relationship between the customer and the covered employee is
not the legal relationship of employer and employee as set forth in
Sec. 31.3401(c)-1. If such a determination or demonstration is made,
then, with respect to remuneration remitted by a CPEO to a covered
employee, the application of exemptions, exclusions, definitions, and
other rules that are based on the type of employer will be based on the
type of employer of the person determined by the Commissioner or
demonstrated by the CPEO to be the common law employer of the covered
employee in accordance with Sec. 31.3401(c)-1.
(3) No inference from presumption. The presumption set forth in
paragraph (b)(1) of this section does not create any inference with
respect to the determination of who is an employer or employee or
whether the legal relationship of employer and employee exists for
federal tax purposes or for purposes of any other provision of law
(other than for paragraph (b)(1) of this section).
(c) Annual wage limitation, contribution base, and withholding
threshold--(1) CPEO has separate taxable wage base, contribution base,
and withholding threshold. For purposes of applying the annual wage
limitations under sections 3121(a)(1) and 3306(b)(1) (relating to the
Federal Insurance Contributions Act and the Federal Unemployment Tax
Act, respectively), the contribution base under section 3231(e)(2)
(relating to the Railroad Retirement Tax Act), and the withholding
threshold under section 3102(f)(1) (relating to the Additional Medicare
Tax), remuneration received by a covered employee from a CPEO for
performing services for a customer of the CPEO within any calendar year
is subject to a separate annual wage limitation, contribution base, and
withholding threshold that are each computed without regard to any
remuneration received by the covered employee during the calendar year
from any other employer (including, if applicable, remuneration
received directly from the customer receiving services from the
employee). Notwithstanding the preceding sentence, a CPEO is treated as
a successor or predecessor employer for purposes of the annual wage
limitations and contribution base upon entering into or terminating a
CPEO contract (as defined in Sec. 301.7705-1(b)(3) of this chapter)
with respect to a work site employee, as described in paragraph (d) of
this section.
(2) Performance of services for more than one customer. If, during
a calendar year, a covered employee receives remuneration from a CPEO
for services performed by the covered employee for more than one
customer of the CPEO, the annual wage limitation, contribution base,
and withholding threshold do not apply to the aggregate remuneration
received by the covered employee from the CPEO for services performed
for all such customers. Rather, the annual wage limitation,
contribution base, and withholding threshold apply separately to the
remuneration received by the covered employee from the CPEO with
respect to services performed for each customer.
(d) Successor employer status--(1) In general. For purposes of
sections 3121(a)(1), 3231(e)(2)(C), and 3306(b)(1), a CPEO and its
customer are treated as--
(i) A successor and predecessor employer, respectively, upon
entering into a CPEO contract with respect to a work site employee who
is performing services for the customer; and
(ii) A predecessor and successor employer, respectively, upon
termination of the CPEO contract between the CPEO and the customer with
respect to the work site employee who is performing services for the
customer.
(2) Non-work site covered employee. A CPEO entering into a CPEO
contract with a customer during a calendar quarter with respect to a
covered employee who is not a work site employee at any time during
that calendar quarter will not be treated as a successor employer (and
the customer will not be treated as a predecessor employer) for
purposes of paragraph (d)(1)(i) of this section regardless of whether,
during the term of the CPEO contract, the covered employee subsequently
becomes a work site employee. Similarly, a CPEO terminating a CPEO
contract with a customer during a calendar quarter with respect to a
covered employee who is not a work site employee at any time during
that calendar quarter will not be treated as a predecessor employer
(and the customer will not be treated as a successor employer) for
purposes of paragraph (d)(1)(ii) of this section regardless of whether,
during the term of the CPEO contract, the covered employee had
previously been a work site employee.
(e) Treatment of credits--(1) In general. For purposes of the
credits specified in paragraph (e)(2) of this section--
(i) The credit with respect to a work site employee performing
services for a customer applies to the customer, not to the CPEO; and
(ii) In computing the credit, the customer, and not the CPEO, is to
take into account wages and federal employment taxes paid by the CPEO
with respect to the work site employee and for which the CPEO receives
payment from the customer.
(2) Credits specified. A credit is specified in this paragraph (e)
if such credit is allowed under--
(i) Section 41 (credit for increasing research activity);
(ii) Section 45A (Indian employment credit);
(iii) Section 45B (credit for portion of employer social security
taxes paid with respect to employee cash tips);
[[Page 24381]]
(iv) Section 45C (clinical testing expenses for certain drugs for
rare diseases or conditions);
(v) Section 45R (employee health insurance expenses for small
employers);
(vi) Section 45S (employer credit for paid family and medical
leave);
(vii) Section 51 (work opportunity credit);
(viii) Section 1396 (empowerment zone employment credit);
(ix) Statutory employee retention credits that are similar to the
employee retention credit in section 1400R and that provide disaster
relief to employers in designated disaster areas; and
(x) Any other section specified by the Commissioner in further
guidance (as defined in Sec. 301.7705-1(b)(8) of this chapter).
(f) Section not applicable to related customers, self-employed
individuals, and other circumstances. This section does not apply--
(1) In the case of any customer that--
(i) Has a relationship to a CPEO described in section 267(b)
(including, by cross-reference, section 267(f)) or section 707(b),
except that ``10 percent'' shall be substituted for ``50 percent''
wherever it appears in such sections; or
(ii) Has commenced a CPEO contract with the CPEO but such
commencement has not been reported to the IRS as described in paragraph
(g)(3)(i) of this section; or
(2) To remuneration paid by a CPEO to any self-employed individual
(as defined in Sec. 301.7705-1(b)(14) of this chapter) in that
capacity;
(3) To any CPEO contract that a CPEO enters into while its
certification has been suspended by the IRS; or
(4) To any CPEO whose certification has been revoked or voluntarily
terminated for periods after the effective date of revocation or
voluntary termination.
(g) Reporting and recordkeeping--(1) Reporting and recordkeeping
for employers. A CPEO that is treated as an employer of a covered
employee pursuant to paragraph (a) of this section must meet all
reporting and recordkeeping requirements described in subtitle F of the
Code that are applicable to employers in a manner consistent with such
treatment.
(2) Reporting on magnetic media--(i) In general. A CPEO must file
on magnetic media any Form 940, ``Employer's Annual Federal
Unemployment (FUTA) Tax Return,'' Form 941, ``Employer's QUARTERLY
Federal Tax Return,'' and Form 943, ``Employer's Annual Federal Tax
Return for Agricultural Employees,'' and all required accompanying
schedules, as well as such other returns, schedules, and other required
forms and documents as is required by further guidance.
(ii) Waiver. The Commissioner may waive the requirements of this
paragraph (g)(2) in case of undue economic hardship (including economic
hardship resulting from temporary software and technological issues).
The principal factor in determining hardship will be the amount, if
any, by which the cost of filing the return, schedule, or other
required form or document on magnetic media in accordance with this
paragraph (g)(2) exceeds the cost of filing on or by other media. A
request for a waiver must be made in accordance with applicable
guidance. The waiver must specify the type of filing (that is, the name
of the form or schedule) and the period to which it applies. In
addition, the waiver will be subject to such terms and conditions
regarding the method of filing as may be prescribed by the Commissioner
in further guidance.
(iii) Magnetic media. The term magnetic media means any magnetic
media permitted under applicable guidance. These generally include
electronic filing, as well as other media specifically permitted under
the applicable guidance.
(3) Reporting to the IRS by CPEOs. A CPEO must report the following
to the IRS in such time and manner, and including such information, as
the Commissioner may prescribe in further guidance:
(i) The commencement or termination of any CPEO contract (as
defined in Sec. 301.7705-1(b)(3) of this chapter) with a customer, or
any service agreement as described in Sec. 31.3504-2(b)(2) with a
client, and the name and employer identification number (EIN) of such
customer or client.
(ii) With any Form 940, Form 941, and Form 943 that it files, all
required schedules, including, but not limited to, the applicable
Schedule R (or any successor form), containing such information as the
Commissioner may require about each of its customers under a CPEO
contract (as defined in Sec. 301.7705-1(b)(3) of this chapter) and
each of its clients under a service agreement (as described in Sec.
31.3504-2(b)(2)). A CPEO must file Form 940, Form 941, and Form 943,
along with all required schedules, on magnetic media, unless the CPEO
is granted a waiver by the Commissioner in accordance with paragraph
(g)(2)(ii) of this section.
(iii) A periodic verification that it continues to meet the
requirements of Sec. 301.7705-2 of this chapter, as described in Sec.
301.7705-2(j).
(iv) Any change that materially affects the continuing accuracy of
any agreement or information that was previously made or provided by
the CPEO to the IRS, as described in Sec. 301.7705-2(k) of this
chapter.
(v) A copy of its audited financial statements and an opinion of a
certified public accountant regarding such financial statements, as
described in Sec. 301.7705-2(e)(1) of this chapter.
(vi) The quarterly statements, assertions, and attestations
regarding those assertions described in Sec. 301.7705-2(f)(1) of this
chapter.
(vii) Any information the IRS determines is necessary to promote
compliance with respect to the credits described in paragraph (e)(2) of
this section and provided in section 3302.
(viii) Any other information the Commissioner may prescribe in
further guidance.
(4) Reporting to customers by CPEOs. A CPEO must meet the following
reporting requirements with respect to its customers in such time and
manner, and including such information, as the Commissioner may
prescribe in further guidance:
(i) Provide each of its customers with the information necessary
for the customer to claim the credits described in paragraph (e)(2) of
this section.
(ii) Notify any customer if its CPEO contract has been transferred
to another person (or if another person will report, withhold, or pay,
under such other person's EIN, any applicable federal employment taxes
with respect to the wages of any individuals covered by its CPEO
contract) and provide the customer with the name and EIN of such other
person.
(iii) If the CPEO's certification is suspended or revoked as
described in Sec. 301.7705-2(n) of this chapter, notify each of its
current customers of such suspension or revocation.
(iv) If any covered employees are not, or cease to be, work site
employees because they perform services at a location at which the 85
percent threshold described in Sec. 301.7705-1(b)(17) of this chapter
is not met, notify the customer that it may also be liable for federal
employment taxes imposed on remuneration remitted by the CPEO to such
covered employees, as described in paragraph (a)(3) of this section.
(5) Information and agreements in any contract or agreement between
a CPEO and a customer or client. Any CPEO contract (as defined in Sec.
301.7705-1(b)(3) of this chapter) between a CPEO and a customer or
service agreement described in Sec. 31.3504-2(b)(2) between a CPEO and
a client must--
[[Page 24382]]
(i) In the case of a contract that is a CPEO contract--
(A) Contain the name and EIN of the CPEO reporting, withholding,
and paying any applicable federal employment taxes with respect to any
remuneration paid to individuals covered by the contract or agreement;
(B) Require the CPEO to provide to the customer the notices and
information required by paragraph (g)(4) of this section;
(C) Describe the information that the CPEO will provide that is
necessary for the customer to claim the credits specified in paragraph
(e)(2) of this section; and
(D) Require the CPEO to notify the customer that the customer may
also be liable for federal employment taxes on remuneration remitted by
the CPEO to covered employees if the work sites at which they perform
services do not (or ever cease to) meet the 85 percent threshold
described in Sec. 301.7705-1(b)(17) of this chapter; and
(ii) In the case of a service agreement described in Sec. 31.3504-
2(b)(2) that is not a CPEO contract (and thus the individuals covered
by that contract are not covered employees), or if this section does
not apply to the contract under paragraph (f) of this section, notify,
or be accompanied by a notification to, the client that the service
agreement or contract is not covered by section 3511 and does not alter
the client's liability for federal employment taxes on remuneration
remitted by the CPEO to the employees covered by the service agreement
or contract.
(h) Penalties and additions to tax--(1) In general. A CPEO that is
treated as an employer of a covered employee under this section and
that is required to meet the reporting requirements of an employer is
subject to the same penalties and additions to tax as an employer with
respect to such reporting requirements, including, but not limited to,
penalties and additions to tax under sections 6651, 6656, 6672, 6721,
6722, and 6723.
(2) Failures to timely make reports required under section 3511.
CPEOs are subject to penalty under section 6652(n) with respect to
reports required to be made to the IRS in paragraphs (g)(1) and (3) of
this section and reports required to be made to customers in paragraph
(g)(4) of this section.
(3) Failures to attach Schedule R. A CPEO is subject to penalty
under section 6652(n) for failure to attach Schedule R (or successor
form) to Forms 941, 940, or 943 as required by paragraph (g)(3)(ii) of
this section. A CPEO is also subject to penalty under section 6723 for
failure to include the EIN of each customer on Schedule R of Form 941,
940, or 943. See Sec. 301.6723-1 of this chapter for the application
of the section 6723 penalty in the case of multiple failures on a
single document.
(4) Failures to file on magnetic media. With respect to the
requirement in paragraph (g)(3)(ii) of this section that a CPEO must
file Forms 940, 941, and 943, along with all required schedules, on
magnetic media, a failure to file on magnetic media does not constitute
a failure to file for purposes of section 6651(a)(1) nor does it
constitute a failure to make a report for purposes of section 6652(n).
Rather, the requirement to file Forms 940, 941, and 943 on magnetic
media is a condition of maintaining certification as a CPEO.
(i) Applicability date. The rules in this section apply on and
after May 3, 2019.
PART 301--PROCEDURE AND ADMINISTRATION
0
Par. 3. The authority citation for part 301 is amended by removing
entries for Sec. Sec. 301.7705-1T and 301.7705-2T and adding entries
for Sec. Sec. 301.7705-1 and 301.7705-2 in numerical order to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.7705-1 also issued under 26 U.S.C. 7705(h).
Section 301.7705-2 also issued under 26 U.S.C. 7705(h).
* * * * *
0
Par. 4. Sections 301.7705-1 and 301.7705-2 are added to read as
follows:
Sec. 301.7705-1 Certified professional employer organization.
(a) In general. The definitions set forth in this section apply for
purposes of this section, Sec. Sec. 31.3511-1 and 301.7705-2, and
sections 3302(h), 3303(a)(4), 6053(c)(8), and 7528(b)(4).
(b) Definitions--(1) Certified professional employer organization
(CPEO) means a person that applies to be certified as a CPEO in
accordance with Sec. 301.7705-2(a) and has been certified by the
Internal Revenue Service (IRS) as meeting the requirements of Sec.
301.7705-2. For purposes of Sec. 301.7705-2(g)(2), the term CPEO also
includes the person before it applied for certification and while its
application is pending with the IRS. For all other purposes, a person
is a CPEO as of the effective date of its certification (as specified
in the certification notice described in Sec. 301.7705-2(a)(2)) and
until its certification is revoked by the IRS (as described in Sec.
301.7705-2(n)) or, if earlier and applicable, until the CPEO
voluntarily terminates its certification in the time and manner
prescribed by the Commissioner in further guidance.
(2) CPEO applicant means a person that has applied to be certified
as a CPEO in accordance with Sec. 301.7705-2(a) and whose application
is pending with the IRS.
(3) CPEO contract means a service contract between a CPEO and a
customer that is in writing and provides that, with respect to an
individual providing services to the customer, the CPEO will--
(i) Assume responsibility for payment of wages to the individual,
without regard to the receipt or adequacy of payment from the customer
for the services;
(ii) Assume responsibility for reporting, withholding, and paying
any applicable federal employment taxes with respect to the
individual's wages, without regard to the receipt or adequacy of
payment from the customer for the services;
(iii) Assume responsibility for any employee benefits that the
service contract may require the CPEO to provide to the individual,
without regard to the receipt or adequacy of payment from the customer
for such benefits;
(iv) Assume responsibility for recruiting, hiring, and firing the
individual in addition to the customer's responsibility for recruiting,
hiring, and firing the individual;
(v) Maintain employee records relating to the individual; and
(vi) Agree to be treated as a CPEO for purposes of section 3511
with respect to the individual.
(4) Certified public accountant (CPA) means a certified public
accountant who--
(i) With respect to a CPEO applicant or CPEO, is independent of the
CPEO applicant or CPEO (as prescribed by the American Institute of
Certified Public Accountants' Professional Standards, Code of
Professional Conduct, and its interpretations and rulings);
(ii) Is not currently under suspension or disbarment from practice
before the IRS;
(iii) Is duly qualified to practice as a CPA in any state;
(iv) Files with the IRS a written declaration that he or she is
currently qualified to practice as a CPA in any state; and
(v) Meets such other requirements as the Commissioner may prescribe
in further guidance.
(5) Covered employee means, with respect to a customer, any
individual (other than a self-employed individual, as defined in
paragraph (b)(14) of this section) who performs services for the
customer and who is covered by a CPEO
[[Page 24383]]
contract between the CPEO and the customer.
(6) Customer--(i) In general. Except as provided in paragraph
(b)(6)(ii) of this section, a customer is any person who enters into a
CPEO contract with a CPEO.
(ii) Persons who are not customers. A provider of payroll services
that uses its own EIN for filing federal employment tax returns on
behalf of its clients (or that used its own EIN immediately prior to
entering into a service contract with the CPEO) is not a customer, even
if it has entered into a service contract with the CPEO that meets all
of the requirements for a CPEO contract described in paragraph (b)(3)
of this section other than being a contract between a CPEO and a
customer.
(7) Federal employment taxes mean the taxes imposed by subtitle C
of the Internal Revenue Code.
(8) Guidance includes guidance published in the Federal Register or
Internal Revenue Bulletin, as well as administrative guidance such as
forms, instructions, publications, or other guidance on the irs.gov
website.
(9) Partnership means a business entity (as described in Sec.
301.7701-2(a)) that is classified as a partnership for federal tax
purposes under Sec. Sec. 301.7701-1, 301.7701-2, and 301.7701-3.
Accordingly, any references to a managing member or general partner of
a partnership mean a managing member or general partner of an entity
that is classified as a partnership for federal tax purposes.
(10) Precursor entity--(i) In general. A precursor entity means,
with respect to a CPEO applicant, any related entity of the CPEO
applicant that is or was a provider of payroll services that--
(A) Has made a substantial asset transfer to the CPEO applicant
during the calendar year in which the CPEO applicant applies for
certification or any of the three preceding calendar years or plans to
make such a substantial asset transfer while the application for
certification is pending or in the 12-month period following the date
of the CPEO applicant's application for certification; or
(B) Has ceased operations or dissolved during the calendar year in
which the CPEO applicant applied for certification or any of the three
preceding calendar years.
(ii) Related. For purposes of this paragraph (b)(10), a provider of
payroll services is considered a related entity of a CPEO applicant if
it is a related entity within the meaning of paragraph (b)(12) of this
section or if it would be or would have been such a related entity
based on the ownership and responsible individuals of the provider of
payroll services at the time of its substantial asset transfer, ceasing
of operations, or dissolution, as applicable, and the ownership and
responsible individuals of the CPEO applicant at the time of its
application.
(11) Provider of payroll services means a person that provides
federal employment tax administration, payroll services, or other
similar federal employment tax-related compliance services to clients,
including, but not limited to, collecting, reporting, and paying
federal employment taxes with respect to wages or compensation paid by
the person to individuals performing services for the clients. A
provider of payroll services includes, but is not limited to, a CPEO.
(12) Related entity means, with respect to a CPEO applicant or
CPEO, any person that meets one or more of the following criteria:
(i) The person is a member of a controlled group of which the CPEO
applicant or CPEO is also a member. Additionally, CPEO applicants and
CPEOs that, but for their status as disregarded entities would
separately be members of a controlled group, are treated as members of
a controlled group for purposes of this paragraph (b)(12)(i). For
purposes of this paragraph (b)(12)(i), controlled group has the meaning
given to such term by sections 414(b) and (c) and Sec. Sec. 1.414(b)-1
and 1.414(c)-1 through 1.414(c)-6 of this chapter, except that--
(A) With respect to a person that is not a provider of payroll
services ``more than 50 percent'' will be substituted for ``at least 80
percent'' each place it appears in section 1563(a) (which is cross-
referenced in section 414(b) and Sec. 1.414(c)-2 of this chapter); and
(B) With respect to a person that is a provider of payroll
services, ``more than 5 percent'' will be substituted for ``at least 80
percent'' each place it appears in section 1563(a) and Sec. 1.414(c)-2
of this chapter; or
(ii) The person is a provider of payroll services and--
(A) A majority of the directors or a majority of the officers (as
described in paragraph (b)(13)(ii) of this section) of the CPEO
applicant or CPEO are directors or officers (as described in paragraph
(b)(13)(ii) of this section), respectively, of the provider of payroll
services; or
(B) An individual is a responsible individual of both the provider
of payroll services and the CPEO applicant or CPEO by reason of
paragraph (b)(13)(i) of this section.
(13) Responsible individual means, with respect to a CPEO applicant
or CPEO, (or, for purposes of paragraph (b)(10)(ii) or (b)(12)(ii) of
this section, a provider of payroll services), the following
individuals:
(i) Any individual who owns, directly or indirectly, applying the
constructive ownership rules of section 1563(e) with respect to stock
ownership and substituting the term ``interest'' for the term ``stock''
and the term ``partnership'' for the term ``corporation'' used in that
section, as appropriate for purposes of determining whether an interest
in a partnership is indirectly owned by any person, 33 percent or more
of--
(A) In the case of a corporation, the total combined voting power
of all classes of stock entitled to vote of such corporation or the
total value of shares of all classes of stock of such corporation; or
(B) In the case of a partnership, the capital interest or profits
interest of such partnership.
(ii) Any individual who is a director or an officer. For purposes
of this paragraph (b)(13)(ii), a director is a voting member of the
governing body (that is, the board of directors or equivalent
controlling body authorized under state law to make governance
decisions on behalf of the organization), and the officers are
determined by reference to the organizing document, bylaws, or
resolutions of the governing body, or otherwise designated consistent
with state law. Officers may include individuals such as a president,
vice-president, secretary, and treasurer.
(iii) Any individual who, regardless of title, has ultimate
responsibility for implementing the decisions of the organization's
governing body. An individual who serves with the title of chief
executive officer, executive director, and/or president has this
ultimate responsibility. An individual with this ultimate
responsibility may include an individual who is not treated as an
employee of the organization. If this ultimate responsibility resides
with two or more individuals (for example, co-presidents), who may
exercise such responsibility in concert or individually, then each such
individual is a responsible individual.
(iv) Any individual who, regardless of title, has ultimate
responsibility for supervising the management, administration, or
operation of the organization. An individual who serves with the title
of chief operating officer has this ultimate responsibility. An
individual with this ultimate responsibility may include an individual
who is not treated as an employee of the organization. If this ultimate
responsibility resides with two
[[Page 24384]]
or more individuals, who may exercise such responsibility in concert or
individually, then each such individual is a responsible individual.
(v) Any individual who, regardless of title, has ultimate
responsibility for managing the organization's finances. An individual
who serves with the title of chief financial officer or treasurer has
this ultimate responsibility. An individual with this ultimate
responsibility may include an individual who is not treated as an
employee of the organization. If this ultimate responsibility resides
with two or more individuals who may exercise the responsibility in
concert or individually, then each such individual is a responsible
individual.
(vi) In the case of a partnership, any individual who is a managing
member or general partner.
(vii) In the case of a sole proprietorship, the sole proprietor.
(viii) In the case of a disregarded entity owned by a corporation
or partnership, the responsible individuals of that corporation or
partnership.
(ix) In the case of a disregarded entity owned by an individual,
the individual owner.
(x) Any other individual with primary responsibility for the
organization's federal employment tax compliance.
(14) Self-employed individual means an individual with net earnings
from self-employment (as defined in section 1402(a) without regard to
the exceptions thereunder) derived from providing services covered by a
CPEO contract, whether such net earnings from self-employment are
derived from providing services as a non-employee to a customer of the
CPEO, from the individual's own trade or business as a sole proprietor
customer of the CPEO, or as an individual who is a partner in a
partnership that is a customer of the CPEO, but only with regard to
such net earnings.
(15) Substantial asset transfer means any transfer of 35 percent or
more of the value of the operating assets of the person making the
transfer, whether through one or a series of transactions and whether
accomplished through sale, lease, gift, assignment, succession, merger,
consolidation, corporate separation, or any other means. For purposes
of this paragraph (b)(15), operating assets include both tangible and
intangible resources related to the conduct of the person's trade or
business, including, but not limited to, such intangible assets as
contracts, agreements, receivables, employees, and goodwill (which
includes the value of a trade or business based on expected continued
customer patronage due to its name, reputation, or any other factors).
In the case of a contract described in section 7705(e)(2) or a service
agreement described in Sec. 31.3504-2(b)(2) of this chapter entered
into by a provider of payroll services, even if the contract or
agreement is not sold, gifted, assigned, or otherwise formally
transferred to a CPEO applicant, it will be considered transferred from
the provider of payroll services to the CPEO applicant if the CPEO
applicant reports, withholds, or pays, under its employer
identification number (EIN), any applicable federal employment taxes
with respect to the wages of any individuals covered by the contract or
agreement.
(16) Work site means a physical location at which an individual
regularly performs services for a customer of a CPEO or, if there is no
such location, the location from which the customer assigns work to the
individual. A work site may not be the individual's residence or a
telework site unless the customer requires the individual to work at
that site. For purposes of this paragraph (b)(16), work sites that are
contiguous locations will be treated as a single physical location and
thus a single work site, and noncontiguous locations will be treated as
separate physical locations and thus separate work sites, except as
provided in the next sentence. A CPEO customer may treat noncontiguous
locations as a single physical location and thus a single work site if
each of the locations is separated by less than 35 miles from every
other location in the single work site and all locations in the single
work site operate in the same industry. For purposes of the preceding
sentence, the determination of the industry of a work site is based on
the nature of the CPEO customer's work at that work site, irrespective
of work performed by other entities at the same site. When treating
noncontiguous locations as a single physical location and thus a single
work site, one noncontiguous location cannot be included in more than
one work site. For example, assume there are three noncontiguous
locations, A, B, and C, operating in the same industry and that B is 20
miles east from A and C is 20 miles east from B. A CPEO customer would
not be permitted to treat these three locations as a single work site
but would be permitted to treat either A and B as a single work site or
B and C as a single work site.
(17) Work site employee--(i) In general. A work site employee
means, with respect to a customer, a covered employee who performs
services for such customer at a work site where at least 85 percent of
the individuals performing services for the customer are covered
employees of the customer.
(ii) Self-employed individuals. Solely for purposes of determining
whether the 85 percent threshold described in paragraph (b)(17)(i) of
this section is met, a self-employed individual described in paragraph
(b)(14) of this section is treated as a covered employee if such
individual would be a covered employee but for the exclusion of self-
employed individuals from the definition of covered employee in
paragraph (b)(5) of this section.
(iii) Excluded employees. In determining whether the 85 percent
threshold described in paragraph (b)(17)(i) of this section is met, an
individual who is an excluded employee described in section 414(q)(5)
is not treated as either an individual providing services or a covered
employee.
(iv) Treatment for calendar quarter. A covered employee will be
considered a work site employee for the entirety of a calendar quarter
if the employee qualifies as a work site employee at any time during
that quarter.C
(v) Separate determination for each work site. The determination of
whether a covered employee is a work site employee is made separately
with regard to each work site at which the covered employee regularly
provides services and for each customer for which the covered employee
is providing services. A covered employee may be determined to be a
work site employee of more than one work site during a calendar
quarter.
(vi) Good faith determination respected. A CPEO's determination
that a covered employee is a work site employee will be respected if
the CPEO has made a good faith determination that the covered employee
meets the requirements of section 7705(e), this paragraph (b)(17), and
any further guidance related to work site employee determinations.
(c) Applicability date. The rules in this section apply on and
after May 3, 2019.
Sec. 301.7705-2 CPEO certification process.
(a) Application requirement and certification--(1) Application. To
be certified as a certified professional employer organization (CPEO),
a person must submit a properly completed and executed application for
certification as a CPEO in the time and manner prescribed by, and
providing such information as required by, this section and any further
guidance issued by the Commissioner. In addition, the applicant's
responsible individuals must submit such information as is
[[Page 24385]]
specified in this section and further guidance.
(2) Notice. A CPEO applicant will be notified by the Internal
Revenue Service (IRS) whether its application for certification has
been approved or denied, and, if approved, the effective date of
certification. If the IRS denies the application, the IRS will inform
the CPEO applicant of the reason(s) for denial. If the IRS denies an
application for certification, or if the CPEO applicant withdraws an
application for certification, the CPEO applicant may reapply for
certification in such time and manner, and must include such
information, as the Commissioner may prescribe in further guidance.
(3) Public disclosure of certification. If the IRS approves a CPEO
applicant's application for certification, the IRS will make available
to the public the name and address of the CPEO, as well as the
effective date of its certification, in the time and manner described
in further guidance.
(4) Effective date of certification. A CPEO's certification will be
effective as of the effective date of certification specified in the
notice described in paragraph (a)(2) of this section and in the public
disclosure described in paragraph (a)(3) of this section and will
continue in effect until the effective date of the revocation of the
CPEO's certification, if any, as described in paragraph (n) of this
section or, if earlier, the date that the CPEO voluntarily terminates
its certification in the time and manner prescribed by the Commissioner
in further guidance.
(b) Requirements for certification. To receive and maintain
certification, a CPEO applicant or CPEO must meet the requirements
described in this section, as well as any additional requirements the
Commissioner may prescribe in further guidance. In addition, any
precursor entities, related entities, and responsible individuals of
the CPEO applicant or CPEO must meet any requirements applicable to
them described in this section and in further guidance. The IRS may
deny an application for certification or revoke or suspend a CPEO's
certification if a CPEO applicant or CPEO, or one or more of its
precursor entities, related entities, or responsible individuals, fails
to meet any applicable requirement described in this section or other
applicable guidance, and the IRS will do so if the IRS determines, in
its sole discretion, that such failure presents a material risk to the
IRS's collection of federal employment taxes. In determining whether
one or more failures to meet the requirements described in this section
presents a material risk to the IRS's collection of federal employment
taxes, the IRS generally will consider all relevant facts and
circumstances, including the size, scope, nature, significance,
recurrence, and timing of and reason for the failure and, in the case
of a CPEO, any prior failures of the CPEO to meet the requirements of
this section.
(c) Suitability--(1) In general. The IRS may deny an application
for certification or revoke or suspend a CPEO's certification for any
of the following reasons:
(i) The CPEO applicant or CPEO, or any of its precursor entities,
related entities, or responsible individuals, has failed to pay any
applicable federal, state, or local taxes or file any required federal,
state, or local tax or information returns in a timely and accurate
manner, unless the failure is determined to be due to reasonable cause
and not due to willful neglect.
(ii) The CPEO applicant or CPEO, or any of its precursor entities,
related entities, or responsible individuals, has been charged with or
convicted of any criminal offense under the laws of the United States
or of a state or political subdivision thereof, or is the subject of an
active IRS criminal investigation.
(iii) The CPEO applicant or CPEO, or any of its precursor entities,
related entities, or responsible individuals, has been sanctioned, or
had a license, registration, or accreditation (including a license,
registration, or accreditation relating to its status or ability to
operate as a professional employer organization) denied, suspended, or
revoked, by a court of competent jurisdiction, licensing board,
assurance or other professional organization, or federal or state
agency, court, body, board, or other authority for any misconduct that
involves dishonesty, fraud, or breach of trust or that otherwise bears
upon the suitability of the CPEO applicant or CPEO to perform its
professional functions (including, but not limited to, any civil or
criminal penalty described in 42 U.S.C. 503(k)(1)(D) imposed by state
law).
(iv) The CPEO applicant or CPEO, or any of its precursor entities,
related entities, or responsible individuals, is listed on any
sanctions list compiled by the Office of Foreign Assets Control (OFAC)
within the Department of Treasury, including, but not limited to, the
OFAC Consolidated Sanctions List and the OFAC Specially Designated
Nationals List.
(v) The CPEO applicant or CPEO, or any of its precursor entities,
related entities, or responsible individuals, fails to demonstrate a
history of financial responsibility, which the IRS may assess by checks
on credit history and other similar indicators.
(vi) The CPEO applicant or CPEO and the responsible individuals of
the CPEO applicant or CPEO fail to demonstrate adequate collective
knowledge or experience with respect to:
(A) Federal or state employment tax reporting, depositing, and
withholding requirements;
(B) Handling of and accounting for payroll, tax payments, and other
funds on behalf of others;
(C) Effective recordkeeping systems;
(D) Retention of qualified personnel and legal advisors as needed;
and
(E) General business and risk management.
(vii) The CPEO applicant or CPEO, or any of its responsible
individuals, gives false or misleading information (including by
intentionally omitting relevant information), or participates in any
way in the giving of false or misleading information, to the IRS,
knowing, or having reason to know, that the information is false or
misleading. For the purpose of this paragraph (c)(1)(vii),
``information'' includes (but is not limited to) facts or other matters
contained in testimony, federal tax returns, and financial statements
and opinions regarding such statements; applications for certification
(and all accompanying documentation); affidavits, declarations,
assertions, attestations, statements, and agreements; and periodic
verifications that the requirements of this section continue to be met;
and any other information that is required to be provided by this
section, section 3511(g), Sec. 31.3511-1 of this chapter, or further
guidance.
(2) Must be a business entity or sole proprietorship--(i) In
general. A CPEO must be a business entity described in Sec. 301.7701-
2(a) or a sole proprietorship. Accordingly, a CPEO may not be an entity
classified as a trust under Sec. 301.7701-4.
(ii) Ownership by a United States person. In addition, a sole
proprietorship or a business entity that is disregarded as an entity
separate from its owner for federal tax purposes under Sec. Sec.
301.7701-2 and 301.7701-3 (without regard to the special rule in Sec.
301.7701-2(c)(2)(iv) that provides that such entities are corporations
for federal employment tax purposes) must be wholly owned directly
(including through one or more disregarded entities organized in the
United States, in the case of a business entity) by a United States
person (as defined in section 7701(a)(30)).
(iii) Treatment as separate member of a controlled group. Except as
provided in paragraph (h) of this section, a CPEO
[[Page 24386]]
applicant or CPEO that otherwise qualifies as a member of a controlled
group (within the meaning of sections 414(b) and (c) and Sec. Sec.
1.414(b)-1 and 1.414(c)-1 through 1.414(c)-6 of this chapter) but for
its status as an entity disregarded as separate from its owner for
federal tax purposes under Sec. Sec. 301.7701-2 and 301.7701-3, is
treated as a separate member of a controlled group for purposes of this
section, Sec. 301.7705-1, section 3511, Sec. 31.3511-1 of this
chapter, and section 7705.
(3) Authorization to investigate suitability. A CPEO applicant or
CPEO, and each of its responsible individuals, must take such actions
as are necessary to authorize the IRS to investigate the accuracy of
statements and submissions, including waiving confidentiality and
privilege when necessary (i.e., in situations in which the IRS is
otherwise unable to obtain or confirm information necessary to evaluate
a CPEO applicant's or CPEO's qualification for certification), and to
conduct comprehensive background checks, including, but not limited to,
Federal Bureau of Investigation or other similar criminal background
checks, checks on tax compliance, professional experience (including
through the contact of third-party references), credit history, and
professional sanctions. In addition, a CPEO applicant or CPEO, and any
of its responsible individuals, must provide the IRS with such
additional information as the IRS may request to facilitate such
background investigations. Each responsible individual of a CPEO
applicant or CPEO must also submit fingerprints in the time and manner
and under the circumstances prescribed by the Commissioner in further
guidance.
(d) Business location--(1) State of organization. A CPEO applicant
or CPEO must be created or organized in the United States or under the
law of the United States or of any state.
(2) Business location in the United States. A CPEO applicant or
CPEO must have one or more established, physical business locations in
the United States at which regular operations of an activity that
constitutes a trade or business within the United States (within the
meaning of section 864(b)) take place and at which a significant
portion of its CPEO-related functions are carried on and administrative
records are kept.
(3) United States responsible individuals. A majority of the CPEO
applicant's or CPEO's responsible individuals must be citizens or
residents of the United States.
(4) Use of financial institution. A CPEO applicant or CPEO must use
only financial institutions described in section 265(b)(5) to hold
substantially all of its cash and cash equivalents, receive payments
from customers, and pay wages and federal employment taxes.
(e) Financial statements--(1) CPEOs. By the last day of the sixth
month after the end of each fiscal year, and beginning with the first
fiscal year that ends after the CPEO's effective date of certification,
a CPEO must cause to be prepared and provided to the IRS--
(i) A copy of its annual audited financial statements for the
fiscal year;
(ii) An opinion of a certified public accountant (CPA) that such
financial statements are presented fairly and in accordance with
generally accepted accounting principles (GAAP); and
(iii) A statement in the Note to the Financial Statements covered
by the CPA opinion that the CPEO's annual audited financial statements
reflect positive working capital or, only if the CPEO satisfies the
requirements of paragraph (e)(3) of this section, reflect negative
working capital, with such statement in either case setting forth in
detail a calculation of the CPEO's working capital as reflected in the
annual audited financial statements (a working capital statement).
(2) CPEO applicants--(i) In general. A CPEO applicant must cause to
be prepared and provided to the IRS, with its application, a copy of
its annual audited financial statements, an opinion with respect to
such financial statements, and a working capital statement (each as
described in paragraph (e)(1) of this section) for the most recently
completed fiscal year as of the date it applies for certification.
Notwithstanding the preceding sentence, if a CPEO applicant applies for
certification before the last day of the sixth month following its most
recently completed fiscal year, and the audit of the financial
statements for that fiscal year has not yet been completed at the time
of application, a CPEO applicant must provide to the IRS, with its
application, the financial statements, opinion, and working capital
statement described in paragraph (e)(1) of this section for the
immediately preceding fiscal year, if any, and must subsequently
provide to the IRS the financial statements, opinion, and working
capital statement for the most recently completed fiscal year by the
last day of the sixth month after such fiscal year ends. In addition,
for any fiscal year that ends after the CPEO applicant applies for
certification and on or before the effective date of certification, if
applicable, the CPEO applicant must provide the audited financial
statements, opinion, and working capital statement by the last day of
the sixth month after such fiscal year ends. The obligation to provide
the annual audited financial statements described in the preceding
sentence continues to apply even if the CPEO applicant is certified as
a CPEO prior to the date the annual audited financial statements are
provided.
(ii) Newly established CPEO applicants. In addition to the
requirements in paragraph (e)(2)(i) of this section, a CPEO applicant
that was not operating as a provider of payroll services for all or
part of its most recently completed fiscal year as of the date it
applies for certification must provide a copy of the annual audited
financial statements of any precursor entity, if one exists, an opinion
with respect to such financial statements, and a working capital
statement (each as described in paragraph (e)(1) of this section) for
the precursor entity's most recently completed fiscal year as of the
date of the application for certification in such time and manner as
the Commissioner may prescribe in further guidance, as well as such
additional information as the Commissioner may prescribe in further
guidance.
(3) Exception to positive working capital requirement. A CPEO
applicant or CPEO with annual audited financial statements for a fiscal
year that do not reflect positive working capital will not fail to meet
the requirements of paragraph (e)(1)(iii) of this section if--
(i) The CPEO applicant or CPEO has negative working capital for no
more than two consecutive fiscal quarters of that fiscal year, as
demonstrated by the financial statements (for the final fiscal quarter
in the fiscal year) and the statements described in paragraph
(f)(1)(ii) of this section (for any other fiscal quarter), as
applicable;
(ii) The CPEO applicant or CPEO, or its CPA, provides, in such time
and manner as the Commissioner may prescribe in further guidance, an
explanation to the IRS describing the reason for the failure; and
(iii) The IRS determines, in its sole discretion, that the failure
does not present a material risk to the IRS's collection of federal
employment taxes.
(4) Completed fiscal year. For purposes of this paragraph (e), a
fiscal year will be considered completed once the last day of that
fiscal year has ended, regardless of whether the CPEO applicant or CPEO
was in operation or certified for all 12 months of the fiscal year or
the fiscal year consisted of fewer than 12 months.
[[Page 24387]]
(f) Quarterly assertions and attestations--(1) CPEOs. By the last
day of the second month after the end of each calendar quarter, and
beginning with the first calendar quarter that ends after the CPEO's
effective date of certification, a CPEO must provide the following to
the IRS:
(i) An assertion, signed by a responsible individual under
penalties of perjury, stating that the CPEO has withheld and made
deposits of all federal employment taxes (other than taxes imposed by
chapter 23 of the Code) as required by subtitle C for such calendar
quarter and an examination level attestation from a CPA stating that
such assertion is fairly stated in all material respects.
(ii) A statement signed by a responsible individual under penalties
of perjury verifying that the CPEO has positive working capital (as
determined in accordance with GAAP) at the end of the most recently
completed fiscal quarter, as well as such additional financial
information that the Commissioner may specify in further guidance.
(2) Exceptions--(i) Immaterial failures. A CPEO will not fail to
meet the requirements of paragraph (f)(1)(i) of this section if the CPA
examination level attestation indicates that the CPEO has failed to
withhold or make deposits in certain immaterial respects, provided
that--
(A) The attestation provides a summary of the immaterial failures
that were found;
(B) The attestation states that the failures were immaterial and
isolated and do not reflect a meaningful lapse in compliance with
federal employment tax withholding and deposit requirements; and
(C) The IRS determines, in its sole discretion, that the isolated
and immaterial failures identified by the CPA do not present a material
risk to the IRS's collection of federal employment taxes.
(ii) Negative working capital. A CPEO with negative working capital
at the end of a fiscal quarter will not fail to meet the requirements
of paragraph (f)(1)(ii) of this section if--
(A) The CPEO does not have negative working capital at the end of
the two fiscal quarters immediately preceding such fiscal quarter, as
demonstrated by the annual audited financial statements described in
paragraph (e)(1) of this section, if available, or the statements
described in paragraph (f)(1)(ii) of this section;
(B) The CPEO provides an explanation to the IRS describing the
reason for such negative working capital in such time and manner as the
Commissioner may prescribe in further guidance; and
(C) The IRS determines, in its sole discretion, that the negative
working capital does not present a material risk to the IRS's
collection of federal employment taxes.
(3) CPEO applicants--(i) In general. By the last day of the second
month after the end of each calendar quarter, beginning with the most
recently completed calendar quarter as of the date of a CPEO
applicant's application for certification and ending with the most
recently completed calendar quarter as of the effective date of
certification (if applicable), a CPEO applicant must provide to the IRS
the assertion, examination level attestation, and working capital
statement described in paragraph (f)(1) of this section, subject to the
exceptions described in paragraph (f)(2) of this section (though
substituting ``CPEO applicant'' for ``CPEO'').
(ii) Newly established CPEO applicants. A CPEO applicant that was
not operating as a provider of payroll services during the most
recently completed calendar quarter as of the date of its application
for certification or during any calendar quarter that ends while its
application for certification is pending must provide to the IRS the
assertion, examination level attestation, and working capital statement
described in paragraph (f)(1) of this section with respect to any
precursor entity, if applicable, in such time and manner as the
Commissioner may prescribe in further guidance, as well as such
additional information as the Commissioner may prescribe in further
guidance.
(g) Bond--(1) In general. A CPEO must post a bond (or bonds, as
described in paragraph (g)(3) of this section) from a qualified surety
(as described in paragraph (g)(6) of this section) for the payment of
federal employment taxes, issued in the form and containing the terms
prescribed by the Commissioner in this paragraph (g) and in further
guidance and in an amount described in paragraph (g)(2) of this
section.
(2) Bond amount--(i) In general. The amount of the bond (or bonds,
as described in paragraph (g)(3) of this section) must be, for each
period beginning on April 1 of any calendar year and ending on March 31
of the following calendar year (or, in the case of a newly certified
CPEO, beginning with the effective date of certification and ending on
the subsequent March 31) (the bond period), at least equal to the
greater of--
(A) Five percent of the CPEO's liability under section 3511 (or, if
applicable, the liability described in paragraph (g)(2)(ii) of this
section) during the calendar year preceding the beginning of the bond
period, but not more than $1,000,000; or
(B) $50,000.
(ii) Amount of bond in first and second year as a CPEO. If a CPEO
does not have any liability under section 3511 for all or a portion of
a preceding calendar year because the CPEO was not certified as a CPEO
for all or a portion of that preceding calendar year, the liability
applied for purposes of paragraph (g)(2)(i)(A) of this section for the
entirety or portion of the preceding calendar year during which the
CPEO was not certified will be the federal employment tax liability of
the CPEO, and of any precursor entity of the CPEO described in Sec.
301.7705-1(b)(10)(i)(A), that results from one or more service
agreements described in Sec. 31.3504-2(b)(2) of this chapter. With
respect to the federal employment tax liability of such precursor
entity during a preceding calendar year, for purposes of paragraph
(g)(2)(i)(A) of this section, the liability will be applied only to the
extent it results from service agreements that have been transferred or
are intended to be transferred by the precursor entity to the CPEO at
the time the bond amount is determined. For purposes of this paragraph
(g)(2)(ii), an entity is considered a precursor entity of a CPEO
described in Sec. 301.7705-1(b)(10)(i)(A) if it was determined to be
its precursor entity under that section at the time it was a CPEO
applicant.
(iii) One continuous obligation. The bond, any riders thereto, and
any strengthening bonds posted to satisfy the requirements of this
section are considered one continuous obligation of the surety for
unpaid tax liabilities accrued by the CPEO under subtitle C from the
effective date of the bond until the bond is superseded or cancelled.
(3) Increase in bond amount--(i) In general. A CPEO must determine
if an increase in the bond amount is necessary for each new bond
period. If a CPEO's liability under section 3511 (or, if applicable,
the liability described in paragraph (g)(2)(ii) of this section) for
the preceding calendar year results in a minimum required bond amount
specified in paragraph (g)(2) of this section that exceeds the current
amount of the bond, the CPEO must increase the amount of its bond with
respect to the new bond period in order to meet the minimum required
bond amount specified in paragraph (g)(2) of this section. To increase
the bond amount, a CPEO may amend an existing bond
[[Page 24388]]
through the use of a rider, or post a strengthening, superseding, or
new bond, where applicable, and in such time and manner as the
Commissioner may prescribe in further guidance.
(ii) To reflect adjustment or assessment. Subject to the limit in
paragraph (g)(2)(i)(A) of this section, if, during the bond period, the
CPEO or the IRS determines that the applicable federal employment tax
liability for the preceding calendar year was higher than the amount
reported and paid and on which the bond amount for the bond period was
based (and the applicable party makes an adjustment or assessment
reflecting such determination), a CPEO must increase the amount of its
bond to meet the minimum required bond amount specified in paragraph
(g)(2) of this section through the use of a rider, or by posting a
strengthening, superseding, or new bond in such time and manner as the
Commissioner may prescribe in further guidance.
(4) Cancellation--(i) Notice. A bond required under this paragraph
(g) must provide that it may be cancelled by the surety only after the
surety gives written notice of such cancellation to the IRS and the
CPEO in such time and manner as the Commissioner may prescribe in
further guidance.
(ii) New or superseding bond required. If a CPEO either receives
notice of cancellation from the surety provider of its bond, or gives
notice to the IRS of the CPEO's intent to cancel the bond, the CPEO
must post a new or superseding bond for the minimum required bond
amount specified in paragraph (g)(2) of this section in such time and
manner as the Commissioner may prescribe in further guidance.
(iii) Ongoing liability. A bond required under this paragraph (g)
must provide that, if a surety cancels the bond without issuing a
superseding bond to the CPEO, the surety will, notwithstanding the
cancellation, remain liable for all federal employment tax liability
accrued by the CPEO during the period beginning with the effective date
of the first bond issued by the surety to the CPEO in any consecutive
series of bonds issued by that surety prior to cancellation and ending
with the cancellation of the bond (the total bond period), up to the
penal amount of the bond at the time of the cancellation. A cancelling
surety will remain liable as described in this paragraph (g)(4)(iii)
for federal employment tax liability accrued during the total bond
period up to the penal amount of the bond for as long as the
Commissioner may assess and collect taxes for such period under
sections 6501 and 6502.
(5) No posting of collateral--(i) In general. Except as provided in
paragraph (g)(5)(iii) of this section, a CPEO must meet the bond
requirements of this paragraph (g) without posting collateral.
(ii) Surety's retention of the right to seek collateral by itself
not a violation of paragraph (g)(5)(i) of this section. A surety's
retention of the right to seek collateral, as long as no collateral is
actually required by the surety or posted by the CPEO, does not violate
the rule in paragraph (g)(5)(i).
(iii) Exceptions to no collateral requirement. The Commissioner may
provide exceptions to the rule in paragraph (g)(5)(i) of this section
in further guidance published in the Internal Revenue Bulletin.
(6) Requirements for surety. Any surety that issues a bond required
by this paragraph (g) to a CPEO must be a surety company that holds a
certificate of authority from the Secretary as an acceptable surety on
federal bonds and meets such other requirements as the Commissioner may
prescribe in further guidance.
(7) Bond definitions--(i) Rider. A rider is an amendment to an
existing bond that increases the bond amount. The rider must apply to
liabilities that arise on or after the effective date of the bond that
the rider amends. The surety remains liable under the existing bond, as
amended by the rider, for the assessment and collection periods
applicable to the CPEO under sections 6501 and 6502, respectively, with
respect to any taxable period that occurs during the term of the bond
unless and until the bond is superseded.
(ii) Strengthening bond. A strengthening bond is an additional bond
posted in the incremental amount of the increase so that the
strengthening bond together with the existing bond equal the total
minimum required bond amount specified in paragraph (g)(2) of this
section. The strengthening bond must apply to liabilities that arise on
or after the effective date of the bond it strengthens. Both the
strengthening bond and the bond it strengthens must remain in effect,
and the surety remains liable under both bonds for the assessment and
collection periods applicable to the CPEO under sections 6501 and 6502,
respectively, with respect to any taxable period that occurs during the
term of the bonds, unless and until the bonds are superseded.
(iii) New bond. A new bond is a bond posted for the total required
bond amount, and a new bond may only be posted upon the CPEO's initial
certification or immediately following cancellation of an existing
bond. In the case of a cancellation of an existing bond, the effective
date of the new bond must be no later than the effective date of the
cancellation of the existing bond, and the surety providing the
existing (now cancelled) bond remains liable for liabilities that
accrued during the term of the cancelled bond for the assessment and
collection periods applicable to the CPEO under sections 6501 and 6502,
respectively, with respect to any taxable period that occurred during
the term of that bond.
(iv) Superseding bond. A superseding bond is a bond posted for the
total minimum required bond amount specified in paragraph (g)(2) of
this section, not just for an incremental increase. Upon execution of
the superseding bond, the superseded bond is no longer in effect, and
the surety that provided the superseded bond is no longer liable under
the superseded bond. The superseding bond must apply to liabilities
that arise on or after the effective date of the superseded bond.
(h) Controlled group. All CPEO applicants and CPEOs that are
members of a controlled group within the meaning of sections 414(b) and
(c), and Sec. Sec. 1.414(b)-1 and 1.414(c)-1 through 1.414(c)-6 of
this chapter, will be treated as a single CPEO applicant or CPEO for
purposes of paragraphs (e) (other than (e)(1)(iii)), (f) (other than
(f)(1)(ii)), and (g) of this section.
(i) Consents to disclose. To receive and maintain certification, a
CPEO applicant or CPEO must provide such consents for the IRS to
disclose confidential tax information to its customers, and to other
persons as necessary to carry out the purposes of these regulations,
that relates to its certification and obligations to report, deposit,
and pay federal employment taxes as the Commissioner may require in
further guidance.
(j) Periodic verification. A CPEO must periodically verify that it
continues to meet the requirements of this section in the time and
manner prescribed by the Commissioner in further guidance.
(k) Notification of material changes. A CPEO applicant or CPEO must
notify the IRS, in the time and manner prescribed by the Commissioner
in further guidance, of any change that materially affects the
continuing accuracy of any agreement or information that was previously
made or provided to the IRS.
(l) Accrual method of accounting. A CPEO must compute its taxable
income using an accrual method of accounting or, if applicable, another
method that the Commissioner provides for in further guidance.
[[Page 24389]]
(m) Compliance with reporting obligations--(1) In general. A CPEO
must agree to make reports to the IRS and to its clients as provided in
section 3511(g) and Sec. 31.3511-1 of this chapter, including filing
all federal employment tax returns and information returns as required.
(2) Filing on magnetic media. A CPEO must file all returns,
schedules, reports, and other forms and documents on magnetic media
when required by section 3511(g) and Sec. 31.3511-1 of this chapter,
other Treasury regulations, or other guidance.
(n) Suspension and revocation--(1) In general. The IRS may suspend
or revoke the certification of any CPEO, in the time and manner and
under the circumstances prescribed by the Commissioner in this section
and in further guidance, as a result of one or more failures to meet
any of the requirements for CPEOs described in this section, section
3511(g), Sec. 31.3511-1 of this chapter, and any further guidance and
will suspend or revoke certification if the IRS determines, in its sole
discretion, that such failure(s) present a material risk to the IRS's
collection of federal employment taxes. See paragraph (b) of this
section for the factors the IRS will consider in determining whether
one or more failures to meet any of the requirements described in this
section presents a material risk to the IRS's collection of federal
employment taxes.
(2) Suspension. Section 3511 will not apply to any contract
described in section 7705(e)(2) into which the CPEO enters while its
certification is suspended.
(3) Revocation. If an organization's certification as a CPEO is
revoked, the organization will not be considered a CPEO for purposes of
section 3511 unless and until it again applies to be certified as a
CPEO in accordance with paragraph (a) of this section and is again
certified by the IRS as meeting the requirements of this section. An
organization whose certification as a CPEO has been revoked may not
reapply to be certified as a CPEO until one year has passed after the
effective date of its revocation.
(4) Disclosure of suspension and revocation--(i) Notification by
the CPEO. An organization whose certification as a CPEO has been
suspended or revoked must notify its customers of such suspension or
revocation in the time and manner prescribed by the Commissioner in
further guidance.
(ii) Disclosure by the IRS. If the IRS suspends or revokes an
organization's certification as a CPEO, the IRS will make available to
the public the fact of such suspension or revocation in the time and
manner described in further guidance. The IRS may also separately
notify the organization's customers of such suspension or revocation.
(o) Applicability date. The rules in this section apply on and
after May 3, 2019.
Sec. 301.7705-1T [Removed]
0
Par. 5. Section 301.7705-1T is removed.
Sec. 301.7705-2T [Removed]
0
Par. 6. Section 301.7705-2T is removed.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
0
Par. 7. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
0
Par. 8. In Sec. 602.101, paragraph (b) is amended by adding entries in
numerical order for ``31.3511-1,'' ``301.7705-1,'' and ``301.7705-2''
and removing the entries for ``301.7705-1T'' and ``301.7705-2T'' to
read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(b) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
31.3511-1............................................... 1545-2266
* * * * *
301.7705-1.............................................. 1545-2266
301.7705-2.............................................. 1545-2266
* * * * *
------------------------------------------------------------------------
* * * * *
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
Approved: May 7, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-10856 Filed 5-23-19; 11:15 am]
BILLING CODE 4830-01-P
