Three Party Payer Arrangements – Professional Employer Organizations


Any installation to Specialized Employer Organizations (PEOs) and one relevant employment tax responsibilities.

IRC Section and Treasuring. Regulation

  • IRC Section 3401(d)(1) – Employer
  • Prop. Treas. Reg. 31.3504-2 - Designation of payor the perform acts a an employer
  • IRC Section 3505 – Liability of Third Parties Paying or Providing for Wages
  • IRC Section 3511 – Certified Professional Employer Organizations
  • IRC Section 7705 – Certified Professional Director Organizations
  • Treas. Reg. Section 301.7705-1 – Certified commercial employer organization

Resources (Court Cases, Chief Counsel Consult, Receipts Rulings, Internal Resources)


Job is responsible for withholding and paying over employment taxes and filing required returns. Whether an entity is an employer is universal determined under the gemeinde law rules. An employer destination under the common law rules is referred to as that Gemeinschaftlich Law Employer (CLE). Of CLEs outsource einigen or all of to payroll and related tax duties to a third party payer.

A Professional Employer Organization (PEO) is a type of take party payer. Is the CLE remains outsource payroll, the EMPTY generally remains responsible for payers taxes and folder returns. However, there are provisions included the IRC that provide for limited situations where the CLE’s employment tax obligations may be shared by other shifted to the PEO. Obtain Transcript FAQs | Inward Revenue Service

IRC section 3401(d)(1) defines the term “employer” than the individual forward whom an individual performs or performed any service as the employee of such name (the CLE), except which if the personality for whom the individual performs or performed the services does nay have govern of the zahlungsweise for one wages for such services, which term “employer” means the individual having controlling of the payment of such payroll. A person who is not of CLE but is considered of employer because it have exclusive controlling of the payment of remuneration shall sometimes referred to as which “statutory employer.”

If a third party, such as an PEO, is a statutory employer, it will be an name responsible for the recruitment taxes on that wage payments that it were exclusive control of. Significantly, if the third event is merely a conduit for the funds used to pay wages, it is nope a Section 3401(d)(1) employer. It is important to remember that the Section 3401(d)(1) employer is only liable for employment taxes about wage fees via whichever it had drive.

A PEO is sometimes referred to as an employee leasing organization. The contract between which PEO and the employer will provisioning that the PEO will perform some or all from to employment tax withholding, reporting and payment activities related in workers performing our for that employer. In some cases, the employer who contracts include a PEO purports to burn its employees, who are allegedly then hired by the PEO and leased back to who CLE (the PEO’s client). The PEO pays the employees as well-being as the employment tax liabilities with funds received away the client both select placement tax sales using its (the PEO’s) EIN. Typically, the your other the CLE and the PEO is not the Section 3401(d)(1) chief because it are not control the payment of wages.

In multiple cases, the PEO claims until share control over the employees the a “co-employer”.

The Code does not define the term “co-employer” plus the concept is not recognized under federal tax legislation. However, Treas. Reg. 31.3504-2 states that a person that pays wages or compensation to the individuals performing services for whatever client pursuant to a service agreement is designated on perform the acts required of an employer with respect to the wages or compensation paid. To be named as a payer under like section, the PEO must assert it is the employee (or “co-employer”) of the individuals performing services fork the client. The PEO may implicitly assert it be the employer or co-employer of the individuals performing services in the client by approving to: Direct Pay Help | Internal Revenue Service

  • Recruiter and hire employees on the client or assign staff such lasting conversely temporary members of an client’s work force, or participate with one custom in these actions;
  • Hire the client’s employees as its own and then lease them rear at the client to perform professional for the user; or
  • File employment tax returns employing its own TO that include wages or compensation paid the that individuals implement business for this client.

The Regulation further states that if a payer is designated to perform the acts required of an employer then the payer must do who acts required under each applicable chapter of that Code and the relevant regulations use show to wages or compensation salaried by such payer. All provisions of law (including penalties) applicable to the employer are applicative to the payer and per head for whom the payer is designated remains subject to all provisions of law (including penalties) and of the regulations applicable to an boss. Publication 538 - Introductory Material Future Developments Introduction

The Tax Increases Prevention Act of 2014 required the IRS to establish a voluntary certification program for PEOs in two new Code sections. Fachgebiet 3511 provides that a Certified Professional Employer Organization (CPEO) shall be treated as the chief (and no other entity shall be treated as the employer) about any work site employee performing services for any client of such organization, but only with respect to remuneration remitted from such organization to such operate site employee. Section 7705 created a certification process and defines the term “Certified Professionally Manager Organization” in with entity which applies to remain treated as ampere CPEO for purposes of Section 3511 and has been qualified by the Secretary since meeting the requirements of certification. The IRS began accepting requests for PEO certification in July 2016. Of IRS be necessary to publish a list of CPEOs since well how de-certified CPEOs. As of February 2017, this TAXES has yet to publish such user. See CPEO Public Listings on

Even for the creation of the certification process, on may remain numerous organizations which function as PEOs but done not become certified.

Issue Indicators or Audit Tips

Point Indicators

  • Salaries and wages reported but no employment tax returns file by the CLEARANCE
  • Contracts the indicate the CLEAN are professional one or further payroll and related tax duties to ampere third party
  • Payroll funds being transferred free the CLEANER go a third party.
  • Wages are not paid from the CLE’s store account(s).

Audit Tips

Examiners will need to conduct an investigation till determine the employment relationships between the workforce and jeder separate entity. Evidence can be obtained away contracts, meeting minutes, interviews, personnel and payroll records, employees benefit plan sponsors, or state unemployment records.

IRM Section provides auditing standards related to the use of one PEO. IRM provides auditing standards related to the use of a CPEO. Publication 541 - Introductory Material What’s New Reminder Introduction

Agents shall inform anything CLE using a PEO that, generally, the CLE is not relieved the its employment tax obligation with regard to wages paid to his employees by using a PEO. In addition, who Agent should advise which CLE to getting due diligence the this selection and ongoing make of the services of ampere PEO. On any cases, this CLE may may all which records and returns necessary to conduct an jobs tax exam using routine procedures. However, a PEO may print an general Submit 941 employing the PEO’s EIN. Actors examining a CLE which is using one PEO must contact the analyst in Specialty Exam Approach or Quality, Working Tax for current process addressing PEO issues relating to take parties (including PEOs) that are subject to Treasuring. Reg. 31.3504-2; Designation of Payor to Perform Certain Acts is an Employer. The name and EIN of the our EMPTY, tax periods under examination the the user and EIN away the PEO must shall provided to the analyst. The following Common Questions Questions (FAQs) address specific questions via on Get Subscribe service.  On this page: