On May 23, the IRS and Treasury released final regulations governing certified professional employer organizations (“CPEOs”).  CPEOs were created by the Tax Increase Prevention Act of 2014, P.L. 113-295, which added new Code sections 3511 and 7705 that contain certification requirements for, and the federal employment tax consequences of, being a CPEO.  The measure, passed with support from the PEO industry, eliminates the requirement for a CPEO to restart the FICA and FUTA wage base when an employee is onboarded from the worksite employer to the CPEO pursuant to a new contract between the worksite employer and the CPEO.  The same applies when the contract is terminated and employees move from the payroll of the CPEO to that of the worksite employer.  The regulations also clarify that the CPEO is solely liable for employment taxes due on remuneration paid by the CPEO.

The final regulations finalize proposed and temporary regulations issued in 2016 that interpret the statutory provisions.  The temporary regulations require a PEO to post a bond equal to 5% of the anticipated employment tax liability between April 1 and the following March 31, up to $1,000,000.  Commenters requested the removal of the requirement that the bond be posted without collateral.  The IRS declined to do so, indicating that it views the surety’s financial underwriting of an uncollateralized bond as essential to ensuring that the PEO’s financial condition is sound.  However, the final rules do permit the Commissioner to issue future guidance providing exceptions to the no-collateral requirement in appropriate circumstances.  According to the preamble, the IRS has certified 120 CPEOs to date, several of whom posted bonds of less than statutory maximum of $1,000,000.

The final regulations also addressed other provisions of the temporary regulations:

  • The regulations incorporate guidance from Rev.  Proc. 2017-14 and add definitions for riders, strengthening bonds, superseding bonds, and new bonds.
  • The regulations specify that the surety’s right to request collateral does not violate the requirement that the bond be posted without collateral. However, if the surety exercises such right, this is a material change that must be timely reported to the IRS and will result in revocation of the PEO’s certified status if another bond cannot be obtained without a collateral requirement or an exception to the no-collateral requirement as discussed above.
  • The final regulations removed the prohibition on disregarded entities applying for CPEO status as announced in Notice 2016-49, provided that the entity is a domestic entity (organized under the laws of a U.S. state) and is wholly owned by a U.S. person. The regulations also make corresponding changes to the definition of responsible individual and permit sole proprietorships to apply for certification.
  • The final regulations revised the requirements related to a CPA opinion that certifies that the audited financial statements reflect positive working capital by permitting such statements to be reflected in notes to the financial statements covered by the opinion rather than in the opinion to be consistent with AICPA guidelines for CPA opinion letters as previously announced in Notice 2016-49.
  • The final regulations clarified the requirement that CPEOs use only financial institutions described in Code section 265(b)(5) to hold cash and cash equivalents to reflect that a CPEO must hold “substantially all” cash and cash equivalents in such financial institutions.
  • The regulations clarified the requirement that CPEOs and responsible persons waive confidentiality and privilege to allow the IRS to investigate the accuracy of statements and submissions to indicate that such waivers are required only in circumstances where the IRS cannot otherwise verify the accuracy of such statements and submissions.

The final regulations are effective on publication in the Federal Register.

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Photo of Marianna G. Dyson Marianna G. Dyson

Marianna Dyson practices in the areas of payroll tax, fringe benefits, and information reporting, with a specific focus on perquisites provided to employees and directors, worker classification, tip reporting, cross-border compensation, backup withholding, information reporting, and penalty abatement.

Ms. Dyson advises large employers…

Marianna Dyson practices in the areas of payroll tax, fringe benefits, and information reporting, with a specific focus on perquisites provided to employees and directors, worker classification, tip reporting, cross-border compensation, backup withholding, information reporting, and penalty abatement.

Ms. Dyson advises large employers on the application of employment taxes, the special FICA tax timing rules for nonqualified deferred compensation, the voluntary correction of employment tax errors, and the abatement of late deposit and information reporting penalties for reasonable cause. On behalf of the restaurant industry, her practice provides extensive experience with tip reporting, service charges, tip agreements, and Section 45B tax credits.

She is a frequent speaker at Tax Executives Institute (TEI), the Southern Federal Tax Institute, and the National Restaurant Association.

Photo of S. Michael Chittenden S. Michael Chittenden

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden…

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden advises companies on their obligations under FATCA and assists in the development of comprehensive FATCA and Chapter 3 (nonresident alien reporting and withholding) compliance programs.

Mr. Chittenden advises large employers on their employment tax obligations, including the special FICA and FUTA rules for nonqualified deferred compensation, the successor employer rules, the voluntary correction of employment tax mistakes, and the abatement of late deposit and information reporting penalties. In addition, he has also advised large insurance companies and employers on the Affordable Care Act reporting requirements in Sections 6055 and 6056, and advised clients on the application of section 6050W (Form 1099-K reporting), including its application to third-party payment networks.

Mr. Chittenden counsels clients on mobile workforce issues including state income tax withholding for mobile employees and expatriate and inpatriate taxation and reporting.

Mr. Chittenden is a frequent commentator on information withholding, payroll taxes, and fringe benefits and regularly gives presentations on the compliance burdens for companies.