November 08, 2019

New IRS Regulations for CPEOs

#1 Annual Wage Base and Withholding Thresholds for Covered Employees:

New IRS regulations require Extensis to start accumulating the Federal Taxable Wage Thresholds for Social Security, FUTA, and Excess Medicare on a client legal entity basis. The finalized regulation dictates that if an employee is working for multiple client legal entity under the same CPEO entity, the employee will have to meet the wage thresholds within each client before the taxes will stop being calculated due to the threshold being met. This change will impact employees that have annual compensation that exceeds the 2020 Social Security taxable wage thresholds of $137,700 if they are paid through separate client legal entities.

In addition, the client level accumulation of taxable wage thresholds will make it possible for organizations that are currently exempt from FUTA taxes (religious, charitable, educational, or other type of organization described under section 501(c)(3)) to maintain that exemption when engaged in a relationship with a CPEO.

Effective Date: Payrolls processed with a check date of 1/1/2020 and thereafter.

Client Action Required:
  • Review all employees that are being reported under multiple client legal entities to determine if they should continue to be paid in that manner. In most cases, employees in multiple legal client entities should be moved to a single legal entity.
  • Contact your payroll support or HR team if employees require a reporting company change prior to the first paycheck in 2020.
  • Notify all employees of this change in wage threshold accumulation as it could have an impact on their net pay over the course of 2020 and going forward.

#2 Treatment of Self-Employed Individuals of a Partnership:

Extensis currently processes all Draw or Guaranteed Payments for partners as described in the updated regulations. The change impacts payments issued to partners for services provided outside of the normal partnership capacity. These can be paid as a tax-free item by Extensis, but clients will need to issue the Partner a 1099-MISC for those payments. The record keeping for distinguishing between the payments issued to a partner will be managed by our clients.

Effective Date:  Payrolls processed with a check date of 1/1/2020 and thereafter.

Client Action Required:
  • Begin processing any payments issued to Partners for services provided outside of their normal partner capacity through a 1099-MISC pay code and provide an annual 1099-MISC for those payments.

To see the full IRS Regulations: TD 9860.
 

IRS Regulations for Certified Professional Employer Organizations


On May 28, 2019, the US Treasury Department and IRS finalized regulations governing certified professional employer organizations (CPEOs), which allow to be solely liable for payroll taxes on wages they pay to their customers' employees. The rules allow a CPEO to, in effect, be the employer for employment tax and payroll obligations, while the customer provides direction to and control over the employees and remains the common law employer for other purposes. The full version of the Treasury Decision can be accessed by this link TD 9860.
 

Background on CPEO Regulation

Legislation enacted in 2014 included a mandate for Treasury and the IRS to establish a voluntary certification program for PEOs. Accordingly, Treasury and the IRS in 2016 issued proposed and temporary regulations relating to a certified PEO program.

Also, in 2016, the IRS issued Rev. Proc. 2016-33 that listed in detail the procedures for applying for a CPEO. In response to that revenue procedure, the IRS and Treasury received comments that concerned the proposed and temporary regulations as well as Rev. Proc. 2016-33. To address these comments, the IRS issued Notice 2016-49 that provided interim guidance and that described changes to some of the CPEO certification requirements.

Lastly, the IRS issued Rev. Proc. 2017-14 to address the requirements for a CPEO to remain certified and the procedures relating to the suspension and revocation of CPEO certification.
 

How will clients of a CPEO be impacted by the finalized regulations?

Annual Wage Base and Withholding Thresholds for Covered Employees:

These regulations require Extensis to start accumulating the Federal Taxable Wage Thresholds for Social Security, FUTA, and Excess Medicare on a client legal entity basis. This will take effect for all payrolls processed with a check date of 1/1/2020 and thereafter. The finalized regulation dictates that if an employee is working for multiple client legal entity under the same CPEO entity, the employee will have to meet the wage thresholds within each client before the taxes will stop being calculated due to the threshold being met. This change will impact employees that have annual compensation that exceeds the 2020 Social Security taxable wage thresholds of $137,700 if they are paid through separate client legal entities.

In addition, the client level accumulation of taxable wage thresholds will make it possible for organizations that are currently exempt from FUTA taxes (religious, charitable, educational, or other type of organization described under section 501(c)(3)) to maintain that exemption when engaged in a relationship with a CPEO.

Treatment of Self-Employed Individuals of a Partnership:
Extensis currently processes all Draw or Guaranteed Payments as described in the updated regulations. The change impacts payments issued to partners for services provided outside of the normal partnership capacity. These can be paid as a tax-free item by Extensis, but our client will need to issue the Partner a 1099-MISC for those Payments. The record keeping for distinguishing between the payments issued to a partner will be managed by our clients.
 

What happens when an employee exceeds the Social Security Threshold?

There is no change to the annual tax filing rules for individuals. The employee would need to work with their tax preparer to claim a refund when their personal income tax returns are filed for any tax year where the Social Security Taxable Wage Threshold is exceeded due to working for multiple employers.
 

Can an employer claim a refund if an employee is paid under related businesses?

Under the new regulation, each client is treated as a separate reporting entity and listed on Schedule R filed along with the quarterly form 941 and annual form 940 returns. This is aligned with how taxes would be reported if the employee worked for unrelated businesses. Based on these guidelines, no refund is available for the employer paid portion of Social Security or FUTA taxes.
 

Next Steps

For all clients of Extensis with employees that are impacted by these changes:

 
  • Review all employees that are being reported under different client legal entities to determine if they should continue to be paid that way.
  • Contact your payroll support or HR team if employees require a reporting company change prior to the first paycheck in 2020.
  • Notify all employees of this change in wage threshold accumulation as it could have an impact on their net pay over the course of 2020 and going forward.
  • Begin processing any payments issued to Partners for services provided outside of their normal partner capacity through a 1099-MISC pay code and provide an annual 1099-MISC for those payments.

Action to be taken by Extensis:
 
  • Make the necessary system updates effective 1/1/2020 to ensure proper wage threshold accumulation.
  • Provide a pay code to be used for Partner payment issued for services provided outside of their normal partner capacity.
  • Continue to file the necessary form 8973’s at the commencement and termination of a contract and service agreement.
  • Continue to include all client level federal tax information on a schedule R that is filed with Forms 940 and 941.
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