Does it seem like the Internal Revenue Service is constantly changing the details in the tax code? If you think so, then you will not be surprised that the IRS recently changed the way businesses control their payroll taxes.
Reported in a Business Management Daily article, the IRS publicized new regulations that leasing organizations might be responsible for their clients’ payroll taxes.
“The IRS can only collect payroll taxes once-either from you or your designated third party. Final regulations, which became effective March 31, 2014, clarify when employee leasing organizations are liable for their clients’ payroll taxes. Warning: Even though the regs heap liability on leasing organizations, they stress that you remain on the hook for your payroll taxes,” according to Business Management Daily.
Typically leasing organizations do not pay close attention to payroll liability because they have no authority over wage payments, they are not payroll reporting agents and they do not possess Form 2678 to make them a certified payroll service bureau.
According to the Federal Insurance Contributions Act (FICA), employers usually must withhold 6.2% of the employee’s wages, which was about $113,700 as of 2013, and is then contributed to Social Security. Furthermore, employers are responsible for the employer portion of 6.2% of their employee’s wages for Social Security.
“Likewise, employers are required to withhold 1.45% of an employee’s wages for Medicare and are separately liable for the employer share of 1.45%. There is no wage base for Medicare, so all of an employee’s wages are subject to Medicare tax. Under the American Taxpayer Relief Act of 2012, the employee share of the Medicare tax increases for 2013 and subsequent years by 0.9%, to a total of 2.35%, for employees whose wages exceed $200,000 for single filers and $250,000 for joint filers,” wrote Joshua R. Welch and Joshua R. Cannon of Tierney Fisher & Nichols law firm early last year.
According to the Federal Unemployment Tax Act (FUTA), employers generally are accountable for paying an amount that is the same as the 6% of an employee’s wage. FUTA’s wage base is $7,000. A credit of that can be as great as 5.4% is offered for the taxes paid on state unemployment. All in all, an employer’s FUTA tax rate may be as small as 0.6%.
“Under the final regs, the IRS may designate a leasing organization as a client’s agent for all payroll purposes, if a service agreement between the parties provides that the leasing organization is the employer or co-employer of employees working for the client; the leasing organization pays wages to those employees; and it assumes responsibility to collect, report and pay, or assumes liability for any payroll taxes, under its own Employer Identification Number. Key: Liability under these regs doesn’t depend on whether you agree to pay the leasing organization gross payroll (i.e., wage and tax amounts) or net payroll (i.e., wages less tax amounts),” wrote Business Management Daily.
It is important to note that these new regulations convolute the tax code further than before because now a third-party can by targeted by the IRS for payroll taxes. It is also worth noting that such regulations are consequential because they do not absolve the client of all responsibilities.