Employ Joint Tax Liability for Leased Employees

A company can use workers provided through an employee leasing company or professional employer organization (PEO) to save money on benefits such as health and life insurance, as well as administrative costs.

joint tax

Employee Leasing
Versus Traditional Staffing Services

With an employee leasing firm or PEO, companies outsource the management of duties, including human resources, employee benefits, payroll and workers’ compensation. What makes PEOs different from some other staffing firms is a long-term “co-employment” relationship, where both the employer and the leasing firm are responsible for meeting employer laws and liabilities.
On the other hand, a traditional temporary staffing service generally supplies workers on a short-term basis. After completion of the work, the leased employees return to the staffing service for reassignment. The workers are considered to be employees of the staffing service.

Here’s How it Works

An employee leasing firm hires people for your company and pays all the related costs for them. You then pay the leasing firm those costs, plus an additional fee to cover the administrative overhead.

If you already have a staff, many of these firms will hire the employees as their own. Your company then leases them back from the company to essentially perform the same duties as before. In some cases, leasing firms allow small companies to provide better benefits and services.

But what if the company that has been leasing employees fails to meet its financial obligations? Which entity is responsible for the payroll taxes for the employees – the leasing company or the company that leases the employees?

One case helps clarify the situation. In the case, Total Employment Company (TEC), an employee leasing company, paid wages and offered benefits for the employees used by American Enterprise Solutions, Inc. (AESI). After the employer fell behind on its payments, TEC advanced payroll on behalf of the client. However, it failed to pay federal employment taxes. The leasing company continued to advance payroll until the contract with AESI was terminated.

The Internal Revenue Service determined unpaid payroll taxes for the leased employees and assessed the tax against TEC, the leasing company. Eventually, the District Court of Florida, overturning a bankruptcy court decision, held that the leasing company controlled the payment of wages to employees.

The court stressed that the entity controlling payment of the wages is in the best position to make the proper accounting and payment of federal payroll taxes. Therefore, joint payroll tax liability is warranted, even though employee leasing companies technically may not be the common law employers of leased workers.

Bottom line: Both the taxpayer and the client were responsible for withholding on leased employee income and for the collection and payment of payroll taxes. However, the District Court also noted that AESI had the ultimate responsibility for the taxes and would be liable to the employee leasing company. (Total Employment Co. Inc., DC-FL., 2/12/04).

Posted In: Tax Advisor, Tax Deductions, Tax Filing

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