IRS Provides Information on Employment Arrangements
Oct. 17, 2013
The IRS recently released Information Letter 2013-0031, which discusses three common types of employer-employee relationships and clarifies employment tax responsibilities in each relationship.
Most employment arrangements are defined under common law rules. Common law rules establish an employer-employee relationship where the employer has the right to direct and control the details and means used by an individual performing service. Under a common law relationship, the employer typically is responsible for remitting Federal Insurance Contributions Act (FICA) tax, Federal Unemployment Tax Act (FUTA) tax, and federal income tax withholding to the IRS.
The second type of employment arrangement is a statutory relationship. A statutory employer doesn’t have the right to direct the activities of an employee, but it does have legal control over the payment of wages. For example, a temporary staffing agency is generally the statutory employer for its employees, but a company receiving the temporary staffing services has the primary responsibility to direct the actions of those employees. In most cases, the statutory employer is responsible for remitting FICA tax, FUTA tax, and income tax withholding to the IRS.
The third type of employment arrangement involves using an agent to act on behalf of the employer. This agent takes on the responsibility to remit FICA and income tax withholding for the employer. An employer using an agent generally is responsible for remitting its own FUTA tax withholdings, and the employer retains the liability if the agent does not appropriately remit payroll taxes.
Employers should regularly review any statutory or agency employment arrangements to verify all employment tax liabilities are being met. Although employers normally retain liability for employment taxes only in an agency arrangement, an improperly structured statutory employer arrangement also could result in unexpected payroll tax liabilities.
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