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IRS issues information letter on common law/statutory employers and employer agents

October 15, 2013

Information Letter 2013-0031

IRS has issued an information letter on common law employers, statutory employers, and employer agents.

Common law employers. Whether a person is an employer for employment tax purposes is determined under the common law rules. Guidelines for determining whether an employer-employee relationship exist are found in three substantially similar sections of the Employment Tax Regulations: (1) Reg. § 31.3121(d)-1; (2) Reg. § 31.3306(i)-1; and (3) Reg. § 31.3401(c)-1, relating to FICA tax, FUTA tax, and income tax withholding, respectively. Generally, the relationship of employer-employee exists when the person for whom the services are being performed has the right to direct and control the individual who performs the services, not only as to the result to be accomplished by the work, but also as to the details and the means by which the result is accomplished.

Statutory employers. Under Code Sec. 3401(d)(1), if a person who is not the common law employer has control of the payment of wages, that person is considered the employer for income tax withholding purposes. The person with control of the payment of wages is sometimes referred to as a statutory employer or a “section 3401(d)(1) employer.” When determining whether a person has control of the payment of wages, the focus is on the “legal control” of the payment of wages (see Reg. § 31.3401(d)-1(f)). IRS considers the facts and circumstances of a particular situation to determine whether a person has legal control of the payment of wages.

FICA and FUTA tax law do not contain a definition of employer similar to the one in Code Sec. 3401(d)(1) for withholding. However, the U.S. Supreme Court ruled in Otte v. U.S. (S Ct 11/19/74), 34 AFTR 2d 74-6194 that a person who is an employer under Code Sec. 3401(d)(1) is also an employer for purposes of FICA withholding. The Otte decision has been interpreted to mean that the person having control of the payment of wages is also an employer for purposes of employer FICA and FUTA tax. Thus, a person who is determined to be a Code Sec. 3401(d)(1) employer is required to report, deposit, and pay income tax withholding, FICA tax, and FUTA tax.

Employer agents. Code Sec. 3504 allows an employer to designate an agent to act on its behalf. The general procedures for requesting authorization to act as a “section 3504” agent are found in Rev Proc 70-6, 1970-1 CB 420. Generally, a request is made by filing Form 2678, Employer/Payer Appointment of Agent, executed by the employer and the person the employer wishes to appoint as its “section 3504” agent.

All provisions of the law applicable with respect to an employer, including penalties and liability for employment taxes, are applicable to the “section 3504” agent. The employer for whom the agent acts remains liable for the employment taxes as well.