[Federal Register Volume 84, Number 102 (Tuesday, May 28, 2019)]
[Rules and Regulations]
[Pages 24367-24389]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-10856]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 31, 301, and 602

[TD 9860]
RIN 1545-BN19


Certified Professional Employer Organizations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document sets forth final regulations relating to 
certified professional employer organizations (CPEOs). The Stephen 
Beck, Jr., Achieving a Better Life Experience Act of 2014, required the 
IRS to establish a voluntary certification program for professional 
employer organizations. These final regulations set forth the 
requirements a person must satisfy in order to become and remain a CPEO 
and the federal employment tax liabilities and other obligations of 
persons certified by the IRS as CPEOs. These final regulations will 
affect persons who apply to be treated as CPEOs and who are certified 
by the IRS as meeting the applicable requirements. In certain 
instances, the final regulations will also affect the federal 
employment tax liabilities and other obligations of customers of the 
CPEO.

DATES: 
    Effective date: These regulations are effective on May 28, 2019.
    Applicability date: For dates of applicability see Sec. Sec.  
31.3511-1(i), 301.7705-1(c), and 301.7705-2(o).

FOR FURTHER INFORMATION CONTACT: Nina Roca at (202) 317-6798 (this is 
not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-2266.
    The collection of information in these regulations is in Sec.  
31.3511-1(g), which provides that the Secretary shall develop such 
reporting and recordkeeping rules, regulations, and procedures as the 
Secretary determines necessary or appropriate to ensure compliance by 
CPEOs with subtitle C of the Internal Revenue Code (Code), and in Sec.  
301.7705-2, which relates to the requirements that a person must 
satisfy to become and remain certified as a CPEO.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
return information are confidential, as required by 26 U.S.C. 6103.

Background

    The Stephen Beck, Jr., Achieving a Better Life Experience Act of 
2014 (the ABLE Act), enacted on December 19, 2014 (Pub. L. 113-295), 
added new sections 3511 and 7705 to the Code relating to the 
certification requirements for, and the federal employment tax 
consequences of, being a ``certified professional employer 
organization'' (CPEO). The ABLE Act required the

[[Page 24368]]

Internal Revenue Service (IRS) to establish a voluntary certification 
program for persons to become CPEOs. Additionally, the ABLE Act made 
conforming amendments to sections 3302, 3303(a), 6053(c), 6652, and 
7528 relating to the obligations, requirements, and penalties 
applicable to a CPEO.
    Section 7705(a) defines a CPEO as a person who applies to be 
treated as a CPEO for purposes of section 3511 and has been certified 
by the Secretary as meeting the requirements of section 7705(b), which 
include requirements related to tax status and background, satisfying 
certain bond, financial review, and quarterly reporting requirements 
(as provided for in section 7705(c)), and notifying the IRS of any 
change that materially affects the continuing accuracy of information 
provided by the CPEO.
    Section 7705(d) gives the Secretary the authority to suspend or 
revoke the certification of any person for purposes of section 3511 if 
the Secretary determines that the person is not satisfying the 
agreements or requirements of sections 7705(b) or (c), or fails to 
satisfy applicable accounting, reporting, payment, or deposit 
requirements. Section 7705(f) provides that the Secretary shall make 
available to the public the name and address of each person certified 
as a CPEO and each person whose certification is suspended or revoked.
    Under sections 3511(a)(1) and (c)(1), for purposes of federal 
employment taxes and other obligations under the federal employment tax 
rules, a CPEO is generally treated as the employer of any individual 
performing services for a customer of the CPEO and covered by a 
contract meeting the requirements of section 7705(e)(2) (CPEO contract) 
between the CPEO and the customer (covered employee), but only with 
respect to remuneration remitted to the covered employee by the CPEO. 
With respect to an individual covered by a CPEO contract who performs 
services for a customer at a work site that meets the coverage 
requirements of section 7705(e)(3) (a work site employee), section 
3511(a)(1) specifies that no person other than the CPEO is treated as 
the employer for federal employment tax purposes with respect to 
remuneration remitted by the CPEO to such individual.
    Under section 3511(g), the Secretary is directed to develop such 
reporting and recordkeeping rules, regulations, and procedures as the 
Secretary determines necessary or appropriate to ensure compliance with 
the applicable federal employment tax provisions by CPEOs. In addition, 
under section 3511(h), the Secretary is directed to prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of section 3511.
    On May 6, 2016, the Department of the Treasury (Treasury 
Department) and the IRS published final and temporary regulations under 
section 7705 (TD 9768) in the Federal Register (81 FR 27315, as 
corrected July 12, 2016 at 81 FR 45012) that describe the application 
process and certification requirements necessary for a person to become 
and remain a CPEO. On the same date, the Treasury Department and the 
IRS published a notice of proposed rulemaking (REG-127561-15) in the 
Federal Register (81 FR 27360) cross-referencing the temporary 
regulations and proposing additional regulations under section 3511 
that describe the federal employment tax consequences for CPEOs and 
their customers. On June 3, 2016, Revenue Procedure 2016-33 (2016-25 
I.R.B. 1034) was also issued, which set forth the detailed procedures 
for applying to be certified as a CPEO. The IRS did not receive any 
requests for a public hearing on the regulations, and therefore no 
public hearing was held. Several comments responding to the proposed 
and temporary regulations and the revenue procedure were received. The 
Treasury Department and the IRS determined that it was important to 
respond promptly to some of these comments and issued Notice 2016-49 
(2016-34 I.R.B. 265) on August 5, 2016 in response. Notice 2016-49 
provided interim guidance and described modifications to certain 
certification requirements, which are reflected in these final 
regulations. Finally, the Treasury Department and the IRS also issued 
Revenue Procedure 2017-14 (2017-3 I.R.B. 426) on December 29, 2016, 
which addressed the requirements for a CPEO to remain certified and the 
procedures relating to suspension and revocation of CPEO certification. 
The written comments received are available for public inspection and 
copying at http://www.regulations.gov or upon request. After 
consideration of all the comments, the proposed regulations are adopted 
as amended by these final regulations.

Summary of Comments and Explanation of Revisions

    The IRS received seven written comments in response to the proposed 
and temporary regulations. Several of the points made in the comments 
related to items specifically addressed in the online application for 
certification, Rev. Proc. 2016-33, Notice 2016-49, Rev. Proc. 2017-14, 
Form 8973 ``Certified Professional Employer Organization/Customer 
Reporting Agreement'', Schedule R (Form 941) ``Allocation Schedule for 
Aggregate Form 941 Filers'', and/or Form 14751 ``Certified Professional 
Employer Organization Surety Bond''. Except to the extent that certain 
of these comments also relate to issues covered by the regulations, the 
comments are beyond the scope of the regulations and they are not 
otherwise addressed herein. They are under further consideration for 
future revisions of the revenue procedures and possible modifications 
to the application program and applicable forms.

1. Annual Wage Base and Withholding Threshold for Covered Employees

    Sections 3511(a) and (c), provide that, for federal employment tax 
purposes, a CPEO is treated as the employer of covered employees that 
are work site employees (section 3511(a)(1)) and covered employees that 
are not work site employees (non-work site covered employees) (section 
3511(c)(1)) with regard to remuneration it pays to these covered 
employees. Remuneration paid by an employer to an employee within any 
calendar year is not subject to the social security portions of Federal 
Insurance Contributions Act (FICA) taxes, the equivalent portions of 
tier 1 Railroad Retirement Tax Act (RRTA) taxes, or Federal 
Unemployment Tax Act (FUTA) taxes to the extent it exceeds the 
applicable annual wage base for these taxes (collectively referred to 
in this Summary of Comments and Explanation of Revisions as the 
``annual wage base''). See sections 3121(a), 3231(e), and 3306(b) for 
FICA, RRTA, and FUTA taxes respectively. Under section 3102(f)(1), 
employers are required to withhold Additional Medicare Tax (AdMT) from 
an employee's wages only to the extent that those wages exceed $200,000 
in a calendar year (referred to in this Summary of Comments and 
Explanation of Revisions as the ``withholding threshold''). The annual 
wage base applies on an employer-by-employer basis, unless the 
predecessor-successor employer rule discussed below applies; thus, only 
remuneration received during any calendar year by an employee from the 
same employer is considered in applying the annual wage base for 
purposes of the remuneration paid by that employer. See Sec. Sec.  
31.3121(a)(1)-1(a)(3) and 31.3306(b)(1)-1(a)(3) for FICA and FUTA 
taxes, respectively. Similarly, the AdMT withholding threshold applies 
only with regard to remuneration received during any calendar year by 
an employee from the same employer. See Sec.  31.3102-4(a).

[[Page 24369]]

    By contrast, the annual wage base is not applied separately to 
successor and predecessor employers. See section 3121(a)(1). In 
accordance with section 3511(b), Sec.  31.3511-1(d) of the proposed 
regulations provides that, for purposes of the annual wage base: (1) A 
customer is considered a predecessor employer and a CPEO is considered 
a successor employer upon entering into a CPEO contract with respect to 
a work site employee who is performing services for the customer, and 
(2) a CPEO is considered a predecessor employer and a customer is 
considered a successor employer upon termination of the CPEO contract 
between the CPEO and the customer with respect to a work site employee 
who is performing services for the customer. The proposed regulations 
also provide that, except as provided with respect to successor and 
predecessor employers in Sec.  31.3511-1(d), remuneration received by a 
covered employee from a CPEO for performing services for a customer of 
the CPEO within any calendar year is subject to a separate annual wage 
base and withholding threshold that are each computed with respect to 
such remuneration, without regard to any remuneration received by the 
covered employee during the calendar year from any other employer 
(including, if applicable, remuneration received directly from the 
customer receiving services from the employee). Thus, upon entering 
into a CPEO contract with a customer with respect to a covered 
employee, the CPEO starts a new annual wage base and withholding 
threshold with respect to the covered employee (unless the CPEO is 
treated as a successor employer under Sec.  31.3511-1(d)).
    The proposed regulations also provide that if, during a calendar 
year, a covered employee receives remuneration from a CPEO for services 
performed by the covered employee for more than one customer of the 
CPEO, the annual wage base and withholding threshold do not apply to 
the aggregate remuneration received by the covered employee from the 
CPEO for services performed for all such customers. Rather, the annual 
wage base and withholding threshold apply separately to the 
remuneration received by the covered employee from the CPEO with 
respect to services performed for each customer.
    The Treasury Department and the IRS received several comments on 
the annual wage base and withholding threshold rules for covered 
employees under the proposed regulations. One commenter recommended 
that current law, unaffected by section 3511 and the regulations 
thereunder, should apply for purposes of determining whether 
remuneration paid by a CPEO to a non-work site covered employee is 
subject to a separate annual wage base. The commenter asserted that the 
statutory distinction between the tax treatment of work site employees 
and the tax treatment of non-work site covered employees was intended 
to address CPEO and customer liability only in each case, and was not 
meant to otherwise change the federal employment tax treatment of wages 
paid to work site employees versus non-work site covered employees.
    The Treasury Department and the IRS disagree with that assertion. 
Section 31.3121(a)(1)-1(a)(3) provides that if an employee receives 
remuneration from more than one employer in a calendar year, the annual 
wage base does not apply to the aggregate remuneration received from 
all of such employers, but instead applies to the remuneration received 
during that calendar year from each employer. Because section 3511 
treats a CPEO as an employer separate and apart from the CPEO customer 
for whom the employees are performing services, employees receiving 
remuneration from both the CPEO and the CPEO customer in a calendar 
year must be treated as receiving remuneration from two different 
employers and the annual wage base therefore applies separately, unless 
the successor and predecessor rules under section 3511(b) apply.
    The same commenter also suggested that, if an employee performs 
services for multiple customers of a CPEO, the annual wage base should 
apply to the aggregate remuneration received by the employee from the 
CPEO for services performed for all customers. The commenter argued 
that the customer-by-customer treatment of the annual wage base in the 
proposed regulations was contrary to the statutory language that treats 
the CPEO as the sole employer of work site employees.
    A customer-by-customer treatment of the annual wage base is 
consistent with section 3511. Specifically, the maintenance of a 
separate annual wage base and withholding threshold with respect to 
each customer for which a covered employee performs services during a 
calendar year is consistent with the statutory language of section 
3511(a)(1) which provides that the CPEO will ``be treated as the 
employer (and no other person will be treated as the employer) of any 
work site employee performing services for any customer of such 
organization, but only with respect to remuneration remitted by such 
organization to such work site employee'' (emphasis added). This 
language contemplates that the CPEO will have a separate annual wage 
base under 3121(a), 3231(e), and 3306(b) (subject to the application of 
the predecessor-successor employer rules on a customer-by-customer 
basis). Furthermore, under section 3511(a)(2) (applicable to work site 
employees) and section 3511(c)(2) (applicable to non-work site covered 
employees), the exemptions, exclusions, definitions, and other rules, 
which are based on the type of employer in most cases will be based on 
the CPEO customer (assuming the typical situation in which the CPEO 
customer is the common law employer of the covered employees). In these 
instances, the attributes of the CPEO customer (e.g., tax-exempt or 
not) will be used to determine the taxes on the remuneration paid by 
the CPEO with respect to services performed for a customer. In 
addition, section 3511(d)(1)(A) provides that, for purposes of certain 
specified credits, with respect to services performed by a work site 
employee for a CPEO customer, the credits apply to the CPEO customer, 
not the CPEO. Thus, section 3511 requires, for both work site and non-
work site covered employees, the separate treatment of amounts paid by 
the CPEO to one employee with respect to services performed by the 
employee for two or more different customers. A separate annual wage 
base and withholding threshold with respect to each customer for which 
a covered employee performs services is needed for purposes of applying 
some of the exemptions, exclusions, definitions, and other rules 
addressed in section 3511(a)(2) and (c)(2) and the treatment of some of 
the credits discussed in section 3511(d). Therefore, if a single 
employee receives remuneration from a CPEO pursuant to multiple CPEO 
contracts with different customers, the CPEO must maintain a separate 
annual wage base and withholding threshold for the employee with 
respect to each customer.
    For instance, wages paid to employees for services performed in the 
employ of a religious, charitable, educational, or other type of 
organization described under section 501(c)(3) are not subject to FUTA 
tax under section 3306(c)(8). Consequently, under sections 3511(a)(2) 
and (c)(2), wages paid by a CPEO to covered employees for services 
performed for a CPEO customer that is an organization described in 
section 501(c)(3) are not subject to FUTA tax. Wages paid by a CPEO to 
a covered employee for services performed for a CPEO customer that is a 
section 501(c)(3) organization cannot be used in

[[Page 24370]]

determining FUTA tax liability for wages paid by the CPEO for services 
performed by that same employee for a CPEO customer that is subject to 
FUTA tax. The FUTA annual wage base must be applied separately to the 
remuneration paid by the CPEO for services performed for the non-
section 501(c)(3) employer because under sections 3511(a)(2) and (c)(2) 
the exemption from FUTA tax applies only to the CPEO customer that is a 
501(c)(3) organization.
    For these reasons, the commenter's proposed changes are not adopted 
in these final regulations.
    Finally, one commenter suggested that, because a CPEO that is 
treated as a successor employer will need to determine the amount of 
wages paid and applied toward the annual wage base by a customer that 
is treated as the predecessor employer and in some cases that 
information provided by a customer may be incorrect, the IRS should 
issue guidance stating that a CPEO may rely on the wage report provided 
by the customer. Whether, and to what extent, a CPEO relies on a wage 
report from its customer is a business decision for the CPEO. The CPEO 
still has the obligation to report accurate information. General 
guidance on the procedures applicable to preparing and reporting wage 
information in predecessor and successor employer situations is 
addressed in the regulations under section 3121(a)(1) and in Revenue 
Procedure 2004-53, 2004-34 I.R.B. 320, (the revenue procedure 
specifically provides guidance on filing Forms 941, W-2, W-4, and W-5 
in predecessor and successor employer situations). CPEOs that are 
treated as successor employers should refer to those provisions for 
guidance. For these reasons, the commenter's suggestion is not adopted 
in these final regulations.

2. Treatment of Credits

a. Non-Work Site Covered Employees
    Under section 3302(h), if a CPEO, or a customer of a CPEO, makes a 
contribution to a state's unemployment fund with respect to wages paid 
to a work site employee, the CPEO is eligible for the credits available 
under section 3302 for purposes of calculating FUTA tax with respect to 
that contribution. Similarly, under section 3303(a)(4), a CPEO is 
allowed an additional credit under section 3302(b) with respect to any 
reduced rate of contributions permitted by a state law if the Secretary 
of Labor finds that under that law the CPEO is permitted to collect and 
remit contributions during the taxable year to the state unemployment 
fund with respect to a work site employee. Because section 3302(h) and 
section 3303(a)(4) apply exclusively with respect to wages paid to work 
site employees, the Treasury Department and the IRS requested comments 
on the application of the credits in sections 3302(h) and 3303(a)(4) 
with respect to wages paid to non-work site covered employees.
    Under section 3511(d), for purposes of various tax credits 
enumerated in section 3511(d)(2) under which the amount of the credit 
is determined by reference to the amount of federal employment taxes or 
the amount of wages subject to federal employment taxes, the credit 
with respect to a work site employee performing services for a customer 
applies to the customer, not to the CPEO. Consequently, in determining 
the amount of the credit, the customer, and not the CPEO, takes into 
account the federal employment taxes and wages paid by the CPEO with 
respect to the work site employee and for which the CPEO receives 
payment from the customer. Because the application of the specified tax 
credits to the customer under section 3511(d) applies exclusively with 
respect to work site employees, the Treasury Department and the IRS 
requested comments on the treatment of tax credits with respect to non-
work site covered employees.
    One commenter responded to these requests for comments. Concerning 
the application of the FUTA tax credits in sections 3302(h) and 
3303(a)(4) to non-work site covered employees, the commenter stated 
that the application of the credits should be governed by current law 
without regard to the statutory provisions related to the CPEO program. 
But the commenter also suggested that ``it is equitable, consistent 
with the intent of the law, and in the best interests of employment 
administration efficiency (without regard to the application of 
[section] 3511) to apply the application of the pass-through of the 
FUTA tax credit to a CPEO with respect to wages paid to . . . 
individuals covered by a CPEO contract that are not Work Site 
Employees.'' In addition, this commenter requested that the preamble to 
the final regulations note that ``as a general matter, the CPEO that is 
liable for the FUTA taxes on remuneration it pays would be eligible for 
the tax credits under sections 3302(h) and 3303(a)(4).''
    The Treasury Department and the IRS have determined that, because 
amendments to regulations under section 3302(h) and section 3303(a)(4) 
were not included in the notice of proposed rulemaking, these final 
regulations will not address the general application of the credits in 
sections 3302(h) and 3303(a)(4) in connection with wages paid to non-
work site covered employees. The Treasury Department and the IRS will 
continue to consider this issue.
    Concerning the treatment of tax credits described in section 
3511(d) with respect to non-work site covered employees, the commenter 
suggested that, just as with the credits under sections 3302(h) and 
3303(a)(4), the application of these credits should be governed by 
current law. The commenter also added that there is ``no basis or 
advantage'' to treating work site employees and non-work site covered 
employees differently and therefore, as a general matter, the customer, 
and not the CPEO, should be eligible for the tax credits listed in 
section 3511(d). The Treasury Department and the IRS agree that current 
law should govern the eligibility for the tax credits listed in section 
3511(d) with respect to wages paid to non-work site covered employees. 
For this reason, these final regulations do not include provisions 
regarding the application of the tax credits in section 3511(d) to non-
work site covered employees. The Treasury Department and the IRS note 
that, in computing these credits under current law, generally the 
customer, and not the CPEO, will take into account wages and federal 
employment taxes paid by the CPEO with respect to the covered employee 
and for which the CPEO receives payment from the customer. This is the 
same treatment accorded to tax credits listed in section 3511(d) for 
work site employees.
b. Additional Credits
    As discussed in the previous section, section 3511(d) governs the 
treatment of various tax credits under which the amount of the credit 
is determined by reference to the amount of wages or federal employment 
taxes and section 3511(d)(2) specifies these credits. Under section 
3511(d)(2)(H), the Secretary may specify other credits subject to the 
treatment provided for under section 3511(d). Consistent with this 
section, the Treasury Department and the IRS requested comments on 
whether other credits should be specified in these regulations or in 
other guidance.
    One commenter requested that the recently enacted employer credit 
for paid family and medical leave under section 45S be added to the 
list of specified credits in the regulations. Section 45S was added to 
the Code by the Tax Cuts and Jobs Act (Pub. L. 115-97) enacted December 
22, 2017. Notice 2018-71, 2018-41 I.R.B. 548, published October 9, 
2018, provides that, for

[[Page 24371]]

wages paid by a CPEO to qualifying employees for services performed for 
an eligible employer, the eligible employer, not the CPEO, may take 
into account wages paid to qualifying employees for services performed 
for the eligible employer in determining the credit under section 45S. 
The notice also announces the IRS's intention to publish proposed 
regulations under section 45S. The Treasury Department and the IRS have 
determined that, although the credit under section 45S does not apply 
to wages paid in taxable years beginning after December 31, 2019 
(unless extended), it is appropriate to add this credit to the list of 
specified credits. Therefore, these final regulations include the 
credit under section 45S in the list of specified credits under Sec.  
31.3511-1(e)(2) (which provides a list of credits that apply to the 
CPEO customer, and not the CPEO, with respect to services performed by 
a work site employee for a CPEO customer). In addition, Sec.  31.3511-
1(e)(2)(ix) of these final regulations provides that the IRS may 
specify any other section as a specified credit in further guidance.
    No other comments on the proposed regulations were received 
specifying additional credits to be included in the final regulations. 
However, subsequent to the issuance of the proposed regulations, the 
IRS did receive questions concerning whether wages paid by a CPEO to 
employees for services performed for a customer can be used by the 
customer in determining the employee retention credit in section 503 of 
the Disaster Tax Relief and Airport and Airway Extension Act of 2017 
(The Disaster Relief Act (Pub. L. 115-63)) (assuming that the customer 
otherwise meets the requirements for the credit). In response to these 
inquiries, the IRS provided, in Publication 976 ``Disaster Relief'', 
and on irs.gov, that for purposes of the employee retention credit, 
qualified wages paid by a CPEO to eligible employees of an eligible 
employer are considered qualified wages incurred by the eligible 
employer. The employee retention credit for disaster relief found in 
The Disaster Relief Act is substantially similar to the credit provided 
for in section 1400R, which provides an employee retention credit for 
employers affected by Hurricane Katrina. In addition, several other 
disaster relief acts have provided employee retention credits modeled 
after the credit in section 1400R. Since future disaster relief acts 
may continue to include employee retention credits similar to those 
provided in section 1400R and in The Disaster Relief Act, these final 
regulations add statutory employee retention credits that are similar 
to the employee retention credit in section 1400R and that provide 
disaster relief to employers in designated disaster areas to the list 
in Sec.  31.3511-1(e)(2).

3.Treatment of Self-Employed Individuals

    Consistent with section 3511(f), which provides that a self-
employed individual is not a work site employee with respect to 
remuneration paid by a CPEO, and with section 3511(c), which provides 
that a CPEO is not treated as an employer of a self-employed 
individual, the proposed regulations provide that section 3511 does not 
apply to any self-employed individual.
    The proposed regulations define a ``self-employed individual'' as 
an individual with net earnings from self-employment (as defined in 
section 1402(a), without regard to the exceptions thereunder) derived 
from providing services covered by a CPEO contract, whether such net 
earnings are derived from providing services as a non-employee to a 
customer of a CPEO, from the individual's own trade or business as a 
sole proprietor customer of the CPEO, or as a partner in a partnership 
that is a customer of the CPEO, but only with regard to such net 
earnings.
    In addition, the preamble discussion of the definition of ``work 
site employee'' in the proposed regulations provides that a self-
employed individual, whether an independent contractor to the customer, 
a sole proprietor customer of the CPEO, or a partner in a partnership 
customer of the CPEO, is not considered to be a work site employee 
under section 3511(f) with regard to those earnings, but also provides 
that in the limited case in which a self-employed individual who is an 
independent contractor of a customer is also paid wages by the CPEO 
under a CPEO contract with the customer, the individual may 
nevertheless be a work site employee with respect to those wages. This 
latter language was intended to address the uncommon situation in which 
one individual is receiving payments from the CPEO for services 
provided to a customer in two separate capacities, i.e., for services 
performed for the CPEO customer as a common law employee of the 
customer and for completely separate and distinct services provided to 
the customer as an independent contractor. The CPEO is treated as the 
employer of the individual for federal employment tax purposes with 
respect to the payments the CPEO makes to the individual for the 
services the individual performs as a common law employee of the CPEO 
customer, and these payments are reported as wages by the CPEO. The 
payments for the services provided as an independent contractor are not 
wages and must be reported as payments to a self-employed individual.
    Further, any payment made by a CPEO to a partner in a partnership 
under a contract between the partnership and the CPEO must always be 
treated as a payment to a self-employed individual and reported as 
such. Under Revenue Ruling 69-184 (1969-1 C.B. 256) ``[b]ona fide 
members of a partnership are not employees of the partnership'' for 
federal employment tax purposes. ``Such a partner who devotes . . . 
time and energies in the conduct of the trade or business of the 
partnership, or in providing services to the partnership as an 
independent contractor, is, in either event, a self-employed individual 
rather than an individual who, under the usual common law rules 
applicable in determining the employer-employee relationship, has the 
status of an employee.'' Thus, ``[r]emuneration received by a partner 
from the partnership is not `wages' with respect to `employment.' '' 
Instead, under the statutory framework of Subchapter K of the Code, an 
allocation or distribution between a partnership and a partner for the 
provision of services generally can be treated in one of three ways: 
(1) A distributive share under section 704(b) (reported as such by the 
partnership on Schedule K-1 (Form 1065), ``Partner's Share of Income, 
Deductions, Credits, etc.''); (2) a guaranteed payment under section 
707(c) (reported as such by the partnership on Schedule K-1 (Form 
1065)); or (3) as a transaction in which a partner has rendered 
services to the partnership in its capacity as other than a partner 
under section 707(a) (reported by the partnership like a payment to an 
independent contractor on Form 1099-MISC, ``Miscellaneous Income''). It 
is irrelevant to the characterization of the payment whether a CPEO 
pays the partner or the partnership pays the partner directly.
    One commenter requested that the IRS permit reporting of payments 
by CPEOs to self-employed individuals using Form W-2, ``Wage and Tax 
Statement.'' However, the reporting of amounts paid to self-employed 
individuals is outside of the scope of these regulations. For example, 
under the section 6041 regulations, certain payments to self-employed 
individuals are reported using information returns such as Form 1099-
MISC,

[[Page 24372]]

``Miscellaneous Income,'' and not on Form W-2. Payments (within the 
meaning of section 6041 and the regulations thereunder) made to self-
employed individuals should be reported in accordance with the rules 
under these and other applicable provisions.

4. Reporting to the IRS by CPEOs

a. Reporting Commencement or Termination of CPEO Contracts and Service 
Agreements
    Section 3511(g) sets forth the reporting requirements and 
obligations that persons must satisfy in order to maintain 
certification as a CPEO. The proposed regulations provide that a CPEO 
must report information relating to the commencement or termination of 
(1) any CPEO contract with a customer and (2) any service agreement 
described in Sec.  31.3504-2(b)(2) with a client and the name and EIN 
of such customer or client. The proposed regulations also provide that, 
with any Form 940, ``Employer's Annual Federal Unemployment (FUTA) Tax 
Return'', or Form 941, ``Employer's Quarterly Federal Tax Return'', 
that a CPEO files, the CPEO must attach the applicable Schedule R (or 
any successor form) including such information as the Commissioner may 
require about each of its customers under a CPEO contract and any 
clients under a service agreement described in Sec.  31.3504-2(b)(2). 
The only comment the IRS received related to these reporting 
requirements stated that they should be eliminated as they relate to 
clients under a service agreement described in Sec.  31.3504-2(b)(2) 
because they are unnecessarily burdensome, ineffective, and not 
supported by statute. The commenter also stated that reporting 
commencement or termination of CPEO contracts or service agreements 
should be required only quarterly.
    Section 3511(g) provides that the ``Secretary shall develop such 
reporting and recordkeeping rules, regulations, and procedures as the 
Secretary determines necessary or appropriate to ensure compliance with 
this title by certified professional employer organizations.'' Because 
a CPEO contract potentially affects the liability of CPEO customers 
under such contracts, the proposed regulations provide that CPEOs must 
report service agreements described in Sec.  31.3504-2(b)(2) with 
clients so that the IRS has a record that explicitly provides which 
CPEO clients are not under a CPEO contract, in the event that disputes 
concerning liability arise. In addition, the instructions to Form 8973, 
which is the form used to report a CPEO contract with a customer and a 
service agreement described in Sec.  31.3504-2(b)(2) with a client, 
require that customers and clients sign Form 8973 and that a copy of 
this form be provided to the customers and clients to ensure the 
customers and clients understand the nature of their relationship with 
the CPEO. This requirement is in line with the statutory requirement in 
section 7705(e)(2)(F) that a CPEO contract include a provision that the 
CPEO agrees to be treated as a CPEO for purposes of 3511 with respect 
to the CPEO customer's employees. Thus, requiring that CPEOs report 
service agreements described in Sec.  31.3504-2(b)(2) with clients not 
only facilitates the IRS's recordkeeping, but also provides a means for 
the IRS to verify that the CPEO has properly represented to clients and 
customers the nature of their contractual arrangement (i.e., whether 
they are covered by a CPEO contract or not).
    Similarly, the proposed regulations provide that CPEOs must include 
information about clients under a service agreement described in Sec.  
31.3504-2(b)(2) on Schedule R so that the IRS has a record of which 
amounts reported on Forms 941 and 940 are not subject to the liability 
provisions in sections 3511(a) and (c), in the event disputes 
concerning liability arise, and so that the IRS can better reconcile 
the total amounts of wages and taxes reported on Forms 940 and 941 with 
the amounts of wages and taxes reported on Schedule R.
    Because the proposed regulations' reporting requirements relating 
to clients under a service agreement described in Sec.  31.3504-2(b)(2) 
assist the IRS in ensuring CPEO compliance with rules governing federal 
employment tax liability, consistent with section 3511(g), these final 
regulations retain the reporting requirements as they were in the 
proposed regulations.
    The proposed regulations do not address the time and manner of 
reporting the commencement or termination of CPEO contracts and service 
agreements. Rather, this information is provided in Rev. Proc. 2017-14 
and in the instructions to the Form 8973. Requirements relating to the 
time and manner of reporting the commencement or termination of CPEO 
contracts and service agreements are criteria for tax administration 
that may need to be modified as processes or technology change or more 
knowledge about administrative challenges is acquired. Therefore, these 
requirements are more appropriately addressed in tax forms and 
publications or revenue procedures.
b. Form 943--Attaching Schedule R and Reporting on Magnetic Media
    The proposed regulations provide that, with every Form 940 and Form 
941 it files, a CPEO must attach all required schedules, including, but 
not limited to, the applicable Schedule R (or any successor form). The 
proposed regulations also provide that a CPEO must file Forms 940 and 
941, and all required accompanying schedules, on magnetic media unless 
the CPEO is provided a waiver by the Commissioner. The proposed 
regulations define magnetic media as electronic filing, as well as 
other media specifically permitted under the applicable regulations, 
revenue procedures, publications, forms, instructions, or other 
guidance.
    For certain agricultural employer clients and customers, CPEOs must 
report federal employment taxes using Form 943, ``Employer's Annual 
Federal Tax Return for Agricultural Employees.'' At the time the 
proposed regulations were promulgated, a Schedule R was not available 
for Form 943, and the form could not be filed electronically. However, 
Schedule R (Form 943) is now available, and electronic filing has since 
been made available for Form 943. For this reason, these final 
regulations provide that, just like Forms 940 and 941, Form 943 must be 
filed with all required schedules, including Schedule R, attached and 
Form 943 must be filed on magnetic media unless the CPEO is provided a 
waiver by the Commissioner.
c. Waivers of the Requirement To Report on Magnetic Media
    The proposed regulations provide that the requirement to file Forms 
940 and 941 on magnetic media can be waived in cases of undue economic 
hardship. Since the promulgation of the proposed regulations, some 
CPEOs experienced difficulties in electronic filing due to temporary 
software and technological issues, and one commenter asked the IRS to 
clarify that undue economic hardship can include economic hardships 
resulting from software and technological issues. The IRS provided 
these clarifications on irs.gov, and these final regulations also 
clarify that undue economic hardship includes economic hardships 
resulting from software and technological issues.

5. Applicable Definitions

a. Certified Public Accountant (CPA)
    In connection with the financial statement and quarterly assertion 
and

[[Page 24373]]

attestation requirements in the temporary regulations, the CPEO 
applicant or CPEO must submit an opinion or an examination level 
attestation, as applicable, from a CPA. The temporary regulations 
define a CPA as an individual who is independent of the CPEO (as 
prescribed by the American Institute of Certified Public Accountants' 
(AICPA) Professional Standards, Code of Professional Conduct), and 
among other things, files with the IRS a written declaration that he or 
she is authorized to represent the CPEO applicant or CPEO before the 
IRS. The Treasury Department and the IRS requested comments regarding 
whether the CPA independence guidelines or requirements of other 
governmental agencies or departments of industry self-regulatory bodies 
(such as the Department of Labor's guidelines on the independence of 
CPAs retained by employee benefit plans under 29 CFR 2509.75-9, the 
Securities and Exchange Commission's (SEC) independence guidelines for 
auditors reporting on financial statements included in SEC filings, and 
the Government Accountability Office's auditor independence 
requirements under Government Auditing Standards that cover federal 
entities and organizations receiving federal funds), as adapted for a 
CPA of a CPEO, would better ensure the impartiality of CPAs providing 
opinions on a CPEO's financial statements. One commenter responded that 
the AICPA's independence guidelines are the most appropriate for the 
CPEO program, and that most CPAs are more familiar with those 
guidelines than the other guidelines referenced in the preamble to the 
temporary regulations. The Treasury Department and the IRS agree that 
the AICPA's independence guidelines are the most appropriate for the 
CPEO program. Therefore, these final regulations retain the reference 
to the AICPA professional standards.
    Several commenters also noted that the requirement that a CPA be 
authorized to represent the CPEO applicant or CPEO before the IRS could 
conflict with the CPA independence requirements of the AICPA. 
Consistent with Notice 2016-49, and to ensure that the CPA may be 
``independent'' within the meaning of the AICPA guidelines, these final 
regulations omit the requirement that the CPA file with the IRS a 
written declaration of authorization to represent the CPEO applicant or 
CPEO before the IRS.
b. Responsible Individual
    Section 7705(b)(1) provides that the Secretary may establish 
requirements for certification that apply not only to the CPEO 
applicant or CPEO, but also to ``any owner, officer, and other persons 
as may be specified in regulations.'' Accordingly, the temporary 
regulations include a number of requirements that apply to certain 
owners, officers, and other individuals (referred to in the regulations 
as ``responsible individuals''). The temporary regulations generally 
define a responsible individual as an individual in any of the 
following categories with respect to the CPEO applicant or CPEO: (1) 
Certain owners; (2) directors and officers; (3) individuals with 
ultimate responsibility for implementing the decisions of the 
organization's governing body; (4) individuals with ultimate 
responsibility for the organization's management and operations; (5) 
individuals with ultimate responsibility for managing the 
organization's finances; (6) managing members or general partners; (7) 
the sole proprietor of a sole proprietorship; and (8) any other 
individuals with primary responsibility for federal employment tax 
compliance of the organization. With respect to determining whether an 
individual is a responsible individual by reason of ownership, the 
temporary regulations specify that a responsible individual includes 
any individual who owns 33 percent or more of the total combined voting 
power of all classes of stock of a corporation entitled to vote or the 
total value of shares of all classes of stock of a corporation, or any 
individual who owns 33 percent or more of the profits interest or 
capital interest in a partnership.
    The Treasury Department and the IRS requested comments regarding 
the administrability of applying the definition of responsible 
individual with respect to ownership of profits interests in a 
partnership, the value of which may fluctuate over time. One commenter 
indicated that, although there would be situations where a partner's 
capital interest or profits interest will fluctuate, similar 
fluctuations will likely occur with respect to changes in corporate 
ownership. The commenter did not suggest revising the definition of 
responsible individual with respect to ownership percentages, but the 
commenter did suggest that the IRS require only annual reporting of 
responsible individuals unless there is significant turnover in the 
CPEO's responsible individuals. The temporary regulations require that 
a CPEO applicant or CPEO notify the IRS, in the time and manner 
prescribed by the Commissioner in further guidance (as defined in Sec.  
301.7705-1(b)(8)), of any change that materially affects the continuing 
accuracy of any agreement or information that was previously made or 
provided to the IRS. A change in responsible individuals is an example 
of a material change, and the time and manner for reporting this 
information to the IRS is currently set forth in Rev. Proc. 2016-33 and 
Rev. Proc. 2017-14. Accordingly, the final regulations do not adopt 
this suggestion, but the Treasury Department and the IRS will consider 
this comment in any future updates to these two revenue procedures. 
Additionally, the final regulations adopt the definition of responsible 
individuals from the temporary regulations, with additional language 
regarding disregarded entities as described in paragraph 7(a) of this 
Summary of Comments and Explanation of Revisions.
    The temporary regulations also require the CPEO, and each of its 
responsible individuals, to take such actions as are necessary to 
authorize the IRS to investigate the accuracy of statements and 
submissions made by the CPEO, including waiving confidentiality and 
privilege when necessary and submitting fingerprints to conduct 
comprehensive background checks, including, but not limited to, checks 
on tax compliance and criminal background. With respect to suitability 
requirements applicable to responsible individuals, the Treasury 
Department and the IRS requested comments regarding the possible 
expansion of the category of individuals who must authorize the IRS to 
conduct comprehensive background checks and submit fingerprint cards to 
include certain directors, officers, and owners of a CPEO applicant's 
or CPEO's related entities. The Treasury Department and the IRS 
received one comment in response. The commenter requested that the 
category not be expanded because such an expansion would impose 
additional paperwork burdens on professional employer organizations 
(PEOs), responsible individuals, and the IRS without any meaningful 
improvements in the program. The Treasury Department and the IRS 
considered the likely impact on PEOs, responsible individuals, and the 
IRS of expanding this category and the likely value of this additional 
information to the IRS. As of the date of these final regulations, the 
IRS has certified 120 CPEOs, and the information provided regarding 
each CPEO applicant, its related entities, precursor entities, and 
responsible individuals, coupled with the ongoing certification 
requirements

[[Page 24374]]

applicable to CPEOs and responsible individuals, has been sufficient 
for the IRS to make determinations regarding certification. Therefore, 
these final regulations do not expand the category of individuals who 
must authorize the IRS to conduct comprehensive background checks and 
submit fingerprint cards beyond what was included in the temporary 
regulations.
c. Provider of Employment-Related Services
    The temporary regulations define a provider of employment-related 
services as a person that provides employment tax administration, 
payroll services, or other employment-related compliance services to 
clients. One commenter suggested that the phrase ``or other employment-
related compliance services'' in the definition of provider of 
employment-related services could be interpreted to include entities 
that only provide (1) labor through a staffing service, or (2) 
employment background screening services. The commenter suggested 
revising the definition to refer to ``other similar employment-related 
compliance services.'' The Treasury Department and the IRS agree with 
the commenter that the phrase ``or other employment-related compliance 
services'' could be construed to apply more broadly than was intended. 
As noted in the preamble to the temporary regulations, the term is 
intended to capture entities that provide payroll or other federal 
employment tax administration and compliance services. Accordingly, 
these regulations replace the term ``provider of employment-related 
services'' with ``provider of payroll services'' and revise the 
definition of this term to clarify that the entity must provide 
payroll, federal employment tax administration, or other similar 
federal employment tax-related compliance services.
d. Work Site
    The proposed regulations define ``work site'' as a physical 
location at which an individual regularly performs services for a 
customer of a CPEO (except that a work site may not be the individual's 
residence or a telework site unless the customer requires the 
individual to work at that site) and if there is no such location, the 
work site is the location from which the customer assigns work to the 
individual. The proposed regulations also provide that, in applying the 
term ``work site,'' contiguous locations are treated as a single 
physical location and thus a single work site, and noncontiguous 
locations that are not reasonably proximate are treated as separate 
physical locations and thus separate work sites. A CPEO may treat 
noncontiguous locations that are reasonably proximate as a single 
physical location and thus a single work site, but any two work sites 
that are separated by 35 or more miles or that operate in a different 
industry or industries will not be treated as reasonably proximate. 
Because the physical location at which an individual regularly performs 
services can, at times, be difficult to ascertain, the Treasury 
Department and the IRS requested comments on the definition of work 
site and any additional clarifications that would facilitate a 
determination of an individual's work site.
    One commenter responded to this request for comments. The commenter 
suggested that the definition focus on the physical location where an 
individual ``primarily'' performs services and that, when appropriate, 
various client locations should be considered one work site location 
rather than providing for separate work sites for each location at 
which the CPEO customer's workers perform services. The commenter also 
suggested that work sites in different industries and work sites that 
are maintained as a separate operation for bona fide business reasons 
(based on facts and circumstances) are factors that should be taken 
into account for purposes of determining whether two or more work sites 
should be treated as one work site.
    The definition of work site in the proposed regulations, as a 
location where an individual regularly performs services, was intended 
to take into account CPEO customers whose workers provide services in 
multiple noncontiguous, non-proximate locations and/or locations that 
operate in a different industry or industries. Under the proposed 
regulations, the determination of whether a covered employee is a work 
site employee is made separately with regard to each work site at which 
the covered employee regularly provides services; under this standard, 
a covered employee may be determined to be a work site employee at more 
than one work site during a calendar quarter. Furthermore, the proposed 
regulations provide that a covered employee will be considered a work 
site employee for the entirety of a calendar quarter if the employee 
qualifies as a work site employee at any time during that quarter. 
Therefore, a covered employee that regularly performs services for a 
customer at multiple sites need only qualify as a work site employee at 
one of the sites in a calendar quarter to be considered a work site 
employee for that entire quarter.
    The use of the phrase ``primarily performs services'' instead of 
the phrase ``regularly performs services'' would not provide the 
customer this flexibility, but would instead require customers with 
covered employees at multiple sites either to identify the site at 
which covered employees ``primarily'' perform services or to make a 
determination (with appropriate substantiation) that it maintains 
separate work sites for a bona fide business reason such that these 
sites can be treated as one work site. To avoid that result, these 
final regulations do not adopt this suggested change.
    However, the Treasury Department and the IRS recognize that certain 
employers have employees regularly working at the location of clients 
of varying industries, all doing work in the employer's industry rather 
than the industry of the client. For example, an information technology 
business might have employees regularly performing services related to 
information technology at the locations of clients in a variety of 
unrelated industries (factory, restaurant, museum, etc.). To address 
this situation, these final regulations provide that the determination 
of the industry of a work site is based on the nature of the CPEO 
customer's work at that work site, irrespective of work performed by 
other entities at the same site.
    In addition, these final regulations provide that when treating 
noncontiguous locations as a single physical location and thus a single 
work site, one noncontiguous location cannot be included in more than 
one work site. The final regulations contain an example illustrating 
this rule. Finally, for clarification, non-substantive changes were 
made to the language in the proposed regulations.
e. Work Site Employee
    The proposed regulations, consistent with section 7705(a), provide 
that a work site employee means, with respect to a customer, a covered 
employee who performs services for the customer at a work site where at 
least 85 percent of the individuals performing services for the 
customer are covered employees of the customer. The proposed 
regulations also provide that a covered employee will be considered a 
work site employee for the entirety of a calendar quarter if he or she 
qualifies as a work site employee at any time during that quarter. 
Consequently, a covered employee can be a work site employee for one or 
more calendar quarters of the year and a non-work site covered employee 
for other calendar quarters

[[Page 24375]]

during the same year. One commenter suggested a safe harbor rule 
providing that a covered employee who qualifies as a work site employee 
at any time during a calendar quarter is considered a work site 
employee for the entirety of that quarter and for the remainder of the 
calendar year. Since the CPEO program began in 2016, the IRS has not 
been made aware of any issues concerning the quarterly determination of 
work site employees. For this reason, and because a quarter-by-quarter 
work site employee determination coincides with a CPEO's quarterly 
federal employment tax reporting, these final regulations do not adopt 
this suggestion.
    The same commenter also requested that the regulations clarify the 
rules regarding excluded employees under section 414(q)(5). In 
accordance with section 7705(e)(3), the proposed regulations provide 
that, in determining whether the 85 percent threshold is met, 
individuals who are excluded employees within the meaning of section 
414(q)(5) (such as newly hired or part-time employees) are not taken 
into account as either covered employees or individuals performing 
services, although those individuals may otherwise be covered employees 
and work site employees under the proposed regulations. The commenter 
was concerned that this rule could be interpreted to mean that all 
employees of a startup company would be excluded employees for purposes 
of determining whether the 85 percent threshold is met. The commenter 
suggested that the regulations incorporate the flush language from 
section 414(q)(5), which provides that an employer may substitute a 
shorter period of service, smaller number of hours or months, or lower 
age for the period of service, number of hours or months, or age 
specified in section 414(q)(5), though the commenter also suggested 
that the regulations provide that any such modifications must be on a 
consistent and uniform basis with respect to individuals performing 
services at the work site.
    Because the application of section 414(q)(5) is outside the scope 
of these regulations, these final regulations do not provide for any 
further explanation of the application of section 414(q)(5). Therefore, 
employers should look to the language of section 414(q)(5) in 
determining which employees should be excluded under section 
7705(e)(3). However, the Treasury Department and the IRS agree that the 
flush language from section 414(q)(5) can be applied in the context of 
determining whether the 85 percent work site coverage requirement 
threshold is met under section 7705(e)(3), such that an employer may 
substitute a shorter period of service, smaller number of hours or 
months, or lower age for the period of service, number of hours or 
months, or age specified in section 414(q)(5).
    Finally, this commenter suggested that the regulations provide that 
reasonable good faith determinations concerning the application of the 
85 percent coverage test in determining work site employees will be 
respected unless there is a pattern of abuse of this rule by the CPEO 
or its customer. The Treasury Department and the IRS agree that, 
because applying the 85 percent coverage rules for determining work 
site employees may be challenging in certain situations, a good faith 
standard is appropriate. For this reason, these final regulations 
provide that a CPEO's determination that a covered employee is a work 
site employee will be respected if the CPEO has made a good faith 
determination that the covered employee meets the requirements of 
section 7705(e), the regulations, and further guidance.

6. Application Process

    The temporary regulations provide that a CPEO applicant will be 
notified by the IRS whether its application for certification has been 
approved or denied, as well as the effective date of certification or 
the reason(s) for the denial, each as applicable. One commenter noted 
that the temporary regulations do not address the reapplication process 
for CPEO applicants that are denied certification. The commenter 
requested that the final regulations clarify that a CPEO applicant may 
not reapply for certification for at least one year following a denial 
of certification, unless the CPEO applicant has resolved the issues 
identified by the IRS as the reason for the certification denial. The 
commenter also suggested that the final regulations clarify that a CPEO 
applicant that withdraws its application before the IRS makes a 
decision regarding certification may reapply for certification at any 
time. Rev. Proc. 2016-33 sets forth the detailed procedures for 
applying to be certified, including the ability to withdraw an 
application, but it does not address reapplication following a denial 
of certification. The Treasury Department and the IRS agree that the 
final regulations should address the ability to reapply after a denial 
of certification or withdrawal. Accordingly, the final regulations 
provide that a CPEO applicant may reapply for certification in such 
time and manner, and must include such information, as the Commissioner 
may prescribe in further guidance. Because procedural requirements 
relating to the time and manner of applying for certification may need 
to be modified as processes or technology change or more knowledge 
about administrative challenges is acquired, the Treasury Department 
and the IRS intend to address these requirements in a future revision 
of Rev. Proc. 2016-33.

7. Suitability

a. Disregarded Entities and Sole Proprietorships
    The temporary regulations provide that a CPEO may not be a business 
entity that is disregarded as an entity separate from its owner for 
federal tax purposes under Sec. Sec.  301.7701-2 and 301.7701-3 
(without regard to the special rule in Sec.  301.7701-2(c)(2)(iv) that 
provides that such entities are corporations for federal employment tax 
purposes). Several commenters expressed concerns regarding the 
prohibition against disregarded entities becoming CPEOs. The commenters 
indicated that the temporary regulations may unnecessarily limit the 
ability of persons to apply for certification. They explained that PEOs 
may be structured as disregarded entities for legitimate business 
reasons, such as to reduce the overall compliance burden associated 
with filing state income tax returns. As a result of those comments, 
the Treasury Department and the IRS announced in Notice 2016-49 the 
expectation that the final regulations would not prohibit a business 
entity that is disregarded as separate from its owner under Sec. Sec.  
301.7701-2 and 301.7701-3 from becoming a CPEO, provided the 
disregarded entity is (1) wholly owned directly (including through one 
or more disregarded entities organized in the United States) by a 
United States person (as defined in section 7701(a)(30)), and (2) 
created or organized in the United States or under the law of the 
United States or of any state (collectively, a domestic disregarded 
entity). Consistent with Notice 2016-49, these final regulations allow 
domestic disregarded entities to apply for certification as CPEOs. The 
Treasury Department and the IRS requested comments on the 
appropriateness of allowing a disregarded entity that is domestically 
organized but not wholly owned directly by a United States person to 
apply for certification as a CPEO, but no comments were received on 
this issue. Accordingly, these final regulations require the 
disregarded entity to be both

[[Page 24376]]

domestically organized and wholly owned directly by a United States 
person.
    As a result of the change permitting certain disregarded entities 
to apply for certification as a CPEO, these final regulations also 
revise the definition of ``responsible individual'' to include: (1) In 
the case of a disregarded entity owned by a corporation or partnership, 
the responsible individuals of that corporation or partnership, and (2) 
in the case of a disregarded entity owned by an individual, the 
individual owner. These final regulations also clarify that CPEO 
applicants and CPEOs that, but for their status as disregarded 
entities, would separately be members of a controlled group, are 
treated as members of a controlled group for purposes of sections 3511 
and 7705 and the regulations thereunder.
    One commenter noted that the requirement that a CPEO must be a 
business entity would preclude an individual operating a business 
through a sole proprietorship from becoming a CPEO. As stated in Notice 
2016-49, to ensure parity between sole proprietorships and disregarded 
entities that are wholly owned by individuals, these final regulations 
also expressly allow sole proprietorships to apply for certification as 
CPEOs.
b. Fingerprint Cards and Background Checks
    The temporary regulations provide that each responsible individual 
must submit fingerprints in the time and manner and under the 
circumstances prescribed by the Commissioner in further guidance. 
Currently, the specific requirements regarding the time and manner of 
fingerprint submissions, including whether a responsible individual 
needs to submit multiple cards are included in Rev. Proc. 2016-33, the 
CPEO application for certification, and in the Responsible Individual 
Personal Attestation (RIPA) instructions. One commenter requested that 
the temporary regulations be revised to clarify that a responsible 
individual may submit a single fingerprint card that will be used for 
background check purposes for all CPEO applicants in a controlled group 
for which that person is a responsible individual. The final 
regulations do not adopt this suggestion because the Treasury 
Department and the IRS have determined that the regulations should 
continue to provide the IRS with the flexibility to include specific 
instructions regarding fingerprint cards in other guidance, such as 
revenue procedures and the application for certification, as the 
program develops and as changes in technology permit new procedures. 
The Treasury Department and the IRS will consider this comment in any 
future updates to Rev. Proc. 2016-33. However, the Treasury Department 
and the IRS consider it appropriate to include a specific reference to 
Federal Bureau of Investigations (FBI) background checks in order to 
acknowledge the scope of the background check. Accordingly, these final 
regulations expressly state that a CPEO or CPEO applicant, and each of 
its responsible individuals must take such actions as are necessary to 
authorize the IRS to conduct comprehensive background checks, 
including, but not limited to, FBI or other similar criminal background 
checks.
    One commenter requested that responsible individuals who are 
attorneys, CPAs, enrolled agents, and officers of publicly traded 
companies be allowed to provide professional status information (e.g., 
credential number, state of jurisdiction, and date of expiration) in 
lieu of submitting fingerprints. The commenter indicated that this 
would be consistent with the IRS's e-file program. Under sections 
3511(a)(1) and (c)(1), with respect to remuneration remitted to an 
individual by a CPEO, for purposes of federal employment taxes and 
other obligations under the federal employment tax rules, the CPEO is 
treated as the employer of any individual performing services for a 
customer of the CPEO and covered by a CPEO contract. This treatment and 
the tax liability associated with it makes the CPEO program unlike 
other contractual arrangements, including a relationship with an e-file 
provider. The Treasury Department and the IRS continue to view the 
criminal background of a CPEO applicant and its responsible individuals 
as an important factor in determining whether the CPEO applicant's or 
the CPEO's certification presents a material risk to the IRS's 
collection of federal employment taxes. Accordingly, the final 
regulations do not adopt the suggestion to rely on professional status 
data in lieu of an FBI or other similar background check.
c. Waiving Confidentiality and Privilege
    The temporary regulations require that CPEOs and responsible 
individuals take such actions as are necessary to authorize the IRS to 
investigate the accuracy of statements and submissions, including 
waiving confidentiality and privilege when necessary. One commenter 
noted that this requirement could be read to imply that responsible 
individuals and CPEOs are required to provide a blanket waiver of 
confidentiality and privilege on all issues. The temporary regulations 
were not intended to require responsible individuals and CPEOs to 
provide a blanket waiver. However, the Treasury Department and the IRS 
recognize that the language in the temporary regulations could be read 
more broadly than intended. Accordingly, and consistent with similar 
provisions in Rev. Proc. 2016-33, the final regulations clarify that 
the waiver will be required only in instances in which the IRS is 
otherwise unable to obtain or confirm the information it needs to 
evaluate a CPEO applicant's or CPEO's qualification for certification 
(e.g., from relevant third parties, such as former employers, because 
of the existence of confidentiality, non-disclosure, or similar 
agreements).
d. Financial Institution
    The temporary regulations require CPEO applicants and CPEOs to use 
only financial institutions described in section 265(b)(5) to hold cash 
and cash equivalents. One commenter stated that CPEOs may violate this 
requirement by keeping small amounts of cash and cash equivalents on 
their premises. The commenter noted that this is a common practice and 
that certain cash equivalents are not ordinarily deposited in financial 
institutions. To address this concern, the final regulations require 
CPEO applicants and CPEOs to hold substantially all of their cash and 
cash equivalents in financial institutions described in section 
265(b)(5). This change is intended to allow CPEO applicants and CPEOs 
to hold petty cash and cash equivalents (such as undeposited checks) on 
their premises.

8. Working Capital Requirements

    The temporary regulations provide that CPEO applicants and CPEOs 
must cause to be prepared and provided to the IRS, by the same date 
they must provide a copy of their annual audited financial statements, 
an opinion of an independent CPA that the financial statements reflect 
positive working capital for the fiscal year, unless an exception 
applies. In addition, the temporary regulations require this opinion to 
set forth in detail, a calculation of the CPEO applicant's or CPEO's 
working capital and state that the financial statements are presented 
fairly in accordance with generally accepted accounting principles 
(GAAP). Two commenters suggested that the final regulations eliminate 
the requirement that a CPEO applicant and CPEO have positive working 
capital. The commenters maintained that because the specific 
requirement of positive working capital is not included

[[Page 24377]]

in the language of section 7705, the IRS should not impose this 
requirement on CPEOs. The commenters suggested that the IRS, instead, 
make its decision regarding whether to certify (or suspend) a CPEO 
applicant or CPEO, as applicable, based on the entity's financial 
situation, experience, and other factors in their entirety. 
Additionally, the commenters cautioned against the imposition of a 
rigid and difficult-to-monitor requirement.
    The Treasury Department and the IRS consider a CPEO with annual 
audited financial statements that reflect positive working capital (as 
determined in accordance with GAAP) to present a materially lower risk 
to the IRS's collection of federal employment taxes than a CPEO without 
positive working capital. Accordingly, pursuant to section 7705(b)(1) 
and consistent with several state PEO certification and registration 
laws, the final regulations have retained the positive working capital 
requirement. The Treasury Department and the IRS recognize that working 
capital may fluctuate over the course of a CPEO's fiscal year due to 
normal business operations. To allow for some fluctuation in working 
capital, the final regulations retain the exception to the positive 
working capital requirement set forth in the temporary regulations. 
This exception allows the CPEO applicant or CPEO to have negative 
working capital for no more than two consecutive quarters, provided the 
CPEO applicant or CPEO explains the reason it has negative working 
capital and demonstrates that the failure to have positive working 
capital does not present a material risk to the IRS's collection of 
federal employment taxes.
    Several commenters indicated that CPAs may be prevented from 
including a statement on working capital in the CPA opinion due to 
certain AICPA limitations on what can be included in a CPA opinion. As 
stated in Notice 2016-49, to ensure consistency with the AICPA 
guidelines applicable to CPA opinion letters, these final regulations 
have been revised to require a CPEO applicant or CPEO to submit a copy 
of its annual audited financial statements and an opinion of a CPA that 
the annual audited financial statements are presented fairly in 
accordance with GAAP, provided that the audited annual financial 
statements covered by the opinion include a Note to the Financial 
Statements that states that the financial statements reflect positive 
working capital or that the CPEO applicant or CPEO satisfies the 
positive working capital exception included in these final regulations. 
The Treasury Department and the IRS anticipate making similar changes 
in future revisions of Rev. Proc. 2016-33 and Rev. Proc. 2017-14.
    The temporary regulations further require a responsible individual 
of a CPEO applicant or CPEO to provide, by the last day of the second 
month after the end of each calendar quarter and beginning with the 
most recently completed quarter as of the date of the application for 
certification, a statement verifying under penalties of perjury that 
the CPEO applicant or CPEO has positive working capital with respect to 
the most recently completed fiscal quarter. The temporary regulations 
further provide that although CPEO applicants and CPEOs that are 
members of a controlled group, within the meaning of sections 414(b) 
and (c), and the regulations thereunder, will be treated as a single 
CPEO applicant or CPEO for purposes of the annual audited financial 
statements, quarterly assertion and attestation, and bond requirements, 
the annual and quarterly requirements imposed with respect to positive 
working capital apply to each CPEO applicant or CPEO on a separate 
basis.
    With respect to both the annual and quarterly requirements 
regarding positive working capital, two commenters suggested that these 
requirements should not apply on an individual CPEO basis. The 
commenters noted that many PEOs have multiple related PEO entities that 
maintain combined or consolidated financial statements, and these 
entities should be permitted to demonstrate compliance with any 
positive working capital requirement on an aggregate basis. The 
commenters suggested that the IRS could impose a requirement that each 
related entity guarantee the liabilities of its related CPEOs to the 
IRS.
    Under the CPEO program, the decision regarding whether to certify, 
suspend, or revoke each CPEO applicant or CPEO (as applicable) is made 
on an entity-by-entity basis. Although the suitability of related and 
precursor entities is relevant when determining whether to certify a 
CPEO applicant, the IRS makes a separate certification determination 
with respect to each CPEO applicant. Accordingly, the final regulations 
adopt without change the provisions in the temporary regulations that 
the annual and quarterly requirements imposed with respect to positive 
working capital apply to each CPEO applicant or CPEO on a separate 
basis.

9. Examination Level Attestation

    In accordance with section 7705(c)(3)(B), Sec.  301.7705-
2T(f)(1)(i) and (f)(3)(i) of the temporary regulations provide that 
CPEOs and CPEO applicants must provide, on a quarterly basis, an 
assertion, signed by a responsible individual under penalties of 
perjury, stating that the CPEO has withheld and made deposits of all 
federal employment taxes (other than taxes imposed by chapter 23 of the 
Code) as required by subtitle C for such calendar quarter, and an 
examination level attestation from a CPA stating that this assertion is 
fairly stated in all material respects. One commenter suggested that 
the final regulations provide the IRS with authority to provide an 
agreed-upon procedural alternative to the examination level attestation 
requirement because that option would provide uniformity, greater 
certainty, and potential cost savings. The Treasury Department and the 
IRS note that section 7705(c)(3)(B) specifically requires an 
examination level attestation on a quarterly basis and does not provide 
authority for other options. For this reason, these final regulations 
do not adopt this suggestion.

10. Bond Requirements

    Section 7705(c)(2) sets forth the bond requirements that a person 
must satisfy in order to become and remain a CPEO. The temporary 
regulations provide, among other things, that a CPEO must meet the bond 
requirements without posting collateral. Two commenters suggested that 
the final regulations remove the requirement that a CPEO meet the bond 
requirements without posting collateral. The commenters suggested that 
the ``no collateral'' requirement could limit access to CPEO 
certification for ``small and medium sized PEOs,'' but the commenters 
did not suggest what size entity would qualify as a small or medium 
sized PEO. As an alternative to removing the requirement in its 
entirety, one commenter suggested the IRS include the fact that a CPEO 
has obtained a bond with collateral as a factor in evaluating the 
application for certification. Alternatively, one commenter suggested 
that a surety be permitted to request collateral for small CPEO 
applicants (those with a required surety bond penal sum of under 
$1,000,000). Finally, one commenter suggested that the IRS retain the 
discretion to not automatically revoke a CPEO's certification merely 
because the surety has sought collateralization of its risk after the 
CPEO is certified. The commenter suggested that the request for 
collateral be treated as a material change that must be reported and 
explained to the IRS.
    One commenter remarked that ``[a]s a general matter, a surety 
prefers to provide bonds on an uncollateralized

[[Page 24378]]

basis.'' The commenter further noted that a surety may require 
collateral if a bond applicant is qualified, but the obligation being 
secured is ``particularly risky.'' The commenter noted that the 
potential duration of the CPEO bond (which is the time during which the 
IRS may make a claim and collect tax under sections 6501 and 6502) may 
make the CPEO bond particularly risky, and indicated that this 
increased risk could conceivably be addressed by a collateral 
requirement.
    As indicated in the preamble to the temporary regulations, one of 
the main benefits of the bond requirement in section 7705(c) is that a 
CPEO must submit to the bonding surety's financial underwriting process 
to obtain the bond. This underwriting process provides the IRS with a 
certain level of assurance concerning the financial condition of the 
CPEO. As of the date of these final regulations, the IRS has certified 
120 CPEOs. Each CPEO (or controlled group, where applicable) has 
provided the IRS with a bond without posting collateral, including 
several with bond amounts below the $1 million threshold. The Treasury 
Department and the IRS view the surety's financial underwriting process 
as a fundamental component of the bond requirement in section 7705(c), 
and have determined that the purpose of the bond requirement is 
substantially undermined if the CPEO obtains the bond by posting 
collateral in the amount of the bond. However, the Treasury Department 
and the IRS acknowledge that in certain limited circumstances, an 
exception to the prohibition on posting collateral may be appropriate. 
Accordingly, these final regulations state that the Commissioner may 
provide exceptions to this rule in further guidance. The Treasury 
Department and the IRS will continue to consider this issue in 
connection with anticipated revisions to Rev. Proc. 2017-14. In 
addition, the Treasury Department and the IRS recognize that in certain 
situations, a surety may want to retain the right to request collateral 
of a CPEO and that this right by itself does not violate the regulatory 
requirement that a CPEO must meet the bond requirements without posting 
collateral. For this reason, the final regulations provide that a 
surety's retention of the right to request collateral does not violate 
the rule against posting collateral, as long as no collateral is 
actually required by the surety or posted by the CPEO. However, if a 
surety later exercises this right and seeks collateral for a CPEO's 
bond, this action qualifies as a material change that must be timely 
reported to the IRS and will result in the revocation of the CPEO's 
certification if the CPEO cannot obtain a bond from another surety that 
does not require the CPEO to post collateral, subject to any exceptions 
the Commissioner may provide, as described above.
    The Treasury Department and the IRS also received comments 
requesting that the regulations clarify whether a CPEO must provide a 
separate bond for each year or adjust the penal sum of the bond based 
on its liability for the applicable bond period. One commenter also 
requested that the Treasury Department and the IRS define the terms 
strengthening bond and superseding bond. Consistent with guidance 
issued in Rev. Proc. 2017-14, these regulations clarify that the bond, 
any riders thereto, and any strengthening bonds are one continuous 
obligation from the effective date of the bond through the date the 
bond is superseded or cancelled. These regulations also provide 
definitions for riders, and for strengthening, superseding, and new 
bonds, and incorporate other guidance from Rev. Proc. 2017-14.

11. Accrual Method of Accounting

    Consistent with section 7705(b)(4) of the Code, the temporary 
regulations provide that a CPEO must compute its taxable income using 
an accrual method of accounting or, if applicable, another method that 
the Commissioner provides for in further guidance. One commenter 
requested that the IRS issue guidance approving the cash method of 
accounting as long as the entity provides audited financial statements 
using the accrual method. The final regulations do not adopt this 
suggestion. Like the temporary regulations, however, the final 
regulations allow the Commissioner to provide for other accounting 
methods in further guidance, and the Treasury Department and the IRS 
will continue to consider the issue of whether to allow CPEOs to use 
the cash method of accounting.

12. Tip Reporting

    The ABLE Act added section 6053(c)(8) to the Code regarding the 
application of the reporting requirements relating to certain large 
food or beverage establishments with respect to CPEOs and their 
customers. Section 6053(c)(8) provides that the CPEO customer with 
respect to whom a work site employee performs services is the employer 
for purposes of reporting under section 6053(c), and the CPEO is 
required to furnish to the customer and the IRS any information the IRS 
prescribes as necessary to complete this reporting. One commenter 
requested that these regulations clarify that the information required 
to be provided by section 6053(c)(8) is limited to information 
generated by the CPEO as a function of the services it performs as a 
CPEO and that is not already available to the customer. The Treasury 
Department and the IRS have determined that, because amendments to the 
regulations under section 6053 were not included in the notice of 
proposed rulemaking, these final regulations will not address 
information that must be provided under section 6053(c)(8). However, 
the Treasury Department and the IRS will continue to consider this 
issue.

13. Maintain Employee Records

    Under section 7705(e)(2)(E), a service contract must provide that a 
CPEO will maintain employee records, and the proposed regulations 
include the same requirement with respect to a CPEO contract. One 
commenter asked for further guidance regarding this requirement to 
maintain employee records. Although the statutory and regulatory 
provisions regarding service agreements and CPEO contracts require that 
the contract or agreement include certain provisions, including that 
the CPEO maintain employee records, the CPEO and its customers and 
client may choose to include additional provisions in their contracts. 
To allow for some flexibility and business judgment in negotiating CPEO 
contracts, the final regulations do not adopt the suggestion to expand 
upon the statutory requirements concerning maintaining employee 
records, and retain without modification the requirements for CPEO 
contracts set forth in the proposed regulations.

14. Marketing as CPEOs

    One commenter asked the Treasury Department and the IRS to clarify 
that only CPEOs may market themselves as CPEOs. Section 7705(f) and 
Sec.  301.7705-2(a)(3) and (n)(4)(ii) provide that the IRS will make 
available the name and address of every person certified as a CPEO and 
every CPEO whose certification is suspended or revoked. These 
regulations impose rules and requirements on CPEO applicants and CPEOs, 
but they do not apply to those entities that do not apply for or obtain 
certification. Whether an entity other than a CPEO incorrectly 
represents its classification in its business materials is not a matter 
for IRS enforcement. Accordingly, the final regulations do not adopt 
this suggestion, but the Treasury Department and the IRS encourage 
customers and clients of entities claiming to be CPEOs to confirm that

[[Page 24379]]

those entities are listed and remain listed as CPEOs on www.irs.gov.

15. Confidentiality of Information

    One commenter requested guidance indicating that information 
submitted to the IRS will be kept confidential. This comment is beyond 
the scope of these regulations, so no changes were made in these final 
regulations. Generally, returns and return information, including CPEO 
applications, are confidential and may only be disclosed as authorized 
by the Internal Revenue Code. See section 6103. Section 7705(f) 
provides for the public disclosure of the name and address of CPEOs and 
whether a CPEO's certification was suspended or revoked.

16. No Inference Language

    One commenter requested that the regulations reiterate language in 
section 206(h) of the ABLE Act that nothing in section 206 of the ABLE 
Act (which includes sections 3511 and 7705) shall be construed to 
create any inference with respect to the determination of who is an 
employee or employer (1) for federal tax purposes (other than the 
purposes set forth in the amendments made by section 206), or (2) for 
purposes of any other provision of law. This suggested addition to the 
final regulations is not necessary. Section 7705(g) sufficiently 
addresses the implications of the no inference provisions with respect 
to the Code. It provides that except to the extent necessary for 
purposes of section 3511, nothing in section 7705 shall be construed to 
affect the determination of who is an employee or employer for purposes 
of Title 26. Comments related to other laws are beyond the scope of 
these regulations, and they are not addressed herein.

17. Other Changes

    In addition to the changes discussed above, these final regulations 
include non-substantive or clarifying changes to the text of the 
proposed and temporary regulations.

Special Analyses

    This regulation is not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Treasury Department and the Office of Management 
and Budget regarding review of tax regulations. It is hereby certified 
that the collection of information contained in these regulations will 
not have a significant economic impact on a substantial number of small 
entities. The collection of information is in Sec. Sec.  31.3511-1(g) 
and 301.7705-2. The certification is based on the following:
    The Treasury Department and the IRS anticipate that the 
organizations that choose to apply for this voluntary certification 
program are likely to be entities that already have many of the systems 
and processes in place that are needed to comply with these 
regulations. For example, it is expected that CPEOs will generally 
maintain annual audited financial statements during the normal course 
of their business, rather than solely as a result of Sec.  301.7705-
2(e). Moreover, the requirements in Sec.  301.7705-2(e) and (f) for 
demonstrating positive working capital on an annual basis and for the 
quarterly assertions regarding federal employment tax compliance build 
upon requirements already reflected in many state PEO certification and 
registration laws, thereby minimizing the economic impact on those CPEO 
applicants already subject to the similar state law requirements.
    In addition, many of the requirements in Sec. Sec.  31.3511-1(g) 
and 301.7705-2 that impose a collection of information on CPEOs 
constitute one-time notifications to the IRS, customers, or clients or 
notifications that relate to events in the life cycle of a CPEO that 
are less predictable and may be infrequent--such as transfers of 
existing CPEO contracts, making material changes to agreements 
previously provided to the IRS, suspension or revocation of the CPEO's 
certification, or the reclassification of employees at a particular 
work site as non-work site covered employees--and thus will have a 
minimal economic impact on the CPEO. Moreover, the Treasury Department 
and the IRS expect that CPEOs participating in this voluntary program 
will be able to build upon pre-existing systems and processes through 
which they already communicate with their clients.
    For these reasons, pursuant to the Regulatory Flexibility Act (5 
U.S.C. chapter 6) it is hereby certified that this rule will not have a 
significant economic impact on a substantial number of small entities. 
Pursuant to section 7805(f) of the Code, the NPRM preceding these 
regulations was submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on their impact on small 
business.

Drafting Information

    The principal authors of these regulations are Melissa Duce, Andrew 
Holubeck, Nina Roca, and Neil Shepherd of the Office of Associate Chief 
Counsel (Employee Benefits, Exempt Organizations, and Employment 
Taxes). However, other personnel from the Treasury Department and the 
IRS participated in the development of these regulations.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings notices, and other guidance 
cited in this document are published in the Internal Revenue Bulletin 
(or Cumulative Bulletin) and are available from the Superintendent of 
Documents, U.S. Government Printing Office, Washington, DC 20402, or by 
visiting the IRS website at http://www.irs.gov.

List of Subjects

26 CFR Part 31

    Employment taxes, Income taxes, Penalties, Pensions, Railroad 
retirement, Reporting and recordkeeping requirements, Social Security, 
Unemployment compensation.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 31, 301, and 602 are amended as follows:

PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT THE 
SOURCE

0
Paragraph 1. The authority citation for part 31 is amended by adding an 
entry for Sec.  31.3511-1 in numerical order to read in part as 
follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 31.3511-1 is also issued under 26 U.S.C. 3511(h).
* * * * *


0
Par. 2. Section 31.3511-1 is added to subpart F to read as follows:


Sec.  31.3511-1   Certified professional employer organization.

    (a) Treatment as employer--(1) In general. For purposes of the 
federal employment taxes and other obligations imposed under chapters 
21 through 25 of subtitle C of the Internal Revenue Code (federal 
employment taxes), a certified professional employer organization 
(CPEO) (as defined in Sec.  301.7705-1(b)(1) of this chapter) is 
treated as the employer of any covered employee (as defined in Sec.  
301.7705-

[[Page 24380]]

1(b)(5) of this chapter), but only with respect to remuneration 
remitted by the CPEO to the covered employee.
    (2) Work site employee. In the case of a covered employee who is a 
work site employee (as defined in Sec.  301.7705-1(b)(17) of this 
chapter) of the customer, no person other than the CPEO is treated as 
the employer of the work site employee with respect to the customer for 
purposes of federal employment taxes imposed on remuneration remitted 
by the CPEO to the work site employee.
    (3) Non-work site covered employee. In the case of a covered 
employee who is not a work site employee, a person other than the CPEO 
is also treated as an employer of the employee for purposes of federal 
employment taxes imposed on remuneration remitted by the CPEO to the 
employee if such person is determined to be an employer of the employee 
without regard to the application of this paragraph (a) and section 
3511.
    (b) Exemptions, exclusions, definitions, and other rules--(1) In 
general. Solely for purposes of federal employment taxes imposed on 
remuneration remitted by a CPEO to a covered employee, the application 
of exemptions, exclusions, definitions, and other rules that are based 
on the type of employer is presumed to be based on the type of employer 
of the customer of the CPEO for whom the covered employee performs 
services. If a covered employee performs services for more than one 
customer of the CPEO during the calendar year, the presumption 
described in the previous sentence applies separately to remuneration 
remitted by the CPEO to the covered employee for services performed 
with respect to each such customer.
    (2) Presumption rebutted. The presumption set forth in paragraph 
(b)(1) of this section may be rebutted if either the Commissioner 
determines, or the CPEO demonstrates by clear and convincing evidence, 
that the relationship between the customer and the covered employee is 
not the legal relationship of employer and employee as set forth in 
Sec.  31.3401(c)-1. If such a determination or demonstration is made, 
then, with respect to remuneration remitted by a CPEO to a covered 
employee, the application of exemptions, exclusions, definitions, and 
other rules that are based on the type of employer will be based on the 
type of employer of the person determined by the Commissioner or 
demonstrated by the CPEO to be the common law employer of the covered 
employee in accordance with Sec.  31.3401(c)-1.
    (3) No inference from presumption. The presumption set forth in 
paragraph (b)(1) of this section does not create any inference with 
respect to the determination of who is an employer or employee or 
whether the legal relationship of employer and employee exists for 
federal tax purposes or for purposes of any other provision of law 
(other than for paragraph (b)(1) of this section).
    (c) Annual wage limitation, contribution base, and withholding 
threshold--(1) CPEO has separate taxable wage base, contribution base, 
and withholding threshold. For purposes of applying the annual wage 
limitations under sections 3121(a)(1) and 3306(b)(1) (relating to the 
Federal Insurance Contributions Act and the Federal Unemployment Tax 
Act, respectively), the contribution base under section 3231(e)(2) 
(relating to the Railroad Retirement Tax Act), and the withholding 
threshold under section 3102(f)(1) (relating to the Additional Medicare 
Tax), remuneration received by a covered employee from a CPEO for 
performing services for a customer of the CPEO within any calendar year 
is subject to a separate annual wage limitation, contribution base, and 
withholding threshold that are each computed without regard to any 
remuneration received by the covered employee during the calendar year 
from any other employer (including, if applicable, remuneration 
received directly from the customer receiving services from the 
employee). Notwithstanding the preceding sentence, a CPEO is treated as 
a successor or predecessor employer for purposes of the annual wage 
limitations and contribution base upon entering into or terminating a 
CPEO contract (as defined in Sec.  301.7705-1(b)(3) of this chapter) 
with respect to a work site employee, as described in paragraph (d) of 
this section.
    (2) Performance of services for more than one customer. If, during 
a calendar year, a covered employee receives remuneration from a CPEO 
for services performed by the covered employee for more than one 
customer of the CPEO, the annual wage limitation, contribution base, 
and withholding threshold do not apply to the aggregate remuneration 
received by the covered employee from the CPEO for services performed 
for all such customers. Rather, the annual wage limitation, 
contribution base, and withholding threshold apply separately to the 
remuneration received by the covered employee from the CPEO with 
respect to services performed for each customer.
    (d) Successor employer status--(1) In general. For purposes of 
sections 3121(a)(1), 3231(e)(2)(C), and 3306(b)(1), a CPEO and its 
customer are treated as--
    (i) A successor and predecessor employer, respectively, upon 
entering into a CPEO contract with respect to a work site employee who 
is performing services for the customer; and
    (ii) A predecessor and successor employer, respectively, upon 
termination of the CPEO contract between the CPEO and the customer with 
respect to the work site employee who is performing services for the 
customer.
    (2) Non-work site covered employee. A CPEO entering into a CPEO 
contract with a customer during a calendar quarter with respect to a 
covered employee who is not a work site employee at any time during 
that calendar quarter will not be treated as a successor employer (and 
the customer will not be treated as a predecessor employer) for 
purposes of paragraph (d)(1)(i) of this section regardless of whether, 
during the term of the CPEO contract, the covered employee subsequently 
becomes a work site employee. Similarly, a CPEO terminating a CPEO 
contract with a customer during a calendar quarter with respect to a 
covered employee who is not a work site employee at any time during 
that calendar quarter will not be treated as a predecessor employer 
(and the customer will not be treated as a successor employer) for 
purposes of paragraph (d)(1)(ii) of this section regardless of whether, 
during the term of the CPEO contract, the covered employee had 
previously been a work site employee.
    (e) Treatment of credits--(1) In general. For purposes of the 
credits specified in paragraph (e)(2) of this section--
    (i) The credit with respect to a work site employee performing 
services for a customer applies to the customer, not to the CPEO; and
    (ii) In computing the credit, the customer, and not the CPEO, is to 
take into account wages and federal employment taxes paid by the CPEO 
with respect to the work site employee and for which the CPEO receives 
payment from the customer.
    (2) Credits specified. A credit is specified in this paragraph (e) 
if such credit is allowed under--
    (i) Section 41 (credit for increasing research activity);
    (ii) Section 45A (Indian employment credit);
    (iii) Section 45B (credit for portion of employer social security 
taxes paid with respect to employee cash tips);

[[Page 24381]]

    (iv) Section 45C (clinical testing expenses for certain drugs for 
rare diseases or conditions);
    (v) Section 45R (employee health insurance expenses for small 
employers);
    (vi) Section 45S (employer credit for paid family and medical 
leave);
    (vii) Section 51 (work opportunity credit);
    (viii) Section 1396 (empowerment zone employment credit);
    (ix) Statutory employee retention credits that are similar to the 
employee retention credit in section 1400R and that provide disaster 
relief to employers in designated disaster areas; and
    (x) Any other section specified by the Commissioner in further 
guidance (as defined in Sec.  301.7705-1(b)(8) of this chapter).
    (f) Section not applicable to related customers, self-employed 
individuals, and other circumstances. This section does not apply--
    (1) In the case of any customer that--
    (i) Has a relationship to a CPEO described in section 267(b) 
(including, by cross-reference, section 267(f)) or section 707(b), 
except that ``10 percent'' shall be substituted for ``50 percent'' 
wherever it appears in such sections; or
    (ii) Has commenced a CPEO contract with the CPEO but such 
commencement has not been reported to the IRS as described in paragraph 
(g)(3)(i) of this section; or
    (2) To remuneration paid by a CPEO to any self-employed individual 
(as defined in Sec.  301.7705-1(b)(14) of this chapter) in that 
capacity;
    (3) To any CPEO contract that a CPEO enters into while its 
certification has been suspended by the IRS; or
    (4) To any CPEO whose certification has been revoked or voluntarily 
terminated for periods after the effective date of revocation or 
voluntary termination.
    (g) Reporting and recordkeeping--(1) Reporting and recordkeeping 
for employers. A CPEO that is treated as an employer of a covered 
employee pursuant to paragraph (a) of this section must meet all 
reporting and recordkeeping requirements described in subtitle F of the 
Code that are applicable to employers in a manner consistent with such 
treatment.
    (2) Reporting on magnetic media--(i) In general. A CPEO must file 
on magnetic media any Form 940, ``Employer's Annual Federal 
Unemployment (FUTA) Tax Return,'' Form 941, ``Employer's QUARTERLY 
Federal Tax Return,'' and Form 943, ``Employer's Annual Federal Tax 
Return for Agricultural Employees,'' and all required accompanying 
schedules, as well as such other returns, schedules, and other required 
forms and documents as is required by further guidance.
    (ii) Waiver. The Commissioner may waive the requirements of this 
paragraph (g)(2) in case of undue economic hardship (including economic 
hardship resulting from temporary software and technological issues). 
The principal factor in determining hardship will be the amount, if 
any, by which the cost of filing the return, schedule, or other 
required form or document on magnetic media in accordance with this 
paragraph (g)(2) exceeds the cost of filing on or by other media. A 
request for a waiver must be made in accordance with applicable 
guidance. The waiver must specify the type of filing (that is, the name 
of the form or schedule) and the period to which it applies. In 
addition, the waiver will be subject to such terms and conditions 
regarding the method of filing as may be prescribed by the Commissioner 
in further guidance.
    (iii) Magnetic media. The term magnetic media means any magnetic 
media permitted under applicable guidance. These generally include 
electronic filing, as well as other media specifically permitted under 
the applicable guidance.
    (3) Reporting to the IRS by CPEOs. A CPEO must report the following 
to the IRS in such time and manner, and including such information, as 
the Commissioner may prescribe in further guidance:
    (i) The commencement or termination of any CPEO contract (as 
defined in Sec.  301.7705-1(b)(3) of this chapter) with a customer, or 
any service agreement as described in Sec.  31.3504-2(b)(2) with a 
client, and the name and employer identification number (EIN) of such 
customer or client.
    (ii) With any Form 940, Form 941, and Form 943 that it files, all 
required schedules, including, but not limited to, the applicable 
Schedule R (or any successor form), containing such information as the 
Commissioner may require about each of its customers under a CPEO 
contract (as defined in Sec.  301.7705-1(b)(3) of this chapter) and 
each of its clients under a service agreement (as described in Sec.  
31.3504-2(b)(2)). A CPEO must file Form 940, Form 941, and Form 943, 
along with all required schedules, on magnetic media, unless the CPEO 
is granted a waiver by the Commissioner in accordance with paragraph 
(g)(2)(ii) of this section.
    (iii) A periodic verification that it continues to meet the 
requirements of Sec.  301.7705-2 of this chapter, as described in Sec.  
301.7705-2(j).
    (iv) Any change that materially affects the continuing accuracy of 
any agreement or information that was previously made or provided by 
the CPEO to the IRS, as described in Sec.  301.7705-2(k) of this 
chapter.
    (v) A copy of its audited financial statements and an opinion of a 
certified public accountant regarding such financial statements, as 
described in Sec.  301.7705-2(e)(1) of this chapter.
    (vi) The quarterly statements, assertions, and attestations 
regarding those assertions described in Sec.  301.7705-2(f)(1) of this 
chapter.
    (vii) Any information the IRS determines is necessary to promote 
compliance with respect to the credits described in paragraph (e)(2) of 
this section and provided in section 3302.
    (viii) Any other information the Commissioner may prescribe in 
further guidance.
    (4) Reporting to customers by CPEOs. A CPEO must meet the following 
reporting requirements with respect to its customers in such time and 
manner, and including such information, as the Commissioner may 
prescribe in further guidance:
    (i) Provide each of its customers with the information necessary 
for the customer to claim the credits described in paragraph (e)(2) of 
this section.
    (ii) Notify any customer if its CPEO contract has been transferred 
to another person (or if another person will report, withhold, or pay, 
under such other person's EIN, any applicable federal employment taxes 
with respect to the wages of any individuals covered by its CPEO 
contract) and provide the customer with the name and EIN of such other 
person.
    (iii) If the CPEO's certification is suspended or revoked as 
described in Sec.  301.7705-2(n) of this chapter, notify each of its 
current customers of such suspension or revocation.
    (iv) If any covered employees are not, or cease to be, work site 
employees because they perform services at a location at which the 85 
percent threshold described in Sec.  301.7705-1(b)(17) of this chapter 
is not met, notify the customer that it may also be liable for federal 
employment taxes imposed on remuneration remitted by the CPEO to such 
covered employees, as described in paragraph (a)(3) of this section.
    (5) Information and agreements in any contract or agreement between 
a CPEO and a customer or client. Any CPEO contract (as defined in Sec.  
301.7705-1(b)(3) of this chapter) between a CPEO and a customer or 
service agreement described in Sec.  31.3504-2(b)(2) between a CPEO and 
a client must--

[[Page 24382]]

    (i) In the case of a contract that is a CPEO contract--
    (A) Contain the name and EIN of the CPEO reporting, withholding, 
and paying any applicable federal employment taxes with respect to any 
remuneration paid to individuals covered by the contract or agreement;
    (B) Require the CPEO to provide to the customer the notices and 
information required by paragraph (g)(4) of this section;
    (C) Describe the information that the CPEO will provide that is 
necessary for the customer to claim the credits specified in paragraph 
(e)(2) of this section; and
    (D) Require the CPEO to notify the customer that the customer may 
also be liable for federal employment taxes on remuneration remitted by 
the CPEO to covered employees if the work sites at which they perform 
services do not (or ever cease to) meet the 85 percent threshold 
described in Sec.  301.7705-1(b)(17) of this chapter; and
    (ii) In the case of a service agreement described in Sec.  31.3504-
2(b)(2) that is not a CPEO contract (and thus the individuals covered 
by that contract are not covered employees), or if this section does 
not apply to the contract under paragraph (f) of this section, notify, 
or be accompanied by a notification to, the client that the service 
agreement or contract is not covered by section 3511 and does not alter 
the client's liability for federal employment taxes on remuneration 
remitted by the CPEO to the employees covered by the service agreement 
or contract.
    (h) Penalties and additions to tax--(1) In general. A CPEO that is 
treated as an employer of a covered employee under this section and 
that is required to meet the reporting requirements of an employer is 
subject to the same penalties and additions to tax as an employer with 
respect to such reporting requirements, including, but not limited to, 
penalties and additions to tax under sections 6651, 6656, 6672, 6721, 
6722, and 6723.
    (2) Failures to timely make reports required under section 3511. 
CPEOs are subject to penalty under section 6652(n) with respect to 
reports required to be made to the IRS in paragraphs (g)(1) and (3) of 
this section and reports required to be made to customers in paragraph 
(g)(4) of this section.
    (3) Failures to attach Schedule R. A CPEO is subject to penalty 
under section 6652(n) for failure to attach Schedule R (or successor 
form) to Forms 941, 940, or 943 as required by paragraph (g)(3)(ii) of 
this section. A CPEO is also subject to penalty under section 6723 for 
failure to include the EIN of each customer on Schedule R of Form 941, 
940, or 943. See Sec.  301.6723-1 of this chapter for the application 
of the section 6723 penalty in the case of multiple failures on a 
single document.
    (4) Failures to file on magnetic media. With respect to the 
requirement in paragraph (g)(3)(ii) of this section that a CPEO must 
file Forms 940, 941, and 943, along with all required schedules, on 
magnetic media, a failure to file on magnetic media does not constitute 
a failure to file for purposes of section 6651(a)(1) nor does it 
constitute a failure to make a report for purposes of section 6652(n). 
Rather, the requirement to file Forms 940, 941, and 943 on magnetic 
media is a condition of maintaining certification as a CPEO.
    (i) Applicability date. The rules in this section apply on and 
after May 3, 2019.

PART 301--PROCEDURE AND ADMINISTRATION

0
Par. 3. The authority citation for part 301 is amended by removing 
entries for Sec. Sec.  301.7705-1T and 301.7705-2T and adding entries 
for Sec. Sec.  301.7705-1 and 301.7705-2 in numerical order to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 301.7705-1 also issued under 26 U.S.C. 7705(h).
    Section 301.7705-2 also issued under 26 U.S.C. 7705(h).
* * * * *


0
Par. 4. Sections 301.7705-1 and 301.7705-2 are added to read as 
follows:


Sec.  301.7705-1  Certified professional employer organization.

    (a) In general. The definitions set forth in this section apply for 
purposes of this section, Sec. Sec.  31.3511-1 and 301.7705-2, and 
sections 3302(h), 3303(a)(4), 6053(c)(8), and 7528(b)(4).
    (b) Definitions--(1) Certified professional employer organization 
(CPEO) means a person that applies to be certified as a CPEO in 
accordance with Sec.  301.7705-2(a) and has been certified by the 
Internal Revenue Service (IRS) as meeting the requirements of Sec.  
301.7705-2. For purposes of Sec.  301.7705-2(g)(2), the term CPEO also 
includes the person before it applied for certification and while its 
application is pending with the IRS. For all other purposes, a person 
is a CPEO as of the effective date of its certification (as specified 
in the certification notice described in Sec.  301.7705-2(a)(2)) and 
until its certification is revoked by the IRS (as described in Sec.  
301.7705-2(n)) or, if earlier and applicable, until the CPEO 
voluntarily terminates its certification in the time and manner 
prescribed by the Commissioner in further guidance.
    (2) CPEO applicant means a person that has applied to be certified 
as a CPEO in accordance with Sec.  301.7705-2(a) and whose application 
is pending with the IRS.
    (3) CPEO contract means a service contract between a CPEO and a 
customer that is in writing and provides that, with respect to an 
individual providing services to the customer, the CPEO will--
    (i) Assume responsibility for payment of wages to the individual, 
without regard to the receipt or adequacy of payment from the customer 
for the services;
    (ii) Assume responsibility for reporting, withholding, and paying 
any applicable federal employment taxes with respect to the 
individual's wages, without regard to the receipt or adequacy of 
payment from the customer for the services;
    (iii) Assume responsibility for any employee benefits that the 
service contract may require the CPEO to provide to the individual, 
without regard to the receipt or adequacy of payment from the customer 
for such benefits;
    (iv) Assume responsibility for recruiting, hiring, and firing the 
individual in addition to the customer's responsibility for recruiting, 
hiring, and firing the individual;
    (v) Maintain employee records relating to the individual; and
    (vi) Agree to be treated as a CPEO for purposes of section 3511 
with respect to the individual.
    (4) Certified public accountant (CPA) means a certified public 
accountant who--
    (i) With respect to a CPEO applicant or CPEO, is independent of the 
CPEO applicant or CPEO (as prescribed by the American Institute of 
Certified Public Accountants' Professional Standards, Code of 
Professional Conduct, and its interpretations and rulings);
    (ii) Is not currently under suspension or disbarment from practice 
before the IRS;
    (iii) Is duly qualified to practice as a CPA in any state;
    (iv) Files with the IRS a written declaration that he or she is 
currently qualified to practice as a CPA in any state; and
    (v) Meets such other requirements as the Commissioner may prescribe 
in further guidance.
    (5) Covered employee means, with respect to a customer, any 
individual (other than a self-employed individual, as defined in 
paragraph (b)(14) of this section) who performs services for the 
customer and who is covered by a CPEO

[[Page 24383]]

contract between the CPEO and the customer.
    (6) Customer--(i) In general. Except as provided in paragraph 
(b)(6)(ii) of this section, a customer is any person who enters into a 
CPEO contract with a CPEO.
    (ii) Persons who are not customers. A provider of payroll services 
that uses its own EIN for filing federal employment tax returns on 
behalf of its clients (or that used its own EIN immediately prior to 
entering into a service contract with the CPEO) is not a customer, even 
if it has entered into a service contract with the CPEO that meets all 
of the requirements for a CPEO contract described in paragraph (b)(3) 
of this section other than being a contract between a CPEO and a 
customer.
    (7) Federal employment taxes mean the taxes imposed by subtitle C 
of the Internal Revenue Code.
    (8) Guidance includes guidance published in the Federal Register or 
Internal Revenue Bulletin, as well as administrative guidance such as 
forms, instructions, publications, or other guidance on the irs.gov 
website.
    (9) Partnership means a business entity (as described in Sec.  
301.7701-2(a)) that is classified as a partnership for federal tax 
purposes under Sec. Sec.  301.7701-1, 301.7701-2, and 301.7701-3. 
Accordingly, any references to a managing member or general partner of 
a partnership mean a managing member or general partner of an entity 
that is classified as a partnership for federal tax purposes.
    (10) Precursor entity--(i) In general. A precursor entity means, 
with respect to a CPEO applicant, any related entity of the CPEO 
applicant that is or was a provider of payroll services that--
    (A) Has made a substantial asset transfer to the CPEO applicant 
during the calendar year in which the CPEO applicant applies for 
certification or any of the three preceding calendar years or plans to 
make such a substantial asset transfer while the application for 
certification is pending or in the 12-month period following the date 
of the CPEO applicant's application for certification; or
    (B) Has ceased operations or dissolved during the calendar year in 
which the CPEO applicant applied for certification or any of the three 
preceding calendar years.
    (ii) Related. For purposes of this paragraph (b)(10), a provider of 
payroll services is considered a related entity of a CPEO applicant if 
it is a related entity within the meaning of paragraph (b)(12) of this 
section or if it would be or would have been such a related entity 
based on the ownership and responsible individuals of the provider of 
payroll services at the time of its substantial asset transfer, ceasing 
of operations, or dissolution, as applicable, and the ownership and 
responsible individuals of the CPEO applicant at the time of its 
application.
    (11) Provider of payroll services means a person that provides 
federal employment tax administration, payroll services, or other 
similar federal employment tax-related compliance services to clients, 
including, but not limited to, collecting, reporting, and paying 
federal employment taxes with respect to wages or compensation paid by 
the person to individuals performing services for the clients. A 
provider of payroll services includes, but is not limited to, a CPEO.
    (12) Related entity means, with respect to a CPEO applicant or 
CPEO, any person that meets one or more of the following criteria:
    (i) The person is a member of a controlled group of which the CPEO 
applicant or CPEO is also a member. Additionally, CPEO applicants and 
CPEOs that, but for their status as disregarded entities would 
separately be members of a controlled group, are treated as members of 
a controlled group for purposes of this paragraph (b)(12)(i). For 
purposes of this paragraph (b)(12)(i), controlled group has the meaning 
given to such term by sections 414(b) and (c) and Sec. Sec.  1.414(b)-1 
and 1.414(c)-1 through 1.414(c)-6 of this chapter, except that--
    (A) With respect to a person that is not a provider of payroll 
services ``more than 50 percent'' will be substituted for ``at least 80 
percent'' each place it appears in section 1563(a) (which is cross-
referenced in section 414(b) and Sec.  1.414(c)-2 of this chapter); and
    (B) With respect to a person that is a provider of payroll 
services, ``more than 5 percent'' will be substituted for ``at least 80 
percent'' each place it appears in section 1563(a) and Sec.  1.414(c)-2 
of this chapter; or
    (ii) The person is a provider of payroll services and--
    (A) A majority of the directors or a majority of the officers (as 
described in paragraph (b)(13)(ii) of this section) of the CPEO 
applicant or CPEO are directors or officers (as described in paragraph 
(b)(13)(ii) of this section), respectively, of the provider of payroll 
services; or
    (B) An individual is a responsible individual of both the provider 
of payroll services and the CPEO applicant or CPEO by reason of 
paragraph (b)(13)(i) of this section.
    (13) Responsible individual means, with respect to a CPEO applicant 
or CPEO, (or, for purposes of paragraph (b)(10)(ii) or (b)(12)(ii) of 
this section, a provider of payroll services), the following 
individuals:
    (i) Any individual who owns, directly or indirectly, applying the 
constructive ownership rules of section 1563(e) with respect to stock 
ownership and substituting the term ``interest'' for the term ``stock'' 
and the term ``partnership'' for the term ``corporation'' used in that 
section, as appropriate for purposes of determining whether an interest 
in a partnership is indirectly owned by any person, 33 percent or more 
of--
    (A) In the case of a corporation, the total combined voting power 
of all classes of stock entitled to vote of such corporation or the 
total value of shares of all classes of stock of such corporation; or
    (B) In the case of a partnership, the capital interest or profits 
interest of such partnership.
    (ii) Any individual who is a director or an officer. For purposes 
of this paragraph (b)(13)(ii), a director is a voting member of the 
governing body (that is, the board of directors or equivalent 
controlling body authorized under state law to make governance 
decisions on behalf of the organization), and the officers are 
determined by reference to the organizing document, bylaws, or 
resolutions of the governing body, or otherwise designated consistent 
with state law. Officers may include individuals such as a president, 
vice-president, secretary, and treasurer.
    (iii) Any individual who, regardless of title, has ultimate 
responsibility for implementing the decisions of the organization's 
governing body. An individual who serves with the title of chief 
executive officer, executive director, and/or president has this 
ultimate responsibility. An individual with this ultimate 
responsibility may include an individual who is not treated as an 
employee of the organization. If this ultimate responsibility resides 
with two or more individuals (for example, co-presidents), who may 
exercise such responsibility in concert or individually, then each such 
individual is a responsible individual.
    (iv) Any individual who, regardless of title, has ultimate 
responsibility for supervising the management, administration, or 
operation of the organization. An individual who serves with the title 
of chief operating officer has this ultimate responsibility. An 
individual with this ultimate responsibility may include an individual 
who is not treated as an employee of the organization. If this ultimate 
responsibility resides with two

[[Page 24384]]

or more individuals, who may exercise such responsibility in concert or 
individually, then each such individual is a responsible individual.
    (v) Any individual who, regardless of title, has ultimate 
responsibility for managing the organization's finances. An individual 
who serves with the title of chief financial officer or treasurer has 
this ultimate responsibility. An individual with this ultimate 
responsibility may include an individual who is not treated as an 
employee of the organization. If this ultimate responsibility resides 
with two or more individuals who may exercise the responsibility in 
concert or individually, then each such individual is a responsible 
individual.
    (vi) In the case of a partnership, any individual who is a managing 
member or general partner.
    (vii) In the case of a sole proprietorship, the sole proprietor.
    (viii) In the case of a disregarded entity owned by a corporation 
or partnership, the responsible individuals of that corporation or 
partnership.
    (ix) In the case of a disregarded entity owned by an individual, 
the individual owner.
    (x) Any other individual with primary responsibility for the 
organization's federal employment tax compliance.
    (14) Self-employed individual means an individual with net earnings 
from self-employment (as defined in section 1402(a) without regard to 
the exceptions thereunder) derived from providing services covered by a 
CPEO contract, whether such net earnings from self-employment are 
derived from providing services as a non-employee to a customer of the 
CPEO, from the individual's own trade or business as a sole proprietor 
customer of the CPEO, or as an individual who is a partner in a 
partnership that is a customer of the CPEO, but only with regard to 
such net earnings.
    (15) Substantial asset transfer means any transfer of 35 percent or 
more of the value of the operating assets of the person making the 
transfer, whether through one or a series of transactions and whether 
accomplished through sale, lease, gift, assignment, succession, merger, 
consolidation, corporate separation, or any other means. For purposes 
of this paragraph (b)(15), operating assets include both tangible and 
intangible resources related to the conduct of the person's trade or 
business, including, but not limited to, such intangible assets as 
contracts, agreements, receivables, employees, and goodwill (which 
includes the value of a trade or business based on expected continued 
customer patronage due to its name, reputation, or any other factors). 
In the case of a contract described in section 7705(e)(2) or a service 
agreement described in Sec.  31.3504-2(b)(2) of this chapter entered 
into by a provider of payroll services, even if the contract or 
agreement is not sold, gifted, assigned, or otherwise formally 
transferred to a CPEO applicant, it will be considered transferred from 
the provider of payroll services to the CPEO applicant if the CPEO 
applicant reports, withholds, or pays, under its employer 
identification number (EIN), any applicable federal employment taxes 
with respect to the wages of any individuals covered by the contract or 
agreement.
    (16) Work site means a physical location at which an individual 
regularly performs services for a customer of a CPEO or, if there is no 
such location, the location from which the customer assigns work to the 
individual. A work site may not be the individual's residence or a 
telework site unless the customer requires the individual to work at 
that site. For purposes of this paragraph (b)(16), work sites that are 
contiguous locations will be treated as a single physical location and 
thus a single work site, and noncontiguous locations will be treated as 
separate physical locations and thus separate work sites, except as 
provided in the next sentence. A CPEO customer may treat noncontiguous 
locations as a single physical location and thus a single work site if 
each of the locations is separated by less than 35 miles from every 
other location in the single work site and all locations in the single 
work site operate in the same industry. For purposes of the preceding 
sentence, the determination of the industry of a work site is based on 
the nature of the CPEO customer's work at that work site, irrespective 
of work performed by other entities at the same site. When treating 
noncontiguous locations as a single physical location and thus a single 
work site, one noncontiguous location cannot be included in more than 
one work site. For example, assume there are three noncontiguous 
locations, A, B, and C, operating in the same industry and that B is 20 
miles east from A and C is 20 miles east from B. A CPEO customer would 
not be permitted to treat these three locations as a single work site 
but would be permitted to treat either A and B as a single work site or 
B and C as a single work site.
    (17) Work site employee--(i) In general. A work site employee 
means, with respect to a customer, a covered employee who performs 
services for such customer at a work site where at least 85 percent of 
the individuals performing services for the customer are covered 
employees of the customer.
    (ii) Self-employed individuals. Solely for purposes of determining 
whether the 85 percent threshold described in paragraph (b)(17)(i) of 
this section is met, a self-employed individual described in paragraph 
(b)(14) of this section is treated as a covered employee if such 
individual would be a covered employee but for the exclusion of self-
employed individuals from the definition of covered employee in 
paragraph (b)(5) of this section.
    (iii) Excluded employees. In determining whether the 85 percent 
threshold described in paragraph (b)(17)(i) of this section is met, an 
individual who is an excluded employee described in section 414(q)(5) 
is not treated as either an individual providing services or a covered 
employee.
    (iv) Treatment for calendar quarter. A covered employee will be 
considered a work site employee for the entirety of a calendar quarter 
if the employee qualifies as a work site employee at any time during 
that quarter.C
    (v) Separate determination for each work site. The determination of 
whether a covered employee is a work site employee is made separately 
with regard to each work site at which the covered employee regularly 
provides services and for each customer for which the covered employee 
is providing services. A covered employee may be determined to be a 
work site employee of more than one work site during a calendar 
quarter.
    (vi) Good faith determination respected. A CPEO's determination 
that a covered employee is a work site employee will be respected if 
the CPEO has made a good faith determination that the covered employee 
meets the requirements of section 7705(e), this paragraph (b)(17), and 
any further guidance related to work site employee determinations.
    (c) Applicability date. The rules in this section apply on and 
after May 3, 2019.


Sec.  301.7705-2  CPEO certification process.

    (a) Application requirement and certification--(1) Application. To 
be certified as a certified professional employer organization (CPEO), 
a person must submit a properly completed and executed application for 
certification as a CPEO in the time and manner prescribed by, and 
providing such information as required by, this section and any further 
guidance issued by the Commissioner. In addition, the applicant's 
responsible individuals must submit such information as is

[[Page 24385]]

specified in this section and further guidance.
    (2) Notice. A CPEO applicant will be notified by the Internal 
Revenue Service (IRS) whether its application for certification has 
been approved or denied, and, if approved, the effective date of 
certification. If the IRS denies the application, the IRS will inform 
the CPEO applicant of the reason(s) for denial. If the IRS denies an 
application for certification, or if the CPEO applicant withdraws an 
application for certification, the CPEO applicant may reapply for 
certification in such time and manner, and must include such 
information, as the Commissioner may prescribe in further guidance.
    (3) Public disclosure of certification. If the IRS approves a CPEO 
applicant's application for certification, the IRS will make available 
to the public the name and address of the CPEO, as well as the 
effective date of its certification, in the time and manner described 
in further guidance.
    (4) Effective date of certification. A CPEO's certification will be 
effective as of the effective date of certification specified in the 
notice described in paragraph (a)(2) of this section and in the public 
disclosure described in paragraph (a)(3) of this section and will 
continue in effect until the effective date of the revocation of the 
CPEO's certification, if any, as described in paragraph (n) of this 
section or, if earlier, the date that the CPEO voluntarily terminates 
its certification in the time and manner prescribed by the Commissioner 
in further guidance.
    (b) Requirements for certification. To receive and maintain 
certification, a CPEO applicant or CPEO must meet the requirements 
described in this section, as well as any additional requirements the 
Commissioner may prescribe in further guidance. In addition, any 
precursor entities, related entities, and responsible individuals of 
the CPEO applicant or CPEO must meet any requirements applicable to 
them described in this section and in further guidance. The IRS may 
deny an application for certification or revoke or suspend a CPEO's 
certification if a CPEO applicant or CPEO, or one or more of its 
precursor entities, related entities, or responsible individuals, fails 
to meet any applicable requirement described in this section or other 
applicable guidance, and the IRS will do so if the IRS determines, in 
its sole discretion, that such failure presents a material risk to the 
IRS's collection of federal employment taxes. In determining whether 
one or more failures to meet the requirements described in this section 
presents a material risk to the IRS's collection of federal employment 
taxes, the IRS generally will consider all relevant facts and 
circumstances, including the size, scope, nature, significance, 
recurrence, and timing of and reason for the failure and, in the case 
of a CPEO, any prior failures of the CPEO to meet the requirements of 
this section.
    (c) Suitability--(1) In general. The IRS may deny an application 
for certification or revoke or suspend a CPEO's certification for any 
of the following reasons:
    (i) The CPEO applicant or CPEO, or any of its precursor entities, 
related entities, or responsible individuals, has failed to pay any 
applicable federal, state, or local taxes or file any required federal, 
state, or local tax or information returns in a timely and accurate 
manner, unless the failure is determined to be due to reasonable cause 
and not due to willful neglect.
    (ii) The CPEO applicant or CPEO, or any of its precursor entities, 
related entities, or responsible individuals, has been charged with or 
convicted of any criminal offense under the laws of the United States 
or of a state or political subdivision thereof, or is the subject of an 
active IRS criminal investigation.
    (iii) The CPEO applicant or CPEO, or any of its precursor entities, 
related entities, or responsible individuals, has been sanctioned, or 
had a license, registration, or accreditation (including a license, 
registration, or accreditation relating to its status or ability to 
operate as a professional employer organization) denied, suspended, or 
revoked, by a court of competent jurisdiction, licensing board, 
assurance or other professional organization, or federal or state 
agency, court, body, board, or other authority for any misconduct that 
involves dishonesty, fraud, or breach of trust or that otherwise bears 
upon the suitability of the CPEO applicant or CPEO to perform its 
professional functions (including, but not limited to, any civil or 
criminal penalty described in 42 U.S.C. 503(k)(1)(D) imposed by state 
law).
    (iv) The CPEO applicant or CPEO, or any of its precursor entities, 
related entities, or responsible individuals, is listed on any 
sanctions list compiled by the Office of Foreign Assets Control (OFAC) 
within the Department of Treasury, including, but not limited to, the 
OFAC Consolidated Sanctions List and the OFAC Specially Designated 
Nationals List.
    (v) The CPEO applicant or CPEO, or any of its precursor entities, 
related entities, or responsible individuals, fails to demonstrate a 
history of financial responsibility, which the IRS may assess by checks 
on credit history and other similar indicators.
    (vi) The CPEO applicant or CPEO and the responsible individuals of 
the CPEO applicant or CPEO fail to demonstrate adequate collective 
knowledge or experience with respect to:
    (A) Federal or state employment tax reporting, depositing, and 
withholding requirements;
    (B) Handling of and accounting for payroll, tax payments, and other 
funds on behalf of others;
    (C) Effective recordkeeping systems;
    (D) Retention of qualified personnel and legal advisors as needed; 
and
    (E) General business and risk management.
    (vii) The CPEO applicant or CPEO, or any of its responsible 
individuals, gives false or misleading information (including by 
intentionally omitting relevant information), or participates in any 
way in the giving of false or misleading information, to the IRS, 
knowing, or having reason to know, that the information is false or 
misleading. For the purpose of this paragraph (c)(1)(vii), 
``information'' includes (but is not limited to) facts or other matters 
contained in testimony, federal tax returns, and financial statements 
and opinions regarding such statements; applications for certification 
(and all accompanying documentation); affidavits, declarations, 
assertions, attestations, statements, and agreements; and periodic 
verifications that the requirements of this section continue to be met; 
and any other information that is required to be provided by this 
section, section 3511(g), Sec.  31.3511-1 of this chapter, or further 
guidance.
    (2) Must be a business entity or sole proprietorship--(i) In 
general. A CPEO must be a business entity described in Sec.  301.7701-
2(a) or a sole proprietorship. Accordingly, a CPEO may not be an entity 
classified as a trust under Sec.  301.7701-4.
    (ii) Ownership by a United States person. In addition, a sole 
proprietorship or a business entity that is disregarded as an entity 
separate from its owner for federal tax purposes under Sec. Sec.  
301.7701-2 and 301.7701-3 (without regard to the special rule in Sec.  
301.7701-2(c)(2)(iv) that provides that such entities are corporations 
for federal employment tax purposes) must be wholly owned directly 
(including through one or more disregarded entities organized in the 
United States, in the case of a business entity) by a United States 
person (as defined in section 7701(a)(30)).
    (iii) Treatment as separate member of a controlled group. Except as 
provided in paragraph (h) of this section, a CPEO

[[Page 24386]]

applicant or CPEO that otherwise qualifies as a member of a controlled 
group (within the meaning of sections 414(b) and (c) and Sec. Sec.  
1.414(b)-1 and 1.414(c)-1 through 1.414(c)-6 of this chapter) but for 
its status as an entity disregarded as separate from its owner for 
federal tax purposes under Sec. Sec.  301.7701-2 and 301.7701-3, is 
treated as a separate member of a controlled group for purposes of this 
section, Sec.  301.7705-1, section 3511, Sec.  31.3511-1 of this 
chapter, and section 7705.
    (3) Authorization to investigate suitability. A CPEO applicant or 
CPEO, and each of its responsible individuals, must take such actions 
as are necessary to authorize the IRS to investigate the accuracy of 
statements and submissions, including waiving confidentiality and 
privilege when necessary (i.e., in situations in which the IRS is 
otherwise unable to obtain or confirm information necessary to evaluate 
a CPEO applicant's or CPEO's qualification for certification), and to 
conduct comprehensive background checks, including, but not limited to, 
Federal Bureau of Investigation or other similar criminal background 
checks, checks on tax compliance, professional experience (including 
through the contact of third-party references), credit history, and 
professional sanctions. In addition, a CPEO applicant or CPEO, and any 
of its responsible individuals, must provide the IRS with such 
additional information as the IRS may request to facilitate such 
background investigations. Each responsible individual of a CPEO 
applicant or CPEO must also submit fingerprints in the time and manner 
and under the circumstances prescribed by the Commissioner in further 
guidance.
    (d) Business location--(1) State of organization. A CPEO applicant 
or CPEO must be created or organized in the United States or under the 
law of the United States or of any state.
    (2) Business location in the United States. A CPEO applicant or 
CPEO must have one or more established, physical business locations in 
the United States at which regular operations of an activity that 
constitutes a trade or business within the United States (within the 
meaning of section 864(b)) take place and at which a significant 
portion of its CPEO-related functions are carried on and administrative 
records are kept.
    (3) United States responsible individuals. A majority of the CPEO 
applicant's or CPEO's responsible individuals must be citizens or 
residents of the United States.
    (4) Use of financial institution. A CPEO applicant or CPEO must use 
only financial institutions described in section 265(b)(5) to hold 
substantially all of its cash and cash equivalents, receive payments 
from customers, and pay wages and federal employment taxes.
    (e) Financial statements--(1) CPEOs. By the last day of the sixth 
month after the end of each fiscal year, and beginning with the first 
fiscal year that ends after the CPEO's effective date of certification, 
a CPEO must cause to be prepared and provided to the IRS--
    (i) A copy of its annual audited financial statements for the 
fiscal year;
    (ii) An opinion of a certified public accountant (CPA) that such 
financial statements are presented fairly and in accordance with 
generally accepted accounting principles (GAAP); and
    (iii) A statement in the Note to the Financial Statements covered 
by the CPA opinion that the CPEO's annual audited financial statements 
reflect positive working capital or, only if the CPEO satisfies the 
requirements of paragraph (e)(3) of this section, reflect negative 
working capital, with such statement in either case setting forth in 
detail a calculation of the CPEO's working capital as reflected in the 
annual audited financial statements (a working capital statement).
    (2) CPEO applicants--(i) In general. A CPEO applicant must cause to 
be prepared and provided to the IRS, with its application, a copy of 
its annual audited financial statements, an opinion with respect to 
such financial statements, and a working capital statement (each as 
described in paragraph (e)(1) of this section) for the most recently 
completed fiscal year as of the date it applies for certification. 
Notwithstanding the preceding sentence, if a CPEO applicant applies for 
certification before the last day of the sixth month following its most 
recently completed fiscal year, and the audit of the financial 
statements for that fiscal year has not yet been completed at the time 
of application, a CPEO applicant must provide to the IRS, with its 
application, the financial statements, opinion, and working capital 
statement described in paragraph (e)(1) of this section for the 
immediately preceding fiscal year, if any, and must subsequently 
provide to the IRS the financial statements, opinion, and working 
capital statement for the most recently completed fiscal year by the 
last day of the sixth month after such fiscal year ends. In addition, 
for any fiscal year that ends after the CPEO applicant applies for 
certification and on or before the effective date of certification, if 
applicable, the CPEO applicant must provide the audited financial 
statements, opinion, and working capital statement by the last day of 
the sixth month after such fiscal year ends. The obligation to provide 
the annual audited financial statements described in the preceding 
sentence continues to apply even if the CPEO applicant is certified as 
a CPEO prior to the date the annual audited financial statements are 
provided.
    (ii) Newly established CPEO applicants. In addition to the 
requirements in paragraph (e)(2)(i) of this section, a CPEO applicant 
that was not operating as a provider of payroll services for all or 
part of its most recently completed fiscal year as of the date it 
applies for certification must provide a copy of the annual audited 
financial statements of any precursor entity, if one exists, an opinion 
with respect to such financial statements, and a working capital 
statement (each as described in paragraph (e)(1) of this section) for 
the precursor entity's most recently completed fiscal year as of the 
date of the application for certification in such time and manner as 
the Commissioner may prescribe in further guidance, as well as such 
additional information as the Commissioner may prescribe in further 
guidance.
    (3) Exception to positive working capital requirement. A CPEO 
applicant or CPEO with annual audited financial statements for a fiscal 
year that do not reflect positive working capital will not fail to meet 
the requirements of paragraph (e)(1)(iii) of this section if--
    (i) The CPEO applicant or CPEO has negative working capital for no 
more than two consecutive fiscal quarters of that fiscal year, as 
demonstrated by the financial statements (for the final fiscal quarter 
in the fiscal year) and the statements described in paragraph 
(f)(1)(ii) of this section (for any other fiscal quarter), as 
applicable;
    (ii) The CPEO applicant or CPEO, or its CPA, provides, in such time 
and manner as the Commissioner may prescribe in further guidance, an 
explanation to the IRS describing the reason for the failure; and
    (iii) The IRS determines, in its sole discretion, that the failure 
does not present a material risk to the IRS's collection of federal 
employment taxes.
    (4) Completed fiscal year. For purposes of this paragraph (e), a 
fiscal year will be considered completed once the last day of that 
fiscal year has ended, regardless of whether the CPEO applicant or CPEO 
was in operation or certified for all 12 months of the fiscal year or 
the fiscal year consisted of fewer than 12 months.

[[Page 24387]]

    (f) Quarterly assertions and attestations--(1) CPEOs. By the last 
day of the second month after the end of each calendar quarter, and 
beginning with the first calendar quarter that ends after the CPEO's 
effective date of certification, a CPEO must provide the following to 
the IRS:
    (i) An assertion, signed by a responsible individual under 
penalties of perjury, stating that the CPEO has withheld and made 
deposits of all federal employment taxes (other than taxes imposed by 
chapter 23 of the Code) as required by subtitle C for such calendar 
quarter and an examination level attestation from a CPA stating that 
such assertion is fairly stated in all material respects.
    (ii) A statement signed by a responsible individual under penalties 
of perjury verifying that the CPEO has positive working capital (as 
determined in accordance with GAAP) at the end of the most recently 
completed fiscal quarter, as well as such additional financial 
information that the Commissioner may specify in further guidance.
    (2) Exceptions--(i) Immaterial failures. A CPEO will not fail to 
meet the requirements of paragraph (f)(1)(i) of this section if the CPA 
examination level attestation indicates that the CPEO has failed to 
withhold or make deposits in certain immaterial respects, provided 
that--
    (A) The attestation provides a summary of the immaterial failures 
that were found;
    (B) The attestation states that the failures were immaterial and 
isolated and do not reflect a meaningful lapse in compliance with 
federal employment tax withholding and deposit requirements; and
    (C) The IRS determines, in its sole discretion, that the isolated 
and immaterial failures identified by the CPA do not present a material 
risk to the IRS's collection of federal employment taxes.
    (ii) Negative working capital. A CPEO with negative working capital 
at the end of a fiscal quarter will not fail to meet the requirements 
of paragraph (f)(1)(ii) of this section if--
    (A) The CPEO does not have negative working capital at the end of 
the two fiscal quarters immediately preceding such fiscal quarter, as 
demonstrated by the annual audited financial statements described in 
paragraph (e)(1) of this section, if available, or the statements 
described in paragraph (f)(1)(ii) of this section;
    (B) The CPEO provides an explanation to the IRS describing the 
reason for such negative working capital in such time and manner as the 
Commissioner may prescribe in further guidance; and
    (C) The IRS determines, in its sole discretion, that the negative 
working capital does not present a material risk to the IRS's 
collection of federal employment taxes.
    (3) CPEO applicants--(i) In general. By the last day of the second 
month after the end of each calendar quarter, beginning with the most 
recently completed calendar quarter as of the date of a CPEO 
applicant's application for certification and ending with the most 
recently completed calendar quarter as of the effective date of 
certification (if applicable), a CPEO applicant must provide to the IRS 
the assertion, examination level attestation, and working capital 
statement described in paragraph (f)(1) of this section, subject to the 
exceptions described in paragraph (f)(2) of this section (though 
substituting ``CPEO applicant'' for ``CPEO'').
    (ii) Newly established CPEO applicants. A CPEO applicant that was 
not operating as a provider of payroll services during the most 
recently completed calendar quarter as of the date of its application 
for certification or during any calendar quarter that ends while its 
application for certification is pending must provide to the IRS the 
assertion, examination level attestation, and working capital statement 
described in paragraph (f)(1) of this section with respect to any 
precursor entity, if applicable, in such time and manner as the 
Commissioner may prescribe in further guidance, as well as such 
additional information as the Commissioner may prescribe in further 
guidance.
    (g) Bond--(1) In general. A CPEO must post a bond (or bonds, as 
described in paragraph (g)(3) of this section) from a qualified surety 
(as described in paragraph (g)(6) of this section) for the payment of 
federal employment taxes, issued in the form and containing the terms 
prescribed by the Commissioner in this paragraph (g) and in further 
guidance and in an amount described in paragraph (g)(2) of this 
section.
    (2) Bond amount--(i) In general. The amount of the bond (or bonds, 
as described in paragraph (g)(3) of this section) must be, for each 
period beginning on April 1 of any calendar year and ending on March 31 
of the following calendar year (or, in the case of a newly certified 
CPEO, beginning with the effective date of certification and ending on 
the subsequent March 31) (the bond period), at least equal to the 
greater of--
    (A) Five percent of the CPEO's liability under section 3511 (or, if 
applicable, the liability described in paragraph (g)(2)(ii) of this 
section) during the calendar year preceding the beginning of the bond 
period, but not more than $1,000,000; or
    (B) $50,000.
    (ii) Amount of bond in first and second year as a CPEO. If a CPEO 
does not have any liability under section 3511 for all or a portion of 
a preceding calendar year because the CPEO was not certified as a CPEO 
for all or a portion of that preceding calendar year, the liability 
applied for purposes of paragraph (g)(2)(i)(A) of this section for the 
entirety or portion of the preceding calendar year during which the 
CPEO was not certified will be the federal employment tax liability of 
the CPEO, and of any precursor entity of the CPEO described in Sec.  
301.7705-1(b)(10)(i)(A), that results from one or more service 
agreements described in Sec.  31.3504-2(b)(2) of this chapter. With 
respect to the federal employment tax liability of such precursor 
entity during a preceding calendar year, for purposes of paragraph 
(g)(2)(i)(A) of this section, the liability will be applied only to the 
extent it results from service agreements that have been transferred or 
are intended to be transferred by the precursor entity to the CPEO at 
the time the bond amount is determined. For purposes of this paragraph 
(g)(2)(ii), an entity is considered a precursor entity of a CPEO 
described in Sec.  301.7705-1(b)(10)(i)(A) if it was determined to be 
its precursor entity under that section at the time it was a CPEO 
applicant.
    (iii) One continuous obligation. The bond, any riders thereto, and 
any strengthening bonds posted to satisfy the requirements of this 
section are considered one continuous obligation of the surety for 
unpaid tax liabilities accrued by the CPEO under subtitle C from the 
effective date of the bond until the bond is superseded or cancelled.
    (3) Increase in bond amount--(i) In general. A CPEO must determine 
if an increase in the bond amount is necessary for each new bond 
period. If a CPEO's liability under section 3511 (or, if applicable, 
the liability described in paragraph (g)(2)(ii) of this section) for 
the preceding calendar year results in a minimum required bond amount 
specified in paragraph (g)(2) of this section that exceeds the current 
amount of the bond, the CPEO must increase the amount of its bond with 
respect to the new bond period in order to meet the minimum required 
bond amount specified in paragraph (g)(2) of this section. To increase 
the bond amount, a CPEO may amend an existing bond

[[Page 24388]]

through the use of a rider, or post a strengthening, superseding, or 
new bond, where applicable, and in such time and manner as the 
Commissioner may prescribe in further guidance.
    (ii) To reflect adjustment or assessment. Subject to the limit in 
paragraph (g)(2)(i)(A) of this section, if, during the bond period, the 
CPEO or the IRS determines that the applicable federal employment tax 
liability for the preceding calendar year was higher than the amount 
reported and paid and on which the bond amount for the bond period was 
based (and the applicable party makes an adjustment or assessment 
reflecting such determination), a CPEO must increase the amount of its 
bond to meet the minimum required bond amount specified in paragraph 
(g)(2) of this section through the use of a rider, or by posting a 
strengthening, superseding, or new bond in such time and manner as the 
Commissioner may prescribe in further guidance.
    (4) Cancellation--(i) Notice. A bond required under this paragraph 
(g) must provide that it may be cancelled by the surety only after the 
surety gives written notice of such cancellation to the IRS and the 
CPEO in such time and manner as the Commissioner may prescribe in 
further guidance.
    (ii) New or superseding bond required. If a CPEO either receives 
notice of cancellation from the surety provider of its bond, or gives 
notice to the IRS of the CPEO's intent to cancel the bond, the CPEO 
must post a new or superseding bond for the minimum required bond 
amount specified in paragraph (g)(2) of this section in such time and 
manner as the Commissioner may prescribe in further guidance.
    (iii) Ongoing liability. A bond required under this paragraph (g) 
must provide that, if a surety cancels the bond without issuing a 
superseding bond to the CPEO, the surety will, notwithstanding the 
cancellation, remain liable for all federal employment tax liability 
accrued by the CPEO during the period beginning with the effective date 
of the first bond issued by the surety to the CPEO in any consecutive 
series of bonds issued by that surety prior to cancellation and ending 
with the cancellation of the bond (the total bond period), up to the 
penal amount of the bond at the time of the cancellation. A cancelling 
surety will remain liable as described in this paragraph (g)(4)(iii) 
for federal employment tax liability accrued during the total bond 
period up to the penal amount of the bond for as long as the 
Commissioner may assess and collect taxes for such period under 
sections 6501 and 6502.
    (5) No posting of collateral--(i) In general. Except as provided in 
paragraph (g)(5)(iii) of this section, a CPEO must meet the bond 
requirements of this paragraph (g) without posting collateral.
    (ii) Surety's retention of the right to seek collateral by itself 
not a violation of paragraph (g)(5)(i) of this section. A surety's 
retention of the right to seek collateral, as long as no collateral is 
actually required by the surety or posted by the CPEO, does not violate 
the rule in paragraph (g)(5)(i).
    (iii) Exceptions to no collateral requirement. The Commissioner may 
provide exceptions to the rule in paragraph (g)(5)(i) of this section 
in further guidance published in the Internal Revenue Bulletin.
    (6) Requirements for surety. Any surety that issues a bond required 
by this paragraph (g) to a CPEO must be a surety company that holds a 
certificate of authority from the Secretary as an acceptable surety on 
federal bonds and meets such other requirements as the Commissioner may 
prescribe in further guidance.
    (7) Bond definitions--(i) Rider. A rider is an amendment to an 
existing bond that increases the bond amount. The rider must apply to 
liabilities that arise on or after the effective date of the bond that 
the rider amends. The surety remains liable under the existing bond, as 
amended by the rider, for the assessment and collection periods 
applicable to the CPEO under sections 6501 and 6502, respectively, with 
respect to any taxable period that occurs during the term of the bond 
unless and until the bond is superseded.
    (ii) Strengthening bond. A strengthening bond is an additional bond 
posted in the incremental amount of the increase so that the 
strengthening bond together with the existing bond equal the total 
minimum required bond amount specified in paragraph (g)(2) of this 
section. The strengthening bond must apply to liabilities that arise on 
or after the effective date of the bond it strengthens. Both the 
strengthening bond and the bond it strengthens must remain in effect, 
and the surety remains liable under both bonds for the assessment and 
collection periods applicable to the CPEO under sections 6501 and 6502, 
respectively, with respect to any taxable period that occurs during the 
term of the bonds, unless and until the bonds are superseded.
    (iii) New bond. A new bond is a bond posted for the total required 
bond amount, and a new bond may only be posted upon the CPEO's initial 
certification or immediately following cancellation of an existing 
bond. In the case of a cancellation of an existing bond, the effective 
date of the new bond must be no later than the effective date of the 
cancellation of the existing bond, and the surety providing the 
existing (now cancelled) bond remains liable for liabilities that 
accrued during the term of the cancelled bond for the assessment and 
collection periods applicable to the CPEO under sections 6501 and 6502, 
respectively, with respect to any taxable period that occurred during 
the term of that bond.
    (iv) Superseding bond. A superseding bond is a bond posted for the 
total minimum required bond amount specified in paragraph (g)(2) of 
this section, not just for an incremental increase. Upon execution of 
the superseding bond, the superseded bond is no longer in effect, and 
the surety that provided the superseded bond is no longer liable under 
the superseded bond. The superseding bond must apply to liabilities 
that arise on or after the effective date of the superseded bond.
    (h) Controlled group. All CPEO applicants and CPEOs that are 
members of a controlled group within the meaning of sections 414(b) and 
(c), and Sec. Sec.  1.414(b)-1 and 1.414(c)-1 through 1.414(c)-6 of 
this chapter, will be treated as a single CPEO applicant or CPEO for 
purposes of paragraphs (e) (other than (e)(1)(iii)), (f) (other than 
(f)(1)(ii)), and (g) of this section.
    (i) Consents to disclose. To receive and maintain certification, a 
CPEO applicant or CPEO must provide such consents for the IRS to 
disclose confidential tax information to its customers, and to other 
persons as necessary to carry out the purposes of these regulations, 
that relates to its certification and obligations to report, deposit, 
and pay federal employment taxes as the Commissioner may require in 
further guidance.
    (j) Periodic verification. A CPEO must periodically verify that it 
continues to meet the requirements of this section in the time and 
manner prescribed by the Commissioner in further guidance.
    (k) Notification of material changes. A CPEO applicant or CPEO must 
notify the IRS, in the time and manner prescribed by the Commissioner 
in further guidance, of any change that materially affects the 
continuing accuracy of any agreement or information that was previously 
made or provided to the IRS.
    (l) Accrual method of accounting. A CPEO must compute its taxable 
income using an accrual method of accounting or, if applicable, another 
method that the Commissioner provides for in further guidance.

[[Page 24389]]

    (m) Compliance with reporting obligations--(1) In general. A CPEO 
must agree to make reports to the IRS and to its clients as provided in 
section 3511(g) and Sec.  31.3511-1 of this chapter, including filing 
all federal employment tax returns and information returns as required.
    (2) Filing on magnetic media. A CPEO must file all returns, 
schedules, reports, and other forms and documents on magnetic media 
when required by section 3511(g) and Sec.  31.3511-1 of this chapter, 
other Treasury regulations, or other guidance.
    (n) Suspension and revocation--(1) In general. The IRS may suspend 
or revoke the certification of any CPEO, in the time and manner and 
under the circumstances prescribed by the Commissioner in this section 
and in further guidance, as a result of one or more failures to meet 
any of the requirements for CPEOs described in this section, section 
3511(g), Sec.  31.3511-1 of this chapter, and any further guidance and 
will suspend or revoke certification if the IRS determines, in its sole 
discretion, that such failure(s) present a material risk to the IRS's 
collection of federal employment taxes. See paragraph (b) of this 
section for the factors the IRS will consider in determining whether 
one or more failures to meet any of the requirements described in this 
section presents a material risk to the IRS's collection of federal 
employment taxes.
    (2) Suspension. Section 3511 will not apply to any contract 
described in section 7705(e)(2) into which the CPEO enters while its 
certification is suspended.
    (3) Revocation. If an organization's certification as a CPEO is 
revoked, the organization will not be considered a CPEO for purposes of 
section 3511 unless and until it again applies to be certified as a 
CPEO in accordance with paragraph (a) of this section and is again 
certified by the IRS as meeting the requirements of this section. An 
organization whose certification as a CPEO has been revoked may not 
reapply to be certified as a CPEO until one year has passed after the 
effective date of its revocation.
    (4) Disclosure of suspension and revocation--(i) Notification by 
the CPEO. An organization whose certification as a CPEO has been 
suspended or revoked must notify its customers of such suspension or 
revocation in the time and manner prescribed by the Commissioner in 
further guidance.
    (ii) Disclosure by the IRS. If the IRS suspends or revokes an 
organization's certification as a CPEO, the IRS will make available to 
the public the fact of such suspension or revocation in the time and 
manner described in further guidance. The IRS may also separately 
notify the organization's customers of such suspension or revocation.
    (o) Applicability date. The rules in this section apply on and 
after May 3, 2019.


Sec.  301.7705-1T   [Removed]

0
Par. 5. Section 301.7705-1T is removed.


Sec.  301.7705-2T  [Removed]

0
Par. 6. Section 301.7705-2T is removed.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 7. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


0
Par. 8. In Sec.  602.101, paragraph (b) is amended by adding entries in 
numerical order for ``31.3511-1,'' ``301.7705-1,'' and ``301.7705-2'' 
and removing the entries for ``301.7705-1T'' and ``301.7705-2T'' to 
read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                                * * * * *
31.3511-1...............................................       1545-2266
 
                                * * * * *
301.7705-1..............................................       1545-2266
301.7705-2..............................................       1545-2266
 
                                * * * * *
------------------------------------------------------------------------

* * * * *

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
    Approved: May 7, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-10856 Filed 5-23-19; 11:15 am]
 BILLING CODE 4830-01-P