Employment Tax Liability Not Shifted to Professional Employer Organizations
AAFCPAs would like to remind cannabis clients using or considering use of a Professional Employer Organization (PEO) that the employment tax liability is most often not shifted from your company, its management and owners, to the PEO. This is a common misconception, so much so, that the Internal Revenue Service issued regulations to help address it and the misclassification and fraud that has occurred.
There are provisions in the Internal Revenue Code that provide for limited situations where the employer’s employment tax obligations may be shared by or shifted to the PEO. We advise clients to consult with their AAFCPAs Tax Partner for full consideration of all facts and circumstances.
Further, cannabis clients considering or engaging in joint ventures (JVs) and mergers & acquisitions (M&A) are reminded to perform comprehensive due diligence, including employment tax, which may often be overlooked due to the focus on income tax exposure related to Code Section 280E.
PEOs: Outsourcing Administration, Not Employment Tax Responsibilities
Hiring firms, cannabis and non-cannabis companies, may choose to outsource their long-term workers through a number of options, including an employee leasing firm such as a PEO. Payroll, benefits, HR, tax administration, and regulatory compliance assistance are some of the many services PEOs provide. Using a PEO has its benefits; however, shifting away employment tax responsibilities is, most often, not one of them.
Most often, hiring firms using a PEO are treated as the employer for employment tax purposes. Employers are responsible for classifying workers as either W-2 employees or 1099 independent contractors. Employers are also responsible for withholding employment taxes, remitting employment taxes, and reporting wages and employment taxes. Unless a hiring firm uses a certified PEO (CPEO), which is a relatively new, IRS-approved designation, the hiring firm remains liable for employment tax collecting, remitting and reporting.
Employment Tax Due Diligence in JVs and M&A
Employment tax due diligence should not be overlooked when engaging in JVs and M&A, especially with the prevalence of misclassification and fraud. AAFCPAs recommends a measured approach using three general steps.
Step 1 – Determine whether co-employer and/or joint liability has been established via contract.
Step 2 – Review payroll tax returns and related supporting documentation.
Step 3 – Independently verify payroll tax liabilities.
AAFCPAs provides cannabis clients with comprehensive tax, accounting, assurance, business & IT advisory solutions, including sell-side and buy-side due diligence, to assist with JVs and M&A transactions. AAFCPAs’ due diligence services include financial, tax, information technology, and post-close integration.
PEO Diligence and Monitoring
For cannabis clients considering outsourcing their employment needs to a PEO, AAFCPAs advises clients to engage a PEO with cannabis business expertise. Further, we recommend pre-engagement diligence, subsequent monitoring, and legal control of the cash to pay employees and the related taxes.
Pre-engagement diligence should include two general steps:
Step 1 – Prepare a request for proposal for tasks to outsource to the PEO.
Step 2 – Perform a qualitative and quantitative cost-benefit analysis.
Subsequent monitoring should include regular reviews of employment tax returns. Legal control of cash may be accomplished by using escrow accounts.