IRS Will Not Acquiesce in TriNet Holding on FICA Tip Credits

IRS Will Not Acquiesce in TriNet Holding on FICA Tip Credits

Internal Revenue Service

In an action on decision (AOD 2021-03, 2021-24 IRB 1199), the IRS has announced that it will not acquiesce in an Eleventh Circuit holding that an employment services company, rather than its clients, had "control of the payment of wages" and that the company was the statutory employer under <a href="/research/federal/usc26/3401#cnwj-0000041" resolve="/lr/resolve//cnwj#cnwj-0000041">section 3401(d)</a> for purposes of a FICA tax refund suit. In <a href="/lr/resolve//2d5n7">TriNet Group Inc. v. United States</a>, 979 F.3d 1311 (11th Cir. 2020), the circuit court affirmed a grant of summary judgment to the employment services company, which provided various services to its clients — including payroll processing, employment tax services, and human resource services — under individual professional services agreements. The company’s clients included restaurants and others in the food and beverage industry, in which tipping is customary. According to the Eleventh Circuit, the district court properly held that the employment services company was the statutory employer under <a href="/research/federal/usc26/3401#cnwj-0000041" resolve="/lr/resolve//cnwj#cnwj-0000041">section 3401(d)</a> because it had sole control over the bank accounts from which the wages were paid and therefore was entitled to claim the section 45B credit for the portion of employer Social Security taxes paid regarding employee cash tips. Rather than following the bank account control interpretation used by the district court, however, the Eleventh Circuit created a new test for determining control of the payment of wages, relying on both the language in the professional services agreements and the relationship between the parties. The IRS disagrees with the Eleventh Circuit’s new test because it ignores congressional intent, Treasury regulations, and long-standing precedent that <a href="/research/federal/usc26/3401#cnwj-0000042" resolve="/lr/resolve//cnwj#cnwj-0000042">section 3401(d)(1)</a> should be narrowly construed. <a href="/research/federal/usc26/3401#cnwj-0000041" resolve="/lr/resolve//cnwj#cnwj-0000041">Section 3401(d)</a> defines the term “employer” for income tax withholding purposes as the person for whom an individual performs or performed any service as an employee, except that under subsection (d)(1), if the person for whom the individual performs the services does not have control of the payment of the wages for the services, the term “employer” means the person having control of the payment of the wages. The IRS notes that the conference report accompanying the enactment of the predecessor to <a href="/research/federal/usc26/3401#cnwj-0000042" resolve="/lr/resolve//cnwj#cnwj-0000042">section 3401(d)(1)</a> explains that the exception was included to cover special cases, and consistent with the legislative history, the IRS has narrowly construed what it means to be in control of the payment of wages. Under <a href="/research/federal/cfr26/31.3401d-1#cxgr-0000009" resolve="/lr/resolve//cxgr#cxgr-0000009">reg. section 31.3401(d)-1(h)</a>, “the special definitions of the term ‘employer’ . . . are designed solely to meet special or unusual situations. They are not intended as a departure from the basic purpose.” The IRS maintains that its long-standing position has been that when the exception in <a href="/research/federal/usc26/3401#cnwj-0000042" resolve="/lr/resolve//cnwj#cnwj-0000042">section 3401(d)(1)</a> applies, liability for employment taxes due on wages shifts from the common law employer to the person in control of the payment of those wages. The shift in sole liability coincides with the intended narrow construction of what it means to be in control of the payment of wages, the IRS says. According to the IRS, by disregarding congressional intent and creating a new test heavily focused on the contractual language of the parties, the circuit court “significantly broadened the scope of the exception in <a href="/research/federal/usc26/3401#cnwj-0000042" resolve="/lr/resolve//cnwj#cnwj-0000042">section 3401(d)(1)</a>, largely circumventing the principle that an employer may not simply delegate or contract away its taxing responsibilities.” Therefore, the IRS will continue to take the position that an entity is not in control of the payment of wages if the payment is contingent on or proximately related to the entity having received funds from the common law employer.

AOD 2021-03 replaces a <a href="/lr/resolve//76lly">notification of the action on decision</a> that appeared in the June 14, 2021, issue of the Internal Revenue Bulletin.

In an action on decision (AOD 2021-03, 2021-24 IRB 1199), the IRS has announced that it will not acquiesce in an Eleventh Circuit holding that an employment services company, rather than its clients, had “control of the payment of wages” and that the company was the statutory employer under section 3401(d) for purposes of a FICA tax refund suit.

In an action on decision (AOD 2021-03, 2021-24 IRB 1199), the IRS has announced that it will not acquiesce in an Eleventh Circuit holding that an employment services company, rather than its clients, had "control of the payment of wages" and that the company was the statutory employer under section 3401(d) for purposes of a FICA tax refund suit. In TriNet Group Inc. v. United States, 979 F.3d 1311 (11th Cir. 2020), the circuit court affirmed a grant of summary judgment to the employment services company, which provided various services to its clients — including payroll processing, employment tax services, and human resource services — under individual professional services agreements. The company’s clients included restaurants and others in the food and beverage industry, in which tipping is customary. According to the Eleventh Circuit, the district court properly held that the employment services company was the statutory employer under section 3401(d) because it had sole control over the bank accounts from which the wages were paid and therefore was entitled to claim the section 45B credit for the portion of employer Social Security taxes paid regarding employee cash tips. Rather than following the bank account control interpretation used by the district court, however, the Eleventh Circuit created a new test for determining control of the payment of wages, relying on both the language in the professional services agreements and the relationship between the parties. The IRS disagrees with the Eleventh Circuit’s new test because it ignores congressional intent, Treasury regulations, and long-standing precedent that section 3401(d)(1) should be narrowly construed. Section 3401(d) defines the term “employer” for income tax withholding purposes as the person for whom an individual performs or performed any service as an employee, except that under subsection (d)(1), if the person for whom the individual performs the services does not have control of the payment of the wages for the services, the term “employer” means the person having control of the payment of the wages. The IRS notes that the conference report accompanying the enactment of the predecessor to section 3401(d)(1) explains that the exception was included to cover special cases, and consistent with the legislative history, the IRS has narrowly construed what it means to be in control of the payment of wages. Under reg. section 31.3401(d)-1(h), “the special definitions of the term ‘employer’ . . . are designed solely to meet special or unusual situations. They are not intended as a departure from the basic purpose.” The IRS maintains that its long-standing position has been that when the exception in section 3401(d)(1) applies, liability for employment taxes due on wages shifts from the common law employer to the person in control of the payment of those wages. The shift in sole liability coincides with the intended narrow construction of what it means to be in control of the payment of wages, the IRS says. According to the IRS, by disregarding congressional intent and creating a new test heavily focused on the contractual language of the parties, the circuit court “significantly broadened the scope of the exception in section 3401(d)(1), largely circumventing the principle that an employer may not simply delegate or contract away its taxing responsibilities.” Therefore, the IRS will continue to take the position that an entity is not in control of the payment of wages if the payment is contingent on or proximately related to the entity having received funds from the common law employer.

Sec. 45B Credit for portion of employer social security taxes paid with respect to employee cash tips

Sec. 3102 Deduction of tax from wages

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IRS Will Not Acquiesce in TriNet Holding on FICA Tip Credits