How CPEOs must report payments to self-employed individuals, including partners

Plain-English summary

This Chief Counsel Advice clarifies, in response to practitioner questions about the preamble to the proposed Certified Professional Employer Organization (CPEO) regulations, how a CPEO must treat and report money it pays to self-employed individuals for employment-tax purposes. Under section 3511(c) a CPEO is not treated as the employer of a self-employed individual, and under section 3511(f) such an individual is not a "work site employee," so section 3511 does not apply to self-employed individuals; instead, the CPEO reports those payments as payments to a self-employed person under section 6041 (for example, on Form 1099-MISC), not as wages on Form W-2. The advice explains the one uncommon exception the preamble flags: where the same person receives payments from the CPEO in two separate capacities, for instance as a common-law employee of a customer (wages, reportable on Form W-2) and separately as a sole proprietor providing services to that customer (self-employment income, reported under section 6041). By contrast, the CCA stresses that a payment to a partner in a partnership under the CPEO's contract with that partnership must always be treated as a payment to a self-employed individual, because under Revenue Ruling 69-184 bona fide partners are never employees of their partnership for employment-tax purposes; a partner's remuneration is not wages whether the partner provides services in the partnership's trade or business or as an independent contractor to it. The practical upshot is a bright line for CPEOs: partner payments are always self-employment income reported under section 6041, and only genuine common-law-employee wages are reported as wages.

Ruling snapshot

• Question: How must a CPEO treat and report payments it makes to self-employed individuals (including partners) for employment-tax purposes?
• Outcome: advice (such payments are not wages; they are reported as payments to a self-employed individual under § 6041, except for any amounts the person separately earns as a common-law employee)
• Key authorities: IRC §§ 3511(c), (f), 7705, 6041, 1402(a); Prop. Treas. Reg. §§ 301.7705-1, 31.3511-1; Rev. Rul. 69-184

Full text (IRS public release)

ID:           CCA_2019030111502346
UILC:         3511.00-00, 7705.00-00, 7705.01-
02
Number: 201916004
Release Date: 4/19/2019
From:
Sent: Friday, March 01, 2019 11:50:24 AM
To:
Cc: --------------------------------------------------------------------------------------------------------------
Bcc:
Subject: Clarification concerning CPEOs and self-employed individuals

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We have received some questions concerning language in the preamble to the
proposed regulations for Certified Professional Employer Organizations (CPEOs)
(proposed section 301.7705-1), specifically regarding the preamble discussion of the
treatment of self-employed individuals who receive remuneration from a CPEO. Some
tax practitioners have asked us to clarify language in the preamble addressing how
payments from CPEOs to self-employed individuals should be treated for employment
tax purposes.

The reporting of amounts paid to self-employed individuals is provided for in section
6041. CPEOs must report remuneration they pay to self-employed individuals (within
the meaning of section 6041 and the regulations thereunder) in accordance with the
rules under these and other applicable provisions. Section 3511(f) of the Code provides
that a self-employed individual is not a work site employee with respect to remuneration
paid by a CPEO to the self-employed individual. Section 3511(c) provides that a CPEO
is not treated as an employer of a self-employed individual. Consistent with these two
provisions, section 31.3511-1(f)(2) of the proposed regulations provides that
section 3511 does not apply to any self-employed individual.

Section 301.7705-1(b)(14) of the proposed regulations defines a “self-employed
individual” as an individual with net earnings from self-employment (as defined in
section 1402(a) and 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. Accordingly, any remuneration from the CPEO to such self-employed
individuals, in their capacity as a non-employee providing services to a customer of the
CPEO, a sole proprietor customer of the CPEO, or a partner in partnership that is a
customer of the CPEO, is not wages and must not be treated as such for reporting
purposes. Under the section 6041 regulations, payments to self-employed individuals
are reported on information returns such as Form 1099-MISC, Miscellaneous Income,
and not on Form W-2.
2

The preamble discussion of the definition of “work site employee” under section
301.7705-1(b)(17) of 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 such earnings,” but also
provides that “in the limited case in which such an individual also is paid wages by a
CPEO under a CPEO contract with the customer, the individual may nevertheless be a
work site employee with respect to such wages.” This latter language addresses the
very uncommon situation in which one individual is receiving payments from the CPEO
in two separate capacities. For instance, a common law employee of a marketing firm
receives wages from a CPEO for services the employee performed for the marketing
firm under a contract between the firm and a CPEO. This employee also owns a part-
time cleaning business as a sole proprietor and this cleaning business is contracted by
the marketing firm to clean its offices. Payments to the cleaning business for its
cleaning services are also managed by the CPEO under its contract with the marketing
firm. Payments made to the individual by the CPEO for the services the individual’s
sole proprietor cleaning business performs for the marketing firm are not wages and
must be reported as payments to a self-employed individual under section
6041. However, the CPEO is treated as the employer of the individual for 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 marketing firm,
these payments are reported as wages by the CPEO.

In contrast to the situation described above, under the proposed regulations 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 section 6041. Under Revenue Ruling 69-184,
“[b]ona fide members of a partnership are not employees of the partnership” for
employment tax purposes. “Such a partner who devotes his 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.’” So whether an individual partner in a partnership is receiving payments
from the CPEO for services performed in the conduct of the trade or business of the
partnership, or receiving payments from the CPEO for services performed as an
independent contractor of the partnership, the payments are payments to a self-
employed individual and should be treated as such for reporting purposes as provided
by section 6041.

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