Could a fiscal agent file Virginia income-tax withholding in aggregate for thousands of consumer-directed home-care employers?

Subject

File Virginia income tax withholding in aggregate

Plain-English summary

A fiscal agent could file Virginia income-tax withholding in aggregate for consumer-directed home-care recipients, subject to two conditions. The entity handled payroll and tax reporting for an estimated 6,000 people who hired their own personal-care attendants through a state Medicaid program.

The service recipient or employee of record—not the state agency or fiscal agent—remained the attendant's employer. Federal law allowed an appointed agent to handle payments and withholding, while Virginia law did not expressly make the agent the employer for state filing.

Virginia used the Tax Commissioner's authority to prescribe tax forms and administrative systems to permit aggregate filing. The approval required that:

1. the entity also be permitted to file aggregate federal income-tax withholding; and
2. the unified Virginia filing cover only home-care recipients.

What this means for you

• Aggregate filing was an administrative accommodation, not a change in who employed the attendants.
• Federal aggregate-filing permission was a prerequisite.
• The Virginia aggregate account could not include unrelated employers or programs.
• Domestic-service wages could be voluntarily subject to income-tax withholding even when withholding was not required.

Common questions

Who employed the home-care attendant?

The service recipient or employee of record, not the fiscal agent or DMAS.

Could the fiscal agent aggregate only Virginia filings?

No. The ruling required permission for federal aggregate withholding as well.

Could unrelated payroll be included?

No. The unified filing was limited to home-care recipients.

Citations and references

• Va. Code § 58.1-202(7).
• I.R.C. §§ 3401(a)(3), 3501, and 3504, as cited in the ruling.
• 23 VAC 10-140-10.
• IRS Revenue Procedure 70-6.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-176

Original ruling text

August 12, 2010

Re: Request to File Virginia Income Tax Withholding in Aggregate

Dear *:

This is in response to your letter of August 6, 2009, and subsequent conversations with my staff, in which you requested to register * (hereinafter the "Entity") as an agent to file in aggregate for Virginia income tax withholding purposes. I apologize for the delay in this response.

FACTS

The Entity was contracted by the Department of Medical Assistance Services ("DMAS") to provide payroll and tax services for an estimated 6,000 individuals receiving in-home care services who hire their own personal care providers. The role of the Taxpayer is to act as an intermediary between DMAS and the individual receiving in-home care services by handling all financial and tax-reporting responsibilities.

The Department of Medical Assistance Services offers two programs for providing elderly or disabled individuals ("service recipients") in-home services to assist with healthcare or other personal needs. The first program is directed solely by DMAS, in which all services and in-home care providers ("attendants") are managed by DMAS. The second program, called Consumer-Directed services, provides the service recipient more discretion in selecting attendants and directing their activities.

Under the Consumer-Directed ("CD") program, a service recipient is directly responsible for screening, hiring, employing, and firing attendants. Instead of using an agency that is responsible for finding and overseeing attendants, the CD program affords the individual an extra measure of control over employment decisions. For each person receiving CD services, there must be an employee of record ("EOR"). A parent of a child under 18 years of age, a family member, or caregiver of an adult with a cognitive impairment who is unable to act as an EOR, can serve as the FOR on behalf of the child or family member in receiving CD services. The EOR is the person who will sign tax paperwork, oversee attendants, and sign timesheets. In many cases, the EOR is the person who is the individual receiving services. The EOR cannot be the paid attendant.

The CD program also involves a public, private or nonprofit intermediary (or "fiscal agent"), to provide payroll and tax services for the service recipients. The primary responsibilities of the fiscal agent are ensuring that payment is within the authorized number of hours of service, keeping records of paychecks and hiring information, and following all hiring and taxi rules on the service recipient's behalf as employer of an attendant. Neither DMAS nor the fiscal agent employs the attendant; the individual receiving in-home care services does.

Although the in-home services provided by an attendant qualify as domestic services pursuant to Internal Revenue Code ("IRC") § 3401(a)(3) and, therefore, are exempt from income tax withholding, taxes for the Federal Insurance Contribution Act ("FICA") and Federal Unemployment Tax Act ("FUTA") are required to be withheld by each service recipient, or EOR. As an agent for the service recipients, the Entity withholds and pays the required Social Security, FICA and federal and state income taxes on behalf of each service recipient.

The Department of Taxation ("TAX") currently considers the service recipient as the employer, and thus categorizes these taxpayers as sole proprietors. As such, a withholding account is established under the name of the person receiving the in-home care, even though the Entity does the actual filing of the returns for each service recipient. Even though Entity files the withholding returns, when income tax withholding is not reported for the in-home care provider by the Entity, the service recipient is considered a nonfiler and any collection actions, including the seizure of income tax refunds, will be taken against the service recipient.

In the instant case, the Entity is requesting permission to file Virginia income tax withholding in aggregate, instead of filing separate income tax withholding returns on behalf of each service recipient.

DETERMINATION

Federal law, under IRC § 3501, defines wages as the "remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration (including benefits) paid in medium other than cash..." Federal income tax withholding is not required for certain types of income or services, including a "domestic service in a private home, local college club, or local chapter of a college fraternity or sorority" (IRC § 3501(a)(3)). While withholding is not required for those providing domestic services, employers may do so voluntarily.

Furthermore, IRC § 3504 and Revenue Procedure 70-6 permit an agent to be designated in order to pay the service provider and to withhold, report, and pay income tax withholding and FICA tax from the wages of the service provider. The agent is then afforded all the responsibilities of an employer.

Virginia defines wages as follows: "all remuneration for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash." This definition, which is substantively identical to the federal definition of wages, also does not require Virginia income tax withholding for a "domestic service in a private home, local college club, or local chapter of a college fraternity or sorority" (23 VAC 10-140-10). However, unlike federal law, Virginia does not allow the designation of an agent to act as the employer in terms of filing and paying various taxes.

Under Va. Code § 58.1-202(7), the Tax Commissioner is authorized to "[p]rescribe the forms of books, schedules and blanks to be used in the assessment and collection of state taxes and call for and prescribe the forms of such statistical reports, notices and other papers as he may deem necessary to the proper administration of the law, and prescribe and install uniform systems to be used by assessing officials." This provision allows the Tax Commissioner to prescribe the form for tax returns and instructions in such a way as to allow TAX to administer state taxes properly. Accordingly, the Commissioner has the authority to issue determinations that improve administrative efficiency in the collection of state taxes.

Therefore, based on this authority, I grant the Entity's request to file income tax withholding in aggregate provided that the Entity is permitted to file income tax withholding in aggregate for federal income tax purposes. The determination is further contingent upon two requirements: 1) the unified income tax withholding is being filed only on behalf of home care recipients; and 2) the Entity is filing income tax withholding for federal income tax withholding purposes.

I trust that this reply answers your ruling request. The Code of Virginia sections cited and other reference documents are available on-line in the Tax Policy Library section of TAX's web site located at www.tax.virginia.gov . If you should have any questions regarding this ruling, you may contact * in the Office of Tax Policy, Policy Development Division, at ***.

Sincerely

Craig M. Burns

Acting Tax Commissioner