II 

109TH CONGRESS 

2D SESSION S. 2913 

To amend the Internal Revenue Code of 1986 to clarify the employment 

tax treatment and reporting of wages paid by professional employer 

organizations. 

IN THE SENATE OF THE UNITED STATES 

MAY 19, 2006 

Mr. GRASSLEY (for himself and Mr. BAUCUS) introduced the following bill; 

which was read twice and referred to the Committee on Finance 

A BILL 

To amend the Internal Revenue Code of 1986 to clarify 

the employment tax treatment and reporting of wages 

paid by professional employer organizations. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Small Business Effi5 ciency Act of 2006’’. 

6 SEC. 2. NO INFERENCE. 

7 Nothing contained in this Act or the amendments 

8 made by this Act shall be construed to create any inferVerDate Aug 31 2005 23:59 May 22, 2006 Jkt 049200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\S2913.IS S2913

bajohnson on PROD1PC72 with BILLS
2 

•S 2913 IS

1 ence with respect to the determination of who is an em2 ployee or employer— 

3 (1) for Federal tax purposes (other than the 

4 purposes set forth in the amendments made by sec5 tion 3), or 

6 (2) for purposes of any other provision of law. 

7 SEC. 3. CERTIFIED PROFESSIONAL EMPLOYER ORGANIZA8 TIONS. 

9 (a) EMPLOYMENT TAXES.—Chapter 25 of the Inter10 nal Revenue Code of 1986 (relating to general provisions 

11 relating to employment taxes) is amended by adding at 

12 the end the following new section: 

13 ‘‘SEC. 3511. CERTIFIED PROFESSIONAL EMPLOYER ORGANI14 ZATIONS. 

15 ‘‘(a) GENERAL RULES.—For purposes of the taxes, 

16 and other obligations, imposed by this subtitle— 

17 ‘‘(1) a certified professional employer organiza18 tion shall be treated as the employer (and no other 

19 person shall be treated as the employer) of any work 

20 site employee performing services for any customer 

21 of such organization, but only with respect to remu22 neration remitted by such organization to such work 

23 site employee, and 


bajohnson on PROD1PC72 with BILLS
3 

•S 2913 IS

1 ‘‘(2) the exemptions and exclusions which would 

2 (but for paragraph (1)) apply shall apply with re3 spect to such taxes imposed on such remuneration. 

4 ‘‘(b) SUCCESSOR EMPLOYER STATUS.—For purposes 

5 of sections 3121(a) and 3306(b)(1)— 

6 ‘‘(1) a certified professional employer organiza7 tion entering into a service contract with a customer 

8 with respect to a work site employee shall be treated 

9 as a successor employer and the customer shall be 

10 treated as a predecessor employer during the term 

11 of such service contract, and 

12 ‘‘(2) a customer whose service contract with a 

13 certified professional employer organization is termi14 nated with respect to a work site employee shall be 

15 treated as a successor employer and the certified 

16 professional employer organization shall be treated 

17 as a predecessor employer. 

18 ‘‘(c) LIABILITY WITH RESPECT TO WORK SITE EM19 PLOYEES.— 

20 ‘‘(1) GENERAL RULES.—Solely for purposes of 

21 its liability for the taxes, and other obligations, im22 posed by this subtitle— 

23 ‘‘(A) the certified professional employer or24 ganization shall be treated as the employer of 

25 any individual (other than a work site employee 


bajohnson on PROD1PC72 with BILLS
4 

•S 2913 IS

1 or a person described in subsection (e)) who is 

2 performing services covered by a contract meet3 ing the requirements of section 7705(e)(2), but 

4 only with respect to remuneration remitted by 

5 such organization to such individual, and 

6 ‘‘(B) the exemptions and exclusions which 

7 would (but for subparagraph (A)) apply shall 

8 apply with respect to such taxes imposed on 

9 such remuneration. 

10 ‘‘(d) SPECIAL RULE FOR RELATED PARTY.—Sub11 section (a) shall not apply in the case of a customer which 

12 bears a relationship to a certified professional employer 

13 organization described in section 267(b) or 707(b). For 

14 purposes of the preceding sentence, such sections shall be 

15 applied by substituting ‘10 percent’ for ‘50 percent’. 

16 ‘‘(e) SPECIAL RULE FOR CERTAIN INDIVIDUALS.— 

17 For purposes of the taxes imposed under this subtitle, an 

18 individual with net earnings from self-employment derived 

19 from the customer’s trade or business (including a partner 

20 in a partnership that is a customer) is not a work site 

21 employee with respect to remuneration paid by a certified 

22 professional employer organization. 

23 ‘‘(f) REGULATIONS.—The Secretary shall prescribe 

24 such regulations as may be necessary or appropriate to 

25 carry out the purposes of this section.’’. 


bajohnson on PROD1PC72 with BILLS
5 

•S 2913 IS

1 (b) CERTIFIED PROFESSIONAL EMPLOYER ORGANI2 ZATION DEFINED.—Chapter 79 of such Code (relating to 

3 definitions) is amended by adding at the end the following 

4 new section: 

5 ‘‘SEC. 7705. CERTIFIED PROFESSIONAL EMPLOYER ORGANI6 ZATIONS. 

7 ‘‘(a) IN GENERAL.—For purposes of this title, the 

8 term ‘certified professional employer organization’ means 

9 a person who applies to be treated as a certified profes10 sional employer organization for purposes of section 3511 

11 and who has been certified by the Secretary as meeting 

12 the requirements of subsection (b). 

13 ‘‘(b) CERTIFICATION.—A person meets the require14 ments of this subsection if such person— 

15 ‘‘(1) demonstrates that such person (and any 

16 owner, officer, and such other persons as may be 

17 specified in regulations) meets such requirements as 

18 the Secretary shall establish with respect to tax sta19 tus, background, experience, business location, and 

20 annual financial audits, 

21 ‘‘(2) represents that it will satisfy the bond and 

22 independent financial review requirements of sub23 sections (c) on an ongoing basis, 

24 ‘‘(3) represents that it will satisfy such report25 ing obligations as may be imposed by the Secretary, 


bajohnson on PROD1PC72 with BILLS
6 

•S 2913 IS

1 ‘‘(4) computes its taxable income using an ac2 crual method of accounting unless the Secretary ap3 proves another method, 

4 ‘‘(5) agrees to verify the continuing accuracy of 

5 representations and information which was pre6 viously provided on such periodic basis as the Sec7 retary may prescribe, and 

8 ‘‘(6) agrees to notify the Secretary in writing of 

9 any change that materially affects the continuing ac10 curacy of any representation or information which 

11 was previously made or provided. 

12 ‘‘(c) REQUIREMENTS.— 

13 ‘‘(1) IN GENERAL.—An organization meets the 

14 requirements of this paragraph if such organiza15 tion— 

16 ‘‘(A) meets the bond requirements of para17 graph (2), and 

18 ‘‘(B) meets the independent financial re19 view requirements of paragraph (3). 

20 ‘‘(2) BOND.— 

21 ‘‘(A) IN GENERAL.—A certified profes22 sional employer organization meets the require23 ments of this paragraph if the organization has 

24 posted a bond for the payment of taxes under 

25 subtitle C (in a form acceptable to the SecVerDate Aug 31 2005 23:59 May 22, 2006 Jkt 049200 PO 00000 Frm 00006 Fmt 6652 Sfmt 6201 E:\BILLS\S2913.IS S2913

bajohnson on PROD1PC72 with BILLS
7 

•S 2913 IS

1 retary) in an amount at least equal to the 

2 amount specified in subparagraph (B). 

3 ‘‘(B) AMOUNT OF BOND.—For the period 

4 April 1 of any calendar year through March 31 

5 of the following calendar year, the amount of 

6 the bond required is equal to the greater of— 

7 ‘‘(i) 5 percent of the organization’s li8 ability under section 3511 for taxes im9 posed by subtitle C during the preceding 

10 calendar year (but not to exceed 

11 $1,000,000), or 

12 ‘‘(ii) $50,000. 

13 ‘‘(3) INDEPENDENT FINANCIAL REVIEW RE14 QUIREMENTS.—A certified professional employer or15 ganization meets the requirements of this paragraph 

16 if such organization— 

17 ‘‘(A) has, as of the most recent audit date, 

18 caused to be prepared and provided to the Sec19 retary (in such manner as the Secretary may 

20 prescribe) an opinion of an independent cer21 tified public accountant as to whether the cer22 tified professional employer organization’s fi23 nancial statements are presented fairly in ac24 cordance with generally accepted accounting 

25 principles, and 


bajohnson on PROD1PC72 with BILLS
8 

•S 2913 IS

1 ‘‘(B) provides, not later than the last day 

2 of the second month beginning after the end of 

3 each calendar quarter, to the Secretary from an 

4 independent certified public accountant an as5 sertion regarding Federal employment tax pay6 ments and an examination level attestation on 

7 such assertion. 

8 Such assertion shall state that the organization has 

9 withheld and made deposits of all taxes imposed by 

10 chapters 21, 22, and 24 of the Internal Revenue 

11 Code in accordance with regulations imposed by the 

12 Secretary for such calendar quarter and such exam13 ination level attestation shall state that such asser14 tion is fairly stated, in all material respects. 

15 ‘‘(4) CONTROLLED GROUP RULES.—For pur16 poses of the requirements of paragraphs (2) and (3), 

17 all professional employer organizations that are 

18 members of a controlled group within the meaning 

19 of sections 414(b) and (c) shall be treated as a sin20 gle organization. 

21 ‘‘(5) FAILURE TO FILE ASSERTION AND ATTES22 TATION.—If the certified professional employer orga23 nization fails to file the assertion and attestation re24 quired by paragraph (3) with respect to any cal25 endar quarter, then the requirements of paragraph 


bajohnson on PROD1PC72 with BILLS
9 

•S 2913 IS

1 (3) with respect to such failure shall be treated as 

2 not satisfied for the period beginning on the due 

3 date for such attestation. 

4 ‘‘(6) AUDIT DATE.—For purposes of paragraph 

5 (3)(A), the audit date shall be six months after the 

6 completion of the organization’s fiscal year. 

7 ‘‘(d) SUSPENSION AND REVOCATION AUTHORITY.— 

8 The Secretary may suspend or revoke a certification of 

9 any person under subsection (b) for purposes of section 

10 3511 if the Secretary determines that such person is not 

11 satisfying the representations or requirements of sub12 sections (b) or (c), or fails to satisfy applicable accounting, 

13 reporting, payment, or deposit requirements. 

14 ‘‘(e) WORK SITE EMPLOYEE.—For purposes of this 

15 title— 

16 ‘‘(1) IN GENERAL.—The term ‘work site em17 ployee’ means, with respect to a certified profes18 sional employer organization, an individual who— 

19 ‘‘(A) performs services for a customer pur20 suant to a contract which is between such cus21 tomer and the certified professional employer 

22 organization and which meets the requirements 

23 of paragraph (2), and 

24 ‘‘(B) performs services at a work site 

25 meeting the requirements of paragraph (3). 


bajohnson on PROD1PC72 with BILLS
10 

•S 2913 IS

1 ‘‘(2) SERVICE CONTRACT REQUIREMENTS.—A 

2 contract meets the requirements of this paragraph 

3 with respect to an individual performing services for 

4 a customer if such contract is in writing and pro5 vides that the certified professional employer organi6 zation shall— 

7 ‘‘(A) assume responsibility for payment of 

8 wages to the individual, without regard to the 

9 receipt or adequacy of payment from the cus10 tomer for such services, 

11 ‘‘(B) assume responsibility for reporting, 

12 withholding, and paying any applicable taxes 

13 under subtitle C, with respect to the individ14 ual’s wages, without regard to the receipt or 

15 adequacy of payment from the customer for 

16 such services, 

17 ‘‘(C) assume responsibility for any em18 ployee benefits which the service contract may 

19 require the certified professional employer orga20 nization to provide, without regard to the re21 ceipt or adequacy of payment from the cus22 tomer for such services, 

23 ‘‘(D) assume responsibility for hiring, fir24 ing, and recruiting workers in addition to the 


bajohnson on PROD1PC72 with BILLS
11 

•S 2913 IS

1 customer’s responsibility for hiring, firing and 

2 recruiting workers, 

3 ‘‘(E) maintain employee records relating to 

4 the individual, and 

5 ‘‘(F) agree to be treated as a certified pro6 fessional employer organization for purposes of 

7 section 3511 with respect to such individual. 

8 ‘‘(3) WORK SITE COVERAGE REQUIREMENT.— 

9 The requirements of this paragraph are met with re10 spect to an individual if at least 85 percent of the 

11 individuals performing services for the customer at 

12 the work site where such individual performs serv13 ices are subject to 1 or more contracts with the cer14 tified professional employer organization which meet 

15 the requirements of paragraph (2) (but not taking 

16 into account those individuals who are excluded em17 ployees within the meaning of section 414(q)(5)). 

18 ‘‘(f) DETERMINATION OF EMPLOYMENT STATUS.— 

19 Except to the extent necessary for purposes of section 

20 3511, nothing in this section shall be construed to affect 

21 the determination of who is an employee or employer for 

22 purposes of this title. 

23 ‘‘(g) REGULATIONS.—The Secretary shall prescribe 

24 such regulations as may be necessary or appropriate to 

25 carry out the purposes of this section.’’. 


bajohnson on PROD1PC72 with BILLS
12 

•S 2913 IS

1 (c) CONFORMING AMENDMENTS.— 

2 (1) Section 45B of such Code (relating to credit 

3 for portion of employer social security taxes paid 

4 with respect to employees with cash tips) is amended 

5 by adding at the end the following new subsection: 

6 ‘‘(e) CERTIFIED PROFESSIONAL EMPLOYER ORGANI7 ZATIONS.—For purposes of this section, in the case of a 

8 certified professional employer organization which is treat9 ed under section 3511 as the employer of a work site em10 ployee who is a tipped employee— 

11 ‘‘(1) the credit determined under this section 

12 shall not apply to such organization but to the cus13 tomer of such organization with respect to which the 

14 work site employee performs services, and 

15 ‘‘(2) the customer shall take into account any 

16 remuneration and taxes remitted by the certified 

17 professional employer organization.’’. 

18 (2) Section 3302 of such Code is amended by 

19 adding at the end the following new subsection: 

20 ‘‘(h) TREATMENT OF CERTIFIED PROFESSIONAL EM21 PLOYER ORGANIZATIONS.—If a certified professional em22 ployer organization (as defined in section 7705), or a cli23 ent of such organization, makes a payment to the State’s 

24 unemployment fund with respect to a work site employee, 


bajohnson on PROD1PC72 with BILLS
13 

•S 2913 IS

1 such organization shall be eligible for the credits available 

2 under this section with respect to such payment.’’. 

3 (3) Section 3303(a) of such Code is amended— 

4 (A) by striking the period at the end of 

5 paragraph (3) and inserting ‘‘; and’’ and by in6 serting after paragraph (3) the following new 

7 paragraph: 

8 ‘‘(4) a certified professional employer organiza9 tion (as defined in section 7705) is permitted to col10 lect and remit, in accordance with paragraphs (1), 

11 (2), and (3), contributions during the taxable year 

12 to the State unemployment fund with respect to a 

13 work site employee.’’, and 

14 (B) in the last sentence— 

15 (i) by striking ‘‘paragraphs (1), (2), 

16 and (3)’’ and inserting ‘‘paragraphs (1), 

17 (2), (3), and (4)’’, and 

18 (ii) by striking ‘‘paragraph (1), (2), or 

19 (3)’’ and inserting ‘‘paragraph (1), (2), 

20 (3), or (4)’’. 

21 (4) Section 6053(c) of such Code (relating to 

22 reporting of tips) is amended by adding at the end 

23 the following new paragraph: 

24 ‘‘(8) CERTIFIED PROFESSIONAL EMPLOYER OR25 GANIZATIONS.—For purposes of any report required 


bajohnson on PROD1PC72 with BILLS
14 

•S 2913 IS

1 by this section, in the case of a certified professional 

2 employer organization that is treated under section 

3 3511 as the employer of a work site employee, the 

4 customer with respect to whom a work site employee 

5 performs services shall be the employer for purposes 

6 of reporting under this section and the certified pro7 fessional employer organization shall furnish to the 

8 customer any information necessary to complete 

9 such reporting no later than such time as the Sec10 retary shall prescribe.’’. 

11 (d) CLERICAL AMENDMENTS.— 

12 (1) The table of sections for chapter 25 of such 

13 Code is amended by adding at the end the following 

14 new item: 

‘‘Sec. 3511. Certified professional employer organizations.’’. 

15 (2) The table of sections for chapter 79 of such 

16 Code is amended by inserting after the item relating 

17 to section 7704 the following new item: 

‘‘Sec. 7705. Certified professional employer organizations.’’. 

18 (e) REPORTING REQUIREMENTS AND OBLIGA19 TIONS.—The Secretary of the Treasury shall develop such 

20 reporting and recordkeeping rules, regulations, and proce21 dures as the Secretary determines necessary or appro22 priate to ensure compliance with the amendments made 

23 by this Act with respect to entities applying for certifi24 cation as certified professional employer organizations or 


bajohnson on PROD1PC72 with BILLS
15 

•S 2913 IS

1 entities that have been so certified. Such rules shall be 

2 designed in a manner which streamlines, to the extent pos3 sible, the application of requirements of such amendments, 

4 the exchange of information between a certified profes5 sional employer organization and its customers, and the 

6 reporting and recordkeeping obligations of the certified 

7 professional employer organization. 

8 (f) USER FEES.—Subsection (b) of section 7528 of 

9 such Code (relating to Internal Revenue Service user fees) 

10 is amended by adding at the end the following new para11 graph: 

12 ‘‘(4) CERTIFIED PROFESSIONAL EMPLOYER OR13 GANIZATIONS.—The fee charged under the program 

14 in connection with the certification by the Secretary 

15 of a professional employer organization under sec16 tion 7705 shall not exceed $500.’’. 

17 (g) EFFECTIVE DATES.— 

18 (1) IN GENERAL.—The amendments made by 

19 this Act shall take effect on the January 1st of the 

20 first calendar year beginning more than 12 months 

21 after the date of the enactment of this Act. 

22 (2) CERTIFICATION PROGRAM.—The Secretary 

23 of the Treasury shall establish the certification pro24 gram described in section 7705(b) of the Internal 

25 Revenue Code of 1986 not later than 6 months beVerDate Aug 31 2005 23:59 May 22, 2006 Jkt 049200 PO 00000 Frm 00015 Fmt 6652 Sfmt 6201 E:\BILLS\S2913.IS S2913

bajohnson on PROD1PC72 with BILLS
16 

•S 2913 IS

1 fore the effective date determined under paragraph 

2 (1). 

Æ 


bajohnson on PROD1PC72 with BILLS