II 

112TH CONGRESS 

1ST SESSION S. 1908 

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

tax treatment and reporting of wages paid by professional employer 

organization, and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

NOVEMBER 18, 2011 

Mr. GRASSLEY (for himself and Mr. NELSON of Florida) 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 organization, and for other 

purposes. 

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

3 SECTION 1. CERTIFIED PROFESSIONAL EMPLOYER ORGA4 NIZATIONS. 

5 (a) EMPLOYMENT TAXES.—Chapter 25 of the Inter6 nal Revenue Code of 1986 is amended by adding at the 

7 end the following new section: 


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1 ‘‘SEC. 3511. CERTIFIED PROFESSIONAL EMPLOYER ORGANI2 ZATIONS. 

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

4 and other obligations, imposed by this subtitle— 

5 ‘‘(1) a certified professional employer organiza6 tion shall be treated as the employer (and no other 

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

8 site employee performing services for any customer 

9 of such organization, but only with respect to remu10 neration remitted by such organization to such work 

11 site employee, and 

12 ‘‘(2) exclusions, definitions, and other rules 

13 which are based on the type of employer and which 

14 would (but for paragraph (1)) apply shall apply with 

15 respect to such taxes imposed on such remuneration. 

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

17 of sections 3121(a)(1), 3231(e)(2)(C), and 3306(b)(1)— 

18 ‘‘(1) a certified professional employer organiza19 tion entering into a service contract with a customer 

20 with respect to a work site employee shall be treated 

21 as a successor employer and the customer shall be 

22 treated as a predecessor employer during the term 

23 of such service contract, and 

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

25 certified professional employer organization is termi26 nated with respect to a work site employee shall be 


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1 treated as a successor employer and the certified 

2 professional employer organization shall be treated 

3 as a predecessor employer. 

4 ‘‘(c) LIABILITY OF CERTIFIED PROFESSIONAL EM5 PLOYER ORGANIZATION.—Solely for purposes of its liabil6 ity for the taxes, and other obligations, imposed by this 

7 subtitle— 

8 ‘‘(1) a certified professional employer organiza9 tion shall be treated as the employer of any indi10 vidual (other than a work site employee or a person 

11 described in subsection (f)) who is performing serv12 ices covered by a contract meeting the requirements 

13 of section 7705(e)(2), but only with respect to remu14 neration remitted by such organization to such indi15 vidual, and 

16 ‘‘(2) exclusions, definitions, and other rules 

17 which are based on the type of employer and which 

18 would (but for paragraph (1)) apply shall apply with 

19 respect to such taxes imposed on such remuneration. 

20 ‘‘(d) TREATMENT OF CREDITS.— 

21 ‘‘(1) IN GENERAL.—For purposes of any credit 

22 specified in paragraph (2)— 

23 ‘‘(A) such credit with respect to a work 

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1 tomer applies to the customer, not the certified 

2 professional employer organization, 

3 ‘‘(B) the customer, and not the certified 

4 professional employer organization, shall take 

5 into account wages and employment taxes— 

6 ‘‘(i) paid by the certified professional 

7 employer organization with respect to the 

8 work site employee, and 

9 ‘‘(ii) for which the certified profes10 sional employer organization receives pay11 ment from the customer, and 

12 ‘‘(C) the certified professional employer or13 ganization shall furnish the customer with any 

14 information necessary for the customer to claim 

15 such credit. 

16 ‘‘(2) CREDITS SPECIFIED.—A credit is specified 

17 in this paragraph if such credit is allowed under— 

18 ‘‘(A) section 41 (credit for increasing re19 search activity), 

20 ‘‘(B) section 45A (Indian employment 

21 credit), 

22 ‘‘(C) section 45B (credit for portion of em23 ployer social security taxes paid with respect to 

24 employee cash tips), 


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1 ‘‘(D) section 45C (clinical testing expenses 

2 for certain drugs for rare diseases or condi3 tions), 

4 ‘‘(E) section 51 (work opportunity credit), 

5 ‘‘(F) section 51A (temporary incentives for 

6 employing long-term family assistance recipi7 ents), 

8 ‘‘(G) section 1396 (empowerment zone em9 ployment credit), 

10 ‘‘(H) 1400(d) (DC Zone employment cred11 it), 

12 ‘‘(I) Section 1400H (renewal community 

13 employment credit), and 

14 ‘‘(J) any other section as provided by the 

15 Secretary. 

16 ‘‘(e) SPECIAL RULE FOR RELATED PARTY.—This 

17 section shall not apply in the case of a customer which 

18 bears a relationship to a certified professional employer 

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

20 purposes of the preceding sentence, such sections shall be 

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

22 ‘‘(f) SPECIAL RULE FOR CERTAIN INDIVIDUALS.— 

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

24 individual with net earnings from self-employment derived 

25 from the customer’s trade or business is not a work site 


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1 employee with respect to remuneration paid by a certified 

2 professional employer organization. 

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

4 such regulations as may be necessary or appropriate to 

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

6 (b) CERTIFIED PROFESSIONAL EMPLOYER ORGANI7 ZATION DEFINED.—Chapter 79 of the Internal Revenue 

8 Code of 1986 is amended by adding at the end the fol9 lowing new section: 

10 ‘‘SEC. 7705. CERTIFIED PROFESSIONAL EMPLOYER ORGANI11 ZATIONS DEFINED. 

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

13 term ‘certified professional employer organization’ means 

14 a person who has been certified by the Secretary for pur15 poses of section 3511 as meeting the requirements of sub16 section (b). 

17 ‘‘(b) GENERAL REQUIREMENTS.—A person meets the 

18 requirements of this subsection if such person— 

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

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

21 specified in regulations) meets such requirements as 

22 the Secretary shall establish with respect to tax sta23 tus, background, experience, business location, and 

24 annual financial audits, 


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

4 ‘‘(3) agrees that it will satisfy the bond and 

5 independent financial review requirements of sub6 section (c) on an ongoing basis, 

7 ‘‘(4) agrees that it will satisfy such reporting 

8 obligations as may be imposed by the Secretary, 

9 ‘‘(5) agrees to verify on such periodic basis as 

10 the Secretary may prescribe that it continues to 

11 meet the requirements of this subsection, and 

12 ‘‘(6) agrees to notify the Secretary in writing 

13 within such time as the Secretary may prescribe of 

14 any change that materially affects whether it con15 tinues to meet the requirements of this subsection. 

16 ‘‘(c) BOND AND INDEPENDENT FINANCIAL REVIEW

17 REQUIREMENTS.— 

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

19 requirements of this paragraph if such organiza20 tion— 

21 ‘‘(A) meets the bond requirements of para22 graph (2), and 

23 ‘‘(B) meets the independent financial re24 view requirements of paragraph (3). 

25 ‘‘(2) BOND.— 


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1 ‘‘(A) IN GENERAL.—A certified profes2 sional employer organization meets the require3 ments of this paragraph if the organization has 

4 posted a bond for the payment of taxes under 

5 subtitle C (in a form acceptable to the Sec6 retary) in an amount at least equal to the 

7 amount specified in subparagraph (B). 

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

9 April 1 of any calendar year through March 31 

10 of the following calendar year, the amount of 

11 the bond required is equal to the greater of— 

12 ‘‘(i) 5 percent of the organization’s li13 ability under section 3511 for taxes im14 posed by subtitle C during the preceding 

15 calendar year (but not to exceed 

16 $1,000,000), or 

17 ‘‘(ii) $50,000. 

18 ‘‘(3) INDEPENDENT FINANCIAL REVIEW RE19 QUIREMENTS.—A certified professional employer or20 ganization meets the requirements of this paragraph 

21 if such organization— 

22 ‘‘(A) has, as of the most recent review 

23 date, caused to be prepared and provided to the 

24 Secretary (in such manner as the Secretary 

25 may prescribe) an opinion of an independent 


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1 certified public accountant that the certified 

2 professional employer organization’s financial 

3 statements are presented fairly in accordance 

4 with generally accepted accounting principles, 

5 and 

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

7 of the second month beginning after the end of 

8 each calendar quarter, to the Secretary from an 

9 independent certified public accountant an as10 sertion regarding Federal employment tax pay11 ments and an examination level attestation on 

12 such assertion. 

13 Such assertion shall state that the organization has 

14 withheld and made deposits of all taxes imposed by 

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

16 Code in accordance with regulations imposed by the 

17 Secretary for such calendar quarter and such exam18 ination level attestation shall state that such asser19 tion is fairly stated, in all material respects. 

20 ‘‘(4) CONTROLLED GROUP RULES.—For pur21 poses of the requirements of paragraphs (2) and (3), 

22 all professional employer organizations that are 

23 members of a controlled group within the meaning 

24 of sections 414(b) and (c) shall be treated as a sin25 gle organization. 


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1 ‘‘(5) FAILURE TO FILE ASSERTION AND ATTES2 TATION.—If the certified professional employer orga3 nization fails to file the assertion and attestation re4 quired by paragraph (3) with respect to any cal5 endar quarter, then the requirements of paragraph 

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

7 not satisfied for the period beginning on the due 

8 date for such attestation. 

9 ‘‘(6) REVIEW DATE.—For purposes of para10 graph (3)(A), the review date shall be 6 months 

11 after the completion of the organization’s fiscal year. 

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

13 The Secretary may suspend or revoke a certification of 

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

15 3511 if the Secretary determines that such person is not 

16 satisfying the representations or requirements of sub17 sections (b) or (c), or fails to satisfy applicable accounting, 

18 reporting, payment, or deposit requirements. 

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

20 title— 

21 ‘‘(1) IN GENERAL.—The term ‘work site em22 ployee’ means, with respect to a certified profes23 sional employer organization, an individual who— 

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1 tomer and the certified professional employer 

2 organization and which meets the requirements 

3 of paragraph (2), and 

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

5 meeting the requirements of paragraph (3). 

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

7 contract meets the requirements of this paragraph 

8 with respect to an individual performing services for 

9 a customer if such contract is in writing and pro10 vides that the certified professional employer organi11 zation shall— 

12 ‘‘(A) assume responsibility for payment of 

13 wages to such individual, without regard to the 

14 receipt or adequacy of payment from the cus15 tomer for such services, 

16 ‘‘(B) assume responsibility for reporting, 

17 withholding, and paying any applicable taxes 

18 under subtitle C, with respect to such individ19 ual’s wages, without regard to the receipt or 

20 adequacy of payment from the customer for 

21 such services, 

22 ‘‘(C) assume responsibility for any em23 ployee benefits which the service contract may 

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1 gard to the receipt or adequacy of payment 

2 from the customer for such services, 

3 ‘‘(D) assume responsibility for hiring, fir4 ing, and recruiting workers in addition to the 

5 customer’s responsibility for hiring, firing and 

6 recruiting workers, 

7 ‘‘(E) maintain employee records relating to 

8 such individual, and 

9 ‘‘(F) agree to be treated as a certified pro10 fessional employer organization for purposes of 

11 section 3511 with respect to such individual. 

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

13 The requirements of this paragraph are met with re14 spect to an individual if at least 85 percent of the 

15 individuals performing services for the customer at 

16 the work site where such individual performs serv17 ices are subject to 1 or more contracts with the cer18 tified professional employer organization which meet 

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

20 into account those individuals who are excluded em21 ployees within the meaning of section 414(q)(5)). 

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

23 Except to the extent necessary for purposes of section 

24 3511, nothing in this section shall be construed to affect 


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1 the determination of who is an employee or employer for 

2 purposes of this title. 

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

4 such regulations as may be necessary or appropriate to 

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

6 (c) CONFORMING AMENDMENTS.— 

7 (1) Section 3302 of the Internal Revenue Code 

8 of 1986 is amended by adding at the end the fol9 lowing new subsection: 

10 ‘‘(h) TREATMENT OF CERTIFIED PROFESSIONAL EM11 PLOYER ORGANIZATIONS.—If a certified professional em12 ployer organization (as defined in section 7705), or a cus13 tomer of such organization, makes a contribution to the 

14 State’s unemployment fund with respect to a work site 

15 employee, such organization shall be eligible for the credits 

16 available under this section with respect to such contribu17 tion.’’. 

18 (2) Section 3303(a) of such Code is amended— 

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

20 paragraph (3) and inserting ‘‘; and’’ and by in21 serting after paragraph (3) the following new 

22 paragraph: 

23 ‘‘(4) if the taxpayer is a certified professional 

24 employer organization (as defined in section 7705) 

25 that is treated as the employer under section 3511, 


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1 such certified professional employer organization is 

2 permitted to collect and remit, in accordance with 

3 paragraphs (1), (2), and (3), contributions during 

4 the taxable year to the State unemployment fund 

5 with respect to a work site employee.’’, and 

6 (B) in the last sentence— 

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

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

9 (2), (3), and (4)’’, and 

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

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

12 (3), or (4)’’. 

13 (3) Section 6053(c) of such Code is amended by 

14 adding at the end the following new paragraph: 

15 ‘‘(8) CERTIFIED PROFESSIONAL EMPLOYER OR16 GANIZATIONS.—For purposes of any report required 

17 by this subsection, in the case of a certified profes18 sional employer organization that is treated under 

19 section 3511 as the employer of a work site em20 ployee, the customer with respect to whom a work 

21 site employee performs services shall be the employer 

22 for purposes of reporting under this section and the 

23 certified professional employer organization shall 

24 furnish to the customer any information necessary 


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1 to complete such reporting no later than such time 

2 as the Secretary shall prescribe.’’. 

3 (d) CLERICAL AMENDMENTS.— 

4 (1) The table of sections for chapter 25 of the 

5 Internal Revenue Code of 1986 is amended by add6 ing at the end the following new item: 

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

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

8 Code is amended by inserting after the item relating 

9 to section 7704 the following new item: 

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

10 (e) REPORTING REQUIREMENTS AND OBLIGA11 TIONS.—The Secretary of the Treasury shall develop such 

12 reporting and recordkeeping rules, regulations, and proce13 dures as the Secretary determines necessary or appro14 priate to ensure compliance with the amendments made 

15 by this section with respect to entities applying for certifi16 cation as certified professional employer organizations or 

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

18 designed in a manner which streamlines, to the extent pos19 sible, the application of requirements of such amendments, 

20 the exchange of information between a certified profes21 sional employer organization and its customers, and the 

22 reporting and recordkeeping obligations of the certified 

23 professional employer organization. 


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

2 the Internal Revenue Code of 1986 is amended by adding 

3 at the end the following new paragraph: 

4 ‘‘(4) CERTIFIED PROFESSIONAL EMPLOYER OR5 GANIZATIONS.—The fee charged under the program 

6 in connection with the certification by the Secretary 

7 of a professional employer organization under sec8 tion 7705 shall not exceed $500.’’. 

9 (g) EFFECTIVE DATES.— 

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

11 this section shall apply with respect to wages for 

12 services performed on or after January 1 of the first 

13 calendar year beginning more than 12 months after 

14 the date of the enactment of this Act. 

15 (2) CERTIFICATION PROGRAM.—The Secretary 

16 of the Treasury shall establish the certification pro17 gram described in section 7705(b) of the Internal 

18 Revenue Code of 1986, as added by subsection (b), 

19 not later than 6 months before the effective date de20 termined under paragraph (1). 

21 (h) NO INFERENCE.—Nothing contained in this sec22 tion or the amendments made by this section shall be con23 strued to create any inference with respect to the deter24 mination of who is an employee or employer— 


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

2 purposes set forth in the amendments made by this 

3 section), or 

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

Æ 


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