II 

113TH CONGRESS 

1ST SESSION S. 479 

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

tax treatment and reporting of wages paid by professional employer 

organizations, and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

MARCH 6, 2013 

Mr. GRASSLEY (for himself, Mr. NELSON, Mr. PORTMAN, and Mr. PRYOR) 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, 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. SHORT TITLE. 

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


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1 SEC. 2. CERTIFIED PROFESSIONAL EMPLOYER ORGANIZA2 TIONS. 

3 (a) EMPLOYMENT TAXES.—Chapter 25 of the Inter4 nal Revenue Code of 1986 is amended by adding at the 

5 end the following new section: 

6 ‘‘SEC. 3511. CERTIFIED PROFESSIONAL EMPLOYER ORGANI7 ZATIONS. 

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

9 and other obligations, imposed by this subtitle— 

10 ‘‘(1) a certified professional employer organiza11 tion shall be treated as the employer (and no other 

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

13 site employee performing services for any customer 

14 of such organization, but only with respect to remu15 neration remitted by such organization to such work 

16 site employee, and 

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

18 which are based on the type of employer and which 

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

20 respect to such taxes imposed on such remuneration. 

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

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

23 ‘‘(1) a certified professional employer organiza24 tion entering into a service contract with a customer 

25 with respect to a work site employee shall be treated 

26 as a successor employer and the customer shall be 


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1 treated as a predecessor employer during the term 

2 of such service contract, and 

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

4 certified professional employer organization is termi5 nated with respect to a work site employee shall be 

6 treated as a successor employer and the certified 

7 professional employer organization shall be treated 

8 as a predecessor employer. 

9 ‘‘(c) LIABILITY OF CERTIFIED PROFESSIONAL EM10 PLOYER ORGANIZATION.—Solely for purposes of its liabil11 ity for the taxes, and other obligations, imposed by this 

12 subtitle— 

13 ‘‘(1) a certified professional employer organiza14 tion shall be treated as the employer of any indi15 vidual (other than a work site employee or a person 

16 described in subsection (f)) who is performing serv17 ices covered by a contract meeting the requirements 

18 of section 7705(e)(2), but only with respect to remu19 neration remitted by such organization to such indi20 vidual, and 

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

22 which are based on the type of employer and which 

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

24 respect to such taxes imposed on such remuneration. 

25 ‘‘(d) TREATMENT OF CREDITS.— 


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

2 specified in paragraph (2)— 

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

4 site employee performing services for the cus5 tomer applies to the customer, not the certified 

6 professional employer organization, 

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

8 professional employer organization, shall take 

9 into account wages and employment taxes— 

10 ‘‘(i) paid by the certified professional 

11 employer organization with respect to the 

12 work site employee, and 

13 ‘‘(ii) for which the certified profes14 sional employer organization receives pay15 ment from the customer, and 

16 ‘‘(C) the certified professional employer or17 ganization shall furnish the customer with any 

18 information necessary for the customer to claim 

19 such credit. 

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

21 in this paragraph if such credit is allowed under— 

22 ‘‘(A) section 41 (credit for increasing re23 search activity), 

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

25 credit), 


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1 ‘‘(C) section 45B (credit for portion of em2 ployer social security taxes paid with respect to 

3 employee cash tips), 

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

5 for certain drugs for rare diseases or condi6 tions), 

7 ‘‘(E) section 45R (employee health insur8 ance expenses of small employers), 

9 ‘‘(F) section 51 (work opportunity credit), 

10 ‘‘(G) section 51A (temporary incentives for 

11 employing long-term family assistance recipi12 ents), 

13 ‘‘(H) section 1396 (empowerment zone em14 ployment credit), 

15 ‘‘(I) 1400(d) (DC Zone employment cred16 it), 

17 ‘‘(J) Section 1400H (renewal community 

18 employment credit), and 

19 ‘‘(K) any other section as provided by the 

20 Secretary. 

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

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

23 bears a relationship to a certified professional employer 

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


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1 purposes of the preceding sentence, such sections shall be 

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

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

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

5 individual with net earnings from self-employment derived 

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

7 employee with respect to remuneration paid by a certified 

8 professional employer organization. 

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

10 such regulations as may be necessary or appropriate to 

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

12 (b) CERTIFIED PROFESSIONAL EMPLOYER ORGANI13 ZATION DEFINED.—Chapter 79 of the Internal Revenue 

14 Code of 1986 is amended by adding at the end the fol15 lowing new section: 

16 ‘‘SEC. 7705. CERTIFIED PROFESSIONAL EMPLOYER ORGANI17 ZATIONS DEFINED. 

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

19 term ‘certified professional employer organization’ means 

20 a person who has been certified by the Secretary for pur21 poses of section 3511 as meeting the requirements of sub22 section (b). 

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

24 requirements of this subsection if such person— 


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

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

3 specified in regulations) meets such requirements as 

4 the Secretary shall establish with respect to tax sta5 tus, background, experience, business location, and 

6 annual financial audits, 

7 ‘‘(2) computes its taxable income using an ac8 crual method of accounting unless the Secretary ap9 proves another method, 

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

11 independent financial review requirements of sub12 section (c) on an ongoing basis, 

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

14 obligations as may be imposed by the Secretary, 

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

16 the Secretary may prescribe that it continues to 

17 meet the requirements of this subsection, and 

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

19 within such time as the Secretary may prescribe of 

20 any change that materially affects whether it con21 tinues to meet the requirements of this subsection. 

22 ‘‘(c) BOND AND INDEPENDENT FINANCIAL REVIEW

23 REQUIREMENTS.— 


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

2 requirements of this paragraph if such organiza3 tion— 

4 ‘‘(A) meets the bond requirements of para5 graph (2), and 

6 ‘‘(B) meets the independent financial re7 view requirements of paragraph (3). 

8 ‘‘(2) BOND.— 

9 ‘‘(A) IN GENERAL.—A certified profes10 sional employer organization meets the require11 ments of this paragraph if the organization has 

12 posted a bond for the payment of taxes under 

13 subtitle C (in a form acceptable to the Sec14 retary) in an amount at least equal to the 

15 amount specified in subparagraph (B). 

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

17 April 1 of any calendar year through March 31 

18 of the following calendar year, the amount of 

19 the bond required is equal to the greater of— 

20 ‘‘(i) 5 percent of the organization’s li21 ability under section 3511 for taxes im22 posed by subtitle C during the preceding 

23 calendar year (but not to exceed 

24 $1,000,000), or 

25 ‘‘(ii) $50,000. 


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1 ‘‘(3) INDEPENDENT FINANCIAL REVIEW RE2 QUIREMENTS.—A certified professional employer or3 ganization meets the requirements of this paragraph 

4 if such organization— 

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

6 date, caused to be prepared and provided to the 

7 Secretary (in such manner as the Secretary 

8 may prescribe) an opinion of an independent 

9 certified public accountant that the certified 

10 professional employer organization’s financial 

11 statements are presented fairly in accordance 

12 with generally accepted accounting principles, 

13 and 

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

15 of the second month beginning after the end of 

16 each calendar quarter, to the Secretary from an 

17 independent certified public accountant an as18 sertion regarding Federal employment tax pay19 ments and an examination level attestation on 

20 such assertion. 

21 Such assertion shall state that the organization has 

22 withheld and made deposits of all taxes imposed by 

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

24 Code in accordance with regulations imposed by the 

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1 ination level attestation shall state that such asser2 tion is fairly stated, in all material respects. 

3 ‘‘(4) CONTROLLED GROUP RULES.—For pur4 poses of the requirements of paragraphs (2) and (3), 

5 all professional employer organizations that are 

6 members of a controlled group within the meaning 

7 of sections 414(b) and (c) shall be treated as a sin8 gle organization. 

9 ‘‘(5) FAILURE TO FILE ASSERTION AND ATTES10 TATION.—If the certified professional employer orga11 nization fails to file the assertion and attestation re12 quired by paragraph (3) with respect to any cal13 endar quarter, then the requirements of paragraph 

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

15 not satisfied for the period beginning on the due 

16 date for such attestation. 

17 ‘‘(6) REVIEW DATE.—For purposes of para18 graph (3)(A), the review date shall be 6 months 

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

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

21 The Secretary may suspend or revoke a certification of 

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

23 3511 if the Secretary determines that such person is not 

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1 sections (b) or (c), or fails to satisfy applicable accounting, 

2 reporting, payment, or deposit requirements. 

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

4 title— 

5 ‘‘(1) IN GENERAL.—The term ‘work site em6 ployee’ means, with respect to a certified profes7 sional employer organization, an individual who— 

8 ‘‘(A) performs services for a customer pur9 suant to a contract which is between such cus10 tomer and the certified professional employer 

11 organization and which meets the requirements 

12 of paragraph (2), and 

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

14 meeting the requirements of paragraph (3). 

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

16 contract meets the requirements of this paragraph 

17 with respect to an individual performing services for 

18 a customer if such contract is in writing and pro19 vides that the certified professional employer organi20 zation shall— 

21 ‘‘(A) assume responsibility for payment of 

22 wages to such individual, without regard to the 

23 receipt or adequacy of payment from the cus24 tomer for such services, 


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1 ‘‘(B) assume responsibility for reporting, 

2 withholding, and paying any applicable taxes 

3 under subtitle C, with respect to such individ4 ual’s wages, without regard to the receipt or 

5 adequacy of payment from the customer for 

6 such services, 

7 ‘‘(C) assume responsibility for any em8 ployee benefits which the service contract may 

9 require the organization to provide, without re10 gard to the receipt or adequacy of payment 

11 from the customer for such services, 

12 ‘‘(D) assume responsibility for hiring, fir13 ing, and recruiting workers in addition to the 

14 customer’s responsibility for hiring, firing and 

15 recruiting workers, 

16 ‘‘(E) maintain employee records relating to 

17 such individual, and 

18 ‘‘(F) agree to be treated as a certified pro19 fessional employer organization for purposes of 

20 section 3511 with respect to such individual. 

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

22 The requirements of this paragraph are met with re23 spect to an individual if at least 85 percent of the 

24 individuals performing services for the customer at 

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1 ices are subject to 1 or more contracts with the cer2 tified professional employer organization which meet 

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

4 into account those individuals who are excluded em5 ployees within the meaning of section 414(q)(5)). 

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

7 Except to the extent necessary for purposes of section 

8 3511, nothing in this section shall be construed to affect 

9 the determination of who is an employee or employer for 

10 purposes of this title. 

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

12 such regulations as may be necessary or appropriate to 

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

14 (c) CONFORMING AMENDMENTS.— 

15 (1) Section 3302 of the Internal Revenue Code 

16 of 1986 is amended by adding at the end the fol17 lowing new subsection: 

18 ‘‘(h) TREATMENT OF CERTIFIED PROFESSIONAL EM19 PLOYER ORGANIZATIONS.—If a certified professional em20 ployer organization (as defined in section 7705), or a cus21 tomer of such organization, makes a contribution to the 

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

23 employee, such organization shall be eligible for the credits 

24 available under this section with respect to such contribu25 tion.’’. 


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

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

3 paragraph (3) and inserting ‘‘; and’’ and by in4 serting after paragraph (3) the following new 

5 paragraph: 

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

7 employer organization (as defined in section 7705) 

8 that is treated as the employer under section 3511, 

9 such certified professional employer organization is 

10 permitted to collect and remit, in accordance with 

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

12 the taxable year to the State unemployment fund 

13 with respect to a 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 (3) Section 6053(c) of such Code is amended by 

22 adding at the end the following new paragraph: 

23 ‘‘(8) CERTIFIED PROFESSIONAL EMPLOYER OR24 GANIZATIONS.—For purposes of any report required 

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1 sional employer organization that is treated under 

2 section 3511 as the employer of a work site em3 ployee, the customer with respect to whom a work 

4 site employee performs services shall be the employer 

5 for purposes of reporting under this section and the 

6 certified professional employer organization shall 

7 furnish to the customer any information necessary 

8 to complete such reporting no later than such time 

9 as the Secretary shall prescribe.’’. 

10 (d) CLERICAL AMENDMENTS.— 

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

12 Internal Revenue Code of 1986 is amended by add13 ing at the end the following new item: 

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

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

15 Code is amended by inserting after the item relating 

16 to section 7704 the following new item: 

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

17 (e) REPORTING REQUIREMENTS AND OBLIGA18 TIONS.—The Secretary of the Treasury shall develop such 

19 reporting and recordkeeping rules, regulations, and proce20 dures as the Secretary determines necessary or appro21 priate to ensure compliance with the amendments made 

22 by this section with respect to entities applying for certifi23 cation as certified professional employer organizations or 


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1 entities that have been so certified. Such rules shall in2 clude— 

3 (1) notification of the Secretary in the case of 

4 the commencement or termination of a service con5 tract described in section 7705(e)(2) of the Internal 

6 Revenue Code of 1986 between such a person and 

7 a customer, and the employer identification number 

8 of such customer, and 

9 (2) such other information as the Secretary de10 termines is essential to promote compliance with re11 spect to the credits identified in section 3511(d) of 

12 such Code, and 

13 shall be designed in a manner which streamlines, to the 

14 extent possible, the application of requirements of such 

15 amendments, the exchange of information between a cer16 tified professional employer organization and its cus17 tomers, and the reporting and recordkeeping obligations 

18 of the certified professional employer organization. 

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

20 the Internal Revenue Code of 1986 is amended by adding 

21 at the end the following new paragraph: 

22 ‘‘(4) CERTIFIED PROFESSIONAL EMPLOYER OR23 GANIZATIONS.—The annual fee charged under the 

24 program in connection with the ongoing certification 


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1 by the Secretary of a professional employer organi2 zation under section 7705 shall not exceed $1,000.’’. 

3 (g) EFFECTIVE DATES.— 

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

5 this section shall apply with respect to wages for 

6 services performed on or after January 1 of the first 

7 calendar year beginning more than 12 months after 

8 the date of the enactment of this Act. 

9 (2) CERTIFICATION PROGRAM.—The Secretary 

10 of the Treasury shall establish the certification pro11 gram described in section 7705(b) of the Internal 

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

13 not later than 6 months before the effective date de14 termined under paragraph (1). 

15 (h) NO INFERENCE.—Nothing contained in this sec16 tion or the amendments made by this section shall be con17 strued to create any inference with respect to the deter18 mination of who is an employee or employer— 

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

20 purposes set forth in the amendments made by this 

21 section), or 

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

Æ 


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