I 
109TH CONGRESS 
2D SESSION 
H. R. 4985 
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 HOUSE OF REPRESENTATIVES 
MARCH 16, 2006 
Mr. BRADY of Texas (for himself, Mr. POMEROY, Mr. SAM JOHNSON of Texas, 
Mr. CARDIN, Mr. RAMSTAD, Mr. ENGLISH of Pennsylvania, and Mr. 
HULSHOF) introduced the following bill; which was referred to the Com-
mittee on Ways and Means 
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. 
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE. 
This Act may be cited as the ‘‘Small Business Effi-
ciency Act of 2006’’. 
SEC. 2. NO INFERENCE. 
Nothing contained in this Act or the amendments 
made by this Act shall be construed to create any infer-
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ence with respect to the determination of who is an em-
ployee or employer— 
(1) for Federal tax purposes (other than the 
purposes set forth in the amendments made by sec-
tion 3), or 
(2) for purposes of any other provision of law. 
SEC. 3. CERTIFIED PROFESSIONAL EMPLOYER ORGANIZA-
TIONS. 
(a) EMPLOYMENT TAXES.—Chapter 25 of the Inter-
nal Revenue Code of 1986 (relating to general provisions 
relating to employment taxes) is amended by adding at 
the end the following new section: 
‘‘SEC. 3511. CERTIFIED PROFESSIONAL EMPLOYER ORGANI-
ZATIONS. 
‘‘(a) GENERAL RULES.—For purposes of the taxes 
imposed by this subtitle— 
‘‘(1) a certified professional employer organiza-
tion shall be treated as the employer (and no other 
person shall be treated as the employer) of any work 
site employee performing services for any customer 
of such organization, but only with respect to remu-
neration remitted by such organization to such work 
site employee, and 
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‘‘(2) the exemptions and exclusions which would 
(but for paragraph (1)) apply shall apply with re-
spect to such taxes imposed on such remuneration. 
‘‘(b) SUCCESSOR EMPLOYER STATUS.—For purposes 
of sections 3121(a) and 3306(b)(1)— 
‘‘(1) a certified professional employer organiza-
tion entering into a service contract with a customer 
with respect to a work site employee shall be treated 
as a successor employer and the customer shall be 
treated as a predecessor employer during the term 
of such service contract, and 
‘‘(2) a customer whose service contract with a 
certified professional employer organization is termi-
nated with respect to a work site employee shall be 
treated as a successor employer and the certified 
professional employer organization shall be treated 
as a predecessor employer. 
‘‘(c) LIABILITY WITH RESPECT TO WORK SITE EM-
PLOYEES.— 
‘‘(1) GENERAL RULES.—Solely for purposes of 
its liability for the taxes imposed by this subtitle— 
‘‘(A) the certified professional employer or-
ganization shall be treated as the employer of 
any individual (other than a work site employee 
or a person described in subsection (e)) who is 
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performing services covered by a contract meet-
ing the requirements of section 7705(e)(2), but 
only with respect to remuneration remitted by 
such organization to such individual, and 
‘‘(B) the exemptions and exclusions which 
would (but for subparagraph (A)) apply shall 
apply with respect to such taxes imposed on 
such remuneration. 
‘‘(d) SPECIAL RULE FOR RELATED PARTY.—Sub-
section (a) shall not apply in the case of a customer which 
bears a relationship to a certified professional employer 
organization described in section 267(b) or 707(b). For 
purposes of the preceding sentence, such sections shall be 
applied by substituting ‘10 percent’ for ‘50 percent’. 
‘‘(e) SPECIAL RULE FOR CERTAIN INDIVIDUALS.— 
For purposes of the taxes imposed under this subtitle, an 
individual with net earnings from self-employment derived 
from the customer’s trade or business (including a partner 
in a partnership that is a customer), is not a work site 
employee with respect to remuneration paid by a certified 
professional employer organization. 
‘‘(f) REGULATIONS.—The Secretary shall prescribe 
such regulations as may be necessary or appropriate to 
carry out the purposes of this section.’’. 
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(b) CERTIFIED PROFESSIONAL EMPLOYER ORGANI-
ZATION DEFINED.—Chapter 79 of such Code (relating to 
definitions) is amended by adding at the end the following 
new section: 
‘‘SEC. 7705. CERTIFIED PROFESSIONAL EMPLOYER ORGANI-
ZATIONS. 
‘‘(a) IN GENERAL.—For purposes of this title, the 
term ‘certified professional employer organization’ means 
a person who applies to be treated as a certified profes-
sional employer organization for purposes of section 3511 
and who has been certified by the Secretary as meeting 
the requirements of subsection (b). 
‘‘(b) CERTIFICATION.—A person meets the require-
ments of this subsection if such person— 
‘‘(1) demonstrates that such person (and any 
owner, officer, and such other persons as may be 
specified in regulations) meets such requirements as 
the Secretary shall establish with respect to tax sta-
tus, background, experience, business location, and 
annual financial audits, 
‘‘(2) represents that it will satisfy the bond and 
independent financial review requirements of sub-
sections (c) on an ongoing basis, 
‘‘(3) represents that it will satisfy such report-
ing obligations as may be imposed by the Secretary, 
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‘‘(4) computes its taxable income using an ac-
crual method of accounting unless the Secretary ap-
proves another method, 
‘‘(5) agrees to verify the continuing accuracy of 
representations and information which was pre-
viously provided on such periodic basis as the Sec-
retary may prescribe, and 
‘‘(6) agrees to notify the Secretary in writing of 
any change that materially affects the continuing ac-
curacy of any representation or information which 
was previously made or provided. 
‘‘(c) REQUIREMENTS.— 
‘‘(1) IN GENERAL.—An organization meets the 
requirements of this paragraph if such organiza-
tion— 
‘‘(A) meets the bond requirements of sub-
paragraph (2), and 
‘‘(B) meets the independent financial re-
view requirements of subparagraph (3). 
‘‘(2) BOND.— 
‘‘(A) IN
GENERAL.—A certified profes-
sional employer organization meets the require-
ments of this paragraph if the organization has 
posted a bond for the payment of taxes under 
subtitle C (in a form acceptable to the Sec-
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retary) that is in an amount at least equal to 
the amount specified in subparagraph (B). 
‘‘(B) AMOUNT OF BOND.— 
‘‘(i) IN
GENERAL.—For the period 
April 1 of any calendar year through 
March 31 of the following calendar year, 
the amount of the bond required is equal 
to the greater of— 
‘‘(I) 5 percent of the organiza-
tion’s liability under section 3511 for 
taxes imposed by subtitle C during the 
preceding calendar year (but not to 
exceed $1,000,000), or 
‘‘(II) $50,000. 
‘‘(ii) SPECIAL RULE FOR NEWLY CRE-
ATED PROFESSIONAL EMPLOYER ORGANI-
ZATIONS.—During the first three full cal-
endar years that an organization is in ex-
istence, subclause (I) of clause (i) shall not 
apply. For this purpose— 
‘‘(I) under rules provided by the 
Secretary, an organization is treated 
as in existence as of the date that 
such organization began providing 
services to any client which were com-
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parable to the services being provided 
with respect to work site employees, 
regardless of whether such date oc-
curred before or after the organization 
is certified under subsection (b), and 
‘‘(II) an organization with liabil-
ity under section 3511 for taxes im-
posed by subtitle C during the pre-
ceding calendar year in excess of 
$5,000,000 shall no longer be de-
scribed in this clause (ii) as of April 
1 of the year following such calendar 
year. 
‘‘(3) INDEPENDENT
FINANCIAL
REVIEW
RE-
QUIREMENTS.—A certified professional employer or-
ganization meets the requirements of this subpara-
graph if such organization— 
‘‘(A) has, as of the most recent audit date, 
caused to be prepared and provided to the Sec-
retary (in such manner as the Secretary may 
prescribe) an opinion of an independent cer-
tified public accountant as to whether the cer-
tified professional employer organization’s fi-
nancial statements are presented fairly in ac-
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cordance with generally accepted accounting 
principles, and 
‘‘(B) provides to the Secretary an assertion 
regarding Federal employment tax payments 
and an examination level attestation on such 
assertion from an independent certified public 
accountant not later than the last day of the 
second month beginning after the end of each 
calendar quarter. Such assertion shall state 
that the organization has withheld and made 
deposits of all taxes imposed by chapters 21, 
22, and 24 of the Internal Revenue Code in ac-
cordance with regulations imposed by the Sec-
retary for such calendar quarter and such ex-
amination level attestation shall state that such 
assertion is fairly stated, in all material re-
spects. 
‘‘(4) SPECIAL
RULE
FOR
SMALL
CERTIFIED 
PROFESSIONAL
EMPLOYER
ORGANIZATIONS.—The 
requirements of paragraph (3)(A) shall not apply 
with respect to a fiscal year of an organization if 
such organization’s liability under section 3511 for 
taxes imposed by subtitle C during the calendar year 
ending on (or concurrent with) the end of the fiscal 
year were $5,000,000 or less. 
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‘‘(5) CONTROLLED
GROUP
RULES.—For pur-
poses of the requirements of paragraphs (2), (3) and 
(4), all professional employer organizations that are 
members of a controlled group within the meaning 
of sections 414(b) and (c) shall be treated as a sin-
gle organization. 
‘‘(6) FAILURE TO FILE ASSERTION AND ATTES-
TATION.—If the certified professional employer orga-
nization fails to file the assertion and attestation re-
quired by paragraph (3) with respect to a particular 
quarter, then the requirements of paragraph (3) 
with respect to such failure shall be treated as not 
satisfied for the period beginning on the due date for 
such attestation. 
‘‘(7) AUDIT DATE.—For purposes of paragraph 
(3)(A), the audit date shall be six months after the 
completion of the organization’s fiscal year. 
‘‘(d) SUSPENSION AND REVOCATION AUTHORITY.— 
The Secretary may suspend or revoke a certification of 
any person under subsection (b) for purposes of section 
3511 if the Secretary determines that such person is not 
satisfying the representations or requirements of sub-
sections (b) or (c), or fails to satisfy applicable accounting, 
reporting, payment, or deposit requirements. 
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‘‘(e) WORK SITE EMPLOYEE.—For purposes of this 
title— 
‘‘(1) IN GENERAL.—The term ‘work site em-
ployee’ means, with respect to a certified profes-
sional employer organization, an individual who— 
‘‘(A) performs services for a customer pur-
suant to a contract which is between such cus-
tomer and the certified professional employer 
organization and which meets the requirements 
of paragraph (2), and 
‘‘(B) performs services at a work site 
meeting the requirements of paragraph (3). 
‘‘(2) SERVICE
CONTRACT
REQUIREMENTS.—A 
contract meets the requirements of this paragraph 
with respect to an individual performing services for 
a customer if such contract is in writing and pro-
vides that the certified professional employer organi-
zation shall— 
‘‘(A) assume responsibility for payment of 
wages to the individual, without regard to the 
receipt or adequacy of payment from the cus-
tomer for such services, 
‘‘(B) assume responsibility for reporting, 
withholding, and paying any applicable taxes 
under subtitle C, with respect to the individ-
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ual’s wages, without regard to the receipt or 
adequacy of payment from the customer for 
such services, 
‘‘(C) assume responsibility for any em-
ployee benefits which the service contract may 
require the certified professional employer orga-
nization to provide, without regard to the re-
ceipt or adequacy of payment from the cus-
tomer for such services, 
‘‘(D) assume responsibility for hiring, fir-
ing and for recruiting workers in addition to 
the customer’s responsibility for hiring, firing 
and recruiting workers, 
‘‘(E) maintain employee records relating to 
the individual, and 
‘‘(F) agree to be treated as a certified pro-
fessional employer organization for purposes of 
section 3511 with respect to such individual. 
‘‘(3) WORK SITE COVERAGE REQUIREMENT.— 
The requirements of this paragraph are met with re-
spect to an individual if at least 85 percent of the 
individuals performing services for the customer at 
the work site where such individual performs serv-
ices are subject to 1 or more contracts with the cer-
tified professional employer organization which meet 
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the requirements of paragraph (2) (but not taking 
into account those individuals who are excluded em-
ployees within the meaning of section 414(q)(5)). 
‘‘(f) DETERMINATION OF EMPLOYMENT STATUS.— 
Except to the extent necessary for purposes of section 
3511, nothing in this section shall be construed to affect 
the determination of who is an employee or employer for 
purposes of this title. 
‘‘(g) REGULATIONS.—The Secretary shall prescribe 
such regulations as may be necessary or appropriate to 
carry out the purposes of this section.’’. 
(c) CONFORMING AMENDMENTS.— 
(1) Section 45B of such Code (relating to credit 
for portion of employer social security taxes paid 
with respect to employees with cash tips) is amended 
by adding at the end the following new subsection: 
‘‘(e) CERTIFIED PROFESSIONAL EMPLOYER ORGANI-
ZATIONS.—For purposes of this section, in the case of a 
certified professional employer organization that is treat-
ed, under section 3511, as the employer of a work site 
employee who is a tipped employee, the credit determined 
under this section does not apply to such organization, but 
does apply to the customer of such organization with re-
spect to which the work site employee performs services. 
For this purpose the customer shall take into account any 
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remuneration and taxes remitted by the certified profes-
sional employer organization.’’. 
(2) Section 3302 of such Code is amended by 
adding at the end the following new subsection: 
‘‘(h) TREATMENT OF CERTIFIED PROFESSIONAL EM-
PLOYER ORGANIZATIONS.—If a certified professional em-
ployer organization (as defined in section 7705) (or a cli-
ent of such organization) makes a payment to the State’s 
unemployment fund with respect to a work site employee, 
such organization shall be eligible for the credits available 
under this section with respect to such payment.’’. 
(3) Section 3303(a) of such Code is amended 
by striking the period at the end of paragraph (3) 
and inserting‘‘; and’’ and by inserting after para-
graph (3) the following new paragraph: 
‘‘(4) a certified professional employer organiza-
tion (as defined in section 7705) is permitted to col-
lect and remit, in accordance with paragraphs (1), 
(2), and (3), contributions during the taxable year 
to the State unemployment fund with respect to a 
work site employee.’’, and 
(A) in the last sentence— 
(i) by striking ‘‘paragraphs (1), (2), and 
(3)’’ and inserting ‘‘paragraphs (1), (2), (3), 
and (4)’’, and 
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(ii) by striking ‘‘paragraph (1), (2), or 
(3)’’ and inserting ‘‘paragraph (1), (2), (3), or 
(4)’’. 
(4) Section 6053(c) of such Code (relating to 
reporting of tips) is amended by adding at the end 
the following new paragraph: 
‘‘(8) CERTIFIED PROFESSIONAL EMPLOYER OR-
GANIZATIONS.—For purposes of any report required 
by this section, in the case of a certified professional 
employer organization that is treated, under section 
3511, as the employer of a work site employee, the 
customer with respect to whom a work site employee 
performs services shall be the employer for purposes 
of reporting under this section and the certified pro-
fessional employer organization shall furnish to the 
customer any information necessary to complete 
such reporting no later than such time as the Sec-
retary shall prescribe.’’. 
(d) CLERICAL AMENDMENTS.— 
(1) The table of sections for chapter 25 of such 
Code is amended by adding at the end the following 
new item: 
‘‘Sec. 3511. Certified professional employer organizations’’. 
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(2) The table of sections for chapter 79 of such 
Code is amended by inserting after the item relating 
to section 7704 the following new item: 
‘‘Sec. 7705. Certified professional employer organizations’’. 
(e) REPORTING
REQUIREMENTS
AND
OBLIGA-
TIONS.—The Secretary of the Treasury shall develop such 
reporting and recordkeeping rules, regulations, and proce-
dures as the Secretary determines necessary or appro-
priate to ensure compliance with the amendments made 
by this Act with respect to entities applying for certifi-
cation as certified professional employer organizations or 
entities that have been so certified. Such rules shall be 
designed in a manner which streamlines, to the extent pos-
sible, the application of requirements of such amendments, 
the exchange of information between a certified profes-
sional employer organization and its customers, and the 
reporting and recordkeeping obligations of the certified 
professional employer organization. 
(f) USER FEES.—Subsection (b) of section 7528 of 
such Code (relating to Internal Revenue Service user fees) 
is amended by adding at the end thereof the following new 
paragraph: 
‘‘(4) CERTIFIED PROFESSIONAL EMPLOYER OR-
GANIZATIONS.—The fee charged under the program 
in connection with the certification by the Secretary 
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of a professional employer organization under sec-
tion 7705 shall not exceed $500.’’. 
(g) EFFECTIVE DATES.— 
(1) IN GENERAL.—The amendments made by 
this Act shall take effect on the January 1st of the 
first calendar year beginning more than 12 months 
after the date of the enactment of this Act. 
(2) CERTIFICATION PROGRAM.—The Secretary 
of the Treasury shall establish the certification pro-
gram described in section 7705(b) of the Internal 
Revenue Code of 1986 not later than 6 months be-
fore the effective date determined under paragraph 
(1). 
Æ 
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