Question 239: CPA is an employee of CPA Inc. CPA Inc. contracts with Client Inc. to provide management services, including serving as an officer of Client Inc. Who is the employer of CPA in respect of services provided to Client Inc.? Do these facts create any issues with respect to the qualified plans of both CPA Inc. and Client Inc.?
Answer: There are all kinds of issues here and the answers are anything but clear. Because this covers multiple areas in my book, Who's the Employer, I will provide references to specific sections. Subscribers to the web edition will be able to click and read the relevant discussion.
Who's the employer? Generally speaking, employment tax laws honor the corporate form. If I work for a corporation, and you hire the corporation for legal services, and I end up providing them, I will generally be treated as the employee of the corporation, not as your employee. (More at WTE Q 2:34.)
However, corporate officers almost always are treated as employees, whether they fit the normal common law definition or not. (More at WTE Q 3:01.) I think that rule makes sense here and takes precedence over the corporation rule.
Consider: If you hire my corporation to provide you with legal services, all the paperwork should be in the name of the corporation. However, in the situation you describe, CPA Inc. will not show on the corporate minutes as the Chief Financial Officer (or whatever other officer is involved). Rather, CPA individually will be the officer.
In theory this would mean that CPA should be submitting two bills for his or her time, one as an individual (which would necessarily be treated as employee compensation and be accompanied by a W-2) and one for the work the corporation is doing.
Of course, that isn't what's happening. There's just one bill, and it comes from the corporation. If I were an IRS agent, my temptation would be to treat it as an invalid assignment of income, and tax it to CPA directly. That being the case, it should not be included in CPA's compensation from CPA Inc.
Of course, you could respond that CPA is merely a worksite employee of Client, meaning CPA Inc. is the true common law employer. I see some logic to such a position, but IRC 3121(d)(1) is tough to ignore.
Does that create an issue for the plans? You bet! Potentially, Client has an employee they didn't think they had, and CPA Inc. is paying CPA less compensation than it thinks-- which affects allocations, 415 limits, 404 deduction limits, etc. Then you need to make sure that CPA Inc. is getting money from a bunch of other clients, or else you have to start looking at whether a management function group exists. (More at WTE Q 13:13.)
Put it all together and it can be pretty messy. This is not a question that can be answered authoritatively over an Internet column. Hie thee to an ERISA attorney!