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Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Who Takes the Work Tax Credits If We Use a Staffing Firm?

(Posted August 7, 2001)

Question 117: For several years our company has taken advantage of the "Work Opportunity" and "Welfare to Work" tax credits. We are nearing completion of our first year of leasing our employees from a Professional Employer Organization. The question of "who's the employer" has arisen on several subjects, but now we wonder who can take the WOTC and WTW credits-- us or the PEO?

Answer: These are good questions. The Internal Revenue Code sections dealing with these credits speak of them as being available for "employers." Neither tax credit provision has a special definition of employer, so the standard definition of employer for Federal income tax purposes should apply.

For most staffing firm situations, in which the recipient does the actual recruiting and the staffing firm is little more than a bookkeeping convenience, the recipient organization would be the common law employer and the employer for tax purposes. That means that the recipient can claim the credit if the recipient has received the appropriate certification by using IRS Form 8850.

On the other hand, suppose a staffing firm makes a business of finding people who would qualify for these credits and putting them in short term job placements, something like a temp firm specializing in welfare and SSI recipients and ex-felons. In such a situation, the staffing firm would be a common law employer and could claim the credit if it submitted the Form 8850. Such an arrangement is clearly contemplated by Internal Revenue Code section 51(k)(2), which states:

No credit shall be determined under this section with respect to remuneration paid by an employer to an employee for services performed by such employee for another person unless the amount reasonably expected to be received by the employer for such services from such other person exceeds the remuneration paid by the employer to such employee for such services.

Presumably, that limitation might be an issue for a firm helping mentally or physically disabled workers find temporary employment. The staffing firm may charge less than they are paying to the worker, because the worker is disabled. In such a situation, the credit would be limited to the lesser amount that the recipient pays to the staffing firm.

For more on the issue of whether a staffing firm or the recipient organization is the employer, see chapter 4 of my book, Who's the Employer?.

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.