Question 265: What tax write-offs do I get if I lease my employees?
Answer: Precious few, but you are asking the wrong questions.
If you pay your employees directly, you deduct their salary and your share of the payroll taxes. You also deduct any employee benefits you pay for.
If you use a staffing firm, they pay the salary and the payroll taxes and the benefits costs, but you reimburse them for those costs. In addition, they charge somewhat more than that because they must cover their overhead and make a profit. You pay that as well. You can deduct as an ordinary business expense what you pay the staffing firms. The deductions are likely somewhat higher than if you do it yourself, but that's because you pay them more than you would likely pay to do it yourself.
I say that's the wrong question because tax write-offs should not determine whether or not you use a staffing firm.
On the one hand, staffing firms offer convenience in that you don't have the problems of dealing with payroll, payroll taxes, withholding, etc. Using a staffing firm lets a small employer concentrate more on its core business. The firm also can negotiate for benefits, such as health insurance, on a more cost-effective basis than a small employer can. Many small employers find they are able to offer a more generous benefit package through a staffing firm than they can on their own.
But you need to recognize that the IRS still treats you as being the employer. So, if the staffing firm doesn't pay over the payroll taxes, you are still liable even though you have paid them to the staffing firm. This happens all too frequently. In fact, the Justice Department has been taking criminal action against staffing firms operators who collect money and never pay it over to the government. The IRS recently issued a warning on this point, as part of Information Release 2004-47,saying:
"There are two primary categories of third party payers – Payroll Service Providers and Professional Employer Organizations. Payroll Service Providers typically perform services for employers such as filing employment tax returns and making employment tax payments. Professional Employer Organizations offer employee leasing meaning that they handle administrative, personnel, and payroll accounting functions for employees who have been leased to other companies that use their services. Many of these companies provide outstanding services to employers. Unfortunately, in some instances, companies of both types of services have failed to pay over to the IRS the collected employment taxes. When these employment service companies dissolve, millions in employment taxes can be left unpaid. Employers are urged to exercise due diligence in selecting and monitoring a third party payer. For example, when choosing a third party payer, employers should look for one that is reputable and uses the Electronic Federal Tax Payment System (EFTPS). This allows the business owner to verify payments made on their behalf. Also, an employer should never allow their address of record with the IRS be changed to that of the third party payer."
Thus, the decision to use a leasing firm is one that should be reviewed very carefully. We will be discussing leasing firms and PEOs from an retirement plan standpoint at SunGard Corbel's upcoming set of Who's the Employer workshops.