US Senators Introduce Small Business Efficiency Act

by Mike Godfrey, Tax-News.com, Washington

24 May 2006

Legislation introduced into the Senate will update and clarify tax rules for small businesses which use outside organizations to pay wages and federal employment taxes.

The Small Business Efficiency Act, introduced by Senate Finance Committee chief Chuck Grassley and ranking Democrat Max Baucus, would improve small businesses’ efficiency by eliminating uncertainty about the ability of qualifying Professional Employer Organizations (PEOs) to assume liability for paying wages and collecting and remitting federal employment taxes.

An increasing number of small and mid-sized businesses are using Professional Employer Organizations (PEOs) for comprehensive employment services. The PEOs assume responsibility for the management of human resources, employee benefits, payroll, and workers’ compensation, allowing their business clients to focus on their core competencies to maintain and grow their bottom line.

The Act would permit PEOs certified by the IRS to collect and remit the federal employment taxes of their business clients’ employees on a voluntary basis. To be certified by the IRS, the organization would have to meet financial and other standards and maintain ongoing certification by the IRS. The certified organization would be required to assume full and sole responsibility for the collection of federal employment taxes.

Grassley and Baucus said that in addition to the many benefits for business clients, the bill would benefit the government by improving employment regulatory compliance and tax administration.

The IRS has stated that certified PEOs would facilitate tax administration by reducing the number of returns it processes and by reducing errors in calculating and paying employment taxes.

With small businesses responsible for the majority of American job creation, Grassley noted that they are increasingly turning to outside organisations to cope with the growing paperwork and tax compliance burden.

"Federal law is too ambiguous in its treatment of these outside groups and whether they can appropriately represent small businesses. This bill clears up the ambiguity. It will improve the efficiency of America’s small businesses. It will also help to ensure tax compliance," Grassley explained.

Baucus added that:

"It’s vital to entrepreneurs and employees alike that these outside groups provide consistent, quality service."

"Our bill will clarify just what quality and consistency small businesses should be able to expect.”

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