Corporate downsizing - tax treatment of leased employees.

• Jurisdiction: United States
• Date: 01 July 1994
• Author: Heikkinen, Debra L.

A business that downsizes may find itself without sufficient staff to complete current projects or meet the anticipated demands of future projects. To fulfill these needs, the company may lease workers from a third-party employment agency. In some cases, the employment agency engages former or retired employees of the company and leases them to the company to perform job assignments.

As the IRS sharpens its focus on employment tax issues, the question of who employs the leased workers for Federal tax purposes - the employment agency or the company - becomes increasingly important. The tax issues will become even more significant if Congress enacts health care legislation requiring businesses to insure or finance health coverage for their employees, but not for independent contractors rendering services to a company.

Under Federal income and employment tax rules, there are significant differences between the tax treatment of employees and the tax treatment...