However, HS2’s breach of the legislation lies with how the organization works with third party organizations acting as consultancies. These distinctions made by HMRC have important implications for agencies offering project-based products and SOW-based IR35 solutions.

What We Know

From HS2’s internal review and additional HMRC guidance, we can see that HS2 did not carry out employment status determinations on a number of contractors because they were supplied by a third-party provider.

HS2 took the view that it was the third parties’ responsibility for determining the IR35 status for each individual contractor. In principle, this is correct. Consultancies that provide genuine contracted out services to a client would be responsible for determining the IR35 status.

However, we are seeing an increasing number of cases where the service the consultancy or agency is providing is a provision of labor as part of or disguised as a consultancy agreement or SOW. This would leave the end client open to investigation, as the agreement between the consultancy and the end client does not reflect a genuine managed service and therefore changes the responsibility for IR35 determinations by moving it to the end client — in this case, HS2.

What Does Outsource Service Provision Mean?

When engaging with contractors through a third party, there are different things the end client must consider. Arrangements should be carefully analyzed to ensure that a contract has not simply been re-labelled as a managed service when what’s being provided is a source of labor. Agencies and other service providers should ensure that the right contracts and practices are in place to make the distinction.

This is not an issue that can be dealt with by an IR35 status tool such as CEST; an IR35 specialist should review the arrangement to ensure the person responsible can be correctly identified. If labor is supplied, the IR35 rules may still apply depending on what is being provided and who is providing it.

PREMIUM CONTENT: Direct Sourcing Platform Landscape

How Does This Affect Contractors?

If the service is genuinely outsourced and the outsourced service provider is classed as a small company, contractors will still be responsible for their own IR35 determination. This should be advised by the consultancy, but it is important to get this in writing. If the job role changes or the consultancy grows in size, the IR35 position may change. This issue is becoming more common in sectors with long supply chains and where sub-contracting takes place, particularly in the oil and gas sector where there are often six or seven people in the supply chain.

What Should End Clients Be Doing?

If you think the contractor supplied to you is genuinely part of an outsourced service, ensure you have the appropriate documentation to evidence this in case of investigation by HMRC. You should be considering this for all contracts which involve the use of contractors, and it is recommended that you liaise with all service providers on this issue for peace of mind.

What Should Agencies Be Doing?

If you provide outsourced services in addition to your core recruitment business, you should ensure you have taken IR35 advice from a specialist, or you could inadvertently bring risk to your clients. This may lead to short-term gain in helping your clients alleviate their own IR35 responsibilities, but this could cause long term reputational damage if HMRC investigates and finds this not to be the case. If you are unsure who should be responsible for assessing the contractors, get legal advice to review the circumstances before the contracts are agreed upon.

Don’t Be Caught Out

Using a contracted-out service as an IR35 get-out was once viewed as a silver bullet to the IR35 changes, but HS2’s mistake highlights that it is vitally important to ensure full due diligence is carried out to minimize the risk of a hefty fine. Always seek expert advice if you are uncertain to protect yourself and your supply chain.

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Prior to the TCJA, individuals were able to claim a deduction on their federal income tax returns for state and local taxes paid; the legislation placed a $10,000 limit on those deductions. This affected taxpayers, particularly business owners, wealthy individuals and those in high tax states like California and New York. There has been debate at the federal level about removing the limit, but the politics are tricky. The states most affected are Democrat controlled, but removing the deduction limit would mostly benefit wealthy taxpayers.

Enter pass-through entity taxes, the solution used by most states that was blessed by the IRS in November 2020. Pass-through entities, such as partnerships, LLCs and S corporations, are not typically subject to income taxes but pass their income to their owners, who then pay tax on that income. With pass-through entity taxes, the business elects to pay tax at the entity level, which would get around the federal deduction limit of $10,000 for individuals. The individual taxpayer would then get an offsetting credit for their state return, allowing them to avoid double-taxation while getting the full benefit of their state taxes paid.

PREMIUM CONTENT: North America Legal Update Q2 2022

The details of each program vary by state, as do income tax rates, but I can briefly explain how the savings are calculated. The business pays the state tax (not federal tax) on its income and still passes that income on to the owner to report. The state then offers the owner a credit or some other way to offset the tax paid at the entity level, so the taxes paid to the state at the combined business and individual level are unchanged. The state tax expense paid by the business reduces the income passed on to the owner and the amounts that they report and pay on their federal return. The state tax expense has remained the same but the federal income tax has been lowered — a real savings to the business owners!

More than 20 states have enacted legislation enabling this solution. Several others have such legislation pending, and more still are expected to join if action is not taken at the federal level. This has the potential to be a big tax savings opportunity for business owners and a huge change in the way pass-through entities are taxed. I say “potential” because federal action could remove the deduction limit and make almost all of this moot.

The news on federal action changes every week, and many states have enacted rules to adapt, all with their own rules. With each state having their own systems of pass-through entity rules and often the need for filing additional returns, compliance is going to be complicated. Despite the possibility for additional complexity, the potential benefit makes this something business owners and managers will need to look into. If you haven’t already, this is a great time to reach out to a tax professional for more information.

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Accessing a contingent workforce is key for many sectors, enabling companies to remain flexible, attract new skills, manage costs and complement permanent headcount to support business growth. There is an opportunity now to review your approach to the legislation and implement a robust IR35 strategy that will open the door to agile resources while maintaining control of costs and compliance.

The Race for Talent

Accessing the flexible workforce is crucial for many organizations. When we surveyed medium to large companies that use contractors at the turn of the year, 90% said that they plan to extend their use of contractors over the next 18 months.

When we asked them what they considered to be the greatest risks from having a poor IR35 solution, more recognized commercial risks, including contractor costs (53%), talent attraction (42%) and project delays (42%), as potential concerns over unforeseen tax bills (31%).

One of the most significant findings of our research, however, was that 77% of respondents are finding it difficult to hire and access the flexible workforce that they need to grow.

Spiraling Rates of Pay

To address this challenge, 87% of medium to large companies that use contractors or freelancers were forced to increase their contractor pay rates between the introduction of changes to the IR35 tax rules in April 2021 and the start of 2022. 75% of companies raised their contractor rates by 11% or more in this time. The was prior to the rapid rise of inflation in Q1 2022, which only makes matters worse.

Increasing contractor rates can cause a strain on the growth of a business, but it doesn’t guarantee the recruitment or retainment of the flexible workforce. With record numbers of vacancies available, we are currently in a job seeker’s market, so being attractive to potential contractors is crucial.

PREMIUM CONTENT: Workforce Solutions Buyer Survey 2022: Initial Findings

Regaining Control Through IR35

For contractors, the key to this is offering outside IR35 roles. These not only provide better take-home pay — with no requirement to pay employment taxes or the increased National Insurance rate — but they provide contractors with greater freedom to choose how and when they work.  This has been supported by recent research from Kingsbridge Contractor Insurance, which revealed 66% of contractors said they would not even consider a role inside IR35 rules, despite outside IR35 roles only accounting for 41% of contract jobs on offer.

According to data from HMRC, only around one-third of contractor roles in the UK should be determined as inside IR35, while the other two-thirds could be determined as outside. Recent research from IPSE shows that 43% of freelancers reported that they had worked on contracts deemed outside IR35 over the last 12 months. A further 31% stated that they had refused a contract because the client deemed the engagement to be inside IR35. Similarly, 20% had stopped working with a client because the client now deemed the engagement to be within IR35.

Having a robust flexible workforce strategy in place can ensure that all roles which should be outside of IR35 have the appropriate structure and contracts in place to remain compliant. These processes also offer greater visibility for compliance and cost control. 43% of those we surveyed said they have a better visibility of contractor workforce because of their IR35 solution.

Reaping the Benefits

There are some who are still keen to repeal the IR35 changes. This is understandable, given the challenges that these changes have presented for businesses over the last two years. However, as our economy recovers, there is an opportunity to reassess the benefits that a robust IR35 solution can deliver for more flexible and agile ways of working.

Dedicating time to implement IR35 correctly will allow businesses to increase their visibility of contractor workforces, keep better control of costs and engage with the large pool of contractors and freelancers who wish to continue working outside of IR35.

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Enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in 2020, this tax credit provides employers up to $7,000 per employee per quarter in refundable tax credits for the first three quarters of 2021, as well as up to $5,000 per employee for March 13 through December 31 of 2020.

According to Rob Tiernan, Vice President at human capital management and tax incentive firm HIREtech, the ERTC presents a unique opportunity for businesses. “Over the last two years we have all been through things that I don’t think anyone could have imagined. The creation of the Employee Retention Tax Credit and the subsequent changes and expansion of the program have given businesses a tremendous opportunity to help them get back on their feet.”

While the Infrastructure Investment and Jobs Act effectively ended the ERTC at the end of September 2021 for most businesses, the good news for staffing owners is that that they have up to three years from the filing of Forms 941 (Employer’s Quarterly Federal Tax Return) to determine if the wages they paid from March 13, 2020, to September 30, 2021, are eligible.

“If you have not looked into ERTC for your business, there is still time to go back to 2020 and 2021, but you want to act sooner than later, as there are some time constraints approaching,” says Tiernan. However, because the ERTC is so often misunderstood, many businesses that are eligible to receive a tax credit aren’t even filing.

Am I Eligible?

Most employers, regardless of size, can qualify for the credit if they either:

• Were fully or partially suspended due to a government order. The credit applies only for the portion of the quarter the business is suspended, not the entire quarter.
• Had a significant decline in gross receipts. This is defined as a decline of more than 50% for a quarter in 2020 as compared to the same quarter in 2019 or 20% of a quarter in 2021 (Q1 – Q3) as compared to the same quarter in 2019. Alternatively, for 2021, you can also compare the previous quarter to the one you are evaluating to the equivalent quarter in 2019. If you qualify under this method, the credit applies to the entire quarter.

There is an exception to qualification for entities of the government.

PREMIUM CONTENT: Coronavirus (COVID-19) Resource Center

What Wages Qualify?

In general, the wages that qualify for ERTC are wages/compensation that are subject to FICA taxes, as well as qualified health expenses (medical, dental and vision). The wages must have been paid after March 12, 2020, and before October 1, 2021. The credit can only be taken on wages that are not forgiven under PPP.

For businesses with an average of 100 or fewer full-time employees in 2019, the company can capture almost all the wages in both 2020 and 2021 for the time period(s) the company qualifies for.

For businesses with an average of 500 or fewer full-time employees in 2019, the company can capture almost all the wages in 2021 for the time period(s) the company qualifies for. For example, if you had an average of 490 full-time employees in 2019 with an additional 200 part-time employees, then almost the entire payroll will be eligible for the ERTC.

For businesses with an average of more than 500 full-time employees in 2019, the tax credit is for wages paid to employees not working. There is no limit on the number of employees or the size of your company that prevents you from taking the credit.

Retroactive Claiming

The good news for staffing firm owners is that the end of the program does not impact your ability to retroactively claim ERTC. Staffing businesses have a minimum three-year statute of limitations from the filing of the Form 941 to conduct a lookback to determine eligible wages. The IRS released guidelines explaining that to claim credit for past quarters, businesses must file a Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, for the applicable quarter(s) in which the qualified wages were paid.

Still Time to Claim Credit

If you have not taken advantage of the ERTC yet, you still have time to determine whether wages paid in 2020 and 2021 are eligible. If you think this might be the case, we suggest you talk with a qualified partner who can help you through the process.

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To help, we have put together a quick guide on what compliance looks like, what the penalties are and where to turn for guidance should you need it.

The State of the ACA’s Employer Shared Responsibility in 2022

While the ACA has gone through changes over the years, the ACA’s Employer Shared Responsibility provision is still very much in effect and being enforced. In 2022, Applicable Large Employers (ALEs) — employers with an average of 50 or more full-time employees and full-time equivalent employees during the prior calendar year — must still:

• Offer affordable and adequate coverage (by IRS standards) to full-time employees for each calendar month of the year or risk a potential assessment if at least one full-time employee receives a Premium Tax Credit.
• File Forms 1094 and 1095 with the IRS.
• Provide timely and accurate Form 1095-C statements to employees.
• Actively manage employee eligibility and compliance.

Completing your filings accurately and on time is crucial; otherwise, you could face stiff financial penalties.

The Different Types of Penalties

There are several different ways to fall short of your ACA compliance and get hit with penalties. Here are the main types to know:

4980H(a) – Failure to offer coverage to at least 95% of employees. For tax year 2021, ALEs incur a $2,700 penalty per full-time employee minus the first 30 if the employer fails to offer minimum essential coverage to at least 95% of its full-time employees and their dependents, and any full-time employee obtains coverage on the exchange and receives a Premium Tax Credit.

4980H(b) – Failure to provide affordable, minimum value coverage. Even if you offer minimum essential coverage to 95% of your full-time employees, you can still be subject to a second type of penalty. The Employer Shared Responsibility penalty for failure to offer coverage that meets minimum value and affordability standards set by the IRS is $4,120 annually per full-time employee that receives a Premium Tax Credit.

The IRS is currently issuing 4980H proposed penalties via Letter 226-J.

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Failure to file Form 1094/1095. Employers who fail to file correct Forms 1094 or 1095 face penalties of $280 per return, with a $3,426,000 maximum. If it is found they intentionally disregarded the filing, the penalty increases to $570 per employee.

The IRS will send these proposed penalties via Letter 5005-A.

Failure to furnish Form 1094-C or 1095-C . If employers fail to provide correct 1094-C or 1095-C forms to employees, they face a penalty of $280 per form that doubles to $570 for intentional disregard.

What Staffing Firms Can Do

The positive news is that there are several proactive things staffing owners can do to help prevent costly penalties.

• Look over your Form 1094-C and Form 1095-Cs carefully. Be sure that the forms you file with the IRS and furnish to your employees are accurate. For instance, on Form 1095-C, make sure the “Yes” box is checked in Line 23 if minimum essential coverage was offered for all 12 months. On 1095-C, review the codes carefully to avoid combinations that may trigger assessments.

• File electronically to avoid backlog. The IRS is facing a paper backlog, and best practices suggest you file online. This will also help you avoid fees for filing in the wrong format. Organizations have until March 31, 2022, to file electronically.

• Find a vendor to help. Sometimes the best thing you can do for your staffing business is to admit that you need expert help on a complicated topic. There are many companies that specialize in ACA compliance, some specifically for the staffing industry.

At the end of the day, you can avoid costly penalties by staying compliant and on top of any changes that occur when it comes to the ACA.

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What Unemployment Loans Coming Due Means for Staffing

When the pandemic first hit the US and business as usual came to a screeching halt, unemployment soared to extreme levels. Suddenly, a significant part of the population was relying on increased unemployment benefits and for longer than the typical 26 weeks.

That extra money had to come from somewhere. And it came, and went, very quickly — leaving business owners in some areas to pick up the slack later.

After state funds were wiped out, 22 states had to rely on Title XII federal loans to borrow funds. And while the loans were initially interest-free, they began to accrue interest in September of 2021. Now, 10 states – California, Colorado, Connecticut, Illinois, Massachusetts, Minnesota, New Jersey, New York, Pennsylvania and Texas – still owe approximately $40 billion plus interest.

For staffing owners in those states, this could mean potential unemployment tax hikes. To help, we’ll take you through how the unemployment tax system works, what the coming repayments mean for your state and what you can do to prepare your staffing business.  

How Unemployment Taxes Work

The tax system behind unemployment funds and benefits is a two-tiered system. You have the federal tax, which funds the administration of benefits, and then a state tax, which pays the benefits issued to workers.

Typically, state funds are replenished by charging employers various amounts of unemployment taxes. The premium amounts are based on the overall health of the unemployment insurance trust fund and what is known as an “experience rate.” The experience rate is determined by factors like:

• Payroll size
• Industry
• Wages subject to premiums
• How much the employer claimed in previous years

But the past two years have been anything but typical. And with state funds depleted and loans coming due, states are putting the burden on businesses to pay it back.

PREMIUM CONTENT: March 2022 US Jobs Report

How States Repay the Title XII Loans

States will typically repay the Title XII advances by having higher unemployment taxes. Businesses will have to plan for the higher anticipated costs of unemployment taxes, and that puts the onus on businesses like staffing firms, which have already been hit hard by economic hardships due to the pandemic.

Coming Due in November

If the 10 states fail to pay back the government by November 10, 2022, the FUTA (Federal Unemployment Tax Act) tax rate will automatically increase by 0.3% for the entire calendar year. And states are also increasing their SUI (State Unemployment Insurance) rates to compensate as well. Colorado, for instance, increased their taxable wage base and increased unemployment insurance premiums in 2022.

What Staffing Firms Can Do to Prepare

Knowing that unemployment tax hikes are coming, particularly in the ten states mentioned above, staffing firms have a couple options to keep costs down. Here are a few things you can do to mitigate costs:

• Discuss the expected rate increases with your UI (Unemployment Insurance) claims manager.
• Keep diligent track of unemployment claims, including fraud exams to filter out fraudulent claims.
• Reconcile SUI tax rates used to pay tax contributions with the most recently issued tax rate notices to ensure proper payment.
• Audit your benefit charge statements and appeal to those that appear improper.
• Use strategies to lower SUI tax rates like voluntary contributions, joint account formation, negative write-off payments, payroll variation elections, etc. Note that these will be state-specific.

The bottom line for staffing businesses in these states is to keep diligent track of what is happening so you can prepare for potential unemployment tax hikes ahead.

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As we reflect on the rocky year that was 2020, many Americans were forced to file for unemployment due to the economic impact of COVID-19. With both small and large businesses having to temporarily and even permanently close their doors, many were greatly financially affected. As we head into tax return season, we know that taxes are likely to be more complicated than previous years for many. What types of things should you look out for? How can you stay ahead of what is likely to be one of the busiest tax return seasons ever? Let’s take a look below.

Tax Updates, Tips & Tricks 

In this recent article from the Internal Revenue Society (IRS), they are heavily encouraging taxpayers to take necessary actions early to help file federal tax returns timely and accurately in 2021. There are a few key items to consider involving credits, deductions and refunds:

• Recovery Rebate Credit/Economic Impact Payment 

• Interest on refunds taxable 

• Charitable deduction changes 

Be sure to read the full article above for additional details on these categories and this tax season’s tips. Additionally, the IRS has created this special resource page that covers all the steps necessary to get ahead on your taxes.

Continued Economic Impacts Due to COVID-19 and Insight from the IRS 

As the effects of the pandemic continue, many are still facing economic hardships including unemployment, small business troubles, and many other impacts. According to the Bureau of Labor Statistics (BLS), the unemployment rate from 2020 reached 14.8% in April, which is a significant increase from the 3.5% rate from 2019. As of December 2020, the unemployment rate has lowered significantly to 6.7%. For the latest information, be sure to follow our BLS Jobs Report update here on our website.

When the Washington Post asked an IRS representative his thoughts on preparing for this year’s tax season, he is encouraging people to file electronically. “More than ever, this is a great year to switch to filing electronically and choosing direct deposit,” IRS spokesman Eric Smith said. “About half of paper filers actually prepare their return with tax software. If you’re one of them, why not take the next step and e-file, rather than mailing your return to the IRS? It’s fast, and secure, and there are fewer mistakes, too.”

The pandemic continues to cause delays for the IRS, as they are dealing with the evolving stimulus packages and increased intricacies in this year’s tax returns.

Adecco’s Thoughts   

We asked our Account Managers within our Accounting and Finance vertical, how the pandemic has introduced new challenges for this year’s tax season and how companies are adjusting to the increased demand. Our customers are seeing two specific gaps that need to be addressed. First, due to the increased volume of requests being filed by consumers, there is a higher demand to cover shifts. Second, social distancing requirements have impacted the number of workers allowed in buildings for processing. Adecco has stepped in to deliver strategic solutions that provide rapid hiring for additional headcount.

Additionally, one of our tax preparation customers has increased their need for Customer Service Representatives by 60% in order to support consumers using their software. This year, the customer service roles are remote opportunities to best support the consumer base within the continued pandemic environment.

Our Accounting and Finance teams are continuing to keep an eye on this year’s tax season trends, as well as providing staffing solutions for customers who have greater finance hiring needs than previous years. To learn more about how we can support your business needs this tax season, visit our website and contact us.

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