Court: Payroll service company can’t combine wages


The Federal Circuit, affirming the Court of Federal Claims, has held that, for purposes of calculating the FICA (Social Security and Medicare) contribution and benefit wage base and the FUTA (Federal Unemployment Tax Act) wage base, a payroll service company could not aggregate wages paid to workers who performed services during the year for several of its clients.

Cencast is a payroll service company whose clients are movie and television production companies. Cencast employs its client’s production workers, who often perform services for multiple production companies within a given year. The IRS and Cencast agreed that Cencast is the statutory employer, and the production companies are the common-law employers.

Cencast aggregated all wages it paid to the production employees for purposes of calculating their amount of taxable wages subject to FICA and FUTA. As a result, per employee amounts in excess of the wage base were not taxed.

The IRS argued that the separate production companies were each the common-law employers of the production employees and that Cencast could not aggregate the wages it paid them for FICA and FUTA taxable wage calculation purposes.

In 2004, the Claims Court ruled in favor of the IRS. It said that the IRS and Congress have consistently interpreted the FICA and FUTA wage base calculations to apply to common-law employers, regardless of which entity actually paid the employees’ wages (Cencast Services L.P. v U.S., Ct Fed Cl, Sept. 30, 2004).

On appeal, Cencast argued that liability for FICA and FUTA is imposed only on the entities that control the payment of wages. Thus, if the common-law employer retains an entity such as Cencast to formally make the payments, only Cencast is liable for the tax and therefore must be the relevant “employer” for purposes of determining whether the employees’ wages exceeded the FICA and FUTA wage limits

The Federal Circuit has now agreed with the Court of Claims (Cencast Services L.P. v. U.S., CA-FC, 112 AFTR 2d Paragraph 2013-5284, Sept. 10, 2013). The court said that there can be no doubt that “employment” for purposes of FICA and FUTA must refer to the common-law employment relationship. References in the statute consistently refer to employment in the common-law sense, and the wage cap provision must therefore be calculated with respect to the employees’ various common-law employments during the calendar year.