Does the payroll a payroll/employee-leasing company processes for its clients' employees count as the company's own gross payroll when computing the fixed dollar minimum tax?

Plain-English summary

A company offered payroll and employee-leasing services to small and mid-sized businesses. For each client, the client kept complete control — canvassing, interviewing, hiring, firing, setting pay and hours, and directing the work — while the company simply generated payroll, cut checks, and remitted employment taxes, drawing funds from the client's bank account. The company also had its own employees and officers. On its 2005 S-corporation return it reported gross payroll of about $12.4 million, of which roughly $11.9 million was the clients' employees' pay and only about $515,000 was its own officers and employees. It asked whether the clients' payroll counts in its "gross payroll" for computing the fixed dollar minimum (FDM) tax under Tax Law § 210.1(d).

The Department said no. The FDM tax bracket is set by the taxpayer's gross payroll, defined as the total compensation of all of the taxpayer's employees (§ 210.1(d)(2)(A), referring to § 210.3(a)(3) and the employee definition in 20 NYCRR § 4-5.2). Because the clients retain complete authority and control over the leased workers, those workers are not the company's employees. So the payroll the company merely processes for its clients is excluded from its gross payroll, and only the company's own officers' and employees' compensation counts toward the FDM bracket.

What this means for you

Payroll companies, PEOs, and employee-leasing firms

If your clients control the workers (hiring, firing, pay, duties), those workers are the clients' employees, not yours — so the large dollar amounts of client payroll you process do not inflate your gross payroll for the fixed dollar minimum tax. The control test is what matters.

Businesses choosing a fixed-dollar-minimum bracket

Don't conflate "payroll you handle" with "payroll of your employees." The FDM bracket looks only at compensation of the taxpayer's own employees as defined for the payroll factor.

Accountants and tax professionals

Document the control facts: who hires, fires, sets pay, and directs the work. Where the client retains that control (as here), the leased workers fall outside 20 NYCRR § 4-5.2's definition of the company's employees and outside the § 210.1(d) gross-payroll computation.

Common questions

Q: Does processed client payroll count in a PEO's gross payroll for the fixed dollar minimum tax?
A: No, where the clients control the workers. The clients' employees are not the PEO's employees, so the payroll it processes for clients is excluded; only the PEO's own payroll counts.

Q: What determines whose employees they are?
A: Control. Here the clients retained complete authority over hiring, firing, pay, hours, and duties, so the workers were the clients' employees, not the company's.

Q: Which payroll does count?
A: Only the compensation of the company's own officers and employees is included in its gross payroll for the fixed dollar minimum tax.

Citations and references

Statutes, regulations, and authorities:
- Tax Law § 210.1(d) (fixed dollar minimum tax; gross payroll brackets)
- Tax Law § 210.3(a)(3) (payroll factor; the taxpayer's employees)
- 20 NYCRR § 4-5.2 (definition of employee)
- Onondaga Employee Leasing Services, TSB-A-06(7)C (Aug. 28, 2006)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2006.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a06_7c.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-06(7)C
Corporation Tax
August 28, 2006

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C060609A

On June 9, 2006, a Petition for Advisory Opinion was received from Onondaga
Employee Leasing Services, c/o Kall & Reilly, LLP, 3522 James Street, Syracuse, NY 12306.
The issue raised by Petitioner, Onondaga Employee Leasing Services, is whether, for the
taxable year beginning in 2005, the amount of payroll that Petitioner processed for its clients is
included in Petitioner’s gross payroll for purposes of the computation of the fixed dollar
minimum tax under section 210.1(d) of Article 9-A of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a company that offers payroll and other business services for small to
medium-sized businesses. Typically a client will determine that it needs payroll services and
decide to retain Petitioner to provide those services. The client retains all control over
canvassing, interviewing, hiring and firing employees. The client ensures that all employment
applications and all other required documentation are completed by the employee and forwarded
to Petitioner. Petitioner generates a payroll account for that employee and produces payroll
checks for that employee. Petitioner also processes the payment of all employment taxes for the
client's employee. Prior to authorizing a paycheck for an employee or making payment of
employment taxes, Petitioner draws funds against the client's bank account. The client retains the
responsibility of providing workers’ compensation insurance and any other benefits for its
employees.
Petitioner does not have direct contact with a client's employees. Petitioner does not set
the employees’ rates of pay or hours of service, dictate the employees’ duties, or provide
guidance to the employees. Petitioner provides no workplace, tools, or work products for the
employees. At all times, the client maintains complete authority and control over the employees.
However, Petitioner also has its own employees for which it does have exclusive
authority and control.
When filing its 2005 Form CT-3-S, New York S Corporation Franchise Tax Return,
Petitioner reported a gross payroll of $12,426,227. This total amount of $12,426,227 reported for
gross payroll is comprised of three distinct dollar amounts: 1) $11,911,463, which represents the
amount of payroll Petitioner processed for its client's employees, 2) $250,176, which represents
the amount of compensation Petitioner paid its own officers, and 3) $264,588, which represents
the amount of salaries and wages Petitioner paid its own employees.

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TSB-A-06(7)C
Corporation Tax
August 28, 2006

Applicable law and regulations
Section 210.1(d) of Article 9-A of the Tax Law provides the computation of the fixed
dollar minimum tax and for taxable years beginning in 2005 provides, in part:
(1) The amount prescribed by this paragraph shall be for a taxpayer which during
the taxable year has:
(A) a gross payroll of twenty-five million dollars or more, ten thousand dollars;
(B) a gross payroll of less than twenty-five million dollars, but more than six
million two hundred fifty thousand dollars, five thousand dollars;
(C) a gross payroll of no more than six million two hundred fifty thousand dollars
but more than one million dollars, four hundred twenty-five dollars;
(D) a gross payroll of no more than one million dollars but more than five
hundred thousand dollars, three hundred twenty-five dollars;
(E) a gross payroll of no more than five hundred thousand dollars (except as
prescribed in clause (F) of this subparagraph), one hundred dollars;
(F) a gross payroll of one thousand dollars or less, with total receipts within and
without this state of one thousand dollars or less, and the average value of the assets of
which are one thousand dollars or less, eight hundred dollars.
(2) For purposes of this paragraph:
(A) gross payroll shall be the same as the total wages, salaries and other personal
service compensation of all the taxpayer's employees, within and without this state, as
defined in subparagraph three of paragraph (a) of subdivision three of this section, except
that general executive officers shall not be excluded.
Section 210.3(a) of the Tax Law provides, in part, the computation of the payroll factor
of the business allocation percentage as follows:
(3) ascertaining the percentage of the total wages, salaries and other personal
service compensation, similarly computed, during such period of employees within the
state, except general executive officers, to the total wages, salaries and other personal
service compensation, similarly computed, during such period of all the taxpayer's
employees within and without the state, except general executive officers;
Section 4-5.2 of the Business Corporation Franchise Tax Regulations (”Regulations”)
provides the definition of employee as follows:

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TSB-A-06(7)C
Corporation Tax
August 28, 2006

(a) Employees whose wages, salaries and other personal service compensation are
included in the computation of the payroll factor of the business allocation percentage
include every individual, except a general executive officer, where the relationship
existing between the taxpayer and the individual is that of employer and employee.
(b) Generally, the relationship of employer and employee exists when the
taxpayer has the right to control and direct the individual not only as to the result to be
accomplished by him but also as to the means by which such result is to be accomplished.
If the relationship of employer and employee exists, the designation or description of the
relationship, and the measure, method or designation of the compensation are immaterial.
(c) A director of a corporation is not an employee and, therefore, compensation
paid to directors for acting as such should not be included in computing the payroll
factor.
Opinion
Petitioner states that at all times its clients have complete authority and control over the
employees for which Petitioner provides client payroll services.
Therefore, based on the facts presented, the employees of Petitioner’s clients are not
employees of Petitioner for purposes of the payroll factor (see section 210.3(a)(3) of the Tax
Law and section 4-5.2 of the Regulations). Section 210.1(d)(2)(A) provides that for tax years
beginning in 2005 for purposes of computation of the fixed dollar minimum tax, gross payroll is
the same as the total wages, salaries, and other personal service compensation paid to all of the
taxpayer’s employees as defined in section 210.3(a)(3).
Accordingly, for the taxable year beginning in 2005, the amount of payroll that Petitioner
processed for its clients is not included in Petitioner’s gross payroll for purposes of the
computation of the fixed dollar minimum tax under section 210.1(d) of Article 9-A of the Tax
Law.

DATED: August 28, 2006

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.