Rev. Proc. 78-13

Section 1. Purpose.

The purpose of this Revenue Procedure is to update and supersede Rev. Proc. 67-41, 1967-2 C.B. 677, which sets forth procedures providing certain conditions under which third parties financing employers' payrolls are liable for the taxes required to be withheld from employees' wages.

Sec. 2. Background.

.01 The requirements, applicable to wages paid on or after January 1, 1967, are set forth in section 3505 of the Internal Revenue Code of 1954, relating to the withholding tax liability imposed on a lender, surety, or other person (other than the employer) either directly paying wages to an employee or group of employees of another, or supplying funds to or for the account of an employer, for the specific purpose of paying wages of such person's employees.

.02 The reference to "other person" means any person similar to a lender or surety who directly pays or supplies the funds for payment of wages of employees of another. It does not include a person who is acting only as agent of the employer or as agent of the employees, for example, a union agent.

Sec. 3. Changes.

Section 5.02 revises section 4.02 of Rev. Proc. 67-41 to make it clear that the liability of the supplier for taxes is limited to 25 percent of the amount supplied, and that the supplier is also liable for interest on the taxes for which the supplier is liable from the due date of the employer's return.

Sec. 4. Direct Payment by Third Parties.

.01 Section 3505(a) of the Code applies only to a lender, surety, or other person (other than the employer) who directly pays wages to employees of another or to an agent on behalf of such employee or group of employees. The payor of wages is liable for a sum equal to the taxes (together with interest) required to be withheld including not only income tax withholding, but also withholding for purposes of the social security and railroad retirement laws. The liability of the lender, surety, or other person in such a case is to pay the taxes only where the employer does not do so.

.02 The liability imposed under section 3505(a) of the Code upon the payor of wages is limited to the taxes which are required to be deducted and withheld from the wages of the employees, plus interest from the due date of the employer's return.

.03 For example, if a surety company pays the wage claim of an employee, pursuant to the surety company's payment bond covering a private construction job, the surety company is liable for an amount equal to the taxes (together with interest) that are required to be withheld from the employee's wages.

Sec. 5. Funds Supplied by Third Parties.

.01 Section 3505(b) of the Code imposes a personal liability upon a lender, surety, or other person who supplies funds to or for the account of employers for the specific purpose of paying wages due employees of such employers when the following conditions exist:

(a) The supplier of funds advances funds to or for the account of an employer for the specific purpose of paying wages of the employer's employees, and

(b) At the time such funds are advanced, the supplier of funds has actual notice or knowledge (within the meaning of section 6323(i)(1)) that the employer to whom the funds are advanced does not intend to or will not be able to make timely payment or deposit of the taxes required to be withheld.

.02 The liability of the supplier of funds for taxes under this provision is limited to 25 percent of the amount supplied for the specific purpose of paying wages. The supplier is also liable for interest on the taxes for which the supplier is liable from the due date of the employer's return.

.03 Section 3505(b) of the Code is applicable in a case where the supplier of funds knows that the funds are to be used to pay net wages, even though the written agreement under which the advances are made states a different purpose. However, section 3505(b) does not apply to an ordinary working capital loan.

Sec. 6. Payment of Tax.

.01 The liability of the lender, surety, or other person, under section 3505 of the Code, is to pay the taxes only when the employer does not do so. Payment should be accompanied by Form 4219, Statement of Liability of Lender, Surety, or Other Person For Withholding Taxes which is available at Internal Revenue Offices.

.02 A separate Form 4219 is to be submitted, in duplicate, for each employer and for each calendar quarter of the Code is incurred. The form for which liability under section 3505 is to be filed with the office of the Internal Revenue Service with which the employer for whom wages were paid or funds were supplied, files its Federal employment tax returns. The lender, surety, or other person may obtain assistance from the Service, in the computation of its liability.

.03 To avoid the accrual of interest, payment should be made on or before the due date of the employer's Federal employment tax return. In the event the lender, surety, or other person does not voluntarily satisfy the liability imposed by section 3505 of the Code, the Government may collect such liability by appropriate civil proceeding.

.04 Section 3505(c) of the Code provides that any amounts paid to the United States pursuant to section 3505 shall be credited against the liability of the employer. Therefore, payments by the lender, surety, or other person of withheld taxes reduce the liability of the employer.

Sec. 7. Responsibilities of Employer.

Section 3505 of the Code does not relieve an employer of responsibilities with respect to such withholding taxes even though a lender, surety, or other person may be paying the employees' wages. The employer is required to file the usual employment tax returns and furnish statements of withholding tax to employees with respect to employees' wages paid by the employer and by others.

Sec. 8. Effect on Other Documents.

Rev. Proc. 67-41 is superseded.