On Aug. 8 the Internal Revenue Service issued proposed regulations containing some clarification on the Tax Cuts and Jobs Act (TCJA) passed last December. One of the areas of anticipated clarification was whether W-2 wages paid from third party payers, such as professional employer organizations (PEOs) or agents under section 3504, were included in the wages of the third party payer or the taxpayer for purposes of calculating the qualified business deduction for pass-through entities.
The proposed regulation states that the W-2 wage rules of Section 1.199A-2 (TCJA) generally follow the rules under former section 199. Section 199, more commonly known as domestic production activities deduction (DPAD) was repealed by the TCJA, but contained a W-2 wage limitation similar to the one in section 199A. "In order for wages reported on a Form W-2 to be included in the determination of W-2 wages of a taxpayer, the Form W-2 must be for employment by the taxpayer." In other words, the third party payer (PEO) is unable to include the W-2 wages of the taxpayer in their calculation for the qualified business deduction because the employees do not actually work for them (the PEO), even though their name is on the employee's W-2. The taxpayer gets to include the W-2 wages in their calculation and are not limited merely because they use a third party payer to pay and report wages to their employees.
Stay tuned for more updates for the proposed regulation and the Tax Cuts and Jobs Act. If you have any questions regarding the treatment of W-2 wages in regards to the qualified business deduction contact us at one of our many locations.