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Austin TX Business Law Blog

Monday, July 27, 2015

Texas Passes Bill Eliminating Double Taxation for Professional Employer Organizations

Did Texas enact any recent changes to its tax laws, particularly with regard to small businesses? 


As of July 1, 2014, House Bill 3150 became law thanks to the concerted lobbying efforts of small business advocates and businesses known as Professional Employer Organizations (PEO’s). The bill, which ultimately resulted in a slight increase in unemployment taxes statewide, worked to create an attractive tax incentive for small business contracting with PEO’s for purposes of outsourcing various human resources tasks. In sum, the bill would help alleviate double taxation of PEO partnerships, thereby allowing business the opportunity to reinvest these funds. 

How HB 3150 helps the PEO’s in Texas 

For many small businesses, it is easier and more cost effective to outsource an entire human resources department as opposed to hiring and employing such professionals in-house. Accordingly PEO businesses began to spring up and are organized to offer these services to businesses for a flat annual contract rate. However, under the old laws, PEO’s were actually facing somewhat of a double taxation rate, unlike any other small business in Texas. 

More specifically, when a company contracts with a PEO, the PEO then contracts with each employee for purposes of supplying unemployment benefits should the need arise. During the PEO’s tenure with the company, it is responsible for placing all unemployment taxes in trust until a point when a terminated employee needs the funds. Under the new laws, which become effective September 1, 2015, a PEO would receive a tax credit for any unemployment taxes paid to the employer prior to engaging with the PEO, thereby resulting in tax savings for the small business sector overall. 

In a statement by the National Association of Professional Employer Organizations, “[w]e thank Governor Abbott for his support of this bill, which will enable PEOs to continue to help small businesses in Texas grow and thrive while eliminating what was essentially a double tax on small business and maintaining the integrity of the UI trust fund at the same time.” 

Texas lawmaker Brandon Creighton similarly commented, stating “[t]his bill changes the law to ensure that these small employers in a PEO relationship are not faced with paying double tax if they make a change after Jan. 1….This bill is good for small employers in Texas, it’s good for all PEOs in Texas and it avoids double taxation.”

If you are a small business with questions about human resources or taxation issues, please contact the Austin, Texas business law attorneys at the Kumar Law Firm by calling (512)960-3808 today! 

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