taxes

Franchise Tax Frequently Asked Questions

Professional Employer Organizations

What is a professional employer organization?

A professional employer organization means a business entity that offers professional employer services, as defined by Labor Code, §91.001, or a temporary employment service, as defined by Labor Code, §93.001.

What does a client company of a professional employer organization include in computing cost of goods sold (COGS)?

A client company may include in COGS the total amount paid to a professional employer organization for covered or assigned employees. The client company would include this amount in the same way it would include the amount in COGS if it had employed the covered or assigned employees directly.

What does a client company of a professional employer organization include in computing its compensation?

A client company may include in compensation the wages and cash compensation and benefits paid to a professional employer organization for covered or assigned employees. The client company would include these amounts in the same way it would include the amounts in compensation if it had employed the covered or assigned employees directly. A client company cannot include in its compensation:

  • any administrative fee,
  • reimbursement for payments made to independent contractors assigned to the client company and reportable on IRS Form 1099, or
  • other fees paid to the professional employer organization.
Are there any exclusions from total revenue for a professional employer organization?

A taxable entity that is a professional employer organization shall exclude from total revenue any payments it received for the following items from a client company for covered or assigned employees:

  • wages,
  • payroll taxes on those wages,
  • employee benefits, and
  • workers' compensation benefits

A professional employer organization cannot exclude from total revenue any payments it received from a client company for independent contractors assigned to the client company whose non-employee compensation is reportable on IRS Form 1099.

Does a professional employer organization include all its employees in computing its compensation?

A taxable entity that is a professional employer organization shall determine compensation only for its own employees who are not covered or assigned employees.

How does a client company know what amounts to include in computing COGS or compensation?

A professional employer organization is required to provide a report to the client company containing the information for covered or assigned employees that a client company will need to calculate compensation and COGS on the client company's franchise tax report. (Texas Tax Code 171.2125.)