March 9, 2021 | By Laura Platero
Picture this: your business is thriving, but you keep losing staff to a competitor who gives their employees access to great healthcare options. You know how tight your margins are, so you wonder just how your competitor is able to afford such costly benefits. Partnering with a Professional Employer Organization (PEO) can help you level the playing field by offering high-quality health insurance at costs you and your employees can afford.
A PEO can help you by providing affordable benefits and taking complex and burdensome HR duties off your plate. A PEO handles your payroll, HR compliance, benefits administration, and so much more. This is all possible because of the co-employment relationship that comes with partnering with a PEO, they file your payroll taxes under their federal FEIN while you maintain control of the responsibility of the employee, they take care of the rest.
This co-employment relationship does not take away any of your day-to-day authority and decision-making power over how your business operates and who you employ. But there are legal issues surrounding co-employment. The Internal Revenue Service (IRS) provides clarity in this model through a voluntary certification program. The IRS does not state a preference of any particular certified PEO but rather provides certain minimum standards a PEO must meet and maintain to hold certification. Because CPEOs meet these standards, they are able to take advantage of some perks that are not available to non-certified PEOs.
When you handle your own payroll and taxes, you file under your FEIN. But when you partner with a PEO, they file your taxes under their FEIN, so it may not be clear which company receives any tax credits.
The CPEO model clarifies this ambiguity, and it benefits you. Tax credits and employment tax exclusions pass-through to you so you can claim them. This applies to almost any tax credit, including:
Each of these tax credits can have a tremendous impact on reducing your tax burden. This allows you to reinvest in your company, sparking more growth and opportunities.
When you join or leave a PEO at a time of year other than January 1, you face possible double taxation.
When employees reach a certain level of pay, called a wage base, you no longer have to contribute taxes on their wages. But that amount resets if the employee changes employers, as happens when a PEO becomes the employer of record for your employees. So, your Federal Unemployment Tax Act (FUTA) and Federal Insurance Contributions Act (FICA) taxes will restart. That means you may end up paying double taxes.
With a CPEO, however, your wage base for FUTA and FICA does not reset. This gives you the ability to make important business decisions whenever you need to make them without worrying about double taxation.
A PEO is responsible for paying taxes on your behalf. But if they fail to pay on time or at all, your company does not escape liability.
Your company is responsible for making sure your PEO is paying your employment taxes to the government. You are also responsible for making sure those taxes are accurate. If you have to ensure the taxes are filed accurately and timely, you may as well do them yourself.
A CPEO, however, holds sole responsibility and liability for paying, recording, and storing employment taxes. While you should still review all of your tax filings, you will not have to review and audit with the level of detail with a regular PEO. You want everything to be accurate, but your CPEO is on the hook if anything goes wrong. That also means they have a vested interest to ensure accuracy.
Certification is not the only thing you look for when choosing any business partner. But it can put some options above the rest. Eliminating the wage base tax restarts, taking on all responsibility for federal employment tax, and passing tax credit eligibility to your company can put a CPEO above the competition.
PEO's have a vested interest in the accuracy of your business filings and the success of your company. Partnering with a CPEO gives you access to all of the benefits of working with a regular PEO plus the peace of mind knowing that your chosen HR outsourcing partner has met strenuous certification requirements.
You want your HR partner to be a long-standing business that has HR and tax experts on staff who can guide you through complex situations while reducing your overhead. A CPEO holds the answer to your questions.
The IRS does not endorse any particular certified professional employer organization. For more information on certified professional employer organizations, go to www.irs.gov.
Laura serves as the Director of Product Strategy. She is an expert in large scale benefits account management, project management, product development, sales, customer service, and benefits consulting.