February 17, 2021 | By Derek Carlstrom
Professional Employer Organizations (PEO) help small and mid-sized companies overcome HR challenges. PEOs have long helped companies reach their goals by reducing the internal strain of complex and time-consuming HR tasks. PEOs could handle complex HR duties at the state and federal level, but statutory authority related federal duties remained unclarified. In 2014, the Small Business Efficiency Act (SBEA) addressed this by creating a voluntary program offering a PEO opportunity to become a certified PEO (CPEO). In exchange, CPEOs are held to a higher regulatory standard than other PEOs. The question facing PEOs become whether to become a certified vs. non-certified PEO.
The SBEA was signed into law as part of the Tax Increase Prevention Act of 2014. For many years, small business owners and employees have drowned in compliance and regulation, getting confused by wage and hour laws, workers' compensation, and equal employment opportunity requirements. PEOs have been a lifeline for some companies, helping to navigate these complex waters. By enacting the SBEA, PEOs have clear direction from a federal compliance perspective, something that was lacking prior to this law.
For many years, PEOs have operated under state law, filing taxes for small businesses at the state level. PEOs also remitted federal tax, which they were able to do through a co-employment relationship, but there was never clear federal guidance. The SBEA provided PEOs and their clients with clear statutory authority to collect and remit federal employment taxes. The SBEA helped to ease any confusion about how and whether a PEO could handle federal taxes for small business clients.
The SBEA went one step further by providing a certification process for PEOs. This process is entirely voluntary. Receiving certification requires the PEO to undergo an initial evaluation and also to meet certain annual requirements. Getting and maintaining certification with the IRS involves four key steps:
To get and maintain certification, a PEO must get a $50,000 bond. This amount is the bare minimum and will be higher if the PEO is larger. The PEO is required to have a bond equal to five percent of the federal employment tax liabilities for the previous year. The bond requirements caps at $1 million.
A PEO must provide the IRS with annual audits from the PEO's CPA. Each independent financial statement audit must be signed off on by a CPA. These audits are required for the PEO to remain certified.
Besides annual audits, to maintain certification, a PEO must provide quarterly assertions to the IRS. These quarterly documents must clearly state all employment taxes paid by the PEO. Each of these filings must also contain an attestation by an independent CPA.
To maintain certification status with the IRS, a PEO must pay an annual fee. The IRS calculates the annual fee for each PEO, and the fee is not more than $1000.
There are several advantages for both PEOs and their clients when a PEO gets and maintains certification from the IRS. Many of the benefits for both the PEO and their small business clients center around tax liability and cost savings.
With few exceptions, every company must pay federal employment taxes on a certain amount of employee's wages. This is called the wage base. When a business joins a PEO on any date other than January 1, there is the potential for double taxation because the wage base could be reset by filing under a new Federal Employer Identification Number (FEIN). The SBEA clarified that when a small business joins or changes a CPEO mid-year, their wage base does not reset, eliminating any potential for double taxation.
Because tax credits only apply to the employer, there is the potential for confusion about whether the PEO or your business would receive tax credits. Through certification, the SBEA further clarified that tax credits remain with your small business when you partner with a CPEO.
Generally, the IRS holds both the PEO and their small business clients liable for paying federal employment taxes. However, a certified PEO holds sole responsibility for federal tax liability under the SBEA. Once your business has paid the invoice to your CPEO, the IRS will hold them liable for any mistakes or missed federal tax payments.
PEOs relationships can cause confusion about which company is responsible for different aspects of employee compliance and tax. The SBEA helps to clarify and properly structure the relationship between certified PEOs and their small business clients while simultaneously providing for additional tax benefits and savings.
Beyond that, the certification process provides additional peace of mind to you. As a small business owner, you can have confidence that a certified PEO like Questco understands their responsibilities in your partnership and will not let your business down.
The IRS does not endorse any particular certified professional employer organization. For more information on certified professional employer organizations, go to www.irs.gov.
Derek is the Vice President of Sales Growth. He is a proactive leader with refined business acumen and exemplary people skills. He has progressive experience in sales leadership with the skills to drive business growth, capitalize on new revenue potential, and execute proper territory maximization