Topic Outsourcing HR / PEO

Certified vs. Non-certified PEO: What is the Difference?

Certified vs. Non-certified PEO: What is the Difference?

The challenges of running a small to medium-sized business increase exponentially when trying to expand market presence. Organizational growth tends to be a good news/bad news situation. The good news is, your business is getting bigger, which is the only thing that really matters. The bad news, however, is that now you need to increase critical aspects of operations to match all that wonderful growth. Things like payroll and human resources become more complex, and if they're not handled with extreme efficiency, your company will suffer. 

For many business leaders facing the problem of scale, the answer lies in outsourcing key responsibilities to a Professional Employer Organization (PEO). Such a decision can help to control costs, reduce risk, and relieve the burden of a potentially overwhelming level of administrative tasks.

The benefits of onboarding a PEO may be something you've been considering for a while now. What you might not be aware of, however, is that some PEOs are IRS certified and some are not.

What is a certified PEO?

A certified Professional Employer Organization (CPEO)  is a PEO that has gone through a rigorous certification process by the Internal Revenue Service.

It's critically important to know that the IRS does not equate certification to the preference of one PEO over another. It doesn't indicate endorsement or anything of that nature. All it means is that the PEO passed and continues to maintain certain regulatory and legislative requirements. 

Is your current PEO providing best-in-class service? Let's find out.

Origins and Requirements of CPEOs

The certification program for PEOs originates from the Small Business Efficiency Act (SBEA) that was part of the Tax Increase Prevention Act of 2014. The certification program consists of an entirely voluntary process that PEOs can participate in to achieve certain legal and financial protections. To gain such status, PEOs must undergo the following requirements on a periodic basis.

Bonding - The applying PEO must submit to the IRS proof of the greater between a $50,000 bond or a bond equal to 5 percent of the firm's federal employment tax liabilities for the previous year. This verification needs to be submitted within 30 days of the notice for certification. If the PEO meets all the other requirements but fails to provide proof of bonding, certification will not be granted. 

Annual Audits - Any PEO who desires certification must learn to love audits. The PEO is required to at least work with a CPA to submit annual independent financial statement audits to the IRS without lapse.

Quarterly CPA Attestations - More than mere audits, CPEOs must also provide the IRS with quarterly proof of payment for all employment taxes. Each of these statements must also include an attestation by a CPA. 

Annual Fee - They say you get what you pay for, and PEO certification is no different. PEOs are required to pay an annual fee of $1,000 to obtain and maintain certification status.

Results of Certification

So now you know all about the gauntlet of standards and processes required for a PEO to achieve certification. Once that happens, they can pay forward the following results to their clients:

Some Wage Base Tax Restarts Eliminated - Due to the successor employer status of CPEOs for federal payroll taxes, clients that contract with them will not be subject to double taxation from the Federal Insurance Contributions Act (FICA) or the Federal Unemployment Tax Act (FUTA).

Tax Liability Clarified - Federal employment taxes for worksite employees become 100 percent the responsibility of the CPEO, not their client. 

Tax Credit Eligibility - Businesses that partner with CPEOs are still eligible for certain federal tax credits.

The biggest benefit for the CPEO itself is that the idea of certification—on its own—provides a certain sense of professionalism among industry outsiders, like federal watchdogs and even likely financial benefactors. So far, nearly 1,000 PEOs exist in the USA, but less than 15 percent of them have passed the certification model.

How to Choose Your Certified PEO

Although, certification is not the only thing to look for when choosing a PEO, keep in mind the many benefits the CPEO can pay forward to its clients, such as the elimination of wage base tax restarts, the delegation of federal employment tax liability, and retaining tax credit eligibility. 

If you're thinking about partnering with a PEO to outsource your HR tasks and responsibilities, you should consider extending your knowledge base by downloading this informative ebook: "How the Right HR Outsourcing Partner Brings you Closer to Your Dreams." Doing business with a PEO can be a tremendously valuable partnership, but only if you select the right one for your specific needs.

The IRS does not endorse any particular certified professional employer organization. For more information on certified professional employer organizations, go to

How the Right HR Outsourcing Partner Brings you Closer to Your Dreams

Brandon Hartsaw

Brandon Hartsaw

Acting as the Chief Operations Officer, Brandon actively promotes an environment of creativity, collaboration, and individual ownership to empower Questco team members to deliver exceptional client experiences.