Running a business is no easy feat, and one of the best ways to get help streamlining operations and promoting growth is by working with a professional employer organization (PEO). But not all these organizations are the same. Some, known as certified PEOs, have higher standards that set them apart from their peers. In this article, we'll look at what makes working with a certified PEO a worthwhile investment for your business.
What is a PEO?
A PEO provides comprehensive HR outsourcing solutions for small and medium-sized businesses (SMBs). PEOs help with payroll processing, benefits administration, payroll tax administration, and HR compliance. When a client engages with a PEO for services, the PEO becomes the co-employer of the client’s employees for certain services. This means that the client continues to manage their employees and run the daily operations, and the PEO is the employer of record and assumes certain responsibilities of payroll processing and tax filings and also helps with human resources functions.
A Certified Professional Employer Organization (CPEO) is a PEO that has met specific requirements set forth and approved by the Internal Revenue Service (IRS). TriNet is a certified PEO trusted by thousands of its clients.
Through this voluntary certification program, the IRS and federal law set requirements for PEOs on obligations relating to finance and payroll taxes. By attaining the CPEO status, PEOs demonstrate a higher level of credibility and reliability in their financial operations and payroll tax administration. The IRS wants payroll taxes to be accurately paid and accounted for. The program helps the agency prevent businesses working with PEOs from inadvertently evading their payroll tax obligations.
Distinction Between Certified and Non-Certified PEOs
There are some important differences that SMBs should note when considering a non-certified PEO or a CPEO. Here are some of the benefits of SMBs working with a CPEO:
Certification and oversight
CPEO. Undergoes a rigorous certification process with the IRS and recurring quarterly and annual reviews upon certification. This process and reviews ensure that the PEO meets strict requirements related to tax status, financial stability, and background.
Non-Certified PEO. Does not undergo the IRS certification process and isn't subject to the same level of federal oversight.
Tax liability and benefits
CPEO. Solely responsible for the collection and remittance of federal employment taxes on wages that is paid by CPEO clients. Clients working with a CPEO also do not have to worry about potentially paying additional FUTA (Federal Unemployment Tax Act) and FICA (Federal Insurance Contributions Act) taxes since these taxes are paid on the wage base for each employee. When a client works with a CPEO, these taxes are paid on the CPEO employer identification number (EIN), and clients do not have to pay these taxes again if they join or leave the PEO mid-year.
Non-Certified PEO. Shared liability might exist between the PEO and the client. The potential for a wage base restart exists if clients switch mid-year.
Financial reporting
CPEO. Required to undergo regular financial audits and provide quarterly assertions, attestations, and working capital statements. This enables the IRS to monitor the financial health and compliance of CPEOs.
Non-Certified PEO. Not bound by the same stringent financial reporting requirements as CPEOs.
Bond requirement
CPEO. Must hold a bond equal to 5% of the federal employment tax liabilities reported during the previous year with a minimum of $50,000 and a maximum of $1,000,000 to help ensure tax obligations are met.
Non-Certified PEO. No such specific bond requirement related to federal employment taxes.
Compliance benefits
CPEO. Certified status provides clarity around the PEO's responsibility regarding federal employment tax liabilities, which can be appealing to potential clients.
Non-Certified PEO. They might not offer the same level of clarity or assurance, making due diligence surrounding payroll taxes crucial for businesses considering a PEO relationship.
Why did the IRS create a PEO Certification Program?
In 2014, the Small Business Efficiency Act (SBEA) helped establish the voluntary program offering PEOs the opportunity to become certified PEOs. The CPEO designation isn't one that the IRS takes lightly. Below are some specific reasons to creation of the program:
- Clarification about maintaining tax credits. Before the creation of the CPEO program, there was ambiguity regarding the eligibility to claim wage-based tax credits when a business contracted with a PEO. This is because, technically, the PEO becomes the employer of record for tax purposes. However, with the advent of CPEOs, clarity was provided. Now, clients of CPEOs can retain their eligibility for certain tax credits based on wages and employment, such as the Work Opportunity Tax Credit (WOTC).
- Clarification of employment tax responsibilities. Before the CPEO program, there was ambiguity regarding who — the PEO or the client company — was responsible for federal employment tax liabilities. With CPEOs, the IRS made it clear that the CPEO is liable for the payroll administration and related federal employment taxes.
- Enhanced oversight and compliance. The CPEO certification process involves background checks, financial audits, and bonding requirements, which helps to ensure CPEOs are financially stable and compliant. This level of oversight helps to assure businesses that CPEOs are trustworthy providers with expertise to follow the Internal Revenue Code.
- Elimination of wage-base restarts: A wage base restart occurs when a business switches to a PEO mid-year, potentially causing employees to restart their Social Security and Medicare wage bases, leading to possible double taxation on wages. CPEOs offer an advantage by eliminating the possibility of a wage base restart. When businesses work with a CPEO, the wage base continuity is maintained by designating the CPEO as the "successor employer" at the federal level, preventing the double taxation scenario.
Find a Certified PEO that's Right for Your Business
Small businesses that work with CPEOs gain access to extra value in managing complex and ever-evolving HR tasks. By choosing a CPEO, businesses can collaborate with an organization that has met the stringent financial, tax, and background standards set by the IRS. This not only guarantees expert handling of tax responsibilities but also can help to eliminate certain potential risks.
TriNet, as a CPEO, reflects these high standards of excellence and reliability. Beyond just meeting the rigorous IRS requirements, TriNet goes the extra mile in serving its clients. It offers a comprehensive suite of HR solutions tailored to specific industries, helping businesses, whether startups or established enterprises, receive personalized HR support. By trusting TriNet, clients gain not only an HR provider but also the peace of mind that comes from knowing they are a certified PEO. Contact a representative at TriNet today to find out more about how they can prove to be a valuable provider for your business.
This communication is for informational purposes only, is not legal, tax or accounting advice, and is not an offer to sell, buy or procure insurance.
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