The Small Business Efficiency Act (SBEA), passed in December 2014, became the first-ever statutory recognition of Professional Employer Organizations (PEOs). The SBEA established a voluntary certification process for PEOs with the IRS - The CPEO Program.
A certified Professional Employer Organization (CPEO) must meet rigorous financial and reporting requirements established by the IRS, providing greater protections and advantages to business owners.
If a PEO is certified with the IRS and its client worksite employees are covered by a qualified service contract at a qualified worksite, the following provisions apply to the CPEO:
• The CPEO has clear statutory authority to collect and remit federal employment taxes under the CPEO’s EIN for wages the CPEO pays to worksite employees.
• The CPEO does not have to restart the FICA and FUTA wage bases when a client joins or leaves a CPEO midyear.
• The clients of CPEOs qualify for specified federal tax credits that the clients would be entitled to claim if there were no PEO relationship.
• The CPEO receives a federal tax credit for SUTA taxes paid. If a CPEO (or a client) contributes to a state unemployment fund for wages paid to a worksite employee, the CPEO receives the federal (FUTA) tax credit for that contribution.
• The CPEO is treated as the employer for employment-tax liability purposes, and the employer is released from liability for those employment taxes.
Tax Advantages to CPEO Clients
- Once taxes are paid to the CPEO, the client is relieved of any future tax liability.
- CPEO clients continue to qualify for the specified federal tax credits to which they are entitled.
- The CPEO has express authority to collect and remit federal employment taxes for wages the CPEO pays to worksite employees.
- The CPEO does not have to restart the FICA and FUTA wage bases when a client joins or leaves a CPEO mid-year. More Client Protections
- The CPEO must maintain a bond of up to $1 million each year in favor of its clients.
- The CPEO must provide the IRS with annual independent financial statement audits prepared by a CPA.
- The CPEO must provide quarterly certifications to the IRS from an independent CPA that all taxes have been paid.
Engage PEO is among the first PEOs in the U.S. to become a CPEO with the IRS. A list of all CPEOs is published on the IRS website, as well as a list of those PEOs whose certification has been revoked or suspended.
The IRS does not endorse any particular certified professional employer organization. For more information on certified professional employer organizations, go to www.IRS.gov.