The creation of these new IRS-certified service providers for small businesses clarifies some issues around traditional professional employer organizations.
On June 1, 2017, the IRS approved 84 organizations as Certified Professional Employer Organizations (CPEOs), the first group ever to be so certified. A CPEO is a special type of professional employer organization (PEO). PEOs allow businesses to outsource their payroll tax and other tax responsibilities, as well as other obligations, including paying wages and providing Forms W-2, Wage and Tax Statement. The client business keeps day-to-day supervision of employees.
PEOs, which are sometimes referred to as "employee leasing companies," are favored by businesses that do not have the expertise necessary to manage payroll, taxes, benefits, and/or hiring or to navigate compliance with laws such as the Fair Labor Standards Act and the Family and Medical Leave Act. In an era of escalating health, disability, and workers' compensation insurance costs, many smaller companies view PEOs as economically attractive because PEOs representing many companies can capture the volume discounts given to larger organizations.
Under legislation enacted in late 2014, the IRS established a voluntary certification program for PEOs. A PEO that becomes certified under this IRS program is referred to as a CPEO. The certification was welcomed by some as a means for providing more stability and confidence in the PEO marketplace. The CPEO rules lay to rest certain issues that have arisen with PEOs, giving businesses that use them more assurance that they will not be liable for employment taxes.
TYPICAL TERMS OF A PEO
The terms of a PEO arrangement typically provide that the PEO is the employer of a client's employees and is responsible for paying the employees and for the related employment tax compliance. The client typically pays the PEO a fee based on payroll costs plus an additional amount. PEOs may also provide employees with certain benefits coverage, such as a retirement plan or a health plan, even if the client does not maintain such a plan.
In some cases, the employees provided by a PEO to work in a client's business are legally the employees of the client, and the client is legally responsible for employment tax compliance. In other cases, clients rely on the PEO for employment tax compliance and treat the employees as employees of the PEO.
TAX ISSUES AND THE USE OF PEOs
One of the more important issues...