New Certification for Professional Employer Organizations: Is Your Business Protected?

New regulations regarding Professional Employer Organizations (PEOs) were released by the Internal Revenue Service and began to take affect this year. The changes, part of the Tax Increase Prevention Act (TIPA) of 2014, were designed to create enhanced protection for businesses that utilize PEOs for their workforce needs.

Also known as employee leasing companies, PEOs pay employees directly and serve as “co-employers” with the businesses who hire them. The PEO also deposits the taxes on their wages, pays for worker’s compensation insurance, withholds 401(k) contributions and files the various employment tax returns (under the PEO’s name and identification number).

Prior to the TIPA law, businesses were considered responsible for withholding taxes for employees paid by a PEO. Therefore, if the PEO failed to make the tax deposits, the business would be required to pay the taxes again, this time directly to the IRS.

Under TIPA, the IRS was instructed to prepare and regulate a Certified Professional Employee Organization (CPEO) designation program. The CPEO applicant must, among other requirements:

  1. Complete a background and tax compliance check;
  2. Secure an approved surety bond;
  3. Satisfy service agreement and financial review requirements;
  4. Provide quarterly assertions and attestations regarding federal employment tax compliance; and
  5. Pay an annual use fee of up to $1,000.

 

The IRS began accepting applications in July. If your business currently uses a PEO, follow up with them to ensure they have gone through the certification process. If you’re considering a PEO, make sure to work with one that is already certified.

What’s in it for you? Once your PEO is certified, they are treated as the sole employer of the employees, and your business is released from any liability to withhold taxes on their wages. Furthermore, failure of the CPEO to follow IRS regulations and/or pay the fee to maintain their certification is made public by the IRS, allowing you the opportunity to check your CPEO’s status at any time.

If you have any questions about protecting your business under the new CPEO regulations, please contact Alan S. Isaacs, CPA, MBA at [email protected].



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