You’ve made the decision to start investigating PEOs, and you’re ready to compare all the different plans that PEOs have to offer. There are lots of things to consider, but you should begin analyzing every PEO with three critical questions that cover the basics about disclosure regarding fees, cancellation, and taxes.
UNDERSTAND THE ADMIN FEE
A PEO’s administration fee covers the main functions of the service, including payroll, benefits administration, and the other core services in a PEO agreement. Since that’s the bulk of the cost of using a PEO, you want to know exactly how that fee breaks down.
When you ask about the details of a PEO’s admin fee, you should come away knowing several important things. Is the admin fee a flat amount per employee? Is it a percentage of payroll? Can the PEO explain each piece of the overall admin fee, or is it bundled together into one big mysterious charge?
You want to make sure that the details of the admin fee are fully disclosed/unbundled and that you understand your cost of doing business with a PEO. A great PEO will work hard to answer your questions and ensure that you’re comfortable with working with them.
JUST IN CASE… CAN YOU CANCEL?
Things sometimes happen -- an unexpected significant change to your business or the sector that you operate in, or an emergency that makes working with a PEO a no-go… and unfortunately, you’ve just signed up. What now?
Ask your potential PEO for a clear explanation of their cancellation policy. A trustworthy PEO will have no trouble outlining what happens if, for whatever reason, you decide not to continue working with them. Look for a PEO with a 30-day cancellation policy, which could save you a tremendous amount of trouble if something too difficult comes up (and be wary if the cancellation policy is excessively restrictive).
ARE THERE ANY STATE OR FEDERAL TAX RESTARTS?
You probably don’t want to wait to switch over to a PEO until it’s perfectly aligned with the fiscal year -- you want to get HR done cheaper and more efficiently starting right now. But are there any tax consequences of changing course mid-year?
For example, the Federal Unemployment Tax Act (FUTA) stipulates that an employer must pay a 6% tax on the first $7,000 of an employee’s wages each year. Switching to a PEO means that the employee will be paid from a new employer identification number (EIN) mid-year so that tax could potentially be re-started and paid again. Both you and your employees want to avoid double taxation.
The federal Small Business Efficiency Act (SBEA) was passed in part to eliminate that problem; it eliminates wage-based tax restarts at the federal level and was fully implemented by the IRS on July 1 of this year. States, however, may have PEO-friendly policies or may require a bit more action from the PEO to ensure a smooth transition on the tax front. Your PEO should be able to explain the processes for all potential state and federal tax restarts before you begin a relationship with them.
IF YOU’RE NOT SURE, ASK (AND ASK AGAIN)
Asking questions of a potential PEO pays off in several ways. Not only does it clear up areas of concern or confusion for you, but it also gives you an idea of what it’s like to work with that PEO -- it’s like the first date in the PEO relationship. You want to cover the basics we’ve outlined (admin fee, cancellation policy, and tax restarts), but you also want to see how the PEO responds to your queries. You’ll surely have questions somewhere down the road, so getting early insight into how a PEO will serve you will help you decide which PEO is the best fit for you.