The Small Business Efficiency Act and PEOs

Back in 2011, The Small Business Efficiency Act was introduced in to help Professional Employer Organizations and their clients by providing clarity in how the IRS views the relationship between PEOs and taxes. The bill was passed by Senate in December of 2014 and goes into effect in January 1st, 2016.

For years companies have enjoyed the benefits of Professional Employer Organizations (PEO) by gaining access to streamlined payroll, Fortune 500 benefits, discounts on Workers’ Compensation insurance and trusted HR compliance. PEOs can do this because they co-employ their client’s employees, this simply means that the PEO is the employer of record for taxation and insurance purposes. The client still has full control of their employees, continues to hire and fire their employees and directs their day to day activities.

Because of the co-employment structure the PEO files their client’s state and federal taxes under the PEO's Tax Identification number. When the PEO processes their clients payroll, they take out the taxes and remit them. In the past, a huge headache for companies looking to join a PEO mid-year had been tax restarts. Because if a company decided to join a PEO anytime other than the beginning of the year, the company's taxes would restart.

PEOs would adjust pricing and in many cases absorb the taxes, to gain business. Years ago many PEOs went the legal route and gained opinion letters from prominent tax lawyers and authorities that would allow them to credit the taxes paid back to their clients. That has become the norm for many years now and works even now, never resulting in an issue.

With the advent of The Small Business Efficiency Act, the IRS is recognizing the PEO relationship and give PEOs a solid basis to collect and remit taxes for their clients. The FICA and FUTA tax portion will not restart like in the past. Also, the IRS has created a Voluntary Certification Process that will allow PEOs to become certified and will add protection for PEO clients of Certified PEOs to not be liable if their unpaid payroll taxes by their PEO.

Of particular interest to companies will be the IRS Certification process that adds another layer of protection for PEO clients of Certified PEOs. Here is what a PEO will need to provide to become a certified PEO.

  • PEOs must provide audited financials
  • Have a surety bond of $50,000 minimum or 5% of the PEOs federal payroll tax liabilities.
  • CPA Quarterly attestation
  • Pay an annual filing fee of $1,000 to be a part
  • The IRS will maintain and publish a list of Certified PEOs

Most PEOs now depending on state regulations must submit Audited Financials to obtain state licensing. It seems likely the majority of PEOs will become a Certified PEO to add another layer of protection for their clients. It makes sense to become certified as it will undoubtedly reassure clients and potential clients of the PEO’s stability.

The key takeaways here are that The Small Business Efficiency Act will streamline tax reporting and collection for PEOs and their clients. Allow businesses to join a PEO at their choosing, instead of the beginning of the year. Add another layer of protection for clients of Certified PEOs and resolve issues with certain tax credits.

While this certainly is not going to fix everything in the ever growing PEO industry, it’s a huge leap forward and offers clarity. If you would like to explore how a PEO can help your company, contact us and we will be happy to help you.