From taking time-consuming administrative tasks off of your plate, to managing your payroll operations, to providing access to low-cost (but high-quality) healthcare, and more, the benefits of partnering with a Professional Employer Organization to assist with your critical HR tasks are clear – just take a look at our blog, “The Case for Partnering with a PEO”.
And now, a recent IRS certification provides additional safeguards and assurances that protect businesses who partner with PEOs like Ethan Allen HR Services. But what does this certification mean for your business? We break it down below.
Background on the CPEO Certification
Businesses have been reaping the benefits of PEO services for decades. But in 2014, The Small Business Efficiency Act (SBEA) was enacted – this legislation established additional safeguards for small businesses that use a PEO with the creation of a voluntary IRS certification. Once certified, PEOs become CPEOs and all payroll tax liability is shifted off of their customers and on to them.
How a CPEO Can Protect Your Business
Just as with a PEO, when partnering with a CPEO your business remains the primary employer of your workforce while a CPEO acts as a co-employer. And, again, just like with a typical PEO, while you manage the day-to-day aspects of your business, your partner CPEO handles employer-related tasks like payroll, taxes, filings, compliance, etc. So, what’s the difference then? Take a look:
Payroll tax liability
Under the SBEA, IRS-Certified PEOs are solely liable for employment taxes on wages they pay to your employees. Without the certification, if a PEO neglects to pay employment taxes, the IRS can go after the client company (that’s you) – even if you’ve already paid employment taxes to the PEO.
SBEA outlines that businesses who partner with a CPEO are not at risk of losing potential tax credits as a result of their co-employer relationship – including the work opportunity credit and credit for health insurance expenses.
No FICA and FUTA wage base restart
As you know, employers must pay FICA and FUTA taxes up to the wage base for each employee. Every time a new federal employer identification number is used on an employee’s tax form, the tax must be paid again – do you see the problem? Until SBEA, when a company engaged a PEO after January 1st the wage bases for FICA and FUTA taxes were reset, potentially leading to repayment of FICA and FUTA taxes. But now, when a company engages with a CPEO, the wage bases for these taxes are not reset and there is no repayment needed.
What Does a CPEO Have to Do to Qualify?
To protect businesses, not every PEO can qualify as a CPEO under SBEA. The application process is rigorous and requires a lot of checks and balances that the PEO must undergo. Below is a quick list from NAPEO, the National Association of Professional Employer Organizations.
Bonding – A CPEO must maintain a bond in an amount that is equal to five percent of the CPEO’s federal employment tax liabilities for the previous year (not to exceed $1 million).
Annual Audits – A CPEO must prepare and provide the IRS with comprehensive financial audits annually prepared by a CPA.
Annual Fee – In addition to an application fee, the CPEO must pay an annual fee to remain certified.
Background Reports – The CPEO employees who will make the tax payments must undergo a comprehensive background report.
What Results Can I See with the Support of a CPEO?
Businesses who partner with a CPEO like Ethan Allen HR Services don’t just get time back in their day and protection against compliance issues – they see real bottom line impacts. Here are a few examples:
- According to independent studies from NAPEO, the average annual revenue growth for PEO users is double that of comparable companies who don’t use a PEO, and businesses in a PEO arrangement grow 7-9% faster and are 50% less likely to go out of business.
- According to another study from NAPEO, the turnover rate of businesses that used a PEO for at least four consecutive quarters was 10-14% lower than the average turnover rate across all companies.
- Since a PEO will be a co-employer to your workforce, you’ll benefit from their large-group buying power and be enabled to provide your employees with Fortune 500-level benefits. At Ethan Allen HR Services, our qualified customers can save up to 20% off of the community-rated market!
We break down more benefits your business could see in our fact sheet “10 Benefits of Working with a PEO”. Check it out – no download necessary!