As a small business owner, your customers expect you to be up to code and up-to-date on your certifications, licenses, and insurance documents. Shouldn’t you expect the same of your professional employer organization? When it comes to finding the right PEO for your business, there’s a lot to consider. One of the things you should look for is if the PEO is IRS certified. But what makes this certification so important? At The Medical Link, we’ve partnered with leading PEOs to ensure that your business gets the quality benefits it deserves. As such, we’ve found that IRS-certified PEOs make for great partners. Let’s take a look at why.
Why Does Your PEO Need to be Certified?
The need for IRS certification stems from a piece of legislation from 2014. The SBEA, or Small Business Efficiency Act, made clear the connection between a PEO and their customers for federal payroll tax reasons.
Prior to this act, the IRS didn’t recognize the difference between client and PEO when assessing federal taxes. This made it difficult for businesses to maintain a partnership with their PEO or move from one PEO to another.
What Does it Take to Become IRS Certified?
Not every professional employer organization will be certified by the IRS. To begin with, this is an entirely voluntary process. To be eligible to become certified, the PEO must be a business entity with at least one physical entity in the U.S., and has a long-running history of local, state, and federal tax compliance.
In order to receive this certification, the PEO has to meet a few requirements. In brief, this process includes an audit of the financial statements of the PEO, proof that they have positive working capital, reports that are CPA-affirmed showing they pay employment taxes on time, and thorough background checks for those who handle employment tax payments.
Essentially, the IRS wants to screen PEOs for the features because these companies are responsible for paying employment taxes on the wages they’re paying to worksite employees. By partnering with a CPEO, you’re shifting tax liabilities to the PEO, which reduces double tax liability and grants you more freedom to run your business based on your needs.
The Co-Employment Relationship With Your CPEO
One of the major advantages of working with a CPEO is that they will assume many of the employee responsibilities that you currently manage, like HR, payroll, onboarding, and even time tracking. To do this, your CPEO establishes a co-employment relationship with you. In this relationship, you still serve as the employer, and still control what your employees work on, your organizational structure, and goals. Additionally, your leadership team stays in their positions. This allows everyone in your business to focus on their key objectives.
The CPEO then acts to alleviate some of the pressures from your business. The CPEO acts as an employer for tasks like benefits, payroll, government filings, and tax remittance.
What You Need to Know About CPEO
One of the pressing concerns small business owners have when choosing a PEO is determining who is eligible for certain tax credits. The SBEA clarified who was responsible for payroll tax liability and double payment of taxes, as well as determined who retained specified tax credits.
Before the SBEA, the IRS could approach the small business asking for payroll taxes, even though the PEO was managing them. In many cases, the business thought that these taxes had already been paid to the PEO. After the passage of the act, however, it’s clear that CPEOs are the only ones liable for the payment of federal employment taxes on the wages it paid to worksite employees. So when the small business pays its CPEO partner, it includes these taxes. This means that the IRS cannot collect any further taxes from the business. Ultimately, the SBEA made the CPEO liable for payroll taxes, not its business client.
In the past, there was some concern about the double payment of these taxes. This happened when businesses would start working with a PEO. This is the result of “wage-base restart” which occurs when a company joins or leaves a PEO part way through the year. The wage-base restart would occur when a new federal employer identification number was used. Thanks to the SBEA, the wage-base does not reset. The CPEO becomes a successor employer and is solely responsible for the payment of the taxes.
In many cases, tax credits are dependent on the employer, and when a business enters a CPEO co-employment relationship, business owners might be concerned that they would no longer be eligible for these credits. The SBEA ensures that business owners get to keep tax credits even when working with a CPEO. This includes credits like:
The Advantages of a CPEO
While a PEO and a CPEO are very similar, that IRS certification affords you more benefits than if you were to work with just a PEO.
An IRS certification has to be renewed regularly for a PEO to maintain the status. This means that your CPEO partner regularly repeats the certification process, ensuring that it is financially sound and responsible. You can easily verify if a PEO has been certified by using the verification tool from ESAC. Finally, a CPEO offers you a level of financial security that a PEO cannot. Should the PEO fail, or mismanage your funds, you have no recourse with a PEO.
We Can Help You Find the Right CPEO for Your Business
Ready to partner with a CPEO? Let The Medical Link help. With more than 25 years of experience, we have the connections and resources you need to find the right CPEO for your needs. Contact us today!