If you’re just starting a business and expecting to hire employees, you’ll soon tackle the challenge of payroll. Managing payroll is oftencompli ...
What Is a Certified PEO?
Written by: Carolyn Young
Carolyn Young is a writer with over 25 years of experience in business in various roles, including bank management, marketing management, and business education.
Reviewed by: Daniel Eisner
Daniel Eisner is a payroll specialist with over a decade of practical experience in senior accounting positions.
Updated on October 1, 2023
What Is a Certified PEO?
A PEO is a professional employer organization that offers outsourced HR services, such as payroll and benefits administration. But what is a certified PEO? This guide provides a complete definition.
A PEO can choose to apply to the IRS to be certified. To earn that distinction, the PEO must provide extensive information about their financials and background. This is no simple task, which is why less than 7% of US PEOs are certified.
After certification, the certified professional employer organization, or CPEO, provides its clients with special protections. For instance, if your small business hires a non-certified PEO to pay your taxes and it fails to submit the required documents and funds on time, you could be liable for unpaid taxes, late penalties and interest that you were required to pay to the IRS on behalf of your employees.
Note that the certification program requires a CPEO to post a bond each year of up to $1 million guaranteeing payment of its federal employment tax liabilities.
Payroll Tax Liability
Before the IRS started certifying PEOs, the PEO and its clients were jointly liable for federal employment taxes. This changed with the Small Business Efficiency Act (SBEA) of 2014, which created the certification system.
Today a CPEO is solely liable for the payment of federal employment taxes, once the client has sent the tax funds to the CPEO.
Employers are eligible for several tax credits. But in a PEO-client relationship, the PEO is considered the employer, which can put those tax credits at risk. This may seem odd, but for tax purposes, the PEO is technically the employer of the employees of its client companies.
Under a CPEO-client relationship, the SBEA clarifies that the client maintains those tax credits.
For employers, federal employment taxes must be paid on a certain amount of each employee’s wage, which is known as the taxable wage base.
If a client company ends its working relationship with a PEO, it often complicates that year’s tax payments for both businesses. The change in the PEO’s status relative to its former client triggers the issuance of a new Federal Employer Identification Number (FEIN) for the PEO. This new FEIN in turn triggers a wage base restart, which means the former client owes additional federal employment taxes.
With a CPEO, this restart cannot occur, potentially saving you significant tax dollars.
Price Difference Between PEOs and Certified PEOs
Certification for a PEO does not come cheap. Certified PEOs are thus more expensive, sometimes significantly more, than PEOs. While having a Certified PEO offers critical protections, you’ll need to determine if it’s worth the added cost for your business.
Using a Payroll Service
Most payroll services are PEOs, and a small percentage of those are CPEOs.
Processing payroll is more complicated than you might think, so it’s a good idea to consider using a payroll service, preferably a CPEO. It’s likely to be less expensive than creating a new staff position for managing payroll.
Payroll and payroll taxes come with countless laws, rules and restrictions, and a payroll service can ensure your business remains in compliance at the federal, state and local levels.
You’ll just need to send over your digital timesheets and relevant employee and business information, and the payroll provider will do the rest. The service even takes care of payments and taxes, freeing you up to focus on running, and growing, your business.
We highly recommend hiring a payroll service — as a busy entrepreneur, you won’t regret it!