On December 19, 2014, the Tax Increase Prevention Act of 2014 was signed into law. This included the enactment of the Small Business Efficiency Act (SBEA), which amended the Internal Revenue Code to establish a certification program for Professional Employer Organizations (PEOs).This certification program should eliminate certain concerns employers may have about partnering with a PEO.
What Does the SBEA do?
In a PEO relationship, the PEO collects and remits employment taxes for their clients and worksite employees. The current tax law is somewhat vague regarding who is ultimately responsible for the withholding and payment of these employment taxes in the PEO environment – the client or the PEO. The SBEA eliminates any uncertainties by clarifying that it is the PEO which is responsible for remitting federal payroll taxes to the IRS. As such, employers that use certified PEOs to remit their payroll taxes are protected under the Act.
In addition, the SBEA:
- Grants certified PEOs clear authority to collect and pay federal employment taxes on behalf of their clients under the PEO’s EIN (Employer Identification Number) for wages the PEO pays to worksite employees;
- Provides protections for PEO clients who pay their federal payroll tax obligations through a PEO and states PEO clients will never be held liable for those taxes;
- Considers the PEO a Successor Employer. This eliminates the double taxation of FICA and FUTA when a client joins or leaves a PEO mid-year. The law clarifies that employee wage bases will not restart when joining or leaving a PEO mid-year;
- Establishes that clients, and not the PEO, can claim certain tax credits related to employment taxes (the Work Opportunity Tax Credit, for example). This removes any uncertainty and confirms PEO clients may claim the same tax credits that they would be entitled to claim if there were no PEO relationship.
The Certification Process
The SBEA tasks the IRS with creating a voluntary certification program for PEOs prior to the January 1, 2016 effective date of the law. To qualify for IRS certification, PEOs must meet a range of stringent standards, including:
- Specific bonding requirements – PEO must maintain either a $50,000 bond or a bond equal to 5% of the PEO’s federal employment tax liabilities for the previous year (up to a maximum of $1 million);
- Obtaining and providing the IRS an independent financial review from a certified accounting firm;
- Quarterly audits by an outside CPA firm regarding payment of all employment taxes;
- Have no criminal record;
- Have a clean tax payment history;
CPEhr welcomes the passage of the SDEA and the IRS certification program. CPEhr intends to voluntarily engage the certification process to ensure the highest standards of accountability and reliability to its clients.
With the growing popularity of Professional Employer Organizations and the ongoing uncertainty of many laws pertaining to the PEO/client relationship, CPEhr applauds the passage of the SBEA which resolves many of these unsettled issues. Furthermore, many PEOs do not currently adhere to any industry accreditation programs and the new law provides a strong message to businesses across the nation that utilizing a certified PEO to manage their payroll and tax liabilities is a secure and responsible way to run their business.
For more information about CPEhr’s Professional Employer Organization services, please contact us at firstname.lastname@example.org