As businesses choose PEOs to manage HR tasks so they can focus on core operations, many select a certified PEO for the added protections.
For businesses bogged down by human resources requirements, partnering with a certified professional employer organization (CPEO) is an option. Outsourcing HR functions like payroll administration offers business owners more time to focus on customer service and growth. Potential cost savings are another benefit.
According to the National Association of Professional Employer Organizations (NAPEO), 180,000 small and midsize businesses use professional employer organizations (PEOs).¹ Larger companies are also increasingly turning to PEOs. Some may prefer a certified PEO because they offer certain financial protections and safeguards regarding federal employment taxes.
Rigorous vetting and requirements set CPEOs apart from PEOs. The NAPEO states there are only 487 CPEOs in the U.S.² This article will focus on certified PEOs and how they differ from noncertified PEOs.
What is a certified PEO?
A certified PEO is considered a co-employer that manages the responsibilities and risks of human resources. They may provide some or all of a company’s HR needs including payroll, benefits administration, and workers’ compensation. They manage all the company’s federal employment tax responsibilities and obligations. CPEOs are accredited by one of three governing agencies:
- Employer Services Assurance Corporation (ESAC), the official accreditation and financial assurance organization for the industry.
- Internal Revenue Service (IRS).
- Certification Institute.
To receive accreditation, PEOs must demonstrate compliance with 40 of the industry’s gold standard practices. Certification ensures that companies meet stringent financial, background, and reporting requirements.
The accrediting agencies have slightly different certification processes. For example, the IRS focuses more on payroll issues like federal and state taxes. ESAC tends to take a broader approach, verifying the PEO’s reliability, tax responsibility, and knowledge. It also verifies liability insurance coverage and the organization’s financial stability.
This voluntary certification program falls under the Small Business Efficiency Act, part of the Tax Increase Prevention Act of 2014.
PEO vs. CPEO: What’s the difference?
A CPEO is a PEO that has, through the agencies mentioned above, proven its financial and tax responsibility history. Also, it is required to maintain a physical location in the United States.
Outside of the accreditation, the most significant difference is that CPEOs are solely liable for tax filings. If there are questions or discrepancies in the tax filings, the burden falls on the CPEO. Contracting with a noncertified PEO means that both businesses are equally liable for the payment of taxes and any penalties.
What does a PEO do?
A PEO is a human resource management company staffed by professionals specializing in HR, legal, tax, and accounting. A PEO provides covering:
- Administration of employment taxes including tax filings and tax credits.
- Employee benefits administration.
- Compliance for insurance, workers’ compensation, and human resources.
- Talent hiring, firing, and general management.
- Background screening and employee drug testing.
While many PEOs provide all-inclusive services, companies can outsource responsibilities based on their needs. For instance, they may choose to bring on board an in-house HR specialist from the PEO. Or, they might request specific services such as data analytics to identify issues that lead to high employee turnover.
PEOs also help businesses to expand and hire internationally without having to establish their own entity. On the company’s behalf, PEOs maintain responsibility for hiring and paying international employees by country-specific laws and regulations.
As a side note, PEOs typically bill their clients either per employee or as a percentage of the annual payroll. And, because they manage payroll, employee paychecks might come from the PEO and not their employer.
What does PEO certification mean?
Certification is a vetting process that ensures the PEO has a financial and employment tax responsibility history. To be eligible for the certification program, a professional employer organization must undergo a rigorous background check, including electronic fingerprinting. Other requirements include:
- It must be a business entity with a physical address in the U.S.
- Show a history of financial responsibility, tax compliance at every level, and organizational integrity.
- Demonstrate knowledge of federal and state employment tax compliance.
- Post a $1 million bond each year, ensuring they can guarantee employment tax payments for federal tax liabilities.
- It should be managed by experienced tax professionals, a majority of whom are U.S. citizens or residents.
While a PEO may file taxes, the responsibility for errors can fall on the company that outsources them. Thus, it would be liable for interest and penalty fees for those filing errors. If a business opts for a CPEO, instead, they are not responsible. The CPEO must pay for additional monies due for taxes.
Also, with a CPEO, wage-based payroll taxes are not restarted. That means companies that switch mid-year can use their current employer identification number.
Who should consider a CPEO?
A CPEO is a practical option for medium and small businesses without experience with worksite employees, benefits, and payroll. A CPEO also frees up time for stakeholders so they can focus on expanding their business.
CPEOs offer benefits to businesses that prefer to co-employ to meet their staffing needs. It provides peace of mind because the CPEO is responsible for tax errors. That means there is zero tax liability for the business working with the CPEO. As a business grows, it may be more cost-efficient to outsource HR responsibilities rather than to add staff.
In addition, CPEOs undergo an extensive quarterly verification process to maintain their certification. It ensures they are making the required payments, not just for taxes, but also for health insurance and retirement accounts.
1 2021 PEO Industry Footprint, NAPEO
2 Industry statistics, NAPEO