What is a Certified PEO and Do I Need One?

certified peoOn December 19, 2014, President Obama signed the Small Business Efficiency Act (SBEA), giving professional employer organizations (PEOs) statutory recognition. Essentially, PEOs will now have the opportunity to seek certification with the IRS in order to obtain certain benefits.

The IRS must define the PEO certification progress and implement the program by July 1, 2016. With this deadline quickly approaching, many PEOs are prepared to seek certification; however, the SBEA does not require PEOs to be certified.

That leaves many businesses asking: What are the ramifications of PEO certification for small businesses? Will it make a difference in the services offered? Here’s what you need to know.

Requirements for Certification

In order to be certified by the IRS, a PEO must meet the following requirements:

  • Annual CPA Audit
  • Quarterly Confirmation of Employment Tax Payments
  • Minimum $50,000 Surety Bond
  • Employee Background Checks
  • IRS-Approved Client Service Agreement
  • Pay Annual Fee

Reputable PEOs already have many of these items in place to ensure the best service for their clients. The IRS requirements will simply need to be documented and submitted for review in order receive and maintain certification.

How Does the PEO Benefit?

Certification brings with it some associated costs. Since it isn’t required, PEOs will have to weigh the benefits of certification against those costs in order to determine which direction they will go. Benefits include:

  • Statutory Authority—Certified PEOs (CPEOs) will have the authority to collect and remit taxes on behalf of their clients. While PEOs do this already, certification will give this activity official IRS recognition.
  • Eliminate Wage Base Restarts—Currently, if a business joins a PEO mid-year, FICA and FUTA wage bases are reset, which results in higher costs for tax withholding. These wage base restarts will be eliminated for CPEOs, which will act as successor employers.
  • Tax Credits—Small businesses that partner with a CPEO will still qualify for small business tax credits. Without certification, the larger employee base of the PEO may affect the ability of some small businesses to benefit from these tax credits.

Will Small Businesses Be Affected?

The working relationship a business has with a PEO will remain virtually unchanged. The SBEA ruling does not change how a PEO will interact with clients or which services may be offered. It simply provides official recognition of the PEO and provides some tax benefits.

The bottom line is that businesses will still receive significant benefits from a PEO partnership whether or not that PEO has official certification. Costs may fluctuate slightly among providers since there will be an annual fee associated with voluntary certification.

If you are ready to partner with a PEO, our PEO matching tool helps you compare individual providers based on your business requirements.