So we all know that being an employer entails many tax and legal obligations. These include figuring and paying employment taxes, complying with minimum wage and overtime rules, addressing workers’ compensation and unemployment benefit issues, and ensuring that the company and employees don’t violate federal or state labor laws. Large corporations have HR, accounting, and legal departments to make sure they are in compliance; small businesses don’t.
Professional employer organizations (PEOs) can help small businesses with employer challenges. PEOs (sometimes called employee leasing companies, or what the IRS calls third-party payer arrangements) are companies that become co-employers. If you use a PEO, you remain the common law employer, with the right to hire, fire, and supervise; the PEO shoulders the tax and legal responsibilities of an employer.
If you engage a PEO to manage employment taxes, recognize that you remain 100% liable for these taxes. Even if the PEO absconds with your employment tax deposits and never submits them to the government, you continue to owe them.
A report last March from the Treasury Inspector General of Tax Administration discussed the need for processes to reduce the risk of fraud in employment taxes. As a result, the IRS has taken some steps:
- The Small Business/Self-Employed (SB/SE) division of the IRS issued some guidance to its agents on PEOs; the guidance contains a good explanation of how PEOs work in a tax context.
- The IRS will now send dual notifications if there is a change in address of the employer. (This dual notification requirement was mandated by the Consolidated Appropriations Act of 2014.) The notices are CP 148A, Confirmation of Address Change Mailed to the Taxpayer’s New Address, and CP 148B, Confirmation of Address Change Mailed to the Taxpayer’s Previous Address.
A little noted provision of the Tax Increase Prevention Act of 2014, which extended for 2015 the 50+ tax rules that had expired at the end of 2013, was a direction to the IRS to create a certification program for PEOs. Now the IRS has provided some details about the program, which is poised to become effective on July 1, 2016.
The law says the IRS must:
- Complete background, credit and tax compliance checks of PEOs;
- Verify the PEO has an active and approved surety bond;
- Verify the PEO satisfies the service agreement and financial review requirements;
- Collect a user fee ($1,000) from the PEO; and
- Provide public disclosure of certified PEOs and any whose certification has been suspended or revoked.
Should you use a PEO?
Using a PEO relieves you of some time-consuming and confusing employer obligations (e.g., it can help with a variety of employee benefit plans). It can provide a partner in case of liability. It can save you enough money to pay the cost of the PEO (e.g., contesting bogus workers’ comp claims). And it lets you focus on your business activities.
According to a 2013 white paper, businesses that use PEOs have a 10% higher growth rate. The IRS’ certification program will provide some level of confidence when choosing a PEO if you decide to use one.
There are about 3,500 PEOs in the U.S . Some examples of PEOs:
Learn more about PEOs from the National Association of Professional Employer Organizations (NAPEO).