Congress Eliminates Downsides for Companies Using PEOs
Many companies in the technology space use a professional employer organization to handle payroll, benefits and HR functions, but a lack of guidance from tax authorities created several downsides. The Small Business Efficiency Act removes many of those.
Many companies in the technology space use a professional employer organization (PEO) to handle their payroll, benefits and human resource functions. Under this arrangement, the PEO provides comprehensive payroll, insurance and human resource outsourcing to unrelated third-party employers. The PEO can offer a broad range of benefits that companies would otherwise need to price and shop for including retirement, health, disability and life. PEOs generally make money by charging a fee based upon total payroll; however, a business can often offset this fee by having access to group rates and a larger pool of resources.
Previously, a lack of guidance by tax authorities created several downsides to using a PEO. It was unclear which company was the true employer for tax credit purposes, and companies were similarly unsure which business would be responsible for payroll taxes if they were not paid timely. Employers could also be subject to double taxation if a company switched to or from a PEO mid-year because the employers’ wage base would reset for tax purposes.
Fortunately, Congress passed the Small Business Efficiency Act (SBEA) in December 2014, which creates a Certified Professional Employer Organization (CPEO) program maintained by the IRS. If a work-site employer utilizes a CPEO, then it will not be held liable for any unpaid payroll taxes that the PEO does not remit. This had been an issue in the past, as some insolvent PEOs did not pay the applicable payroll taxes and the work-site employer was held liable even though the taxes had been paid to the PEO.
Another issue concerned the restart of the wage base (FICA, FUTA and SUTA ), should the work-site business start or stop using the PEO during the year. The SBEA now allows employers to join or leave CPEOs mid-year without resetting their wage base.
The legislation also states that the work-site employer, not the CPEO, will qualify for the specified federal tax credits to which the employer would otherwise be entitled. Those tax credits include: the R&D credit, the employee health insurance expenses of small employers, the work opportunity tax credit, state-specific jobs tax credits, temporary incentives for employing long-term family assistance recipients, the empowerment zone employment credits, the renewal community employment credits and any other credit as provided by the Secretary of Treasury.
In order to be considered a CPEO, each PEO must satisfy bond and audit requirements. A CPEO must undergo background and tax compliance checks, satisfy financial review requirements and provide quarterly assertions and attestations regarding federal employment tax compliance. The CPEO is also required to provide the employer with any information necessary for the employer to claim their applicable tax credits.
While the decision of a company to use a PEO hinges on many factors and may still not be the best option for your company, this legislation removes many of the downsides. Congress has taken a step in the right direction by providing clarity to the many companies using PEOs across the U.S.
Are you considering a PEO or searching for a payroll provider? Contact Charles Webb at email@example.com to discuss how HA&W can help you choose the right provider for your company.
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.