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A Professional Employer Organization (PEO) provides outsourcing of payroll, human resources, and other administrative tasks to help businesses manage employee-related functions. The difference between a PEO and a Certified Professional Employer Organization (CPEO) lies in the certification status. A CPEO has been certified by the Internal Revenue Service (IRS), indicating it has met specific standards related to tax compliance, financial responsibility, and business practices. This certification can offer businesses greater assurance and potential tax benefits that non-certified PEOs do not provide.
- A Professional Employer Organization (PEO) is a company that takes over payroll, HR and employment compliance tasks on behalf of client companies.
- A certified PEO (CPEO) is a PEO that has gone through the rigorous certification process overseen by the Internal Revenue Service (IRS).
- Certified PEOs should be distinguished from accredited and registered PEOs which involve separate processes.
If you’re in the market for the services of a PEO (Professional Employer Organization), you may have come across the term ‘certified Professional Employer Organization’ — otherwise known as a CPEO. This begs the question: What exactly is a CPEO? Furthermore, how does a CPEO differ from the traditional PEO business model? This article delves into the issue: Read on to find out which is better for your business.
PEOs vs. CPEO: An Overview
PEOs and CPEOs are both providers of HR outsourcing services. In general, PEOs help small to mid-sized businesses with payroll, benefits administration, workers’ compensation, and other HR-related tasks. They become the ‘Employer of Record’ (EOR) for the workforce of a client company, becoming responsible for filing employment taxes and a range of other compliance obligations. CPEOs are a subset of PEOs that have also been certified by the Internal Revenue Service (IRS).
To become a CPEO, an organization must meet certain requirements late out in federal law, and by the IRS. These requirements relate to financial stability, insurance coverage, past performance, criminal background checks, and bonding. Once certified, a CPEO becomes the sole party legally responsible for withholding, paying, and reporting employment taxes on behalf of its clients. This arrangement can provide significant advantages for businesses that use CPEO services.
What is a CPEO?
A certified Professional Employer Organization, or CPEO, is a PEO that has been certified by the IRS (also known as ‘IRS Certified Professional Employer Organizations‘): As part of their certification, they must meet strict compliance requirements, as well as posting a bond or line of credit to ensure that they will meet their obligations to their clients.
In exchange for these services, CPEOs typically charge a fee equal to a percentage of their clients’ total payroll expenses. While CPEOs can provide a valuable service to businesses of all sizes, they are particularly well-suited to small businesses that lack the resources to manage these functions on their own, and want assurance that a third party will become responsible for tax compliance. By outsourcing these important but time-consuming tasks, small business owners can free up time to focus on growing their businesses.
What Are the Requirements for Becoming a CPEO?
There are several requirements that a PEO must meet in order to become a CPEO:
- They must be a registered business entity
- They must have at least one physical business location within the United States. This means that global PEOs can become a CPEO in the US as long as they have a business location there
- They must have a demonstrated history of financial responsibility, organizational integrity, and tax compliance (at the federal, state, and local levels)
- They must be managed by individuals (a majority of whom are U.S. citizens or residents) with knowledge or experience concerning federal and state employment tax compliance and related business practices.
What must a CPEO do to maintain certification?
PEO certification is not a ‘one-time thing’: There are steps which need to be taken every year to maintain certification. This includes:
- CPEO Account Updates. This means updating any essential information changes regarding the CPEO with the IRS
- Annual Verification. Through this step, the company verifies that it has complied with all the compliance requirements that year.
- Bond. Within 30 days of certification, a CPEO must post bond to ensure they are able to pay taxes as they fall due. Each year the CPEO must continue to post a bond (or bonds) from a qualified surety to guarantee payment of federal employment taxes.
- Annual Audited Financial Statements. Along with these statements, a CPA is required to assert that the statements have been prepared in accordance with Generally Accepted Accounting Principles (GAAP).
- Quarterly Assertions, Attestations, and Working Capital Statements. By the end of the second month after each quarter, a CPEO must assert with the IRS that it has withheld and made deposits of all federal employment taxes for which it is liable for the quarter. They must also provide an attestation from a CPA stating that this assertion is fairly stated in all material respects. Finally, the CPA needs to provide a statement verifying that the CPEO has positive working capital.
- Report Commencement and Termination of Contracts. A CPEO must report to the IRS which companies it has responsibility for.
- Employment Tax Reporting. All reports relating to federal payroll and unemployment taxes, as well as income taxes must be filed on time.
- Material Changes. The CPEO must declare any material changes in statements that they have made to the IRS in the past.
- Reporting to Customers. If there has been a change in the CPEO responsible for a client company, this must be declared to the client company.
Is a certified PEO the same as an accredited PEO or a registered PEO?
No. The term ‘certified PEO’ is reserved under federal law for companies that have complied with CPEO requirements set by the IRS.
There is a popular accreditation process run by the Employer Services Assurance Corporation (ESAC). After meeting rigorous ethical, financial and operational standards, as well as passing their examination process and paying required fees, a company can call itself an “ESAC-accredited PEO’ or ‘accredited PEO’ for short.
Most US states require that a PEO be registered with state authorities, or hold a license or valid exemption in order to operate in that state. As an example, check out New York State’s PEO registration requirements.
How do PEOs and CPEOs differ?
It will be clear by now that a CPEO is a PEO — A PEO that has met the rigorous requirements administered by the IRS for calling oneself a ‘CPEO’. In short:
- A CPEO becomes solely liable for federal employment taxes for the workforce they employ. By contrast, for non-certified PEOs, the co-employer client company retains liability for employment taxes, depending on whether they meet the ‘common law employer’ test.
- A CPEO must meet extra ongoing and annual compliance requirements with the IRS. By contrast, a non-certified PEO must only meet the standard IRS requirements applying to employers and corporations.
- A CPEO must provide sufficient bond money to ensure that they can comply with their employer obligations. A non-certified PEO simply files employment taxes, including pre-payments, on the same schedule as any other business.
Given the more rigorous requirements for CPEOs, it might be thought that this is obviously the best option for a client company interested in a CPEO. Not necessarily.
Due to their increased compliance and financial burdens, CPEOs may be more expensive than non-certified-PEOs. And while many smaller PEOs have gained certification, most smaller PEOS do not consider it viable to do so. For clients who prefer the more personalized service of a smaller PEO, it may be worth taking the risk of going with a non-certified option.
It is worth noting, however, according to a recent analysis by law and accountancy academics, Lorraine Lee and Ursula Ramsey, while only 7 percent of PEOs are certified, the four largest publicly listed PEOs in the US do have certification, and they employ 69 percent of the employees under PEO arrangements. Therefore, it seems likely that a greater number of PEOs will become certified over time and it will eventually become the industry standard in the US.
Why Use a CPEO? Axcet's Take
CPEO vs PEO: Which to Choose?
CPEOs meet a set of extremely rigorous certification requirements, as well as satisfying ongoing compliance obligations. By choosing a CPEO, you eliminate some of the residual tax risk associated with using a PEO. However, CPEOs are often a more costly option, and smaller businesses may find that is worth their while to go with smaller, non-certified PEOs.
A certified PEO is one that meets the ongoing requirements of the IRS' voluntary certification program for PEOs. It is distinct from an 'accredited PEO', a 'registered PEO' or a 'licensed PEO', which are PEOs that have met requirements set by private certifiers and state regulators respectively.
The IRS manages a public listing of all PEOs that are certified, and all that have been suspended or had their certification revoked.