What is a Certified PEO (CPEO), and Why Does It Matter?

Quick look: Professional employer organizations (PEOs) help their clients minimize time spent on daily HR tasks, reduce employment risk, control HR costs, and more. But with hundreds of PEOs in the market, how should business leaders decide which one to partner with? Dive into the significance of the certified PEO (CPEO) designation, understand why it’s crucial in assessing PEO providers, and learn about additional certifications worth considering.

Hundreds of professional employer organizations (PEOs) exist in the U.S. today, but not all of them are created equal.

PEOs provide a range of human resources (HR), employee benefits, and risk and compliance services. Because a PEO is so closely involved with multiple essential business functions, it’s critical to ensure that it adheres to the strictest industry standards, including being designated as a certified professional employer organization (CPEO) by the Internal Revenue Service (IRS).

What is a certified PEO (CPEO)?

A certified PEO (CPEO) is a professional employer organization (PEO) that routinely passes strict audits and is certified by the IRS. To uphold their certification, CPEOs must maintain tax compliance, pass rigorous financial standards, and complete routine background checks.

CPEO designation began in 2014 when the Small Business Efficiency Act (SBEA) became law and provided federal recognition of PEO services. The SBEA required the IRS to create a voluntary certification program for PEOs—a first for the industry.

Then, on June 1, 2017, the IRS designated around 35 PEO companies as certified professional employer organizations (CPEOs), the first group to be qualified. Since then, more PEOs have been added and recognized by the IRS, but many PEOs in the country remain uncertified.

CPEO vs. PEO: what’s the difference?

Less than 10% of PEOs in the U.S. have passed the CPEO IRS certification process—but what does this endorsement mean?

All PEOs must be licensed in every state they operate in and meet each specific state’s requirements. When considering a certified PEO vs. a non-certified PEO, the difference is that certified PEOs (CPEOs) are regulated at a federal level and held to the highest standards. Additionally, CPEOs hold sole liability for federal tax filings, whereas non-certified PEOs do not.

Becoming a CPEO means a PEO meets the most stringent guidelines set by the U.S. government. To obtain the CPEO designation, a PEO must:

• Meet IRS-set expectations around tax status, background, experience, location, and annual financial audits.
• Satisfy certain bond and financial review requirements.
• Agree to verify to the IRS periodically that it continues to meet certification requirements.
• Agree to provide background reports of any individuals responsible for employment tax payments.
• Once becoming a CPEO, the organization must notify the IRS of any change affecting the accuracy of any information used to meet certification requirements.
• Once the certification status has been established, PEOs must maintain specific records and provide the IRS with ongoing independent financial review reporting. If not, a PEO risks having their CPEO designation suspended or revoked.

The IRS states they “may suspend the certification of any CPEO as a result of a failure to meet any requirement described in the applicable guidance, and will do so if the IRS determines, based on a review of the relevant facts and circumstances, that the failure presents a material risk to the IRS’s collection of federal employment taxes.”

What are the functions of a certified professional employer organization?

Like standard PEOs, certified PEOs provide various HR services for their clients, who are frequently small– to medium-sized businesses.

CPEOs enable business owners to outsource HR functions that can be tedious to maintain but are necessary to scale a business. Some HR solutions frequently offered by certified PEOs are:

• Employee benefits administration and planning
• Workers’ compensation and risk management
• Tax compliance and payroll administration
• Strategic HR support and guidance
• Recruiting

An effective CPEO can help organizations save money and expand their business by reducing turnover, mitigating risk through adhering to the latest compliance standards, and attracting top talent.

Certified PEO benefits: why being a CPEO is important

What separates a CPEO from a non-certified PEO is that a CPEO provides clients with financial peace of mind by minimizing financial liability. When dealing with a non-certified PEO, the IRS views that both the PEO and the client have payroll tax responsibility.

In other words, if a non-certified PEO fails to pay a client’s payroll taxes, the IRS can pursue the client for the taxes owed, even if the client has already remitted the payroll taxes to the PEO. This can place a great deal of financial risk on a client, who may not be aware of any unpaid taxes or penalties until the IRS sends a notice and a bill.

Working with a certified professional employer organization significantly reduces this risk. As the SBEA mandates, a CPEO is solely liable for federal employment tax payments. This means the IRS can’t go after a client to collect any unpaid payroll taxes. That liability falls entirely on the certified PEO (if the client has remitted the payroll taxes to the CPEO).

Choosing to work with a certified PEO provides the same business benefits as a non-certified PEO but with added financial assurance regarding the proper remittance of payroll taxes.

Beyond CPEO: other key accreditations to consider

In addition to CPEO designation, before selecting a PEO to partner with, business leaders should check for the following accreditations:

• Employer Services Assurance Corporation (ESAC): According to its site, ESAC “verifies a PEO’s ongoing financial stability, ethical business conduct and compliance, and adherence to operational standards, government regulations and important industry standard.”
• Certification Institute (CI): CI certification signals that a PEO meets all industry professional risk management best practices, strives to create safe work environments, and successfully manages workers’ compensation losses. (Note: Only 1% of PEOs hold CPEO, ESAC, and CI certifications!)
• SOC 1 Type 2 Certification: System and Organization Controls (SOC) 1 Type 2 certification is an internationally recognized standard developed by the American Institute of Certified Public Accountants (AICPA) that assures clients, partners, and stakeholders that the organization in question has established and maintained effective internal controls over financial reporting and data security.

It may also be helpful to check if the PEO has received any company culture awards. These accolades—from organizations such as Great Place to Work®, Energage Top Workplaces, and Comparably—signal that the PEO provides an engaging, enjoyable work environment. Partnering with a PEO that is a thoughtful employer can have many business advantages, as happy workers have been shown to be 13% more productive—meaning the team supporting your organization will likely be efficient and genuinely glad to assist you.

Always check for CPEO status when exploring PEO solutions

Choosing to work with a PEO is a critical business decision. A co-employment relationship with a PEO can yield business growth and success that otherwise may not have been achievable.

Knowing what to look for in a potential PEO partner is crucial whether you already have one or are evaluating potential providers. Confirming that a PEO is certified by the IRS, ESAC, CI, and SOC 1 Type 2 provides greater financial assurance and peace of mind.

ExtensisHR is proud to have been one of the first professional employer organizations to become a certified PEO (CPEO) in 2017, and we have maintained our certification ever since. Additionally, ExtensisHR holds CI, ESAC, SOC 1 Type 2, and multiple company culture accreditations.

ExtensisHR specializes in simplifying HR for SMBs by providing reliable and secure services, from recruiting to payroll administration—and everything in between. Learn more about our certified PEO solution, browse our multiple accolades, or contact us today to get started.