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

Despite the number of professional employer organizations (PEOs) that exist today, not all PEOs are created equal. Business owners should ensure their potential PEO partner has been designated as a certified professional employer organization (CPEO) by the internal revenue service (IRS).

Additionally, before selecting a PEO to partner with, checking for accreditation from the Employer Services Assurance Corporation (ESAC) is an important step, as very few PEOs have this distinction.

What is a certified professional employer organization?

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

In 2014, 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 major first for the industry.

Then, on June 1, 2017, the IRS designated around 35 PEO companies as certified professional employer organizations (CPEO), the first group to ever be certified. Since then, roughly 25 more PEOs have been added and recognized by the IRS.

PEO vs. CPEO – What’s the real difference?

To be very clear, not all PEOs are CPEOs. In fact, only 6% of PEOs in the United States have passed the CPEO IRS certification process. 

A professional employer organization (PEO) is an organization that provides human resource services such as payroll administration and employee benefits for their clients. All PEOs must be licensed in each state they operate in and must meet each specific state’s requirements. The difference is that certified PEOs are regulated at a federal level and are thus held to the highest standards. Additionally, CPEOs hold sole liability for federal tax filings, where non-certified PEOs do not.

Becoming a CPEO means a PEO meets the strictest guidelines set by the United States 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 on a periodic basis 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 that affects the accuracy of any information that was 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 and/or revoked.

Once the certification status has been established, PEOs must maintain specific records and provide the IRS with ongoing independent financial statements and reporting. If not, a PEO risks having their CPEO designation suspended and/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 CPEO?

Certified PEOs, much like a standard PEO, provide an array of HR services for their clients, who are frequently small- to medium-sized businesses. CPEOs are a way for small business owners to outsource HR functions that can be tedious to maintain, but are necessary to scale a business. Some of the HR solutions frequently offered by certified PEOs are:

A good CPEO program will help organizations save money and expand their business by reducing turnover, mitigating risk through maintaining the most up-to-date compliance standards, and attracting top talent. 

Why is CPEO status important to business owners and PEO clients?

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 are jointly liable for the payment of payroll taxes.

This means that if a non-certified PEO fails to pay a clients’ payroll taxes, the I.R.S. can go after the client for taxes owed, even if the client has already remitted the payroll taxes to the PEO. This places a great deal of financial risk on a client, who may not be aware of any unpaid taxes or penalties until the I.R.S. sends a notice and a bill.

Working with a CPEO, however, significantly reduces this risk. As mandated in the Small Business Efficiency Act (SBEA) – which created the PEO certification program – a CPEO is solely liable for federal employment tax payments. This means that the I.R.S. cannot go after a client to collect any unpaid payroll taxes. That liability falls completely on the certified PEO (as long as 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 PEOs, but with the added financial assurance regarding the proper remittance of payroll taxes.

Always check for CPEO status when exploring PEO solutions

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

However, knowing what to look for in a potential PEO partner is crucial. Checking to see if a PEO is ESAC-accredited and is certified by the IRS provide greater financial assurance and peace of mind.

ExtensisHR is proud to have been one of the first professional employer organizations (PEOs) to become a Certified PEO (PEO) in 2017, and we have maintained our certification ever since.

Learn about ExtensisHR’s Certified PEO solution

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