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What is a Certified PEO? And What Does it Mean for Employers?

Despite the number of professional employer organizations (PEOs) that exist today, not all PEOs are created equal. Before selecting a PEO to partner with, checking for accreditation from the Employer Services Assurance Corporation (ESAC) is an important step as only 5% of PEOs have this distinction.

In addition to ESAC accreditation, business owners should ensure their potential PEO partner has been designated as a Certified Professional Employer Organization (CPEO) by the Internal Revenue Service.


The ground work for CPEOs came in late 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 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. Which means, as of today, just 6% of U.S. PEOs have received the CPEO designation.

Becoming a certified professional employer organization means a PEO meets the strictest guidelines set by the United States government. In order 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.

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 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.


Choosing to work with a professional employer organization 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 I.R.S. provide greater financial assurance and peace of mind.

Not all PEOs want to take clients away from brokers. Broker-Only PEOs look to partner with brokers to help protect and grow their book of business. Download our eBook to learn more about Broker-Only PEOs, how they operate, and what this partnership could mean for you.

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