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Not All PEOs Are Created Equal: Why Certification Matters

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Many businesses choose to partner with a Professional Employer Organization, or PEO, to take advantage of services including human resource management, payroll, and benefits processing, and other HR and related administrative tasks. A company’s arrangement with a PEO can open up additional benefits for their employees, which may otherwise be too costly or difficult for the business to obtain on its own. Some examples include retirement plans and supplemental or ancillary insurance programs.


PEOs are co-employers, and the PEO is able to include each client’s employee count as part of their overall employee base. This gives the PEO bargaining power and relative stability, and can help to negotiate better rates for benefit products and insurance, which can then be passed on to their clients.


What is Co-Employment?

A co-employer relationship also means that clients’ wages and taxes will be reported under the federal employer identification number (FEIN) of the PEO. In the eyes of the IRS and other taxing authorities, when a company’s employees start getting paid through the PEO, they are treated as if they are new employees of the PEO. This means any year-to-date wage and tax calculations are effectively ‘reset’ when the PEO arrangement becomes effective. If the company and/or its employees previously reached wage or tax caps for items like unemployment insurance or Social Security taxes, these calculations will start all over with the PEO, and the business and its employees could end up double-paying taxes.


While the PEO generally handles payment and filing of employment taxes, the business is ultimately liable for payment and associated penalties if there are any errors or mishaps with the PEO’s handling of the taxes. Business tax credits that a company’s employees might qualify for can be claimed by the PEO, which may not be passed along to clients.


However, not all PEOs are made the same. The IRS identifies certain PEOs with a certified professional employer organization, or CPEO, designation. The certification process for a PEO to become a CPEO can be complex and time-consuming, and requires audits, background checks, and extensive documentation, and only a small number of PEOs choose to pursue certification.


What’s the benefit of working with a CPEO?

Businesses have some added protections and peace of mind when working with CPEOs. Certification allows the CPEO to carry over employees’ year-to-date wages and avoid mid-year resets and double payment of taxes. Clients of CPEOs are entitled to and can continue to claim tax credits that might have been lost or forfeited in a relationship with a non-certified PEO.

One of the most important benefits of a CPEO is the responsibility of employment tax payments. Clear language from the IRS states that CPEOs are solely liable for payment and filing of their customers’ employment taxes.


Certification isn’t the only thing to look for when choosing a PEO, and there are many other factors to consider. PEO relationships can be very beneficial, but only if your organization has the right PEO partner. In many cases, a standalone payroll service is able to provide the same or better service for their clients, so it’s important to do your research before making a decision.

Christina Hageny

Christina Hageny

President - Valor Payroll Solutions

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