Armanino Blog

Outsourcing to a Certified Professional Employer Organization (CPEO)

by Gary Wyatt
May 02, 2017

Do you currently obtain your workforce through a Professional Employer Organization (PEO) or are you considering it? If so, you probably should find out more about Certified Professional Employer Organization (CPEO).

The Internal Revenue Code (IRC) of 1986, as amended provides for social security (FICA) tax and withholding (from wages) on employees, as well as a parallel FICA tax on employers. The IRC also prescribes employer liability for Federal Unemployment Taxes (FUTA) on employee wages.  Finally, the IRC also prescribes an employer’s liability for income tax withholding on employees. These payroll tax requirements are among the reasons why many small-to-medium-sized businesses have sought the help of PEOs for their workforce needs.

The following quote from the preamble to recent regulations sums up the current status of PEOs:

A PEO sometimes referred to as an employee leasing company, enters an agreement with a client to perform some or all of the federal employment tax withholding, reporting, and payment functions related to workers performing services for the client. The terms of a PEO arrangement typically provide that the PEO is the employer (or ‘‘coemployer’’) of the client’s employees and is responsible for paying the employees and for the related federal employment tax compliance. A PEO also may manage human resources, employee benefits, workers compensation claims, and unemployment insurance claims for the client. The client typically pays the PEO a fee based on payroll costs plus an additional amount. In most cases, however, the employees working in the client’s business are the common-law employees of the client for federal tax purposes, and the client is therefore legally responsible for federal employment tax compliance.

PEOs have been around for a while, but have not been able to completely remove the payroll tax liability from recipient employers. IRC section 3511 changes that. In late 2014, sections 3511 and 7705 were added to the IRC to establish and define the concept of CPEO. IRC section 3511 provides that under certain circumstances, for the purposes of the employer’s liability for withholding and remittance thereof, an employer may transfer its liability to a CPEO through which it hires worksite employees.  In other words, if you use a PEO, your potential liabilities could be decreased by using a CPEO. Recently, IRS released regulations and began accepting applications from PEOs aspiring to become certified (CPEOs).  There is a forthcoming revenue procedure which is expected to provide the details of the application process.

For more information about outsourcing, or for general inquiries about compensation and benefits planning, contact your local Armanino expert.

May 02, 2017

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