There are two crucial ways to vet a Professional Employer Organization (PEO); check for certification and accreditation.
A Certified Professional Employer Organization (CPEO) has fulfilled the IRS regulatory requirements for setting up shop as a CPEO. On the other hand, an accredited PEO has met the Employer Services Assurance Corporation (ESAC) requirements.
There are very few certified PEOs but all credible PEOs have an ESAC accreditation. In this article, you’ll get to understand what is a CPEO, and IRS requirements for CPEOs.
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What Are the IRS CPEO Requirements?
IRS CPEO regulations are a strict set of guidelines the US government requires CPEOs to fulfill. IRS in its regulations require CPEOs to provide the following information for vetting:
- Audited financial statements
- CPA verified documents indicating timely payment of employment taxes
- Submit evidence of working capital also known as the CPEO surety bond
- Background information of the individuals responsible for federal tax payments
The Small Businesses Efficiency Act (2014) mandated the IRS to establish a voluntary certification program for PEOs. In June 2017, IRS certified 35 PEOs as Certified Professional Employer Organizations. They added another 25 CPEOs to the IRS CPEO certification list as of November 2019 bringing the percentage of CPEOs to 6% of all existing PEOs.
IRS’s main interest is ensuring that whoever is responsible for paying taxes, fulfills their responsibility. You may be held liable by the IRS, when a PEO fails to pay taxes. However, with certification, the focus is on the CPEO.
Certification is evidence that the IRS has vetted and is satisfied with the demonstrated legal and financial capacity of the CPEOs to manage their tax obligations.
What Are the CPEO Certification Requirements?
The CPEO application process requires electronic submission of forms and supporting documentation. The requirements are:
1. Attestation by CPEO Responsible Individuals
Responsible individuals include the founders, the directors, and other individuals holding principal decision-making offices. These individuals submit the Responsible Individual Personal Attestation (RIPA) form.
As far as controlled groups are concerned, each entity must also submit their own RIPA and individually fulfill the specific obligations of the IRS requirements.
2. Audited Financial
In an application, a CPEO must include its annual audited financial statements for the most recent fiscal year. The audited financials must contain the original opinion of a certified public accountant (CPA) indicating:
- The applicant CPEO has a positive working capital, or its working capital has not been on the negative for more than two financial years
- Compliance of the applicant CPEO to the generally accepted accounting principles.
The requirements for financial audits may differ if the PEO seeking certification is newly established or if it is a controlled group.
3. CPEO Bond Requirements
The CPEO is further required to satisfy bond requirements, demonstrating that the CPEO can fulfill IRS tax obligations. IRS gives CPEO applicants 30 days to submit a bond application form 1475 signed by the CPEO and a qualified surety.
The minimum amount is $50,000, and the maximum is $1 million. The bond is calculated at 5% of the PEOs federal tax liabilities in compliance to section 3511 of the Internal Revenue Code. The period considered is between April 1 and March 31 of the following year.
In cases of a controlled group applicant, the surety letter must indicate the name and employer identification number (EIN) of each member CPEO applicant. All the CPEO members of the controlled group should be under the same bond.
4. A Non-Refundable User Fee of $1,000
CPEO applicants must pay a non-refundable user fee of $1,000 at the time of making the application.
5. Employment Tax Withholding
CPEO applicants are required to demonstrate that they withhold and make deposits of all the federal employment taxes for which the CPEO applicant is liable.
6. Background Checks
In addition to checks on responsible individuals, IRS also checks for possible precursor identity or any other entities related to the CPEO. The checks include:
- Credit histories
- Tax compliance and criminal record
- Professional experience and sanctions
- Any other relevant information
The CPEO may be required to submit written explanations related to its background or provide written references.
Once certified, CPEOs must maintain certain conditions to sustain their certification. Furthermore, the IRS provides a mechanism for reporting material changes to the CPEO business model that may affect their certification.
Why Is CPEO Status Important?
Certification provides the IRS with an opportunity to vet the capacity to fulfill responsibility for paying taxes and eligibility for tax credits. The CPEO program touches on the following aspects:
- Payroll tax liability
- Double payment of taxes
- Retaining specified tax credits
Working with a CPEO means it is the CPEO and not you as its client, who bears liability for any contravention of tax laws and is solely responsible for federal employment tax payments.
Furthermore, you’re assured that the CPEO has been vetted for financial stability, criminal conduct, and credit history. Such information gives you peace of mind when engaging a CPEO.
Lastly, you can contract a CPEO mid-year, and the taxes paid on the previous Federal Employer Identification Number (FEIN) will carry over. CPEOs are considered a successor employer as far as FICA and FUTA taxes are concerned. Thus adopting a CPEO mid-year will not attract a double tax.
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What Is the Division of Roles While Working With a CPEO?
Under a service agreement with a CPEO, your roles include:
- You’re still in-charge of offering direction, designing, and maintaining structure in their company.
- You remain responsible for overseeing the work of their employees.
The CPEOs role will include:
- Taking over employer obligations outlined in the service agreement.
- Handling insurance, benefits, and responsibility for managing payroll, tax remittance, and other necessary obligations
- Bears the sole liability instances of violating the tax laws and requirement
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