If your business is considering using a Professional Employer Organization this is good news.
A Professional Employer Organization (PEO) can lower business expenses related to human resource administration as well as health and unemployment insurance costs by creating a bigger pool of employees.
A PEO works through a co-employment arrangement. The PEO becomes the “employer of record for tax purposes” handling payroll and filing W-2 for employees, but you retain control and oversight of daily work assignments.
Increasing premiums and the ACA
Health insurance premiums are largely dependent on the number of employees on a plan. And use of the plan can lead to increases in premiums. Unemployment insurance is largely priced the same way. A small business could see a substantial increase in health care premiums if two of its nine employees have surgeries in a year. Because of this reality, co-employment or employee leasing has been used by employers to reduce employment costs since 1960.
The Affordable Care Act, often referred to as ObamaCare, used a tax penalty to require employers with more than 50 employees to offer health insurance. And since the legislation went into effect health care premiums have been increasing.
A larger pool of employees is one of the only ways to reduce health and unemployment insurance premiums. PEOs employ thousands pooling employees from different companies to lower health insurance costs and unemployment taxes. They usually charge a percentage of gross payrolls for the service.
IRS certification program to reduce tax liabilities
An employer, Jane’s Glass Designs, has traditionally carried the burden that a vendor PEO might fail to pay employment taxes on its behalf. In this type of a case when a PEO miscalculated and underpaid employment taxes, Jane’s Glass Designs would remain liable for the deficiency.
As part of 2014 legislation, the IRS developed a voluntary certification program to certify PEOs (adding a C to the acronym, CPEOs). To obtain certification an organization must go through an application process that looks at background/experience, tax compliance, business location, bonding and financial reporting.
Certification shifts employment tax liabilities. The IRS treats a CPEO as the employer when it comes to wages and other compensation paid to individual employees. The first round of review will result in 84 CPEOs. Once the IRS receives required surety bonds from the approved organizations, it will publish the names of CPEOs.
In a future post, we will discuss a recent IRS Chief Counsel Advice holding that illustrates what can happen when a PEO fails to remit employment taxes.