PEOs aren’t without their downsides

As we’ve discussed in a previous post, there are several positive aspects of using a Professional Employer Organization (PEO). Partnering with a PEO can result in significant cost savings in terms of health and unemployment insurance premiums, as well as much less hassle in terms of payroll, human resources issues and tax obligations.

Obviously, using a PEO will be a viable solution for many small businesses, particularly when it comes to concerns about the ever-increasing costs of insurance coverage. PEOs are able to essentially “buy in bulk” to source insurance, and have the power to negotiate discounts with insurers that the proverbial mom-and-pop small business simply cannot wield.

Tax management and filing are another key reason why companies seek out PEOs. Some employers fear they may not have the financial savvy necessary to keep abreast of possible deductions and credits or to accurately and correctly file key tax documentation in a timely manner. Rather than risk running afoul of the IRS or having to retain their own accounting firm at a substantial cost, they may decide that a PEO is a better option (given that it comes with the additional benefits stated above).

Possible negatives

One of the biggest downside to using a PEO is the impact that it can have on a company’s bottom line. PEOs typically charge between three and fifteen percent of a business’ overall gross payroll for their services, and that rate might, depending on the terms of the co-employment contract, be variable. It is vitally important for businesses considering using a PEO to carefully weigh the projected savings in terms of tax compliance and insurance premiums with the costs of administration.

Another key issue that can arise in a PEO relationship is potential tax non-compliance or non-payment. You entrust your PEO to handle proper deductions from employee paychecks and to provide timely payment to the IRS. If that doesn’t occur, you could be facing serious tax issues. You will, of course, have the contract you signed with the PEO as proof of your intent to comply with tax regulations, but you may still be called upon by the IRS to answer for the non-payment in an audit or interview.

Certification could offer protection

The fact that the IRS has now certified a number of PEOs through a voluntary certification system (which requires an application process, background check, financial disclosure and surety bonding) does help ensure consistency across the industry, as well as giving confidence to prospective businesses wishing to enter into these so-called “co-employment” relationships. If you are unsure about the pros and cons of a PEO arrangement for your business, you should contact an experienced attorney to help you make the decision that’s really in the best interests of your company.

Tags: IRS