Lately, there's been quite the buzz surrounding Professional Employer Organizations (PEOs), and it's no wonder why! PEOs, in concept and practice, are very cool and more relevant than ever. As an industry, Professional Employer Organizations offer invaluable services to small and medium-sized enterprises, especially amidst the contemporary landscape of remote work. Specializing in payroll management, benefits administration, HR functions, and ensuring compliance with labor regulations, PEOs streamline administrative tasks, allowing businesses to allocate resources to more strategic endeavors. Moreover, they enable companies to provide competitive benefits packages, fostering talent retention and attraction. What’s not buzz-worthy about that?
Amidst the buzz, you've likely stumbled upon debates about Certified PEOs (CPEOs) and whether their certification should sway your decision when selecting a PEO service provider. The allure of being "Certified" may dazzle, but brace yourselves—there's a twist to this tale. Once hailed as a pinnacle achievement in the PEO realm, CPEO status has lost some of its luster over time, morphing into little more than another way to further complicate an already complicated industry. But fear not, for we're about to embark on a journey to unveil the true essence of CPEO certification and its implications for businesses like yours. But before we delve into the depths of this topic, let's lay some groundwork.
What is a CPEO (Certified Professional Employer Organization)? CPEO status, introduced under the Tax Increase Prevention Act of 2014, established a voluntary certification program facilitated by the Internal Revenue Service (IRS). The certification process itself is intricate, necessitating adherence to various prerequisites, including having a physical presence in the US, demonstrating financial responsibility through audited statements prepared by certified public accountants (CPAs), and ensuring operational oversight by US citizens or residents, with clear backgrounds, and the appropriate subject matter expertise to get things right.
Before we continue, it’s important to note that receiving certification doesn’t equate to obtaining an endorsement from the IRS; but rather indicates compliance with a set of assessments. In short, CPEOs have voluntarily paid to take a test and received a passing grade.
Next, what were the intended benefits of earning the CPEO designation? By inviting this additional level of IRS scrutiny, PEOs achieving CPEO status could then extend to their clients, several purported benefits:
Enhanced peace of mind – Maintaining CPA-audited financials evidencing financial responsibility (including tax compliance), criminal background checks of those running the show, and required annual surety bonding would all provide additional layers of assurance for CPEO customers.
Access to tax credits – Until CPEO, claiming applicable tax credits when partnered with a PEO could become a complex exercise. Certification would clear up any gray areas; and free the path for clients to obtain tax credits in a much more efficient manner.
Insulation from taxable wage base restarts – When an employee leaves one employer, and begins working for a new company - their wage base resets. The new employer must then pay applicable taxes until the appropriate thresholds are met. In the same vein, since the PEO itself (vs. the client) is considered the employer of record for federal tax purposes; many believe a similar restart is triggered by joining, leaving, or changing service providers at any time other than January 1st. Certification would alleviate this concern over double taxation, and pave the way for clients to engage a PEO at any time.
Fast-forward ten years, and what does this all mean to the end-user of a PEO tagged with the “certified” moniker in 2024? The reality is, not much. The notion of CPEO certification as a hallmark of quality or reliability can now be easily undermined by exploring the benefits touted by certification in a traditional (non-certified) PEO setting.
First, let’s look at “peace of mind” in a traditional PEO. With rapid expansion of the industry, has come an equally paced increase in state-level regulation of PEO service providers. In fact, in today’s marketplace - many state-based licensing mandates for PEOs meet or exceed those that come with CPEO certification. Federal background checks of operators, fingerprinting, credit checks, ongoing operating capital requirements, annual CPA-audited financial statements, quarterly CPA-attestations, surety bonding, etc.; have all become commonplace.
In short, obtaining and maintaining PEO licensure is no easy task. Simply confirming that your PEO’s license is current should help you rest easy. For a list of Professional Employer Organizations licensed to operate in your state(s), visit: www.napeo.org; and click the “Find a PEO” button found on the site’s homepage.
Now, let’s tackle tax credit access when using a non-certified provider. Let’s face it, tax credits, with or without a PEO can be confusing and difficult to obtain. As a result, most PEOs either maintain internal tax credit resources, or partner with expertise in the marketplace to make certain clients receive the credits they deserve. This was the case long before CPEO came into being. If your PEO partner knows what they’re doing; or have affiliations with those that do - being certified doesn’t really move the needle.
Lastly, let’s talk about double taxation due to wage base restarts. Ask anyone who doesn’t understand the industry what the “cons” of using a PEO are, and tax restarts are aways at the top of the list. In addition, competing service providers (payroll companies, etc.), regularly site double-taxation as a deterrent to exiting clients allured by the PEO valuation proposition. But what’s the real story? Why do PEOs of all types, certified and non-certified, continue to grow year-round if this is truly a problem? Here's where things get interesting. Any PEO worth its salt, before and since certification, has proven processes in place to either minimize or eliminate the impact of double taxation to their clients. Moreover, recent legal precedents, such as rulings in "Paychex Business Solutions, LLC vs. United States of America" and "Cencast Servs., L.P. v. United States," have shed light on the matter; affirming that such tax restarts should not occur at all, rendering CPEO status somewhat redundant in addressing this concern.
Considering these factors, it's no surprise that CPEO adoption in the industry remains lackluster. Of the 900 or so PEOs operating in the United States, only about 60 have chosen to undergo the certification process (Note: Several certified PEOs maintain multiple certified entities). This markedly limited uptake underscores the skepticism surrounding the program's efficacy and relevance within this dynamic industry.
In a landscape where reliability and efficiency reign supreme, it's clear that businesses should look beyond the surface, and prioritize qualities like expertise, accessibility and cost-efficiency when choosing a PEO partner. So, as you navigate the PEO marketplace, remember to keep your eyes peeled for the qualities that truly matter. With a little diligence and discernment, you'll find the perfect match to support your business objectives and lead you to success.
About Thrive PEO Non-certified by choice - Thrive PEO is Oklahoma’s fastest growing Professional Employer Organization (PEO); and provides a customized suite of human resource solutions designed to help SMBs: lower operating expenses, increase productivity and profitability, and reduce employer liabilities and business risks. Voted "Tulsa's Best HR Outsourcing Company" for the past three years, Thrive PEO's service offering covers the entire employee lifecycle, and includes: payroll and tax administration, employee benefits and related administration, HR and compliance, workers’ compensation insurance, retirement plans and more – all delivered via best-in-market HRIS technology.
For more information, contact Thrive PEO today at: (918) 794-2200.