PEO 202 – The Small Business Efficiency Act: Efficiency from the Feds

After decades of unending employment laws, regulations, updates, and revisions, employers have found a lifeline in professional employer organizations (PEOs).  PEOs take the time-consuming job of managing wage and hour laws, EEO compliance, the Affordable Care Act, workers’ compensation, and so many more burdensome tasks out of the hands of the entrepreneur and into the hands of the trained professional.  PEOs help businesses in every state, of which 39 have already developed registration and licensure requirements.

Filed under “Finally, Some Good News for Small Business,” the federal government has jumped on the PEO bandwagon with regulations that go into effect in July of this year.  The Small Business Efficiency Act (SBEA) was originally part of the Tax Increase Prevention Act of 2014.  The Act creates a voluntary certification process for PEOs nationwide and unifies federal regulations, guidance, and procedures into a straightforward, cohesive program.  The passage of the SBEA is a defining moment for PEOs, promising even more growth to an already expanding industry.

The certification process is voluntary and provides guidelines for customers of PEOs in every state, even those without regulatory or license requirements.  The provisions of the law allow PEOs to become certified professional employer organizations (CPEO) under federal guidelines.  This designation provides long-sought-after benefits for the industry and its client base.

Certification is not automatic.  There are several requirements to achieve and maintain CPEO status under the federal guidelines:

  • Bonding: CPEOs must maintain a bond equal to 5 percent of their federal employment tax liability for the previous year: minimum $50,000/maximum $1 million
  • Voluntary Audits: Annual independent financial statements prepared by a CPA must be provided to the IRS
  • Quarterly Attestations: CPEOs must attest to payment of employment taxes quarterly, along with an examination-level attestation by an independent CPA
  • Fees: An annual fee is required to become and maintain CPEO status

The benefits to the PEO and its clients are myriad.  Some close unclear regulatory gaps, while others offer new benefits.  The valuable benefits of acquiring CPEO status are:

  • Recognition under federal tax law:  CPEOs enjoy clarified statutory authority to collect and remit federal employment taxes for wages under the CPEO’s employer identification number (EIN).
  • Tax credit eligibility confirmed:  Customers of a CPEO will now enjoy certain federal tax credits previously denied through the PEO relationship.
  • State Unemployment Insurance tax credit: The CPEO, and by extension, its customers, are eligible to receive a Federal Unemployment Tax Act (FUTA) credit for contributions made in compliance with State Unemployment Tax Act (SUTA) requirements.
  • Eliminating potential double taxation: FICA and FUTA wage bases do not “reset” if a customer joins or leaves a CPEO mid-year.

The SBEA is a win-win for the professional employer organization industry and its client base.  But don’t let the “Small Business” name in the Act fool you.  Large and small employers reap the benefits of this long-awaited legislation.  As more and more companies discover the benefits of using a PEO, the Small Business Efficiency Act provides clarity to consumers.

The message from the federal government is clear.  Using a CPEO to manage your payroll and tax liability is a secure bright and responsible way to run your business.

For more insight into the professional employer organization industry, sign up for the free eBook “The Truth About PEOs.”

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