IRS Publishes Regulations on Certified Professional Employer Organizations

| 6/9/2016

The IRS released proposed, temporary, and final regulations for the new certified professional employer organization (PEO) designation. Under the regulations, PEOs will be able to apply for the certified PEO designation beginning July 1, 2016. Applications must be submitted by Sept. 1, 2016, for the applicants to be eligible for the first round of certifications, which will be effective beginning Jan. 1, 2017. PEO arrangements typically provide that a PEO will be the co-employer of the business's employees, and the PEO will:

  • Recruit and hire employees for the client or assign employees as permanent or temporary members of the client’s workforce, or participate with the client in these actions
  • Hire the client’s employees as its own and provide the employees back to the client to perform services for the client
  • Use its employee identification number to file employment tax returns that include wages or compensation paid to the employees performing services for the client

For PEOs that are not certified, the employer remains liable for payroll taxes and remitting withholding if the PEO fails to make such deposits with the IRS. Customers of a certified PEO with a contract that meets certain requirements will be able to fully transfer their employment tax filing and payment responsibilities to the PEO, including:

  • Requiring a certified PEO contract to include at least 85 percent of the employees at a work site
  • Preventing employers from using a related-party certified PEO
  • Preventing self-employed individuals (such as partners in a partnership) from being covered by a certified PEO agreement, although such individuals will count toward the 85 percent test
  • Establishing that any employment credits are the property of the employer or customer, not of the certified PEO
  • Establishing that any employment tax exemptions are determined based on the employer’s or customer’s status, not the certified PEO’s status

Revenue Procedure 2016-33 details the application process for certification. PEOs seeking certification are required to submit an electronic application through the IRS’ website and remit a $1,000 application fee. Certified PEO applicants also must obtain bonding to guarantee their obligation to remit payroll taxes and withholding. Once certifications are issued, the IRS will maintain a listing of all certified PEOs.

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Howard Wagner
Partner, National Tax Services