CPEO: What Does It Mean and Why Is It Important?

Aug 24, 2017
| Michael Altiero
What Is A CPEO

For the last 30 years, the professional employer organization (PEO) industry has been rapidly growing and expanding. Today, there are between 780 and 980 PEOs operating throughout the country. The tremendous growth in this industry is due in large part because of the benefits PEOs provide their clients, especially as the laws and regulations surrounding HR services have grown more complex.

By now, you are probably familiar with PEOs and how they operate. But if you are not, here is a quick summary: A PEO is a firm that allows small and medium-sized companies (SMBs) to outsource most of their HR management responsibilities. These include HR services (recruiting, training & development, performance management, etc.), payroll, employee benefits and risk management.

With so many PEOs in the market, there wasn’t much that separated one from the other. That started to change in 1995, when the Employer Services Assurance Corporation (ESAC) was formed. Being accredited by ESAC established a PEO as being held to the highest standards within the industry. To date, only 5% of PEOs have ESAC accreditation.

Then, earlier this summer, another landmark event happened for PEOs.

What Is A CPEO?

On June 1, 2017, the Internal Revenue Service (IRS) designated a select few PEOs as Certified Professional Employer Organizations (CPEO), the first group to ever be certified. This established another benchmark for PEOs to reach, and another assurance to companies who partner with PEOs that they are working with a best-in-class organization.

In order to become certified, a PEO must apply to the IRS and provide extensive background information, including financials. If granted the CPEO designation, it means that an organization has supplied all necessary information and met each of the strict regulations set by the IRS and United States government (more on that shortly).

In total, 6% of U.S. PEOs have been designated as CPEOs. It is an exclusive group of professional employer organizations that have met the high standards of the IRS.

How does a PEO Become Certified?

The ground work for CPEOs came in late 2014, when the Small Business Efficiency Act (SBEA) became law and provided federal recognition of PEO services. The SBEA required the IRS to create a voluntary certification program for PEOs, a major first for the industry. However, not every PEO can become certified. The process to becoming a CPEO isn’t simple and has many strict requirements that must be met before, during and after a company seeks certification.

In order to become a CPEO, a PEO must:
  • Meet IRS-set expectations around tax status, background, experience, location and annual financial audits
  • Satisfy certain bond and financial review requirements
  • Agree to verify to the IRS on a periodic basis that it continues to meet certification requirements
  • Agree to provide background reports of any individuals responsible for employment tax payments
  • Once becoming a CPEO, the organization must notify the IRS of any change that affects the accuracy of any information that was used to meet certification requirements

In addition, once the certification status has been established, PEOs must maintain specific records and provide the IRS with ongoing independent financial review reporting. If not, they can risk losing their CPEO designation.

Becoming a certified professional employer organization ensures that a PEO meets the strictest guidelines set by the government. It also helps potential clients feel more assured that they are making the best possible decision when selecting a PEO, knowing that a CPEO has improved federal regulatory certainty not available through non-certified PEOs.

Why Does Becoming a Certified PEO Matter?

The process of becoming a CPEO is extremely strict and regulated, requiring a lot of time and effort from organizations who seek certification. Why do these PEOs put forth effort? Besides being recognized by the IRS and U.S. government that they meet all requirements, becoming a CPEO provides a clearer picture for clients about who is responsible for what in a PEO partnership and which tax credits are retained. 

Historically, the IRS views that in a PEO arrangement, both the PEO and client are jointly liable when it comes to paying federal employment taxes. For example, if a PEO didn't pay a customer’s employment taxes, the IRS could go after the client for taxes that are due, even if the client had already payed the PEO for employment taxes.

A CPEO, as clearly defined by the SBEA, is solely liable for federal employment tax payments on wages it pays to worksite employees. So if a CPEO fails to pay payroll taxes, the IRS cannot go after the client to collect employment taxes. That liability falls completely on the CPEO, not the customer.

An additional benefit to working with a CPEO has to do with tax credits. Generally, a company must be an employer in order to receive tax credits. Because working with a PEO entails entering into a co-employer relationship, customers may be worried about losing eligibility for certain tax credits. As outlined in the Small Business Efficiency Act, CPEO clients have the ability to maintain specific tax credits, even though they are in a co-employer relationship.

Clients Have More Confidence Partnering With a CPEO

For small and medium-sized business leaders, working with a PEO is a big decision that can have substantial impacts for the company, both in the short and long term. It’s a decision that involves a lot of vetting and questions when looking at PEOs. Choosing the right professional employer organization to partner with can enable an SMB to reach new heights and achieve significant business growth.

An important aspect of the research process is to see which PEOs meet the highest industry and US government standards. Being ESAC accredited and certified by the IRS gives clients the peace of mind that their PEO partner meets incredibly strict requirements and takes pride in the additional responsibilities that come with meeting these standards. If you’re considering working with a PEO, be sure to ask potential partners if they are a Certified Professional Employer Organization.

Want to learn more about PEOs? Check out our eBook, How Well Do You Know PEO? This eBook provides an overview of the PEO industry as well as helpful information for brokers and employers!
How well do you know PEO