Professional Employer Organizations: New Tax Services Possible

Akerman LLP - HR Defense
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Currently, Professional Employer Organizations (PEOs) have no comprehensive federal framework under which to offer employment tax collection and remittance services to their clients. The Small Business Efficiency Act (“SBEA Act”) is set to change this effective as of January 1, 2016, following an interim deadline for the IRS to establish a federal certification program for interested PEOs by July 1, 2015. While the SBEA Act will not require PEOs to provide employment tax collection and remittance services to their clients, the SBEA Act will provide a new way for interested PEOs to add these tax services to their larger base of product and service offerings. This expansion to the general PEO service model is widely perceived as a positive development by both PEOs and their clients.

More specifically, the SBEA Act codifies the authority of certified PEOs (“CPEOs”) to assume sole liability to collect and remit employment taxes on behalf of their employer customers. The SBEA Act also clarifies that CPEOs will be granted successor employer status to eliminate double taxation from a wage base restart for employers that join or leave a PEO relationship in the middle of the tax year, and confirms that the CPEO may claim any available federal tax credits on behalf of its customers. To be certified by the IRS, a CPEO will have to submit annual audits and quarterly attestations to the IRS, as well as comply with certain bonding obligations. A CPEO will also be subject to an annual fee of $1,000.

It is critical to note that the SBEA Act does not change the existing landscape with respect to identifying whether a CPEO and/or its client is the employer of any particular worker. Although a CPEO will be able to assume new levels of responsibility for paying employment taxes on behalf of customers, the SBEA Act clarifies that the Act will not change the analysis of the identification of the underlying common law employer, particularly for the purpose of defining employees under the Affordable Care Act’s “employer mandate”.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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