PEOs, certified PEOs and Federal employment taxes - Why the IRS certification program is not enough

In December 2014, after nearly 15 years of lobbying efforts by Professional Employer Organizations (PEOs), the Small Business Efficiency Act (SBEA) was enacted into law. The SBEA authorizes the Internal Revenue Service (IRS) to create a certification program for PEOs and formally incorporates the role of certified PEOs into the federal employment tax regime. Proponents of the SBEA have generally lauded the legislation as substantially beneficial to client companies as it enables client companies to rely increasingly on PEOs to support growth. This article provides (1) an introduction to the typical PEO relationship and the current law that governs federal employment tax liability and filing requirements when a client company partners with an uncertified PEO, including identifying concerns with the current law and structure, (2) a summary of the SBEA and federal employment tax liability as it applies to certified PEOs, highlighting some of the benefits of the SBEA, (3) the identification of various and perhaps troublesome issues with respect to federal employment tax liability that remain after passage of the SBEA and implementation of the IRS PEO certification program, and finally (4) an outline of four steps that could be taken, alone or in combination, to address these issues by protecting client companies that utilize PEOs from unanticipated federal employment tax liability and reducing the opportunity for tax fraud on the part of PEOs.