Effective July 1, 2016, the IRS will begin accepting applications from PEO’s (Profession Employer Organization) who voluntarily elect to become certified.   A CPEO (Certified Professional Employer Organization) will be allowed to continue the FICA and FUTA taxable wages previously reported by their newly on-boarded client company.    For a client company to enter into a CPEO agreement, at least eighty-five percent of the covered employees are performing services for the worksite.

When an employer enters into a CPEO contract, the CPEO will be treated as a successor employer at a federal level.    Likewise, if a client company dissolves their agreement with a CPEO, the employer will be considered a successor employer, thus allowing the client to continue the taxable wage base reported by the CPEO.   If the client changes service to another CPEO, the taxable wage base would also continue with the new vendor as long as they are a CPEO.  Clients will also not be held liable for federal taxes that were not paid by the CPEO since the CPEO will be considered the employer for federal purposes.

With the ABLE Act of 2014 (a part of The Tax Increase Prevention Act of 2014, PL 113-29) the IRS was required to establish the following with each certified applicant:

The “Person” who applies for the certification, must meet the requirements established under Section 7705(b)(1)which provides that the secretary can establish requirements for certification.   There are several definitions to review before we progress to the application for certification.

The temporary regulations entail requirements that also apply to certain owners, officers, and other individuals named as the “responsible individuals” of the CPEO, related entities, and any precursor entities.   Let’s cover a few definitions supplied within the temporary regulations.

The responsible individuals are defined in the following manner:

    1. Individuals with the ultimate responsibility of implementing decisions of the organization’s governing body
    2. Individuals with ultimate responsibility for the organization’s management and operations
    3. Individual with the ultimate responsibility of managing the organization’s financial finances

The temporary regulations also include requirements for a related entity to the applicant.   The related entity is any person who is part of a controlled group within the meaning of section 414(b), 414(c) and 1.414(C)-2.    A Precursor Entity is also part of the requirements.   A Precursor Entity is any applicant for CPEO who was a provider of employment services and has ceased operations, dissolved or made at least a 35% transfer of the operations.

The CPEO applicant must provide, at the time of application for certification, an assertion signed by a responsible individual, under penalties of perjury, that the PEO has filed and paid all federal taxes timely.   A CPA must also provide an examination-level attestation that the assertion is fairly stated.  The financial records will be supplied by the PEO, and CPA reviews will be provided by the applicant.  To maintain certification, a quarterly update will be required as well as annual reports and biannual financial statement.   The accrual method of accounting must be used as well as all taxes filed and paid timely.   Annual bonds will be set for each CPEO that represents 5% of the CPEOs federal taxes, not to exceed $1,000,000 plus $50,000.   Federal Form 940 and all 941’s must be filed electronically unless a waiver is submitted and approved by the IRS.   At least one location of the PEO must be in the United States.

The IRS can suspend or revoke the CPEO if all requirements are not maintained.  Once a CPEO is suspended or revoked, a year must pass before the PEO can once again become certified.  A list of CPEO’s and those suspended or revolved will be published by the IRS.

Proposed regulations state that the IRS will amend Schedules R of the Federal Form 940 and 941 as well as establish the following forms.  These forms should be available over the next few weeks.

The IRS will begin accepting Application for Certification on July 1, 2016.  The temporary regulations governing the CPEO’s will begin on July 1, 2016, and expire on May 3, 2019, or sooner.   Permanent regulations will replace the temporary regulations on or before May 3, 2019.  To become a certified CPEO the applicant and the PEO applicant’s responsible individuals must submit the information required by the regulation.

A CPEO may have Certified Clients and Uncertified Clients.   To assist the IRS in verifying the entities reported under Schedule R, a list of the clients that meet the service agreement of the CPEO and a list of clients who do not meet the requirements of the CPEO contract.   The commencement and/or terminations are also a part of the reporting responsibility. In order for a CPEO agreement to exist between a PEO and its client, at least 85% of the worksite employees must provide services to that worksite.    All CPEO contracts are standardized and reviewed by the IRS.

In order for a CPEO to continue the year to date FICA and FUTA taxable wage base as reported by the client or other CPEO, the CPEO would need to collect the payroll records from the client company.   In order for those wages to be certified as paid by the IRS, the account numbers in which the client company reported those wages would also need to be provided when entering into the CPEO agreement.

In summary, the obvious advantage of becoming a CPEO is the continuation of the taxable wage base for FUTA and FICA.     The disadvantage for some PEO’s is they become the employer on a federal level now and are responsible for the reporting of the FICA and FUTA taxes.    For the client company leaving the PEO, they may also continue the FUTA and FICA taxable wage base reported by the CPEO.  In past years, this was not allowed.

On a SUTA level, the PEO is considered the co-employer and reports the wages earned to the state unemployment offices.   In most instances, if the PEO does not report wages for a certain client company and/or defaults on the unemployment tax obligations, the state agencies will go back to the client company to demand payment. The advantages to the client company and the PEO (or co-employer) from an unemployment perspective, is the PEO is considered the new employing unit as the client on-boards the PEO.    The clients are able to drop any previous unemployment claims (a part of the unemployment experience) that might have been in place due to the action of the client company before the co-employment agreement was signed.    Likewise, the bad unemployment tax experience stays with the PEO if the client company leaves or discontinues to the co-employer agreement.    Only a few states allow the continuation of the SUTA taxable wage base reported by the client.  Will the SUTA laws for PEO’s change?    Perhaps with the passage of this legislation, unemployment agencies may redefine their definitions of the taxable wage base, which could create problems with experience transfers from client companies or other PEO’s to the new PEO.    The legislation does not exist yet that mandates the states to change their definitions as of the issuance of this newsletter.

For additional information regarding the temporary and permanent regulations, please visit the following website https://www.gpo.gov/fdsys/pkg/FR-2016-05-06/pdf/2016-10700.pdf.   This is a public notification that supplies more definitions and requirements of the regulations.

 

 

 

 

 

 


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