A professional employer organization (PEO) is an organization that enters into an agreement with a client to perform, among other tasks, the federal employment tax withholding, reporting, and payment functions related to workers performing services for the client. Effective for wages for services performed on or after January 1, 2016, a certified professional employer organization (CPEO) may be treated, for purposes of employment tax liability, as the sole employer of a worksite employee performing services for a customer of the CPEO for remuneration the CPEO paid to the employee. To become a CPEO, a person must apply with the IRS for CPEO treatment and be certified by the IRS as meeting certain requirements. The IRS began accepting applications for CPEO certification in July 2016.
The rules for becoming and maintaining status as a certified professional employer organization (CPEO) are detailed, and include rigorous quarterly and annual reporting requirements. The Treasury Department and the IRS view tax compliance of a CPEO applicant or CPEO, and of its responsible individuals, related entities, and precursor entities, as an important factor in determining whether the CPEO applicant’s or the CPEO’s certification presents a material risk to the IRS’s collection of federal employment taxes. For a failure to comply with quarterly or annual reporting requirements, failure to pay applicable federal, state, or local taxes, or failure to file required tax or information returns as required, the price can be steep: denial of CPEO certification, or suspension or revocation of CPEO status.