• Businesses that use PEOs grow 7 to 9 percent faster, have employee turnover that is 10 to 14 percent lower, and are 50 percent less likely to go out of business than companies that do not use PEOs.

• PEOs enable small businesses to offer their employees access to Fortune 500-level benefits such as: 401(k) plans; health, dental, life, and other insurance; dependent care; and other benefits they might not typically receive as employees of a small company.

• Most small companies cannot afford to hire a human resources professional. In contrast, almost all PEOs provide access to human resource professionals as a part of their services to small businesses and their employees. Through this service, PEOs help small businesses comply with myriad federal, state, and local employment laws, and they provide access to HR expertise to small business employees.

• Among businesses with fewer than 10 employees, those using a PEO have more than 3 times greater participation in a retirement plan than employees of businesses that do not use a PEO. For businesses with 10 to 49 employees, 52 percent of PEO client employees have a retirement plan, versus 23 percent in those companies that do not use a PEO.

About the PEO Industry

• There are more than 500 PEOs in the U.S. that provide human resource services to small and mid-size businesses—issuing wages and remitting taxes, offering workers’ comp and risk consulting services, and providing compliance assistance with employment-related rules and regulations. In addition, many PEOs offer HR technology systems and access to 401(k) plans, health, dental, and life insurance, dependent care, and other benefits.

• PEOs help businesses take care of employees by enabling them to offer Fortune 500-level benefits at an affordable cost and providing access to experienced HR professionals. And they help business owners and executives save time by taking administrative and HR-related tasks off their plates, allowing them to focus on the success of their businesses.

• More than 200,000 small and mid-size businesses employing 4.5 million people partner with a PEO.

• About 17 percent of all employers with 10 to 100 employees are PEO clients.

• Over the last 12 years, the PEO industry has quadrupled in size as the regulatory landscape gets increasingly complicated and more and more businesses turn to PEOs for back-office assistance.

Here is the text of her address:

COMMEMORATING NATIONAL PEO WEEK

HON. ERIN HOUCHIN
of Indiana in the U.S. House of Representatives – Monday, April 17, 2023

Mrs. HOUCHIN.

Mr. Speaker, I rise today to commemorate National PEO Week, which starts May 21 and ends May 27, 2023. National PEO Week will celebrate the important contributions of the professional employer organization (PEO) industry, which provides payroll, employee benefits, compliance assistance, and HR services to hundreds of thousands of small and mid-sized businesses that employmore than 4 million people.

PEOs play a critical role in helping businesses survive and thrive, particularly during challenging times. In the dark days of the COVID pandemic, PEOs ensured that that their clients stay afloat by securing PPP loans and loan forgiveness, managing employee leave, and applying for available tax credits. In fact, businesses that partner with a PEO were nearly 60 percent less likely to have permanently closed than those that did not use a PEO during the pandemic.

PEOs help small businesses improve productivity and profitability, focus on their core mission, and grow. Through a PEO, the employees of small businesses gain access to important employee benefits such as: 401(k) plans; health, dental, life, and other insurance; dependent care; other benefits they might not typically receive as employees of a small company.

I can attest to the value of PEOs. Before coming to Congress, I worked for a PEO and saw firsthand the positive impact they had on small businesses in Indiana.

Mr. Speaker, I would like to congratulate the PEO industry for all they do to help our Nation’s small businesses and their employees prosper.

Congressional Record link is here.

The business community is waiting for guidance from the Treasury Department to implement this policy. Secretary of the Treasury, Steve Mnuchin, has stated that participation will be voluntary and employers can choose not to allow their employees to take advantage of this payroll tax withholding deferral. Larry Kudlow the President’s economic advisor, has stated that the President is looking for ways to “fully forgive” the payroll tax deferral however no instructions have been forthcoming in writing from any US Government entity.

Employers are concerned that they will ultimately be responsible for the repayment of the payroll tax deferral. Federal tax law and IRS regulations make it clear that the employer is liable for unpaid payroll taxes. Many organizations that represent businesses providing financial and accounting services are seeking clarity on their responsibilities and those of their clients and constituents to collect and remit payroll tax withholdings.

Including:

• The National Association of Professional Employer Organizations (NAPEO).
• The American Institute of Certified Public Accountants
• The National Payroll Reporting Consortium
• The US Chamber of Commerce

On Friday, 142 House Democrats sent a letter to President Trump demanding he reverse his ”recent executive action on Social Security payroll taxes and abandon your call to defund Social Security by eliminating the payroll tax permanently.” Now it’s a political spin zone.

Since PEOs are considered the employer of record for their clients there is legitimate concern in the PEO industry that they may be held liable for unremitted payroll taxes of worksite employees of their clients. While some rules are still yet to be resolved, all current PEO clients should contact their PEO for guidance on how to proceed in this situation.

Small Businesses Have Never Needed a PEO relationship more

The COVID pandemic has hammered the economic climate for small and medium sized business in 2020. Aside from the general business climate deterioration, the impact in the area of workforce administration continues to be a landscape of confusion and change. PEO services have never been more valuable for their small business clients. Let us help you find the right PEO for your company.

According to an article in the June 8, 2018 Wall Street Journal:

“The Labor Department’s Bureau of Labor Statistics released on Thursday its survey of contingent and alternative workers for the first time in 13 years. It showed the fraction of workers employed as independent contractors was 6.9% in May 2017, down from 7.4% in February 2005, the last time the survey was taken. The broadest measure of the share of workers who are contingent—meaning they don’t expect their jobs to last more than an additional year—was 3.8% last year, down from 4.1% in 2005.”

Let’s explore some possible reasons.

For many employers engaging workers on a contractor (1099) basis has offered companies a way to reduce the cost of many employment related obligations. In a 1099 / contractor arrangement items like HR regulatory risk (hiring and firing practices) workers’ compensation insurance, unemployment insurance, health insurance and employment tax withholding get shifted from the company to the worker. Now that the economy is becoming more robust, companies are having trouble finding workers and must offer a more attractive arrangement to attract workers.

Problems for workers in a 1099 – Independent Contractor Relationship

Trouble with the IRS – Taxes

Many people who have worked on a 1099 basis for a company are not prepared for the associated responsibilities. Often overlooked is the contactors responsibility for making quarterly federal tax payments (FICA). In a traditional employee arrangement the employer deducts the FICA amounts from the employee’s check and remits the withholding to the US treasury department on the employee’s behalf. Many workers in an IC / 1099 arrangement neglect the IRS deposits and fail to set money aside for the annual tax filing. As a result many end up in trouble with the IRS. For workers in an employee arrangement this is less likely. It is probably no coincidence that as the number of 1099 workers in the “Gig economy” grew from 2010 to 2015, the number of people paying an IRS underpayment penalty grew by 40% to 10 million people in 2015.

Note: the Internal Revenue Service is attempting to address this problem for 1099 / independent contractors with a new tax deposit phone app. This helps make it easier for 1099 workers to make their quarterly tax payments.

Worker’s Compensation Insurance

While nobody likes to pay for work comp insurance, it does serve a purpose. Employers in every US state (except Texas) are required by law to provide work comp insurance coverage for their employees. For workers in a 1099 arrangement the cost of a work related injury may be forced on the worker unless other coverage arrangements have been made by the contacting company.

Health Insurance

In a IC / 1099 arrangement the worker has no access to a company sponsored group health plan. This forces the worker to obtain their own coverage and for many people the Healthcare.gov insurance has virtually collapsed, leaving very few / or very expensive coverage options. On the other hand workers who are employees may have access to more cost effective health insurance plans sponsored by their company.

Supplemental Insurance and Retirement Plans

Workers in an IC / 1099 arrangement are on their own for establishing a IRA/ SEP IRA or other retirement plan. It’s an easy thing for workers to overlook. For employees the plan establishment has been done by the employer and many employers also offer 401K matching contributions. Since the employees 401K plan contributions are payroll deducted it is more “automatic” and therefore more likely to actually take place.

How a Professional Employer Organization can help

Since the American workforce appears to now be favoring a traditional employer / employee arrangement, companies need to assess the best way to compete for workers and that includes offering an attractive array of benefits. Traditionally that required extensive overhead associated with an HR department and other ongoing managerial tasks. Companies that join a Professional Employer Organization or PEO get the best of both worlds.

Who must submit a 2018 Form W-4?
Employees with any changes to their withholding tax allowances should submit a 2018 Form W-4 to their PEO. In addition, employees who are exempt from tax withholding must submit a new 2018 Form W-4 to their PEO or their exemption may expire.

Due to the significant tax withholding changes in the new TCJA, employers should urge their employees to double check their withholding elections by using the new IRS withholding tax calculator linked below. Employees with updates should complete and submit their 2018 Form W-4 as soon as possible. A PEO cannot process any changes employees make to their withholding tax allowances or any withholding tax exemptions until they receive an updated 2018 Form W-4. Ask your PEO for instructions regarding how to advise employees to update their W-4 information.

If your employees have questions on how to complete their 2018 Form W-4, please see the information provided by the IRS in the links below or consult with your tax advisor.

IRS News Release: Updated Withholding Calculator, Form W-4 Released
https://www.irs.gov/newsroom/updated-withholding-calculator-form-w-4-released-calculator-helps-taxpayers-review-withholding-following-new-tax-law

2018 IRS Withholding Calculator
https://www.irs.gov/individuals/irs-withholding-calculator

2018 IRS Form W-4
https://www.irs.gov/pub/irs-pdf/fw4.pdf

Clients and prospective clients of any PEO may need to understand some things about this IRS certification. First of all there is no legal requirement for a PEO to gain IRS certification.  It is entirely up to each PEO to determine if they want to incur the additional cost and administrative burden of obtaining and maintaining IRS certification.

Certified by the IRS

About the IRS Certification Program

The Small Business Efficiency Act (SBEA) modified the Internal Revenue Code, and provided statutory authority for those PEOs that have elected to pursue IRS certification.  IRS certified PEOs (CPEOs) are officially authorized by the IRS to collect and remit federal employment taxes under the PEO’s Employer Identification Number (EIN) for wages paid to worksite employees.  PEOs that choose to participate in the IRS certification program must meet specific requirements regarding tax status, background, industry experience and financial reporting.  The IRS process for a PEO to obtain and maintain IRS certification requires:

• Payment of an annual fee to the IRS
• Background verification and tax compliance history review of PEO owners and stakeholders
• Submission of third party CPA opinion statements and annual audited financial statements
• Independent surety bonding for federal tax liabilities
  The IRS certification program requires a CPEO to post a bond each year guaranteeing payment of its federal employment tax liabilities. Bonding for the PEOs must be set to 5% of their collective annual federal tax liabilities with a minimum of $50K up to a maximum of $1M.Full Rules for CPEOs are available in IRS Internal Revenue Bulletin 2017-3 Rev. Proc 2017-14.

Why did the IRS offer a certification program for PEOs?

It’s really pretty simple; avoiding bad press for the PEO industry.  Over the last twenty years there have been a few PEOs that have gone out of business either through mismanagement or (rarely) outright fraud.   As in every industry with a fiduciary responsibility to customers there will be mistakes and some bad actors; banking, investing and insurance have all had some high-profile failures.   In our twenty years as industry advisors we have seen only a very, very few PEOs fail and the vast majority of client/PEO relationships successfully last for decades.  As for potential tax fraud by a PEO who collects employment related taxes and then fudges on the IRS deposits, the threat of being sentenced to federal prison is a pretty good deterrent.   In the few cases where a PEO has failed, it has gained press attention (Google never forgets) and in turn that tends to tarnish the whole PEO industry.

In response, some PEO industry leaders banded together through the National Association of Professional Employer Organizations (known as NAPEO), to construct a certification program and lobby the US congress for its implementation.  To advocates, this program was viewed as a win-win for both the IRS and the PEO industry.  The IRS gets increased confidence and oversight regarding the payment by the PEO of employment related taxes for the PEOs worksite employees and clients.   In turn, certification advocates in the PEO industry were seeking a way to assure prospective clients that employment related taxes are being handled appropriately.  Like any business, winning new clients is competitive and PEOs touting IRS certification are no doubt considering it will deliver a marketplace advantage.

Potential advantages for clients of a CPEO

• Payroll Tax Liability

  Clients who join a CPEO cannot be held liable for unpaid federal employment related taxes for the duration of their time in a CPEO relationship.  Technically in a standard PEO relationship the IRS can legally hold a PEO client liable for unpaid employment related taxes in the event that the PEO failed to make the required tax deposits. In the very few cases we are aware of where the client payed the PEO and the PEO failed to make those tax deposits, the IRS has most commonly declined to pursue the PEO client for such monies. No matter how uncommon, it has remained a concern for PEO clients for years. Clients of a CPEO are released from that potential liability.

• Wage Base Restarts – Successor Employer Treatment

  The IRS provision for CPOEs allows them to be treated as a successor employer regarding federal employment taxes – FUTA and OASDI – social security taxes. These taxes are subject to annual wage cutoff thresholds.  Some companies joining a PEO late in the calendar year have not been credited for earlier current year employment tax contributions due to the change in federal employer identification number (FEIN) reporting the wages.   In the payroll world this is called a wage base restart. A company (and their worksite employees) that joins a CPEO midyear will not be required to restart wage base calculations for federal employment related taxes.  This advantage will primarily affect PEO clients that have employees with annual wages over $127,200 – the social security tax threshold for 2017.  PEO clients with average annual wages below this amount will not see much financial advantage in joining a CPEO versus a standard PEO in a midyear transition.   This treatment also applies in reverse to any CPEO client that elects to leave the CPEO during the year. Since the CPEO program only covers federal employer taxes, successor employer status for state taxes (SUTA) will not be affected by the new certified PEO regulations.

• Tax Credit Eligibility

  In addition a client’s eligibility for other federal tax credit programs will not be impacted by using a CPEO. Since some tax credits eligibility accrues to the employer of record, some have questioned whether a PEO client can apply for tax credits when technically their PEO is the employer of record since form 941 wages are reported under the EIN of the PEO.   Some of the more common employer based tax credits are:

• IRS Section 45B – Related to cash tip credits (common PEO clients in the hospitality industry)
• IRS Section 45R- Related to employee health insurance expenses for small employers
• IRS Section 51- Related to Work Opportunity Credit
• IRS Section 1396 -Related to Empowerment Zone Employment Credit

Under the new CPEO rules, it is now codified that all of the listed federal tax credits will be eligible to the benefit of the CPEO client and that a CPEO has the obligation to calculate and report the eligible financial amounts to their CPEO clients.For more details refer to Internal Revenue Bulletin:  2016-21, REG–127561–15 Section 6

Will joining a Certified PEO Cost More?

Since the CPEO program is just now getting underway, only time will tell whether PEOs charge their clients more in order to offer a certified PEO service solution.  Each PEO who seeks and obtains IRS certification will have increased costs for maintaining program compliance and surety bonding.  It can be expected that those higher operating costs have to be recovered somehow and might result in slightly higher fees charged to clients seeking an IRS certified services suite.

Potential PEO Industry Impacts

According to the National Association of Professional Employer Organizations there are from 780 to 980 PEOs operating in the USA.  Smaller PEOs, may find the costs associated with certification (surety bonding in particular) to be much more marginally expensive than it will for larger PEOs who have a much higher number of clients to spread those relatively fixed costs.  Over the years the CPEO program has been developing, we have spoken with our StaffMarket member PEOs about their plans for obtaining IRS certification. Many are excited to finally have clarity about lack of potential tax liability they can guarantee to prospective clients. Others have expressed dismay that the associated additional expenses incurred to obtain CPEO status may place them at a price disadvantage to some of the larger PEOs. Furthermore there has been industry grumbling that the larger PEOs have been pushing this program with the Department Of Treasury as a strategy to gain a marketplace price advantage and possibly force industry consolidation.  Another possibility is that some smaller PEO operators will offer both a “certified” CPEO option as well as a standard PEO option to their clients, possibly at different price points. There is no doubt that many PEO clients enjoy the “high-touch” personal service of a smaller PEO. Let’s hope those clients of smaller PEOs who also demand certified PEO services are willing to pay a little more to get it.

Once the IRS names those PEOs who have obtained certified status, StaffMarket will track that information and StaffMarket analysts will be glad to review both standard PEO and CPEO solutions available that also meet your company’s other workers compensation, health insurance and HR needs.

Photo credit to Dave Miller at Flickr. Note this photo is of the IRS agent Frank Hamer- responsible for killing Bonnie Parker and Clyde Barrow.