Senate Bill 1908 introduced that will clarify IRS tax treatment for PEOs

Senator Chuck Grassley sponsors legislation for Professional Employer Organizations

November 18, 2011

US Senators Chuck Grassley and Bill Nelson have co-sponsored legislation that would amend the IRS tax code to clarify the tax treatment for companies operating as professional employer organizations. The PEO industry has long sought clarification from congress on the tax implications for PEOs. This clarification has important ramifications for PEOs and their clients.

Why the legislation is needed

Professional Employer Organizations (PEOs) handle large sums of payroll dollars for their client companies and act as the entity responsible for tax withholding and other payroll related obligations. In practice, these dollar flows are a pass through from PEO clients companies to their employees and to tax authorities and should not represent revenue to the PEO. In addition, many tax incentives programs are based on the size (employee count) of the company to be assisted. Since most PEO clients are small companies with less than 50 employees, the PEO industry has long sought to have it clarified (in the IRS code) that all government and tax incentives provided to small business will remain intact when they join a PEO. This legislative certainty is important so that PEOs can continue to provide large company services and employee benefits to the small business community.

Although the full text of the legislation is not yet available on the govtrack website, this page will track the status of the bill as it moves through congress.