Nearly half of the country’s workforce reports each day to a small or medium-sized business. Running the smaller companies that keep the nation’s economic engine chugging requires that owners handle multiple demands at once. It requires strong leadership skills, the ability to align a team to a common vision and an often-intense creative approach to problem-solving.
It’s a tall order – yet entrepreneurs start more than 600,000 new businesses every year. Because of the demands on their time and skillsets, it’s important that small business owners and their teams get meaningful help and support. From a human resources standpoint, a Certified Professional Employer Organization, or CPEO, can be a key resource that helps small businesses streamline workflows, easily maintain compliance with employment regulations and save money.
A certified professional employer organization (CPEO) is a PEO recognized by the Internal Revenue Service as the party responsible for paying federal employment taxes on its clients’ employee wages. Certification is voluntary and requires PEOs to meet stringent criteria, including annual IRS audits and quarterly assertions from a CPA regarding on-time payment of those taxes. Further, the Certified PEO personnel who make the tax payments must undergo comprehensive background checks.
The Certifed Professional Employer Organization program was developed after the Tax Increase Prevention Act of 2014, enacted on December 19, 2014, required the IRS to establish a voluntary certification program for professional employer organizations (PEOs). The certification process is exhaustive, and not all PEOs that embark on the path to certification will qualify. In fact, there are more than 900 PEOs operating in the United States, and fewer than 10% are certified.
Axcet HR Solutions was proud to meet all requirements, including a documented history of federal, state and local tax compliance, financial responsibility and organizational integrity, to be among the first 10% of PEOs in the nation, and the only Kansas City PEO, to receive the IRS designation of Certified Professional Employer Organization (CPEO).
Certified professional employer organizations must continue to meet significant IRS program requirements* to maintain the Certified PEO designation, which Axcet has done since it first earned certification in 2017.
“Axcet HR Solutions is committed to operating according to the highest standards,” said Jo McClure, Axcet’s director of payroll administration. “We take every measure to ensure our clients have the utmost peace of mind when they partner with us for all of their business’ HR needs.”
Professional employer organizations, or PEOs for short, provide outsourced HR services, technology and expertise to small and medium-sized businesses. This includes all aspects of payroll, employee benefits, human resources, training, payroll tax administration, compliance, safety, workers’ compensation and many more functions.
Kansas City’s PEO, Axcet HR Solutions, has been around for more than 30 years, dating back to the same time the PEO model came about. Since that time, the PEO industry has grown significantly. According to the National Association of Professional Employer Organizations (NAPEO), PEOs now provide services to 173,000 small and mid-sized businesses, employing nearly 4 million people.
Clients can establish a relationship with a PEO under a “PEO model,” in which the PEO serves as a “co-employer" to take on responsibilities for certain business functions, including:
Because payroll and payroll tax administration are complex and constant demands, small and mid-sized businesses often have trouble staying up to date on tax code changes. That puts them at risk of filing payments late or incorrectly and incurring penalties as a result.
Third-party administrators can streamline payroll operations by handling some or all of a small company’s payroll services and related tax obligations.
Employers often entrust this critical business function to service providers that help them meet filing deadlines and deposit requirements. It’s important for small business owners to understand, however, that unless they hire a third party that assumes responsibility for those obligations, they may still be responsible for paying income tax and employee contributions to Social Security and Medicare and for paying additional Medicare taxes.
In other words, not all third parties who manage payroll for small businesses are created equal. Here’s a primer on the kinds of organizations that provide payroll services:
A small business owner may authorize a payroll service provider (PSP) to administer payroll and employment tax obligations on the employer’s behalf, including preparing employee paychecks and required tax forms. Entering into an agreement with a PSP does not relieve an employer of its employment tax obligations or any of its employment tax liabilities.
A reporting agent (RA) is a PSP that has notified the IRS of its relationships with clients, which then may authorize the RA to perform any or all of the same services a PSP can. Unlike a PSP, however, an RA generally is required to electronically submit returns it files on behalf of its clients and to electronically deposit client taxes. An RA also may communicate with the IRS on behalf of a client, such as to resolve an issue.
As is the case with a PSP, a reporting agent does not assume any of the employer’s employment tax liability.
A Section 3504 agent is so named because this third-party payer is authorized under Internal Revenue Code Section 3504 to perform acts such as withholding, reporting and paying federal employment taxes for clients’ employees. Section 3504 agents share liability with the employer for the employer's Social Security, Medicare and federal income tax withholding responsibilities, meaning the IRS can seek to collect any unpaid employment taxes from both the employer and the Section 3504 agent who was designated and authorized to pay these taxes.
Employers contract with PEOs to manage payroll-related taxes and other human resources functions. A PEO may withhold and report employment taxes and facilitate payment to its clients’ employees.
While a PEO may be positioned as the employer or co-employer of individuals who work for its clients’ companies, IRS rules and regulations determine which party is liable for employment taxes, regardless of any agreement between an employer and a PEO. And, because PEO-client contracts typically require taxpayers (or clients) to send funds to the PEO for payment of taxes due, employers usually remain ultimately responsible and liable for ensuring all employment taxes are paid.
IRS certification and sole liability for payroll taxes distinguish Certified PEOs from non-certified PEOs. The IRS certifies PEOs only after they prove consistent tax compliance and provide extensive details about their financials. Certification, which periodically must be renewed, provides proof of a PEO’s ongoing viability and reliability.
A Certified PEO informs the IRS when it enters into or ends a contract with an employer using this form, and takes on additional responsibilities pertaining to payroll administration and federal employment tax reporting and payments.
Unlike other third-party arrangements, Certified PEOs are, in most cases, solely liable for paying their customers’ employment taxes, filing returns and making deposits and payments for the taxes reported on wages paid to employees. Clients of certified PEOs cannot be held liable for unpaid federal employment taxes, which is the most significant difference between working with a CPEO and any other type of payroll services provider.
Choosing a Certified PEO over any other third-party payer relieves small businesses of a critically important legal responsibility and gives owners greater peace of mind.
To keep a small business running according to plan and avoid potentially substantial fines or penalties, complying with employment regulations is essential. A Certified PEO ensures that its small and mid-sized clients maintain compliance with legal requirements related to tax issues, unemployment insurance, reporting, workers’ compensation, workplace safety and human resources.
Offering a solid employee benefits package enhances smaller companies’ ability to attract and retain high-quality talent. A Certified PEO helps its clients obtain competitive benefits pricing that includes retirement plans, dental and vision benefits and measurable discounts on insurance premiums. The PEO also handles enrollment and claims management.
Smaller businesses often aren’t aware of the safety risks their employees may be encountering at the workplace or how a few simple, cost-effective changes could dramatically reduce the chance of injury or fines. From performing safety audits to assisting with OSHA inspections, a Certified PEO will emphasize and help to ensure a safe work environment for its clients.
With lingering labor shortages, skilled professionals are in high demand, and smaller businesses are in stiff competition for a relatively small pool of people. A Certified PEO will provide you with a recruiter who understands how to optimally position your firm in the job market, help you assess the applicants who respond to your job ads, onboard employees and establish a desirable culture that makes them want to stay.
Dealing with worker’s compensation-related issues can be strenuous and time-consuming. A CPEO thoroughly understands the nuances of worker’s compensation claims and takes the burden off small businesses by handling compliance issues, premiums, claims and the massive amounts of ongoing paperwork associated with worker’s comp.
Helping employees strategically plan for their retirement is an important way to communicate their value to your organization. A CPEO can provide expert guidance about which plans and retirement savings options might be best for your organization and the people who work within it.
Employee performance measurement helps both company leadership and workers understand where your team members are strong and where reskilling may be needed to address weaknesses and gaps in job-related abilities. A CPEO’s HR experts can help you implement effective employee review processes and use metrics to create performance-based solutions that boost employee productivity.
Smaller companies rarely have money to hire full-time, in-house HR teams. Instead, an owner or a few managers are left to come up with on-the-fly solutions to HR issues. Often, these simply don’t work. By instead hiring a Certified PEO, a smaller company gets a team of proven professionals who understand and are experienced in all aspects of human resources. These pros will offer the right solution to every HR problem.
There’s a difference between a PEO and a Certified PEO. Under the PEO model, a Certified PEO assumes the role of an administrative employer of record for the purposes of payroll, government compliance, risk management and, in many cases, benefits administration. Client companies remain the primary employers, with control over hiring, firing, disciplinary matters and day-to-day operations involving employees.
Unlike a typical PEO, a Certified PEO is certified by the IRS and solely liable for employment taxes on wages it pays its clients’ worksite employees.
When you select a PEO that isn’t certified, you’re putting your company at risk. If you think about it, would you choose a bank that wasn’t insured by the FDIC? Probably not.
Certification matters. Here are the top five differences between a PEO and a CPEO:
A Certified PEO has met rigorous IRS standards, including:
In a traditional arrangement with an uncertified PEO, the IRS holds both the PEO and its small business clients liable for paying federal employment taxes. So, if a client had paid its taxes to the PEO, but the PEO didn’t pay those employment taxes to the IRS, the IRS could come after the client, even though the client had already paid the taxes to the PEO.
However, under the Small Business Efficiency Act (SBEA), which treats Certified PEOs as their clients’ employers for employment tax purposes, a Certified PEO is solely responsible for paying federal employment taxes on wages it pays to its clients’ worksite employees. After a client has issued payment to the Certified PEO, the IRS can’t come back to the client to collect. The Certified PEO is held liable.
Because of the requirements a Certified PEO must meet to earn the designation from the IRS, it is highly unlikely that a Certified PEO would fail to make an employment tax payment. Even if that scenario were to occur, the Certified PEO, not the client company, would bear full responsibility with the IRS.
Often, business owners worry about losing tax credits when choosing to enter a PEO arrangement. When businesses choose a Certified PEO, they maintain the ability to retain certain tax credits, according to the SBEA.
In a non-certified PEO relationship, switching to a PEO for employment tax payments mid-fiscal year comes with tax penalties due to a change in the Federal Employer Identification Number (FEIN). This can result in a smaller employer having to pay double taxes. According to the SBEA, businesses in a Certified PEO agreement will not be subject to a wage-base reset. Therefore, they will not have to double pay certain taxes.
Employers that partner with a Certified PEO like Axcet HR Solutions are assured a reliable, high-value relationship that helps them grow. An IRS-certified PEO offers safeguards and proven results non-certified PEOs cannot. A Certified PEO lifts a financial burden off its clients’ shoulders and is simply the smarter, safer choice.
Small and medium-sized businesses that decide to partner with certified professional employer organizations for critical HR functions have taken an important first step in freeing up internal resources and setting themselves up for greater success.
Like any relationship, though, the more compatible your company is with your Certified PEO partner, the better your business outcomes will be. So, after you’ve answered the question, “What is a Certified PEO?” and before you choose one, ask each Certified PEO you consider the same key questions so you can make an apples-to-apples comparison and find the right fit for your company.
The five most important questions to ask are:
Some CPEOs are web-based, which would, of course, mean that your relationship with them will always remain online. If it’s important for you to have in-person access, take into consideration whether each prospective CPEO is locally based or at least has physical locations staffed with HR professionals where you do business.
Before you engage a CPEO, ask whether a specific HR specialist or team of professionals will be dedicated to your account and be available when you have questions or issues that need to be addressed. The alternative is a call center model, which some PEOs use. This approach might not deliver the personalized service that can ensure a positive experience. If the CPEO does plan to assign a particular team to your business, ask if you may meet them before signing on.
Remember that your CPEO will interact directly with your employees on benefits and other HR issues. Confirm that the CPEO provides exceptional customer service and is committed to transparent communication so that your management team and your employees will always be well informed.
Your company represents your livelihood and provides a living for your employees. Your Certified PEO choice will affect benefits, compliance and other business issues, so its experience matters. Find out how many years your prospective CPEO’s staff has worked in the industry and which HR areas they consider specialties.
You also should ensure the CPEO’s employees know the workplace laws in cities and states where you operate, regularly engage in training and have earned industry certifications that demonstrate professional proficiencies. Two of the most-recognized certifications are:
Both sets of credentials recognize competence, experience, credibility and dedication to the industry, and HR specialists must meet extensive criteria to attain them. In both cases, certification requires passing a rigorous exam, which can be taken only after reaching certain levels of education and industry experience. Once the credentials are earned, individuals who hold them must be recertified every three years.
The professionals handling your payroll may have earned:
Ask whether the CPEO has low turnover, too. A CPEO that can’t maintain a stable employee base won’t serve your company well.
A client service agreement is a legal document. Examining the CPEO’s standard engagement contract should reveal each party’s responsibilities, contract termination provisions, payment terms, how often prices may increase and other key details.
The agreement should be clear and easily understood. If it isn’t, clarify any language you don’t understand and then determine if you would be comfortable signing on under the standard agreement.
The most important aspects to understand here are:
Prospective CPEOs should help you understand which approach is best for your company. Because of the third-party administrator’s (TPA) role in a self-funded plan – which includes handling employees’ personal information – it’s wise to assess on your own whether the TPA is reputable and maintains good hiring practices and privacy policies.
Regardless of the health insurance funding mechanism, for the CPEO to provide insurance to all of your employees, the TPA or carrier must be authorized to do business in the states where you operate.
Beyond the basics of payroll and health care benefits, a Certified PEO can be a trusted business partner that delivers other services and expertise to help your company grow. These may include organizational structure review and design, policy development, leadership development and coaching, employee training, safety program development, emergency preparedness and more.
After you’ve identified your preferred CPEO partner candidates, ask them to outline the services they would provide and the cost of engagement. Be prepared to provide basic information about your workforce demographics, employee wages and existing benefits. A good CPEO also will want to understand and will take into consideration your company’s goals and what you hope to accomplish through the partnership before submitting a proposal.
Choosing a CPEO is a big decision. Performing due diligence and selecting the best fit will position your company for a highly beneficial, long-term relationship with a CPEO you can rely on to expertly manage business-critical HR functions while you focus on core growth activities.
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Among the qualities that make Axcet an ideal Certified PEO solution for small and mid-sized businesses are:
When grouped with our network of clients, your health benefits buying power increases substantially, giving you access to lower premiums, more attractive pricing and more comprehensive benefits options.
Numerous national PEOs operate solely online. Axcet’s consultants are your Kansas City neighbors. This means access to face-to-face conversations with a dedicated HR specialist, one who understands you and your company personally.
As a PEO since 1988 and a Certified PEO since 2017 – the first year the certification program was available – we’ve dealt with just about any HR, payroll and payroll tax, employee benefits and worker’s compensation issues a smaller business in Kansas City is bound to face. Our years of experience add up to cost savings and greater efficiency for your organization.
As your CPEO partner, Axcet protects your business while enabling your team to worry less about HR tasks and instead concentrate on core growth activities. Learn how more by contacting us today.
* The IRS does not endorse any particular certified professional employer organization. For more information on CPEOs, go to www.irs.gov