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CPEO vs PEO: Making the Informed Choice

CPEO vs PEO: A Side-by-Side Comparison

By Jo McClure, CPP on Nov 03, 2023
18 min read 6 Comments

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Understanding the distinction between a CPEO vs PEO is crucial for small and medium-sized businesses that form nearly half of the country's workforce. Running these smaller companies requires owners to handle multiple demands at once, possessing strong leadership skills, the ability to align a team to a common vision and an often-intense creative approach to problem-solving.

Given the demands on their time and skillsets, it's imperative that small business owners and their teams receive meaningful help and support. From a human resources perspective, a certified professional employer organization (CPEO) can be an invaluable resource.

CPEOs assist small businesses in streamlining workflows, easily maintaining compliance with employment regulations and saving money, ultimately contributing to the success and growth of these vital components of the nation's economic engine.

Certified PEO (CPEO) vs PEO

When considering a CPEO vs PEO, it's crucial to understand the primary distinctions between a certified professional employer organization (CPEO) and a professional employer organization (PEO).

The main difference between the two lies in the certification by the Internal Revenue Service (IRS) that CPEOs possess, which enables them to offer specific tax benefits and peace of mind to their clients. Here's a side-by-side comparison of the main differences between a CPEO vs PEO:

  • PEO

    A PEO is a firm that provides a range of human resource services to businesses through a co-employment relationship, such as payroll processing, benefits administration and compliance assistance. In this arrangement, the PEO becomes the employer of record for the client's employees, while the client maintains responsibility for the day-to-day management of the workers.
  • CPEO

    On the other hand, a CPEO provides all of the services of a PEO but it has successfully met the IRS's requirements for certification. This certification grants certain tax advantages to the clients of the CPEO, including the ability to retain specific tax credits and eliminate wage base restarts for Social Security and Medicare taxes when a business starts collaborating with a CPEO. 

    Unlike a typical PEO, a CPEO is certified by the IRS and solely liable for employment taxes on wages it pays its clients’ worksite employees

    Moreover, CPEOs are required to adhere to continuous reporting and bonding requirements, which are designed to ensure their financial stability and compliance with applicable laws and regulations.

In sum, certification matters. Let's take a deeper look into the top five differences between a CPEO vs a PEO that we just touched on:

  • IRS standards

A CPEO has met rigorous IRS standards that a traditional PEO has not. These include:

    • A thorough audit of financial statements performed by a third-party CPA.
    • Documentation, authenticated by the CPA, proving that all employment taxes have been paid on time.
    • Proof of positive working capital.
    • Background checks on CPEO staff members responsible for paying employment taxes on clients’ behalf.
  • Burden of tax liability

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 CPEOs 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 CPEO, 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 CPEO, not the client company, would bear full responsibility with the IRS.

  • Tax credits

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.

  • Wage-base restart

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.

  • Peace of mind

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.

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. 

Now that we've covered the main difference between a CPEO vs PEO, let's learn more about PEOs and CPEOs and the services and benefits they provide small to mid-sized businesses.

why it makes sense to hire a peo instead of an HR person

What Is a PEO?

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.

As Kansas City’s PEO, we have been serving businesses in the metro and beyond since 1988, 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.

What Is a Certified PEO?

As discussed when examining the five differences between a CPEO vs PEO, 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.

But what exactly does it take to become certified? Let's take a look:

  • Development of the CPEO program

    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 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.

  • Voluntary, intensive process

This 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. As part of the certification process, PEO personnel who make tax payments must undergo comprehensive background checks.

  • Continuation to meet requirements

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.

Here at Axcet HR Solutions, we are proud to have met all requirements, including a documented history of federal, state and local tax compliance, financial responsibility and organizational integrity, and to have been among the first 10% of PEOs in the nation to become certified by the IRS. In fact, we were the only local Kansas City PEO, to receive the IRS designation of CPEO and to have maintained our certification, uninterrupted, since first earning it 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.”

why axcet hr solutions certified PEO

CPEO vs PEO: HR Services Provided By Both

How is a CPEO and PEO alike? At their core, both operate under the PEO model in which they serve as a “co-employer" to the small business and its employees and take on responsibilities for certain business functions, including: 

  • Payroll and payroll tax management

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 starting with your best option, a CPEO:

    • Certified PEO

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.

    • Traditional PEO

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.

    • Payroll service providers

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.

    • Reporting agent

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.

    • Section 3504 agent

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.

Summary: 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.

RELATED: Ask the Expert: How Long to Keep Payroll Records >>

  • Compliance Issues

To keep a small business running according to plan and avoid potentially substantial fines or penalties, complying with employment regulations is essential.

A CPEO 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.

  • Employee Benefits Management/Administration

Offering a solid employee benefits package enhances smaller companies’ ability to attract and retain high-quality talent. Both a CPEO and PEO help its clients obtain competitive benefits pricing that includes retirement plans, dental and vision benefits and measurable discounts on insurance premiums. It also handles enrollment and claims management.

  • Risk assessment

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, both a CPEO and PEO will emphasize and help to ensure a safe work environment for its clients.

RELATED: Reduce Employee Injury and Illness with Comprehensive Risk Assessments >>

  • Talent management

With lingering labor shortages, skilled professionals are in high demand, and smaller businesses are in stiff competition for a relatively small pool of people. Both a PEO and CPEO 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.

  • PEO worker’s comp 

Dealing with worker’s compensation-related issues can be strenuous and time-consuming. Both traditional PEOs and certified PEOs thoroughly understand the nuances of worker’s compensation claims and take the burden off small businesses by handling compliance issues, premiums, claims and the massive amounts of ongoing paperwork associated with worker’s comp.


  • Retirement planning 

Helping employees strategically plan for their retirement is an important way to communicate their value to your organization. A certified PEO and traditional PEO 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 tracking 

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.

Both a CPEO and PEO's HR experts can help you implement effective employee review processes and use metrics to create performance-based solutions that boost employee productivity

  • General HR support

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 hiring a certified PEO or (traditional 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.

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Questions to Ask a Prospective Certified PEO Partner

Small and medium-sized businesses that decide to partner with a CPEO 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 CPEO partner, the better your business outcomes will be. So, after you’ve answered the questions, “What is a Certified PEO?” and "What are the differences between a CPEO vs PEO" and before you choose one, ask each CPEO you consider the same key questions. That way you can make an accurate side-by-side comparison and find the right fit for your company.

The five most important questions to ask are:

1. How do you interact with your clients?

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.

2. What are your team members' qualifications, credentials and areas of expertise?

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:

    • The Professional in Human Resources (PHR) and Senior Professional in Human Resources (SPHR) from the HR Certification Institute.

    • SHRM-CP (SHRM Certified Professional) and SHRM-SCP (SHRM Senior Certified Professional) from the Society of Human Resources Professionals.

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.

RELATED: Top Benefits of Hiring SHRM or HRCI Certified HR Consultants >>

The professionals handling your payroll may have earned:

    • Certified Payroll Professional (CPP) from the American Payroll Association. Individuals with this certification have practiced for at least three years and passed the Association’s CPP exam. They maintain certification either by meeting continuing education requirements or retaking the exam.

Ask whether the CPEO has low employee turnover, too. A CPEO that can’t maintain a stable employee base won’t serve your company well.

3. What's included in your CPEO service agreement?

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.

RELATED: Why You Should Hire a PEO To Save on Employee Health Insurance >>

4. How do you structure the health insurance plans you offer?

The most important aspects to understand here are:

    • Is the plan fully funded?

      If the CPEO offers a fully funded plan, the risk falls on its insurance carrier, which pays the claims, potentially allowing your company to face fewer cost ups and downs throughout the year but also potentially creating higher taxes. Ask the CPEO to vouch for its insurance carrier’s reliability and to confirm that its coverage would be relevant for your employees. It’s also a good sign when a CPEO can attest to a longstanding relationship with its insurance carrier.
    • The drawbacks of a self-funded plan

      With a self-funded plan, the CPEO pays claims (usually through a third-party administrator) and assumes the role of insurer. This may save your company money in the long run but also may create higher short-term risk. Both models offer drawbacks and benefits. 
    • Which approach is best

      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.
    • Authorization to do business in your state

      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.

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5. What value-add services do you provide?

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 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.

benefits of a peo six lesser known services that can transform your business

Axcet HR Solutions: Your Trusted CPEO Provider Since 1988

As we mentioned, and are proud to reiterate, Axcet HR Solutions has been operating under the PEO model since 1988, which is when PEOs first came about. We were also among the first 10% of PEOs to ever become certified by the IRS and have maintained that certification, uninterrupted since that time (2017). Here are even more qualities that make Axcet an ideal CPEO solution for small and mid-sized businesses:

  • Job applicant and onboarding help

    Recruiting and onboarding employees can be a lengthy and costly process. Axcet provides strategic recruiting guidance that helps your company get the best available applicants and onboard new hires so they’re prepared to be high performers from day one.
  • Better buying power

    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.

  • Access to Right-Around-the-Corner HR Knowledge and Experience

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.

  • Expertise

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.

Contact the CPEO Experts

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 more by contacting us today.

* The IRS does not endorse any particular certified professional employer organization. For more information on CPEOs, go to

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Written by Jo McClure, CPP

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