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Certified PEO: What is a CPEO and Why Does Certification Matter

Certified Professional Employer Organizations (CPEO): What Are They and Why Does Certification Matter

Axcet HR Solutions was among the first 10% of professional employer organizations (PEOs) in the nation, and the only local Kansas City PEO, to receive the Internal Revenue Service (IRS) designation of Certified PEO (CPEO).

What is a certified PEO? 

The Tax Increase Prevention Act of 2014, enacted Dec. 19, 2014, required the IRS to establish a voluntary certification program for 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 PEOs. Axcet was proud to meet all requirements, including a documented history of federal, state and local tax compliance, financial responsibility and organizational integrity.

In addition to the initial application process, certified professional employer organizations must meet significant requirements to maintain the IRS certified PEO designation, which Axcet has done since it first earned certification in 2017.

“While this IRS certification is voluntary, Axcet HR Solutions is committed to operating at the highest standard,” 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.”

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History of PEOs

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 world has grown significantly. In fact, according to the National Association of Professional Employer Organizations (NAPEO), PEOs provide services to 175,000 small and mid-sized businesses, employing 3.7 million people. Yet, when many business owners hear “PEO,” they still don’t understand exactly what professional employer organizations are and how much benefit they provide to small and medium-sized businesses. 

What is a PEO?

Professional employer organizations, or PEOs for short, provide full-service HR solutions to small and medium-sized businesses through co-employment. This includes all aspects of payroll, employee benefits, human resources, recruiting, training, tax administration, compliance, safety and many more functions (see a full list of services). With 15,000 tax codes that regularly change, and complex laws and regulations, it’s easy to see why business owners would want to outsource this work to a professional, allowing them peace of mind and time to pursue their passion.

As an added advantage, PEOs provide small businesses with access to affordable “big business” benefits for their employees that include 401k plans; health, dental and life insurance policies, dependent care and more. Attractive, yet affordable, benefits have been an area where small businesses have struggled to be competitive, especially when it comes to recruiting top talent. 

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Certified PEO Benefits

However, there’s a difference between a PEO and a certified PEO. 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 four differences between a PEO and a CPEO:

1.  Burden of Tax Liability.  In a traditional arrangement with an uncertified PEO, the IRS holds both the PEO and the client liable for paying federal employment taxes. So, if a client had paid the taxes to the PEO, but the PEO didn’t pay the client’s 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 employers for employment tax purposes, it is clear a CPEO is solely responsible for the payment of federal employment taxes on wages it pays to 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.


2.  Tax Credits.  Often, business owners worry about losing tax credits when choosing to enter into a PEO arrangement. When businesses choose a CPEO, they maintain the ability to retain certain tax credits, according to the SBEA.


3.  Wage-Base Restart.  In a non-certified PEO relationship, switching to a different PEO 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 CPEO agreement will not be subject to a wage-base reset. Therefore, they will not have to double pay certain taxes.


4.  Peace of Mind.  Businesses who partner with a certified PEO have added peace of mind knowing the CPEO has met rigorous background and experience stipulations, along with strict financial requirements. A certified PEO is simply the smarter, safer choice.

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

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Written by Jo McClure, CPP