The Tax Increase Prevention Act of 2014 ("TIPA") was signed into law by President Obama in December of last year. One of the changes made by the Act (Section 206) was a change in the Internal Revenue Code to create – and to give the IRS the authority to recognize – a new category of professional employer organizations, referred to as "certified professional employer organizations" (certified PEOs or CPEOs). The significance of being characterized as a certified PEO is that a CPEO is actually treated, under the Internal Revenue Code, as being the employer of designated employees of its customer ("worksite employees") for federal employment tax purposes. That means that Certified PEOs will have exclusive responsibility for paying worksite employees' wages and for collecting and depositing (and paying) federal employment taxes. The CPEOs' customers will continue to be treated as the actual employer of the worksite employees for other purposes, including other tax purposes, e.g., will be allowed to claim tax credits for employment of the worksite employees if applicable conditions are satisfied.
Classification as a CPEO is not automatic. Effective in 2016, a PEO will be able to voluntarily apply to become a certified PEO by:
- Meeting tax status, background and audit requirements that will be established by Treasury regulations that are yet to be issued, and
- Agreeing to:
- satisfy bonding and independent financial review requirements;
- satisfy reporting obligations imposed by regulation;
- use an accrual method of accounting to compute its taxable income (unless another method is approved by the Secretary of the Treasury);
- verify its ongoing compliance with the various CPEO requirements; and
- notify the Secretary of the Treasury of the occurrence of any changes that affect the accuracy of previous agreements or information provided.
Certified PEOs will be required to enter into written service agreements with their employer-customers that assign responsibility to the PEO for wage payments, taxes and employee benefits for worksite employees, regardless of the employer-customer's payment for those services. The written service agreements must also require that the certified PEO:
- Assume responsibility for recruiting, hiring and firing workers in addition to the employer-customer's responsibility for the same tasks.
- Maintain employee records regarding the worksite employees for whom the PEO is assigned responsibility.
- Explicitly agree to be treated as a certified PEO for purposes of payroll and employment taxes (i.e., for purposes of Section 206 of TIPA), concerning the worksite employees.
As noted, these provisions take effect on January 1, 2016. The statute also requires the IRS to issue regulations concerning certified PEOs and these new requirements by July 1, 2015.