The IRS is set to launch its new voluntary certification program for professional employer organizations (PEOs), also known as employee leasing organizations, on July 1, 2016. A recently-released guidance package describes how PEOs can obtain certification to become “certified PEOs” (CPEOs).
An employer may contract with a PEO to complete and file returns and pay and withhold employment taxes (income tax withholding, FICA and FUTA) on wages paid to employees. Some arrangements also call for human resources and employee benefits administration. The PEO essentially becomes the workers’ employer for tax and insurance purposes, while the employer retains control of the workers’ day-to-day activities.
Voluntary certification program
The Tax Increase Prevention Act of 2014 (TIPA) instructed the IRS to create a voluntary certification program for PEOs. Under TIPA, PEOs will be able to apply to be certified to act – for purposes of the employment tax provisions – as the employer of service providers they lease to their customers. To be certified, a PEO generally must show that it satisfies requirements established by the IRS. The PEO also must adopt the accrual method of accounting to compute its taxable income.
TIPA directed the IRS to establish a PEO certification program before July 1, 2015. However, the IRS responded that it lacked the resources to have a PEO certification program in place before July 1, 2016. The IRS issued temporary and proposed regulations in May.
The guidance sets out the process to become a CPEO, maintain CPEO status and how the IRS can suspend or revoke CPEO status. The IRS reiterated that CPEO program is voluntary. PEOS can elect to participate or not.
Applications. The first step in the certification process is to submit an application to the IRS. The IRS will notify the applicant as to whether its application for certification has been approved or denied and the effective date of its certification. If the IRS denies the application, the IRS will inform the applicant of the reason for denial.
Business location. An organization seeking CPEO status must have been organized under the laws of the U.S. or of any state. An applicant also must have one or more established physical business locations in the U.S. where regular operations take place.
Customers. The IRS regulations define a “customer” as any person who enters into a contract with a CPEO.
Suspension and revocation. The IRS may suspend or revoke the certification of any CPEO as a result of a failure to meet any of the requirements and the failure presents a material risk to the collection of federal employment taxes.
Tax compliance. An applicant’s history of tax compliance is an important factor in determining if certification would present a material risk to the collection of federal employment taxes. The IRS may deny an application for certification, or suspend or revoke certification, if the CPEO, or any of its precursor entities, related entities, or responsible individuals, fails to pay any applicable federal, state, or local taxes or file any required federal, state, or local tax or information returns in a timely and accurate manner.