The Internal Revenue Service is taking a closer look at professional employer organizations to implement a recent law.
The IRS said Tuesday it is requesting information about current PEO practices in an effort to streamline the implementation of a new federal program.
According to legislation that was enacted last December, the IRS is supposed to establish a voluntary certification program for PEOs. The law requires PEOs to meet a number of requirements, including certain bond and independent financial review requirements.
PEOs are increasingly being used by companies to manage functions such as payroll and benefits and deal with the ever-increasing volume of regulations. The PEO essentially becomes the employer of record for many employees, regardless of the company for which they actually work. Large PEOs can leverage their size to negotiate more favorable rates with insurers, but they also insulate companies in some ways from their own employees.
Last December, President Obama signed the Small Business Efficiency Act, which creates a voluntary certification program for PEOs within the IRS. To become IRS-certified, a PEO will have to meet financial standards (including bonding and independent financial audit requirements) and satisfy reporting obligations and other appropriate standards set by the IRS. Once certified, a PEO would take on sole liability for the collection and remission of federal employment taxes for worksite employees. Small and midsize businesses that contract with certified PEOs would be assured that they would not be liable for employment taxes once they remit their employees' tax withholdings to the PEO.
The IRS has been working to determine the procedures and information system changes necessary to implement the new law and plans to begin accepting applications for PEO certification on July 1, 2016.
Currently, the IRS pointed out, PEOs are subject to licensing, registration and other requirements in many states. In addition, there are private assurance organizations that offer PEOs accreditation if they satisfy certain requirements. The IRS said Tuesday it is requesting information related to these state requirements and accreditation programs.
Specific topics of interest to the IRS include covered employees, financial audit practices, verification of payroll tax obligations, and working capital and net worth requirements. The IRS also plans to consider information on other industry practices.
Further details on the specific topics and the process for submitting information are in the full text of the IRS's request for information. The deadline for submissions is Jan. 8, 2016.