Final regulations provide requirements that a person must satisfy to become and remain a certified professional employer organization (CPEO), as well as the CPEO’s federal employment tax liabilities and other obligations.
Some employers contract with PEOs to complete and file tax returns, pay and withhold employment taxes on wages paid to employees, or provide other employee benefits. Code Sec. 3511 and Code Sec. 7705 provide certification requirements for PEOs, and codify the employment tax consequences of being CPEO.
For federal employment tax purposes, a CPEO is generally treated as the employer of any individual who is:
- Performing services for a customer of the CPEO; and
- Covered by a contract between the CPEO and the customer.
Employer treatment applies only to remuneration paid to the covered employee by the CPEO. If an individual covered by a CPEO contract performs services for a customer at a work site that meets certain coverage requirements, only the CPEO is treated as the employer for federal employment tax purposes for remuneration its pays to that work site employee.
A person must apply to the IRS to become a CPEO, and the IRS must certify that the person meets certain requirements. A CPEO must:
- Meet tax status and background requirements;
- Meet bond, financial review, and quarterly reporting requirements; and
- Notify the IRS of any change that materially affects the continuing accuracy of information it has provided to the IRS.
The Treasury Secretary can suspend or revoke CPEO certification if the person does not satisfy certain agreements or applicable requirements.
The final regulations adopt and amend proposed regulations published in 2016 ( NPRM REG-127561-15), and reflect and address certain interim guidance ( Rev. Proc. 2016-33, 2016-25 I.R.B. 1034; Notice 2016-49, 2016-34 I.R.B. 265; Rev. Proc. 2017-14, 2017-3 I.R.B. 426). In finalizing the regulations, the IRS reviewed and analyzed a variety of issues affecting CPEOs, including:
- Maintaining a separate annual FICA tax and FUTA tax wage base and withholding threshold for each customer for which a covered employee performs services during a calendar year;
- The treatment of tax credits, including the addition of the employer credit for paid family and medical leave and certain employee retention credits to the list of specified credits that apply to the CPEO customer and not the CPEO;
- The treatment of self-employed individuals under the CPEO rules;
- CPEO reporting to the IRS, such as reporting the commencement or termination of CPEO contracts and service agreements;
- The meaning of key terms such as “responsible individuals” (certain owners, officers, and other persons of the CPEO), “work site,” and “work site employee”;
- The CPEO application process, including when an applicant may reapply for certification;
- CPEO “suitability” requirements, including domestic disregarded entity and sole proprietorship certification, fingerprint cards and background checks, and the waiver of confidentiality and privilege;
- Working capital requirements, including a limited exception to the positive working capital requirement;
- Bond requirements, including a provision that the IRS Commissioner may provide exceptions to the rule that a CPEO must meet the bond requirements without posting collateral; and
- Maintaining employee records.
The final regulations are effective on May 28, 2019.