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What is a PEO

If you are wondering what a PEO is and whether or not this type of outsourcing may be a good option for your small or medium-sized business, this first article in our series of four posts will help you decide if it’s the right move for you.

In this post, we cover everything you need to know about a PEO company including:

• What’s the meaning of PEO?
• PEO payroll
• PEO benefits
• PEO tax implications, and more.

What Is A PEO Company?

PEO is the acronym for Professional Employer Organization company.

It is an outsourcing arrangement where another company provides human resource (HR) services to small and medium-size businesses by setting up a “co-employment” relationship between your business and the PEO company.

The PEO handles your business’ activities, including payroll, tax administration, benefits, workers comp, and regulatory compliance.

Choosing to hire a PEO company is an ideal solution for a business in need of an HR person (or even department) but is not quite ready for or in a place where it can afford to build its own. Likewise, a PEO company may be a good fit for a business and its owners who do not want to shoulder the many risks associated with personnel issues.

How Does A PEO Work?

If you’re ready to expand your business by hiring new employees and preparing for bigger opportunities and challenges, A PEO company may be a logical next step.

Business owners who don’t have the capacity to manage their ever-growing HR needs can hire a PEO company that specializes in doing exactly that. The PEO company manages all the “back office Human Resources” needs so that the business owner can focus on growing and managing their business.

When you hire a PEO Company, you will enter into a contractual co-employment agreement. This means that your PEO will become your employer of record and will take on the full responsibility and liabilities associated with your company’s HR needs.

Because the PEO company takes on many of the risks associated with being an employer, they will require you to adopt some of their policies. If an employee issue arises, the PEO company will stand behind you if you and your managers have followed their policies and guidance.

PEO Payroll

A PEO company will take over the cumbersome task of payroll administration. PEOs can facilitate automated deposits and one-time payments, along with initiating payment to full-time and part-time employees – both salaried and hourly. Often PEOs will also handle payments to certain vendors and contractors typically recorded on federal form 1099s.

The PEO replaces the need for an in-house payroll specialist or for an outsourced payroll processor. All payroll matters are handled by the PEO as well as all federal, state and local payroll reporting and payroll tax payments.

PEO Benefits

The benefits associated with using a PEO company are numerous. First and foremost, the responsibility of managing human resources is fully transferred to the PEO company, allowing business owners to focus on business operations.

Another benefit of hiring a PEO company is that a PEO is the expert on employment-related compliance, ensuring that your business is always up-to-date regarding the most recent regulations. It is a PEO’s responsibility to stay current on ever-changing federal and your state’s rules and regulations, and to provide guidance on what actions your business needs to take to stay compliant.

Many business owners choose to engage with a Professional Employer Organization because by doing so they may greatly reduce their employees’ group health insurance costs.

PEOs typically have access to more competitive benefits, including health insurance, because it pool of hundreds, if not thousands, of businesses which allows it to negotiate more affordable group health benefits than any single business is able to access and offer to its employees.

A PEO also offers liability assurance, giving you access to valuable HR resources, should you need them. This includes attorneys and licensed HR professionals who can help mitigate employee-related issues if (or when) they arise.

If you’re planning on expanding your business to include global operations, global PEO companies can streamline the process of hiring international employees. The PEO can cost-effectively guide a business through the challenges associated with hiring international employees while adhering to federal, state and local laws and regulations.

Other often overlooked benefits may include perks like commuter benefits (allowing commuters to use pre-tax dollars for transportation costs) or wellness benefits (like discounted gym memberships).

PEO Tax Implications

Because a PEO becomes the employer of record, there are PEO tax implications.

You will be required to run your payroll under the PEO’s tax ID numbers. The implications of doing so can present some risks such as being held liable for late or missed tax payments, losing out on some tax credits, and the possibility of having to pay double wage taxes in the event the business hires the PEO after January 1st.

To mitigate these risks, the Small Business Efficiency Act of 2014 allows PEOs to participate in an IRS certification program on a voluntary basis. This rigorous certification process allows a PEO to become IRS certified, shifting the liability for any unpaid taxes from the business to the PEO. Using an IRS certified PEO means you will not lose any employment-related tax credits or need to pay unnecessary, duplicated payroll taxes should you join a PEO mid-year.

Not all PEOs are currently IRS certified, but we recommend seeking one out that is. Otherwise, the HR risks’ mitigation and efficiencies achieved by working with an PEO company may be outweighed by associating with the wrong PEO.

Additionally, before hiring an IRS Certified PEO (CPEO), verify their certification has not been either suspended or revoked.  The IRS published this information here.

Our next post in this series will cover the disadvantages of using a PEO company. And we follow that post up with a post about Non-Profit Organizations using a PEO and another post about how the PEO becomes the employer when you hire a PEO.

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