What Is a Certified PEO? A Guide to Understand CPEOs

A Certified PEO (CPEO) is a Professional Employer Organization that has met all requirements set forth by a governing body (the IRS being the most well-known) to receive certification. These requirements include strict guidelines that ensure that the organization is both responsible with its finances and is remitting payroll taxes correctly and timely on behalf of its clients. Although CPEOs can be more costly than non-certified PEOs, they are a great option for small businesses that want to ensure they’re sharing employment responsibilities with an organization they can trust.

If you’re looking to start with a CPEO right away, consider working with Justworks. It is an excellent choice for small businesses with limited HR experience because of its affordability and solid PEO services. It offers payroll processing, tax filing services, and employee benefits administration. Its packages include enterprise-level options from top carriers and insurers and provides access to HR professionals who can help you stay compliant.

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What Does It Mean to Be Certified?

When PEOs are deemed “certified,” it means they have volunteered to participate in a certification process that guarantees the financial and operational integrity of the organization. These certifications are only granted after in-depth audits of their financial reporting, tax compliance, and even officer background checks. Its main purpose is to provide business owners with confidence that the PEO is both stable and responsible.

Certified PEOs are also legally held liable for all employment taxes on behalf of the businesses they’re engaged with. This means that the CPEO would be responsible for any unpaid employment taxes and penalties or interest associated, removing all liability from the business owner. This is important for small businesses, as it allows you to outsource employer payroll tax management with the promise that you won’t be penalized for mistakes.

Difference Between CPEO vs PEO

While both CPEOs and PEOs provide critical HR and payroll services, their differences reside in the level of assurance and financial security they offer.

The certification process for CPEOs provides an additional layer of protection for businesses, as the IRS holds CPEOs solely responsible for federal employment taxes. This is a significant distinction, as non-certified PEOs might leave clients vulnerable to shared liability for these taxes.

Both PEOs and CPEOs offer similar services, such as payroll administration, employee benefits, risk management, and regulatory compliance assistance. They can both provide cost savings by pooling resources across multiple businesses, leading to better rates on benefits and insurance. Both types also allow businesses to outsource HR functions, freeing up time and resources.

However, the decision to choose a PEO vs a CPEO largely depends on the specific needs and risk tolerance of your business. If your company values the added financial security and tax benefits, a CPEO might be the better choice. This is particularly true for businesses in highly regulated industries or those with complex tax situations.

On the other hand, if your enterprise is more concerned with basic HR outsourcing and cost efficiency, a well-rated PEO that’s not certified might suffice. They still offer extensive services that can streamline your HR processes and potentially reduce costs.

PEO Certification: IRS vs ESAC

There are two agencies that have created certifications for PEOs, the Internal Revenue Service (IRS) and the Employer Services Assurance Company (ESAC). While the IRS certification primarily focuses on a PEO’s federal tax liabilities, the ESAC takes a more general approach. Its certification process analyzes all employer liabilities to ensure that the organization is compliant and accurate.

Internal Revenue Service (IRS)

The IRS is the United States tax collection agency, and it administers the Internal Revenue Code enacted by Congress. While the IRS is popularly known for being responsible for collecting taxes, it is also responsible for the enforcement of tax laws. Learn more about the laws the IRS upholds in our payroll compliance guide.

To be certified by the IRS, a PEO must meet the following requirements:

• Annual CPA audit: Certified PEOs are required to have their financials audited on an annual basis by an independent CPA to ensure that all reporting is accurate, and there are no underlying financial issues that could cause issues for their clients.
• Quarterly confirmation of employment tax payments: A CPEO must provide proof to the IRS on a quarterly basis that all employment taxes have been paid, in addition to written confirmation of this from an independent CPA.
• Bonding: Certified PEOs must maintain a minimum of a $50,000 bond. These bonds provide assurance that in the event that any tax filings are missed or incorrect, the IRS has available funds to pull from to cover the liability.
• IRS-approved client service agreement: All client service agreements need to be approved by the IRS before they can be presented to clients and used to engage for services. This is very important for business owners, as it ensures that the CPEO does not engage in services that they are not legally able to.
• Employee background checks: The IRS may require background checks for owners and key employees of the organization to confirm the integrity of key players in the organization.
• Annual fee: The CPEO must pay a fee of $1,000 to obtain certification. This fee also has to be paid on an annual basis to remain certified year to year.

It is important to note that the IRS does not equate certification to the preference of one PEO over another, and it does not endorse any PEO or CPEO over others in the market.

Employer Services Assurance Company (ESAC)

The second governing body that certifies PEOs is the Employer Services Assurance Company (ESAC), an independent nonprofit accreditation and financial assurance entity. Similar to the IRS accreditation, the ESAC works to ensure regulatory compliance, financial reliability, and that the owners and managers are dependable.

Some of the things it focuses on include:

• Payments to federal, state, and local employment agencies
• Health and workers’ compensation insurance premiums
• Contributions to 401(k) and other retirement plans

It’s important to note that the two certifications are independent of each other. A PEO seeking certification does not need to be certified by the Internal Revenue Service (IRS) in order to seek certification through the Employer Services Assurance Company (ESAC), and vice versa.

Who Should Use CPEO Services?

Certified PEOs are an excellent option for small businesses in industries that are subject to heavy compliance regulations (i.e., construction), especially those that don’t have in-house HR and payroll resources. These entities ensure that your business is compliant by staying abreast of all laws and provide access to many of the attractive benefits that large corporations offer to their staff, making it easy to attract and retain the best talent. This is a huge value and can really make all the difference for the quality and longevity of your business.

CPEOs are also a great resource for businesses that are in rapid growth phases or looking to expand and build their business quickly without having to add an HR manager. This allows you to focus on the day-to-day tasks of your business while knowing your employees and workplace are being supported properly.

If you don’t think your business is ready to outsource any HR and payroll responsibilities, or you’d prefer to save money by handling all functions independently, consider checking out a payroll service. These services help automate your payroll process and tax filing, so you don’t have to do it by hand. Many also offer benefits (though not at the competitive rates that CPEOs do), onboarding support, and even cover tax penalties if their reps make a mistake. For some options, check out our top picks for the best payroll services for small businesses.

Average Certified PEO (CPEO) Pricing

As you’re comparing PEOs, please note that Certified Professional Employer Organizations are often priced higher than non-certified PEOs. This difference in pricing is directly associated with the additional costs that CPEOs incur throughout the certification process. Depending on which agency they seek certification with, annual fees can range anywhere from $1,000 to over $70,000. With recertification required on an annual basis, certified PEOs often have to increase their pricing to help cover these costs.

Overall, PEO pricing is usually calculated in one of two ways. The first way is a flat fee per employee, per month, and the second is based on a percentage of the total monthly payroll amount. Industry experts estimate PEO costs to be about 3%–10% of wages, on average.

How to Choose the Right CPEO

Choosing the right CPEO is a critical decision for any small business owner. The right CPEO can help streamline your HR operations, manage payroll and benefits, ensure compliance with employment laws, and even help attract and retain top talent.

Here are some key factors to look into when choosing a CPEO:

1. Services Offered: Look at the range of services offered by the CPEO. Some organizations offer a full suite of services including payroll, HR, benefits administration, risk management, and compliance, while others may specialize in certain areas. Consider your business needs and choose a CPEO that offers the services you require.

2. Experience in Your Industry: Each industry has unique needs and challenges when it comes to HR and payroll. A CPEO with experience in your industry will be better equipped to understand and meet your specific needs, especially if you’re in a highly regulated industry like construction.

3. Technology and Integration: Check what kind of technology the CPEO uses. A good CPEO should offer a robust, user-friendly platform that integrates with your existing systems. This can help streamline your processes and improve efficiency.

4. Customer Service: A CPEO will be handling critical aspects of your business, so it’s important they offer excellent customer service. Look for one that is responsive, helpful, and available when you need them.

5. Cost: Understand the pricing structure of the CPEO. Some charge a flat fee per employee, while others charge a percentage of payroll. Be sure to understand what services are included in the fee and if there are any additional costs. Don’t be afraid to walk away if a CPEO is simply too far outside your budget.

6. References and Reviews: Ask for references from current clients, preferably in your industry. You can also look at online reviews and ratings to get a sense of the CPEO’s reputation.

7. Ability to Scale: As your business grows, your HR needs will change. Choose a CPEO that can scale with your business and continue to meet your needs as you grow.

Considerations Before Working With a CPEO

After deciding to use a certified PEO, it’s important to take a few additional things into consideration to ensure that you’re making an informed decision for your business.

A few of these considerations include:

Payroll Tax Liability

When you partner with a CPEO, it is generally treated for employment tax purposes as the employer of any individual performing services for you. This means that the CPEO is responsible for withholding and paying all federal employment taxes, filing required returns, and making deposits for these taxes.

This is a significant benefit to businesses, as it transfers the responsibility and liability for these taxes from the business to the CPEO. It becomes solely liable for the customer’s employment tax obligations for wages and compensation it pays to worksite employees. This is true even if the CPEO fails to meet these obligations.

The IRS will not hold the customer responsible for penalties related to these taxes, provided the customer has paid the CPEO for the payroll taxes. This can provide businesses with significant peace of mind, knowing that their employment tax obligations are being handled correctly and that they are not at risk for penalties or fines due to errors or omissions.

It’s important to note that this protection only applies to federal employment taxes. State and local tax obligations may still fall on the business, depending on the specific laws and regulations in your area.

Wage Base Restart

Federal employment taxes, such as Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes, are required to be paid up to a certain limit of each employee’s wage—known as the wage base. When a company switches to a PEO midyear, it could trigger a wage base restart, which means these taxes might have to be paid again up to the wage base for each employee.

However, this is where partnering with a CPEO provides a significant advantage. A CPEO is recognized by the IRS and therefore, the wage-base restart is eliminated for customers that join or leave a CPEO during the year. This means businesses can make a change at any point in the year without worrying about double taxation on the same wages, providing financial benefits and increased flexibility.

Maintaining Tax Credits

When you enter into a contract with a CPEO, the CPEO is generally treated as the employer for employment tax purposes. However, for purposes of various tax credits that are based on wages paid to employees, the client—your business—is treated as the employer. This means that you, not the CPEO, can claim these credits.

The tax credits you could potentially claim include the Work Opportunity Tax Credit and the Empowerment Zone Employment Credit, among others. To qualify for these credits, you must maintain all records which substantiate your eligibility for these credits. Failure to provide the IRS with any requested information or substantiation could result in denial of the credit.

Bottom Line

A Certified PEO is a Professional Employer Organization that has met all requirements to receive certification, guaranteeing their financial integrity and tax compliance. While PEO certifications are voluntary, working with a CPEO allows small business owners to have complete confidence that all functions of their HR administration will be handled seamlessly.