Learn about the PEO certification requirements that providers need to meet. Our guide will also help you determine whether your business is a good candidate for a CPEO.
This article is part of a larger series on Payroll Services.
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 ADP TotalSource. It’s an IRS-certified PEO that will give you all the pros of a full-service HR department plus health insurance (and other benefits) at a competitive rate. Sign up for a free demo.
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. Their 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.
There are currently about 500 PEOs in the United States. Of those, about 70 are currently certified by the Internal Revenue Service (IRS) and even fewer by the Employer Services Assurance Company (ESAC). This is likely due to both the cost and the administrative strain required to maintain these certifications.
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.
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.
Tip: The IRS has a frequently updated list of all certified PEOs, in addition to all PEOs whose certifications have either been suspended or revoked, available on their website. Pay special attention to PEOs that have involuntarily had their certifications removed—it could be an indication that they have shown fiscal irresponsibility or that other issues are at bay.
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.
The ESAC has a feature on its website that allows you to search PEOs by legal name or federal employee ID number (FEIN) to determine whether or not PEOs are certified by its organization. If you are interested in any PEOs in particular and want to know their certification status, this can be a great resource.
Who Is a Good Candidate for a Certified PEO?
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. They ensure 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.
Certified Professional Employer Organizations 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. Payroll 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.
Certified PEO 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.
To review a list of our recommended PEOs, check out the top seven PEOs in our PEO buyer’s guide. Most are certified.
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.
Still need HR and payroll support but don’t think a PEO is quite right? Check out our top HR payroll solution picks.