IRS prepares to launch voluntary certification program for PEOs

The IRS is set to launch its new voluntary certification program for professional employer organizations (PEOs), also known as employee leasing organizations, on July 1, 2016. A recently-released guidance package describes how PEOs can obtain certification to become “certified PEOs” (CPEOs).

PEOs

An employer may contract with a PEO to complete and file returns and pay and withhold employment taxes (income tax withholding, FICA and FUTA) on wages paid to employees. Some arrangements also call for human resources and employee benefits administration. The PEO essentially becomes the workers’ employer for tax and insurance purposes, while the employer retains control of the workers’ day-to-day activities.

Voluntary certification program

The Tax Increase Prevention Act of 2014 (TIPA) instructed the IRS to create a voluntary certification program for PEOs. Under TIPA, PEOs will be able to apply to be certified to act – for purposes of the employment tax provisions – as the employer of service providers they lease to their customers. To be certified, a PEO generally must show that it satisfies requirements established by the IRS. The PEO also must adopt the accrual method of accounting to compute its taxable income.

TIPA directed the IRS to establish a PEO certification program before July 1, 2015. However, the IRS responded that it lacked the resources to have a PEO certification program in place before July 1, 2016. The IRS issued temporary and proposed regulations in May.

Framework

The guidance sets out the process to become a CPEO, maintain CPEO status and how the IRS can suspend or revoke CPEO status. The IRS reiterated that CPEO program is voluntary. PEOS can elect to participate or not.

Applications. The first step in the certification process is to submit an application to the IRS. The IRS will notify the applicant as to whether its application for certification has been approved or denied and the effective date of its certification. If the IRS denies the application, the IRS will inform the applicant of the reason for denial.

Business location. An organization seeking CPEO status must have been organized under the laws of the U.S. or of any state. An applicant also must have one or more established physical business locations in the U.S. where regular operations take place.

Customers. The IRS regulations define a “customer” as any person who enters into a contract with a CPEO.

Suspension and revocation. The IRS may suspend or revoke the certification of any CPEO as a result of a failure to meet any of the requirements and the failure presents a material risk to the collection of federal employment taxes.

Tax compliance. An applicant’s history of tax compliance is an important factor in determining if certification would present a material risk to the collection of federal employment taxes. The IRS may deny an application for certification, or suspend or revoke certification, if the CPEO, or any of its precursor entities, related entities, or responsible individuals, fails to pay any applicable federal, state, or local taxes or file any required federal, state, or local tax or information returns in a timely and accurate manner.

Please contact our office if you have any questions about PEOs and the new voluntary certification process.

Written by

Steve Moss, CPA is a partner at Holden Moss CPAs and loves helping businesses and their owners grow to be the very best they can be. Our other offices include Raleigh, Oxford and Warrenton.

We are a little different at Holden Moss CPAs. While we still provide traditional tax and accounting services, years ago we realized many clients wanted help in running their businesses and were hungry for ideas, solutions, strategy, and execution. In response, we expanded our skill set and joined Ran One, a global network of business consulting firms. Our membership with Ran One gives us access to proprietary resources and analytical software to help our clients grow, become more profitable and valuable, and have the lifestyle they desire.

Now, blended into the fabric of our normal tax and accounting needs, we are focused on our clients’ businesses in a very different way. While our approach is not right for everyone, for those whom it is, incredible results may be obtained. Whether you have a new, or established, business, or for those in transition of selling or retiring, or for those who simply need to develop an exit strategy or succession plan, our unique approach to client service may be the edge you need.

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