If you are operating a Professional Employer Organization (PEO), you are undoubtedly familiar with a Certified PEO (CPEO) and may be wondering if the benefits of getting your certification will outweigh the administrative time and cost required.  If you’re an organization considering outsourcing parts of your business to a PEO, you may also be wondering about the benefits of using a CPEO vs. using a Non-Certified PEO.

Overview of a CPEO

A CPEO is a specialized PEO that has successfully fulfilled the stringent criteria established by the Internal Revenue Service. These CPEOs have undergone a thorough accreditation procedure, ensuring their operations are conducted within the bounds of the law and uphold ethical standards. Furthermore, they have successfully completed an extensive background check and financial audit, providing assurance of their utmost integrity.

Of the roughly 520 unique PEOs operating in the U.S., fewer than 12% are currently certified by the IRS.[1]

Who can benefit from a CPEO?

The IRS certification offers several benefits to both PEOs and their clients alike.  Here are some key advantages:

  1. Enhanced Credibility: CPEO certification demonstrates that a PEO has met stringent requirements set by the IRS. It signifies that the PEO has undergone a thorough review of its financial, operational, and compliance systems. This certification can enhance the PEO’s credibility and reputation in the industry.
  2. Tax Compliance Assurance: CPEO certification provides assurance to clients that the PEO is compliant with federal employment tax requirements. It helps mitigate the risk of tax-related issues and provides peace of mind to clients who entrust their payroll and tax responsibilities to the PEO.
  3. Liability Protection: CPEO certification offers certain liability protections to clients. Under the IRS regulations, if a CPEO fails to remit payroll taxes, the IRS can hold the CPEO accountable rather than the client. This protection can help shield clients from potential tax liabilities and penalties.
  4. Competitive Advantage: CPEO certification can give a PEO a competitive edge in the market. It demonstrates the PEO’s commitment to excellence, compliance, and financial stability. Clients may prefer to work with a certified PEO, as it provides an added layer of assurance and professionalism.
  5. Access to Certain Tax Benefits: CPEOs and their clients may have access to certain tax benefits. For example, CPEOs can offer their clients the option to claim the Opportunity Tax Credit (WOTC) for eligible employees. This can result in potential tax savings for both the PEO and its clients.

Becoming Certified PEO?

To become a CPEO, several requirements need to be met. These requirements may vary depending on the jurisdiction, but here are some common criteria:

  1. PEOs must obtain the necessary licenses and permits to operate legally in their jurisdiction. This may involve meeting specific state or local requirements and obtaining appropriate business licenses.
  2. PEOs must demonstrate financial stability and responsibility. This includes providing financial statements, proof of insurance coverage, and maintaining adequate reserves to cover potential liabilities.
  3. PEOs must comply with all applicable employment laws and regulations, including tax withholding, reporting, and payment requirements. This includes adhering to federal, state, and local employment laws, such as the Fair Labor Standards Act (FLSA) and the Family and Medical Leave Act (FMLA).
  4. PEOs must adhere to professional standards and ethical business practices. They should have policies and procedures in place to ensure proper handling of client funds, confidential information, and maintaining client relationships.
  5. PEOs may be subject to audits and reviews by regulatory bodies to ensure compliance with industry standards and regulations. This may involve financial audits, operational reviews, or compliance assessments.
  6. PEOs will be required to meet certain criteria, undergo audits or inspections, and maintain ongoing compliance with certification standards.

Obtaining the CPEO certification offers numerous benefits for both PEOs and their clients.  The process may vary slightly depending on the jurisdiction and industry regulations, but the advantages significantly enhance the credibility and effectiveness of a PEO.

If you have more questions regarding CPEOs, please contact a Marsh McLennan Agency (MMA) advisor.

[1] List of Active CPEOS – July 2024 (irs.gov) ;  Industry Statistics – NAPEO

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