For about 30 years, the Professional Employer Organization (PEO) industry has seen a slow and steady growth as an important partner to the small and mid-size business community. Indeed, a recent study has shown that businesses in a PEO arrangement grow 7-9% faster, have 23-32% lower employee turnover and are 50% less likely to go out of business. Since passage of the first licensing bills in Florida and New Hampshire in the early 1990s, many states have recognized the importance of this business service and followed suit. On December 16, it was time for the federal government to weigh in. When President Obama signs the Small Business Efficiency Act (SBEA) in the next few days, the PEO industry will get the recognition it deserves and more importantly, those who partner with a PEO will have a clear vision of what it means to join forces with a PEO.
Passage of this bill has been a long time coming. It was about 20 years ago when NAPEO first began efforts to codify the concept of co-employment on a federal level. Each NAPEO chairman since then (myself included in 2002-2003) held onto the hope that passage would happen on their watch. Brent Tilson, NAPEO’s current chairman and CEO of Tilson HR in Greenwood, IN was the lucky guy – deservedly so – who spoke for all of us who have labored long and hard for passage of this important legislation that is so important to the business community. “This is truly a historic moment for the PEO industry. We urge the President to sign the extenders bill and we look forward to working with the administration on the regulations so we can get the necessary framework in place to broaden our reach within the small business community”, said Tilson.
So what will these mean for businesses who contemplate a PEO partnership? First, changes will be made to the Internal Revenue Tax Code:
• The IRS will be required to create a voluntary PEO certification program.
• Certified PEOs (CPEO) will have clear statutory authority to collect and remit federal employment taxes under the CPEO’s EIN for wages paid to worksite employees. CPEO customers will never be liable for those taxes.
• CPEO clients will qualify for federal tax credits they would be entitled to absent a CPEO relationship.
• FICA and FUTA wage bases will not restart when a client joins (or leaves) a PEO during the year.
Most importantly the CPEO certification process will generally contemplate the standards established by the Employer Services Assurance Corporation (ESAC). Today about 65% of all worksite employees employed in the United States work for ESAC certified companies. I am proud to say that Genesis HR Solutions is one of them, and given that we have been continually certified since 1996, we are in the very top echelon of PEOs who can lay claim to this important level of scrutiny.
Bonding requirements, annual audits, fees, and quarterly CPA attestations on employment taxes are part of the process for PEO hoping to attain CPEO status. These requirements are nothing new for ESAC accredited firms. Two important components of the new legislation are also worth considering:
• The IRS will publish a list of all CPEOs, as well as those PEOs whose certifications have been revoked or suspended.
• CPEOs will assume sole responsibility for the collection and remission of federal payroll taxes with respect to wages paid by the CPEO to worksite employees.
Passage of the SBEA is indeed a turning point for PEOs and their client partners. In recent years, Massachusetts has continued to see the growth of the PEO industry grow in the small business community. When Genesis began almost 25 year ago, the industry was almost unheard of in the Commonwealth. Today, Massachusetts ranks as the 8th highest state with respect to workers employed in a PEO relationship. Perhaps 2015 will be the year for the Massachusetts legislators to follow the lead taken by their federal counterparts and establish licensing requirements to regulate this growing and important business service offering. We applaud the bipartisan report the SBEA has received and hope that Massachusetts will follow suit. The SBEA will become law and the PEO service model is here to stay. Here’s to hoping the Commonwealth will follow suit.
For more information on what the SBEA means for the PEO Industry, please reach out to Genesis HR Solutions at AskUs@genesishrsolutions.com or 800-367-8367.
Genesis HR Solutions is the premier PEO provider for Massachusetts based businesses.