In a previous post, I detailed the introduction of the Small Business Efficiency Act (SBEA) in the US Senate.  I expect similar legislation to follow in the House of Representatives.

The National Association of Professional Employer Organizations (NAPEO) has created a reference guide highlighting the key features of the SBEA which we’ve expanded upon here.

What is the SBEA?

The SBEA legislation provides legal clarity for the PEO industry. Some of the changes it introduces are:

Certified Professional Employer Organizations (CPEOs)

The SBEA is a tax bill that creates a process for those PEOs who choose to participate and be recognized by the Internal Revenue Service (IRS) as a Certified PEO.  To comply, the following would be required of a PEO:

  • Provide annual audited financial statements from an independent CPA
  • Obtain a surety bond
  • Pay an annual registration fee

Presently, PEOs who are accredited by the Employer Services Assurance Corporation (ESAC) already meet this criteria.  Once certified, the CPEO assumes the responsibility and liability for payment of taxes and wages for covered workers.  In essence, the bill creates a safe harbor provision for small businesses that use a CPEO.

Payroll Tax Credits

Passage of the SBEA will give credit to clients for payroll taxes paid by the client as a result of a mid-year engagement with a PEO rather than restarting the tax clock.

The Benefits of This Legislation

By creating a voluntary certification program, more small businesses will likely choose to partner with Certified PEOs to take advantage of the protections that are the equivalent of working with an ESAC accredited PEO today.

The IRS clearly supports the SBEA by stating that the legislation “would make it easier and safer for small businesses to use PEOs to fulfill their employment tax obligations.”  As more companies partner with PEOs, it will continue to streamline the tax collection process for the IRS and state taxing authorities.

Growth of the PEO Industry

The PEO industry continues to grow and with good reason.  According to NAPEO, as many as 6 million people are afforded access to healthcare through a PEO while about 250,000 small and mid-sized businesses partner with PEOs.  What is even more telling is that it is estimated that 95% of employees in PEO arrangements have access to 401(k) benefits compared to 19% of all small business employees nationwide.

As for how this can help your business, Pat Cleary, President and CEO of NAPEO states:  “The Small Business Efficiency Act (S. 479) will improve tax compliance and create needed certainty for small businesses so that they can focus on growing their companies while leaving benefits administration and tax compliance to the experts in the PEO industry…Legislation is long overdue to recognize and certify PEOs, an important provider of solutions for small businesses on everything from healthcare to regulatory compliance.”