On December 19, 2014, President Obama signed the Tax Increase Prevention Act of 2014. Included in this legislation was the Small Business Efficiency Act (SBEA), which created a voluntary IRS certification program for professional employer organizations. It was previously approved by the House of Representatives as a provision in the ABLE Act to off-set the costs associated with that proposal, then incorporated into the Tax Increase Prevention Act of 2014 and passed by the Senate.
SBEA Implementation Process
In August 2015, the IRS announced that the PEO certification program created by the SBEA will be fully implemented on July 1, 2016.
On June 3, the Internal Revenue Service (IRS) released Revenue Procedure 2016-33 which contains procedures a PEO must follow when applying for certification with the IRS. Read the summary of the revenue procedure prepared by Randy Hardock and Courtney Zinter of Davis & Harman.
On May 4, 2016, the Treasury Department and the IRS released two regulatory projects in connection with the implementation of the PEO certification legislation:
- Final and temporary regulations that (along with a to-be-released revenue procedure, and future application forms and instructions) provide the basic procedures for the PEO certification application process; and
- Proposed regulations regarding the federal employment tax consequences of certified PEO (CPEO) status along with certain definitions.
NAPEO has prepared this summary of both regulations.
Key Provisions of the SBEA
- Certification: The SBEA creates a voluntary certification process within the IRS for PEOs and criteria for PEO certification, which includes:
- Bonding - A CPEO must maintain a $50,000 bond, or, if greater, a bond in an amount that is equal to five percent of the CPEO's federal employment tax liabilities for the previous year (not to exceed $1 million).
- Annual Audits - A CPEO must prepare and provide the IRS with annual independent financial statement audits prepared by a CPA.
- Quarterly CPA Attestations on Employment Taxes - A CPEO must provide quarterly assertions to the IRS regarding payment of all employment taxes, accompanied by an examination level attestation by an independent CPA with respect to each such assertion.
- Annual Fee - The CPEO must pay an annual fee of up to $1,000 per year to be (and remain) certified.
- PEOs Recognized Under Federal Tax Law: PEOs that choose to be certified (CPEOs) will have clear statutory authority to collect and remit federal employment taxes under the CPEO's EIN for wages the CPEO pays to worksite employees.
- Customer Eligibility for Tax Credits Confirmed: The SBEA expressly codifies that customers of CPEOs will qualify for specified federal tax credits that the customers would be entitled to claim if there were no PEO relationship.
- CPEO Gets Federal Tax Credit for SUTA Taxes Paid: If a CPEO (or a customer) makes a contribution to a state unemployment fund with respect to wages paid to a worksite employee, the CPEO receives the federal (FUTA) tax credit with respect to that contribution.
- Potential Double Taxation Eliminated: The FICA and FUTA wage bases will not restart when a customer joins or leaves a certified PEO mid-year.