IRS Now Accepting Applications for Certified Professional Employer Organizations Status
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Your PEO needs a bond letter. Now what?
On July 1, 2016, the IRS started accepting applications for certification of PEOs under the Small Business Efficiency Act (SBEA), which will go into effect on January 1, 2017. Once certified, PEOs will have IRS recognition and clear authority to collect and remit federal tax payments on behalf of their clients. This “stamp of approval” by the IRS makes great strides for PEOs in solidifying them as legal financial guardians and responsible financial partners for their clients.
The act also eliminates the wage restart or “double taxation” when a client leaves or joins a PEO mid-year and ensures PEO clients will qualify for specified federal tax credits that they would be entitled to claim if there were no PEO relationship. This will undoubtedly help PEOs gain even more traction in an already growing industry.
To qualify for IRS certification, PEOs must meet the following standards:
- Annual financial audits conducted by an independent CPA firm
- Quarterly assertions and CPA confirmation regarding payment of all employment taxes
- Maintain a surety bond equal to 5% of the PEO’s federal tax liabilities for the prior year (subject to a $50,000 minimum and $1,000,000 maximum)
- Background checks
- Annual fee of $1,000
Although surety bonds are common in many other industries, they have not generally been required of PEOs until now. Our goal is to help you gain a better understanding of the terms, requirements and overall process.
What’s a surety bond?
A surety bond is a third party financial guarantee. It’s essentially a promise by the surety company to pay on behalf of the PEO in the event the PEO would fail to make their federal tax payments to the IRS. A surety bond letter is simply a signed statement by the surety confirming they have underwritten and agree to issue IRS bond form 14751 to the CPEO applicant, if and when they become certified.
Is it difficult to get a bond?
Obtaining a bond is a fairly easy process. Assurance has made arrangements with more than a dozen ‘A’ rated carriers to provide CPEO surety bonds and can turn around approval and the required bond letter quickly. All we need to get started is:
- Confirmation of bond amount
- Last three fiscal year-end audited financial statements
What about underwriting and costs?
- Surety bonds are underwritten based on strength of financials and surety loss history. Since the CPEO bond is a new obligation and no historical loss exposure exists, underwriting will weigh heavily on the financial strength of the PEO.
- Bond costs can vary broadly based on several financial factors. A general rule of thumb is 1% to 3%+ of the bond amount depending on strength of financials.
- The IRS does not allow PEO surety bonds to be collateralized.
- In some instances, personal financials of the owner may be required for private companies.
If you have questions regarding the CPEO certification process or are interested in obtaining the required surety letter required for your application, please reach out to your Assurance PEO professional today!
Stephanie Ohrt, Vice President, Assurance Staffing Practice
Greg Segall, Vice President, Assurance Staffing Practice
Matt Buol, Vice President, Assurance Surety Division
Assurance's client, MidwestHR, was named one of the first Certified Professional Employer Organizations (CPEO) in the United States by the Internal Revenue Service. As of June 2017, only 84 companies have met the rigorous criteria to have earned this recognition, which puts MidwestHR among the top in the industry. For more information, see the press release.
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