As your startup moves from pre-seed to exit, you’ll continually find yourself multitasking on several fronts. However, HR — including payroll processing, benefits administration, compliance, and risk — doesn’t need to be one of them when you partner with a professional employer organization (PEO).
By outsourcing HR and benefits management to a PEO, companies can focus on their mission, vision, and goals. In addition, working with a PEO enables startups to offer Fortune 500-level benefits at more affordable prices, so they can attract and retain top talent that drives their business growth forward. PEOs specifically made for startups also include a compensation management solution that helps you better manage your compensation philosophy.
However, choosing the right PEO can be overwhelming for startup leaders, especially with so many providers specializing in companies of certain sizes, locations, and industries. To narrow the field, an important question to ask is whether a provider is a certified professional employer organization (CPEO) or is Employer Services Assurance Corporation (ESAC) accredited. These are important distinctions because of the liabilities companies may take on when working with non-certified and unaccredited PEOs. Read on to learn more about why these PEO recognitions are important for startups.
What Is a CPEO?
The Tax Increase Prevention Act of 2014 required the IRS to establish a voluntary certification program that recognizes PEOs as certified after they complete the rigorous process required by the IRS.
To be recognized by the IRS as a CPEO, a PEO must meet background, experience, business location, financial reporting, tax compliance, and bonding requirements.
PEOs that pass a series of IRS assessments and achieve certification show they are more stable, responsible, and have a fiduciary responsibility to their clients.
To be eligible for IRS CPEO recognition, a business entity must:
- Have at least one physical business location within the United States
- Have a history of financial responsibility, organizational integrity, and tax compliance (federal, state, and local)
- Be willing to submit quarterly and annual audited financial statements prepared by a certified public accountant (CPA)
- Be managed by individuals (a majority of whom are U.S. citizens or residents) who have knowledge or experience regarding federal and state employment tax compliance and business practices relating to those compliance requirements
- Submit fingerprints of all responsible parties involved in the CPEO
- Provide a signed letter from a qualified surety
- Pay a $1,000 application fee for certification
Benefits of Using a Certified PEO
While there are many PEOs that aren’t certified, it is recommended to work with a CPEO over one that is not. When working with a CPEO, clients have peace of mind knowing their HR, payroll, and taxes are handled by qualified and certified professionals.
One major difference between a CPEO and a non-certified PEO lies in tax implications. A certified PEO takes on federal employment tax liabilities for their clients and ensures they comply with IRS and other legal regulations. For startups, this reduces the risk of tax compliance issues that could otherwise stain their reputation or lead to hefty penalties. Companies that choose a non-certified PEO can be held liable for unpaid taxes, late fees, penalties, interest, and compliance issues.
What Is ESAC Accreditation?
The Employer Services Assurance Corporation (ESAC) is an independent non-profit corporation that provides accreditation and financial assurance programs for the PEO industry and objectively verifies a PEO’s reliability. While ESAC accreditation a is voluntary, it demonstrates a PEO’s financial stability, ethical business conduct, and adherence to operational standards and regulatory requirements.
To be eligible for ESAC accreditation, a PEO must:
- Submit financial information for evaluation
- Pay a $5,000 application fee
- Provide quarterly tax and benefits financial statements prepared by a certified public accountant (CPA)
Benefits of Partnering with an ESAC-Accredited PEO
ESAC accreditation is not required for PEOs to work with clients. However, it shows additional commitment from PEOs toward their fiduciary responsibilities to their clients.
To become ESAC accredited, PEOs must undergo a rigorous analysis of their financial stability, ethical business conduct, and adherence to operational standards and regulatory requirements. Working with an ESAC-accredited PEO ensures startups receive reliable and high-quality HR management.
Why Are Some PEOs Not Certified or Accredited?
As we covered, achieving the status of CPEO and ESAC accreditation is a rigorous and extensive process. In many cases, PEOs don’t become certified or accredited simply because they don’t want to spend the time or resources doing so, or they don’t meet the requirements of the IRS and ESAC. Achieving certification or accreditation ultimately speaks to the quality of the PEO and the services it can provide to its client.
How Does Certification and Accreditation Impact Your Startup?
CPEOs and ESAC-accredited PEOs showcase excellent business practices, which they reflect in their service delivery. The stringent requirements for certification and accreditation require these PEOs to demonstrate consistency, reliability, and financial stability. This can be particularly beneficial for startups that can’t afford any hindrances in their initial growth stages or take on additional tax and compliance risk.
PEOs are required to maintain ample working capital, retain independent financial auditors, and adhere to ethical business practices to achieve and maintain ESAC accreditation and certification status. These processes ensure that the PEO can successfully deliver on its responsibilities over the long term, providing reassurance to startup founders and their investors alike.
Partnering with an accredited and certified PEO indicates to potential investors the seriousness of a startup in ensuring compliance and efficiency in HR management. This could significantly impact a startup’s ability to attract funding.
Most Referred ESAC-Accredited and Certified Professional Employer Organization for Tech Startups
Not all PEOs stand at par in service delivery, reliability, or assurance on continuity and compliance. While partnering with a PEO presents startups with an efficient HR management solution, considering a CPEO or one with an ESAC accreditation comes with numerous benefits. As a startup founder, choosing a CPEO that’s ESAC accredited could mean the difference between a smooth, worry-free HR management experience and potential pitfalls that could hurt your fledgling business.
Sequoia One is both ESAC accredited and recognized by the IRS as a CPEO. Startup founders choose to work with Sequoia One because of our focus on PE- and VC-backed tech companies. We help great companies grow into great, big companies with dedicated and proven guidance, service, and technology. Explore Sequoia One and our total comp and benefits PEO offerings today.
