Professional employer organizations (PEOs) handle various payroll administration and tax reporting responsibilities. The Tax Increase Prevention Act of 2014 required the IRS to establish a voluntary certification program for PEOs. When a PEO is recognized by the IRS as a Certified Professional Employer Organization (CPEO), it has met the background, experience, business location, financial reporting, tax compliance, and bonding requirements needed to be a part of the program.

PEOs that complete the rigorous process 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

It is always recommended to work with a certified PEO (CPEO) over a non-certified PEO. CPEOs undergo ongoing rigorous review by the IRS to ensure they still meet all necessary requirements to be certified. When working with a CPEO, clients have peace of mind knowing their HR, payroll, and taxes are handled by qualified and certified professionals.

Companies that choose a non-certified PEO can be held liable for unpaid taxes, late fees, penalties, interest, and compliance issues, while CPEOs protect companies who partner with them by holding the tax liability.

CPEOs are required to post a bond of up to $1 million each year, guaranteeing proper repayment of any federal tax liabilities. That means the IRS will hold the CPEO responsible for any unpaid taxes, not the CPEO’s client. Clients of CPEOs are also eligible for certain tax credits that aren’t available to non-certified PEO clients.

For companies who work in industries or states (like California and New York) that must adhere to heavy compliance regulations, partnering with a CPEO is invaluable.

The Employer Services Assurance Corporation (ESAC) is an independent, nonprofit organization that objectively verifies a PEO’s reliability. Accreditation through ESAC demonstrates a PEO’s financial stability, ethical business conduct, and adherence to operational standards and regulatory requirements. PEOs become ESAC accredited voluntarily. Those who achieve accreditation show their commitment to providing excellent compliance and competitive advantages to their clients.

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)

PEOs do not need to be ESAC accredited to work with clients. However, ESAC accreditation 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.

Well-established, credible PEOs are not only ESAC accredited but also recognized as Certified Professional Employer Organizations (CPEOs). This is particularly important for PE- and VC-backed tech companies. ESAC accreditation and CPEO recognition proves a PEO is financially stable enough to properly serve their clients in HR, payroll, compliance, benefits, and compensation. Sequoia One is both ESAC accredited and recognized by the IRS as a CPEO.

A PEO, or professional employer organization, provides comprehensive human resources outsourcing solutions to small and medium-sized businesses. Typically, a PEO delivers services such as employee benefits administration, payroll processing, tax compliance, worker’s compensation, risk mitigation, human resources management, and others under a co-employment model. This arrangement allows the client company to remain focused on their core business functions while the PEO handles HR-related responsibilities.

Startups face unique challenges on the road to maturity. As your business grows, so do the strains from employee-related services and government regulations. Inevitably, the critical attention of your leadership is diverted away from strategic decision making to everyday people operations.

You have enough to worry about without administrative burdens slowing you down and distracting you from your business goals. By turning to a Professional Employer Organization (PEO), you can outsource key HR responsibilities to a trusted partner who will help you with employee benefits, payroll, workers’ compensation, onboarding, risk and safety management, and training and development. A PEO can also provide experts in legal matters and compliance, help you control costs and business risks, and free up resources on your team by handling the large majority of employee inquiries.

From a legal perspective, a PEO hires a client company’s employees by accruing wages under its Federal Employer ID and thus sharing responsibility for payroll tax and insurance purposes.

Many PEOs specialize in various areas including local, multi-state, national, and global. Some are IRS-certified and some are not. While most PEOs offer resources, payroll, and benefits administration, the level of service included in the PEO varies. When evaluating which PEO is right for your company, you’ll want to make sure the PEO provider offers services and solutions vital to your company’s current and future operations.

While any size company can find value in partnering with a PEO, companies who typically choose to work with a PEO have around 10-200 employees. This is because smaller businesses and startups do not traditionally have a fully-stacked internal HR team with members who specialize in HR, payroll, compliance, benefits, compensation strategy, workers’ compensation, accounting, and more. Larger companies may still find a PEO to be extremely valuable if they want to alleviate pressure facing their people team and refocus that team on more strategic goals.

Startups can largely benefit from outsourcing HR services to a PEO. As they enter a critical phase of growth and expansion, startups need to be able to attract and retain the best talent, but often lack the necessary resources or expertise in HR management. Managing payroll, benefits, and legal compliance can become a burden and shift focus from the startup’s core competencies. Here, a PEO can step in to manage these functions, allowing the startup to focus on its strategic goals and operational challenges.

Outsourcing HR to a PEO also ensures startups stay in compliance with the latest employment laws and regulations. This is particularly beneficial as employment legislation can be complex and continually evolving. By outsourcing to a PEO, startups have access to experts in HR compliance, ensuring they avoid costly legal issues.

Additionally, a PEO can provide startups access to better employee benefits packages, which can help attract and retain top talent—giving startups the competitive edge necessary to be successful.

Your largest expense is your people and your PEO partner will manage this expense strategically. Employees of your startup gain access to “big-business” benefits such as healthcare, dental, vision, life insurance, disability, dependent care, retirement, and other benefits they wouldn’t receive at another small company. PEOs also provide support to your employees, allowing them to feel more connected to training, culture, and the total rewards your startup provides.