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IRS won’t begin accepting applications for PEO certification until July 1, 2016

Click here for IRS’s announcement on the Voluntary Certification Program for Professional Employer Organizations.

IRS has announced that it will defer beginning the acceptance of applications for the professional employer organization (PEO) certification program until July 1, 2016. The new program under Code Sec. 3511, which was authorized by the Tax Increase Prevention Act of 2014 (TIPA), was supposed to have been established by July 1, 2015.

Background. Small businesses often contract with PEOs, also known as employee leasing companies, to ensure compliance with workplace laws and regulations. In the typical contract, the PEO computes the FICA, withholding tax, worker’s compensation, and 401(k) contributions of each employee and bills the client for the amount. The contract requires the PEO to pay the employees and make the clients’ tax deposits. Some PEOs file their client companies’ employment tax returns under the PEO’s name and list the PEO as the employer of the client companies’ employees.

Under current rules, the contractual agreement between the employer and the PEO does not relieve the employer/client from responsibility for all taxes due with respect to its employees if the PEO fails to withhold or remit the taxes or otherwise comply with related reporting requirements. However, effective for wages for services performed on or after Jan. 1, 2016, Code Sec. 3511, as added by the “Tax Increase Prevention Act of 2014” (TIPA), allows a certified PEO to be treated as the sole employer of the employees.

A certified PEO is an organization that has been certified by the IRS as meeting certain requirements, which are intended to ensure that the PEO properly remits wages and employment taxes. As part of the certification program, which is voluntary, TIPA requires IRS to:

…complete background, credit, and tax compliance checks of PEOs;
…verify that the PEO has an active and approved surety bond;
…verify that the PEO satisfies the service agreement and financial review requirements (including the requirement to submit audited financial statements);
…collect a user fee of $1,000; and
…provide public disclosure of certified PEOs and certified PEOs whose certification has been suspended or revoked.

Certification program will be postponed. TIPA required the certification program to be established by July 1, 2015, but IRS now says it needs more time to set it up. It will begin to accept applications for PEO certification on July 1, 2016.

References: For certified PEO treated as sole employer of work site employees, see FTC 2d/FIN ¶  H-4861  ; United States Tax Reporter ¶  35,114  ; TaxDesk ¶  559,901  ; TG ¶  9147  .