Final Regs Address CPEO Requirements, Responsibilities
regulations provide requirements that a person must satisfy to become
and remain a certified professional employer organization (CPEO), as
well as the CPEO’s federal employment tax liabilities and other
employers contract with PEOs to complete and file tax returns, pay and
withhold employment taxes on wages paid to employees, or provide other
employee benefits. Code Sec. 3511 and Code Sec. 7705 provide certification requirements for PEOs, and codify the employment tax consequences of being CPEO.
For federal employment tax purposes, a CPEO is generally treated as the employer of any individual who is:
performing services for a customer of the CPEO; and
covered by a contract between the CPEO and the customer.
treatment applies only to remuneration paid to the covered employee by
the CPEO. If an individual covered by a CPEO contract performs services
for a customer at a work site that meets certain coverage requirements,
only the CPEO is treated as the employer for federal employment tax
purposes for remuneration its pays to that work site employee.
person must apply to the IRS to become a CPEO, and the IRS must certify
that the person meets certain requirements. A CPEO must:
meet tax status and background requirements;
meet bond, financial review, and quarterly reporting requirements; and
notify the IRS of any change that materially affects the continuing accuracy of information it has provided to the IRS.
Treasury Secretary can suspend or revoke CPEO certification if the
person does not satisfy certain agreements or applicable requirements.Final RegsThe final regulations adopt and amend proposed regulations published in 2016 ( NPRM REG-127561-15), and reflect and address certain interim guidance ( Rev. Proc. 2016-33, 2016-25 I.R.B. 1034; Notice 2016-49, 2016-34 I.R.B. 265; Rev.
Proc. 2017-14, 2017-3 I.R.B. 426). In finalizing the regulations, the
IRS reviewed and analyzed a variety of issues affecting CPEOs,
maintaining a separate
annual FICA tax and FUTA tax wage base and withholding threshold for
each customer for which a covered employee performs services during a
the treatment of tax
credits, including the addition of the employer credit for paid family
and medical leave and certain employee retention credits to the list of
specified credits that apply to the CPEO customer and not the CPEO;
the treatment of self-employed individuals under the CPEO rules;
CPEO reporting to the IRS, such as reporting the commencement or termination of CPEO contracts and service agreements;
the meaning of key terms such as "responsible individuals" (certain owners, officers, and other persons of the CPEO), "work site," and "work site employee";
the CPEO application process, including when an applicant may reapply for certification;
CPEO "suitability" requirements,
including domestic disregarded entity and sole proprietorship
certification, fingerprint cards and background checks, and the waiver
of confidentiality and privilege;
working capital requirements, including a limited exception to the positive working capital requirement;
bond requirements, including
a provision that the IRS Commissioner may provide exceptions to the
rule that a CPEO must meet the bond requirements without posting
maintaining employee records.
The final regulations are effective on May 28, 2019.