By Bradley S. Buttermore
Managing Director and Chief Financial Officer
The recent passage of the Small Business Efficiency Act (SBEA) brings both pros and cons to the Professional Employer Organization (PEO) industry.
The bill, signed by President Obama in December 2014, recognizes PEOs under federal tax law and will establish a set of rules for them under the tax code. The SBEA also establishes a voluntary program for PEOs to be certified by the IRS for the payment of federal workplace taxes.
A PEO is a business that has an agreement with one or more client companies to manage their human resource activities, including payroll processing and collections, and the remitting of taxes to state and federal authorities. The industry estimates that more than 250,000 businesses use PEOs.
The rules to implement the SBEA will be issued by the IRS no later than Jan. 1, 2016, and the certification program is expected to be ready about six months after rules are issued, or around June 1, 2016.
In this blog post, we’ll take a look at the main pros and cons of the SBEA.
- The SBEA brings certainty to the PEO industry. The act defines more clearly what rules govern the operations of a PEO that opts to be certified, and that’s a good thing.
- The act should drive more acceptance of the PEO industry among the business community because a business employing a PEO now has some protections under federal law.
- The SBEA eliminates the wage base restart for federal taxes for PEO clients who join or leave a PEO relationship.
- The SBEA gives PEOs clear statutory authority to collect and remit federal employment taxes while codifying that its customers qualify for specified tax credits. Current federal tax law does not address who is ultimately responsible for the withholding and payment of these employment taxes — the client or the PEO — because the term “PEO” is not recognized in federal tax law.
- Some advocates claim that the SBEA actually constrains IRS regulation by limiting those regulations to parameters defined in the legislation, as opposed to surprise regulation of the industry by IRS policy, without the constraints of specific regulatory legislation.
- The SBEA comes at a cost. PEOs will be required to provide the IRS with an annual independent financial audit prepared by a CPA. Although many states already require an audit, the rules were often looser. There will also be costs associated with bonding and ongoing IRS reporting.
- The PEO will be on the hook for the taxes owed by the client whether or not the client has paid the PEO. While state law currently requires the same obligations in about 29 states, the SBEA effectively expands that liability to all 50 states.
- Federal regulation may begin to feed upon itself, resulting in more regulation of the PEO industry in the future — the slippery slope.
- The SBEA creates a conflict with the industry’s self-governing organization known as ESAC (Employer Services Assurance Corp.). PEO members of ESAC are subject to stringent requirements for handling client funds of any kind, even more stringent than SBEA requirements. Certification under ESAC is voluntary and expensive, but it is a free choice among PEOs who believe it gives them a competitive advantage.
To be sure, the SBEA will be one of the most talked about issues for the PEO industry this year. We invite you to continue following the Capital Alliance blog for future updates about this important law and how it will affect PEOs and the businesses that employ them.