To ensure that it collects withheld federal employment taxes, the Internal Revenue Service established a new voluntary certification program Jan. 1 for professional employer organizations.
PEOs handle various payroll administration and tax reporting responsibilities for their business clients and are typically paid a fee based on payroll costs. Certification affects the employment tax liabilities of the certified PEO and its customers. A certified PEO is generally treated as the employer of someone performing services for a customer of the certified PEO and covered by a contract between the certified PEO and the customer, but only for wages and other compensation paid to the individual by the certified PEO.
Certified professional employer organizations must meet tax status, background, experience, business location, financial reporting, bonding and other requirements established by the IRS to become and remain certified under the program. This means a certified PEO will submit several pieces of financial information to the agency and be subject to increased examination of its financial viability.
In addition to submitting annual audited financial statements to show they are in good financial shape to handle collection duties, a certified PEO must also provide the IRS with the opinion of an independent CPA that its financial statements “reflect positive working capital for the fiscal year or that the certified PEO satisfies” the exception to the positive working capital requirement. The opinion must also provide a detailed calculation of the certified PEO’s working capital and a copy of unaudited financial statements for the most recently completed fiscal quarter.
The IRS and Treasury Department consider a certified PEO with annual audited financial statements that reflect positive working capital to present a materially lower risk to the collection of federal employment taxes than a certified PEO without such financial statements.
The requirement that a certified PEO be a business entity was expanded to include those that are disregarded as an entity separate from its owner for federal tax purposes and sole partnerships. The disregarded entity must be wholly owned directly by a United States person.
The IRS sought to exclude disregarded entities and sole partnerships from certification, but commenters expressed concern about their exclusion.
The IRS said it had the power to end certification based on any compliance failure, and would do so “in its sole discretion” if it found a risk to employment tax collection. The agency released guidance (Revenue Procedure 2017-14) that expanded the rules for the organizations to remain compliant and the procedures the IRS planned to use to suspend or revoke certification.
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