Certified Professional Employer Organization (CPEO) vs. PEO

What does CPEO stand for?

PEO stands for professional employer organization, while the meaning of CPEO is certified professional employer organization. An HR outsourcing provider that carries the designation of certified professional employer organization has met strict requirements outlined by the IRS and has earned certification from the government agency.

“[CPEOs] have gone through a rigorous accreditation process that confirms they operate in a legal and ethical manner,” writes author Anna Baluch in the Forbes article, “What is a Certified PEO?” “In addition, they’ve passed a comprehensive background check and financial audit to verify they are of the highest levels of integrity.”

While PEOs have been operating for at least 30 years, they received official recognition by the federal government in 2014 when the Small Business Efficiency Act (SBEA) became law. As part of the law, the IRS established this voluntary certification program for PEOs.

What does a CPEO do?

A CPEO is a type of professional employer organization. As such, it provides PEO services – HR management, payroll, and benefits, for example – as an HR outsourcing provider to growing businesses. While all CPEOs are professional employer organizations, keep in mind that not all PEOs are certified.

First, let’s review what a PEO does. A PEO manages HR on behalf of your company. As a small or mid-sized business, when you engage a PEO, you enter into a co-employment relationship. This means your professional employer organization becomes the employer of record for your employees and you share liability with the PEO on employment-related matters.

In this arrangement, the PEO handles day-to-day HR tasks, such as HR management, payroll processing, benefits administration, compliance guidance, risk management and safety services, recruitment, and more. A certified professional employer organization (CPEO) engages in the same co-employment relationship and handles the same HR tasks as a PEO.

As the business owner, you retain full control over your business with a PEO or a CPEO – including management of your company and employees and handling day-to-day operations. All personnel decisions – such as choosing who to hire, promote, or terminate – also remain your responsibility.

What is the difference between a PEO and a CPEO?

When deciding whether to choose a CPEO vs. PEO, there are two key differences to consider:

• Certification requirements the CPEO meets
• CPEO’s liability for paying employment-related taxes

Let’s explore both.

CPEO Requirements

To become a CPEO, a firm must meet rigorous standards defined in the IRS’ voluntary certification program. Some of those requirements include:

• Audited annual financial statements
• Documentation from a CPA that the PEO regularly meets employment tax deadlines
• Proof of a bond as a financial guarantee
• Proof of positive working capital
• Background information on the PEO’s responsible individuals, such as the owner, director, or individual overseeing payroll tax compliance

These requirements help the IRS certify that the PEO is able to pay federal employment taxes on wages for its clients’ employees and is compliant with payroll tax laws. Therefore, knowing your PEO is certified by the IRS can help alleviate any concerns you may have about its reputation and trustworthiness.

Liability for Payroll Taxes

Once a PEO is certified by the IRS, the CPEO “agrees to take over some or all of the employer’s federal employment tax responsibilities and obligations.” Further, the IRS website states, “generally, the CPEO is solely liable for paying the customer's employment taxes, filing returns, and making deposits and payments for the taxes reported with regard to remuneration it pays to work site employees.”

The IRS certification provides an added layer of protection versus working with a non-certified PEO. Traditionally, a PEO and its client share liability for federal employment taxes. And, unfortunately in the past, some unscrupulous PEOs have collected wages and federal payroll taxes from a client but then failed to remit federal taxes on behalf of the client. In this scenario, the federal government could collect the employment taxes from the client – even though the client paid that money to the PEO.

However, when you are working with a certified professional employer organization, the CPEO is solely liable for remitting employment taxes on wages for your employees, who are referred to as worksite employees by a PEO.

Of course, it’s worth noting that a PEO that doesn’t carry certification status with the IRS isn’t necessarily untrustworthy. However, because a CPEO has already met the IRS’ stringent requirements, you can enter into a contract with a CPEO like G&A Partners with more confidence.

What are the benefits of a CPEO?

Working with a CPEO offers an added level of protection, as your certified PEO assumes full responsibility for payroll tax liabilities – such as remitting your payroll taxes and filing quarterly tax reports.

“One of the CPEO program’s most touted benefits is the transfer of liability from the client-employer to the CPEO for the collection and remission of the federal payroll taxes for its eligible worksite employees,” says professors Lorraine Lee and Ursula Ramsey in a Journal of Accountancy article that reviews the certification program. “Another oft-touted benefit of CPEO certification is the official recognition of a PEO by a government agency [here, the IRS], which brings additional credibility to the industry.”

To find a CPEO or confirm whether a specific PEO is certified, you can review the list of certified PEOs on the IRS website. The list is updated quarterly. Additionally, the IRS provides lists of CPEOs that have recently had their certification suspended or revoked.

Another CPEO benefit includes the ability for businesses to maintain tax credits. Often, tax credits are available for businesses to claim, but it’s usually dependent upon being an employer. The co-employment relationship between a business and a PEO can make this status unclear. However, working with a CPEO ensures that you maintain tax credits that your business is eligible for.

While the benefits listed above are unique to a CPEO, working with a professional employer organization as your HR outsourcing provider can lead to a number of additional benefits, such as:

• Access to affordable, high-quality employee benefits
• Access to a team of experienced HR professionals
• More time to focus on your core business functions
• Guidance on complex regulatory compliance
• Better employee retention
• Improved recruiting and onboarding for new hires
• HR services that can scale with your business as it grows