IRS Details Certification Process for PEOs

The Internal Revenue Service released further details Friday on how a business entity can become certified under the IRS’s new certified professional employer organization program.

Revenue Procedure 2016-33, posted on IRS.gov, along with temporary and proposed regulations published last month in the Federal Register, carries out legislation enacted in late 2014, the Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014, also known as the ABLE Act,  requiring the IRS to establish a voluntary certification program for professional employer organizations.

A professional employer organization, sometimes referred to as an employee leasing company, is an organization that enters into an agreement with a client to perform some or all of the federal employment tax withholding, reporting, and payment functions related to workers performing services for the client.  PEOs handle various payroll administration and tax reporting responsibilities for their business clients and are typically paid a fee based on payroll costs. To become and remain certified under the new program, certified PEOs must meet tax status, background, experience, business location, financial reporting, bonding and other requirements (see IRS Provides Voluntary Certification Program for Professional Employer Organizations).

Being certified by the IRS as a certified professional employer organization, or CPEO, has certain federal employment tax consequences for both the CPEO and its clients.  The revenue procedure describes the process by which a person applies for certification as a CPEO and the requirements a person must satisfy in order to become a CPEO.

Under the revenue procedure, interested applicants will be able to apply electronically (paper applications will not be accepted) and submit supporting documents through a new online system. As authorized by law, a $1,000 application fee must be paid using Pay.gov. The revenue procedure also includes detailed information on bond, financial audit and other requirements.

The IRS said the new online application system will be accessible on IRS.gov in the coming weeks, and the IRS will be ready to accept application materials beginning on July 1, 2016. The effective date of certification for an applicant that submits a complete and accurate application before Sept. 1, 2016, and is certified will be Jan. 1, 2017, even in situations where the certification letter is not issued until after that date. The IRS will publish a list of CPEOs on its website, and the list will be updated quarterly.

The IRS said it also welcomes public comment on the revenue procedure. Details on submitting comments can be found in the revenue procedure, posted on IRS.gov.