Dec. 22, 2014 – PRESIDENT SIGNS LEGISLATION DEFINING PROFESSIONAL EMPLOYER ORGANIZATIONS IN THE FEDERAL TAX CODE. President Obama signed the Small Business Efficiency Act (SBEA), shortly after the Senate approval on December 19th, 2014. The SBEA constructs a certification process for PEO’s within the Internal Revenue Service, and makes it easier and safer for small businesses to use PEOs to fulfil their employment tax obligations. Effective Jan. 1, 2016, the Act will impact several aspects of PEOs. Recognition Means PEOs Can Help More Small Businesses Grow and Thrive.
The National Association of Professional Employer Organizations (NAPEO) today hailed President Obama’s signing of tax extenders legislation that included provisions defining professional employer organizations (PEOs) in the federal tax code and creating a voluntary certification program for PEOs within the IRS. PEOs provide comprehensive HR, benefits, tax administration, and compliance services for small and mid-size businesses. “This is an historic moment for the PEO industry because Congress has now formally codified PEOs within the tax code and recognized the key role PEOs play in helping small businesses grow and thrive,” said NAPEO President and CEO Pat Cleary. “The certification program created by this legislation provides added assurance to small business owners who want to turn to a PEO to handle their employment tax issues and back office administrative and HR tasks.”
The legislation (the Small business Efficiency Act/SBEA) creates a voluntary certification program for PEOs within the IRS. To become IRS-certified, a PEO would have to meet financial standards (including bonding and independent financial audit requirements) and satisfy reporting obligations and other appropriate standards set by the IRS. Once certified, a PEO would take on sole liability for the collection and remission of federal employment taxes for worksite employees. Small and mid-sized businesses that contract with certified PEOs would be assured that they would not be liable for employment taxes once they remit their employees’ tax withholdings to the PEO.
The key champions of the bill were Reps. Kevin Brady (R-TX) and Mike Thompson (DCA), and Sens. Chuck Grassley (R-IA) and Bill Nelson (D-FL). “Now that the bill has been signed, we look forward to rolling up our sleeves and working with the administration to develop an effective regulatory framework. Our hope is that the process will begin soon since the bill language provides a relatively tight implementation timeline,” said Cleary.
According to NAPEO approximately 250,000 businesses use PEOs, and PEOs provide access to healthcare coverage for as many as six million people. Through a PEO, the employees of small businesses gain access to employee benefits such as 401(k) plans; health, dental, life, and other insurance; dependent care; and other benefits typically provided by large companies. According to a recent study, by noted economist Laurie Bassi, businesses in a PEO arrangement grow 7-9 percent faster, have 23-32 percent lower employee turnover, and are 50 percent less likely to go out of business than companies not using a PEO.
What Does the SBEA do for the PEO industry?
- Creates a certification process for PEOs within the IRS;
- Gives certified PEOs (CPEOs) the clear statutory authority to collect and remit federal employment taxes;
- Eliminates the wage base restart for PEO clients join or leave a PEO relationship; and,
- Codifies that customers of CPEOs will qualify for specified federal tax credits that the customers would be entitled to claim if there were no PEO relationship.
- The IRS must issue regulations to implement the SBEA. The regulations to implement the certification program must be issued by July 1. Any additional regulations implementing the SBEA must be issued by the IRS no later than January 1, 2016.
- The SBEA become effective on January 1, 2016.
Additional Material on the SBEA
- A copy of the SBEA legislative language can be found here.
- Background material from the House of Representatives on the ABLE Act (which contains the House Ways and Means Committee analysis of the SBEA) can be found here.
To learn more about the passage of the SBEA and what it means for the PEO Industry, view NAPEO’s one page summary here: http://www.napeo.org/docs/SBEAPassageFactSheet.pdf