Regulations provide guidance for new program for professional employer organizations

The IRS has issued temporary (TD 9768) and proposed (REG-127561-15) regulations implementing a new voluntary certification program for professional employer organizations (PEOs).

PEOs handle various payroll administration and tax reporting responsibilities for their business clients and consider themselves co-employers of their clients’ employees. Forms W-2 are typically issued to the employees in the name of the PEO, and the PEO takes responsibility for remitting federal employment taxes. However, under federal employment tax rules, a PEO’s clients are ultimately responsible for employment taxes. Legislation enacted in late 2014 requires the IRS to establish a voluntary certification program for PEOs. For purposes of federal employment taxes and other obligations under the federal employment tax rules, a certified PEO (CPEO) is generally treated as the employer of any individual performing services for a customer of the CPEO. Thus, if a PEO is a CPEO, the PEO’s customers are relieved of ultimate responsibility for employment taxes.
The regulations establish the certification process. To become and remain certified, PEOs must meet requirements that are described in the regulations and cover areas such as tax status, background, experience, business location, financial reporting and bonding. The application process for CPEO status will open on July 1, 2016. Subsequently, as required by law, the IRS will publish lists of CPEOs and those whose certification has been revoked or suspended.

The temporary regulations were effective on May 6, 2016. The proposed regulations are to be effective on and after the date they are published in the Federal Register as final or temporary regulations, but taxpayers can rely on the proposed regulations until final or temporary regulations are published.

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