PEO and CPEO Wage Continuation
This article covers the key differences between a PEO and a Certified PEO as it relates to Wage Continuation.
OVERVIEW
It's important to understand the differences between Professional Employer Organizations (PEOs) and Certified Professional Employer Organizations (CPEOs) because both have tax implications for your employees.
Transitioning away from a PEO mid-tax-year will reset your employee wage bases, because they are technically seen as new employees of your company. This is because PEOs have a joint employment relationship with your employees.
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FICA and FUTA taxes paid for employee wages for the year under the PEO are not transferable.
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Wage bases will restart at the time of transfer, resulting in double taxation.
TIP:
Employees can reconcile excess payroll taxes on their individual tax returns!
On the other hand, If you are leaving a Certified PEO, a mid-year exit will not result in tax consequences because CPEO’s are considered a successor employer.
DEFINING PEOS AND CPEOS
A professional employer organization (PEO) is a firm that provides a service under which an employer can outsource employee management tasks, such as employee benefits, payroll and workers' compensation, recruiting, risk and safety management, training, and development.
A certified professional employer organization (CPEO), is a PEO that is certified by the IRS as being solely liable for federal employment tax payments on wages paid to employees. Click here to review the CPEO Public Listings.
WHAT IS THE DIFFERENCE BETWEEN A PEO AND CPEO?
A CPEO acts as a successor in terms of wage continuation for FUTA and FICA wage-base limits. A wage-base restart is not required to calculate these taxes which is also known as wage continuation.
A certification eliminates the wage-base restart for certain federal payroll tax purposes if you join or leave a CPEO relationship mid-year. Only a few states allow the continuation of the SUTA taxable wage base reported by the client.
STATES THAT MAY REQUIRE PEO WAGE CONTINUATION
TIP:
Confirm with your current PEO which states were filed under the company's agency IDs.
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IMPORTANT NOTES
State Filings
If the PEO is using your organization's own registration ID and rate, then there will most likely be wage continuation. This means Namely will need to collect the taxable wage/tax amounts for YTD importing. While state laws are always subject to change, this is generally the case. When transitioning, you'll need to confirm with your current PEO or CPEO, which states were filed under your organization's own agency ID.
For PEO's that are filed under your Tax ID, Namely does not need to collect or upload any YTD data.
FUTA and FICA
The advantage of coming from a CPEO is the continuation of the taxable wage base for FUTA and FICA. If you are leaving the CPEO, you are now allowed to continue the FUTA and FICA taxable wage base reported by the CPEO.
When your organization entered into a CPEO contract, the CPEO was treated as a successor employer at a federal level. Once your company dissolves the agreement with a CPEO, your company will be considered as a successor employer allowing you to continue the taxable wage base reported by the CPEO. You will not be held liable for federal taxes that were not paid by the CPEO as the CPEO will be considered as the employer for federal purposes.
SUTA
The PEO is considered a co-employer and reports wages earned to state unemployment offices for SUTA taxes.
When a new employee is hired by your company, the PEO is actually considered the new employing unit. When you transition to a PEO, any unemployment claims made against your company before the co-employment agreement was signed, transition to the PEO. Those claims will remain with the PEO even after you discontinue your co-employer agreement.
Only a few states will allow the continuation of the SUTA taxable wage base reported by your company.
If the PEO does not report wages for your company and defaults on the unemployment tax obligations, state agencies will demand payment from your company in most instances.