Reinaldo Lopez on December 23, 2014
Big Changes for the PEO Industry: Congress Passes the Small Business Efficiency Act
On December 16, 2014, Congress officially passed the Small Business Efficiency Act (SBEA), which will become effective on January 1, 2016. This is big news in the Professional Employer Organization (PEO) world because it’s the culmination of a lot of hard work and perseverance. It should also have some major long-term implications that can streamline the tax paying process for employers. Let’s now discuss the details of the SBEA and what it means for PEOs and business owners.
Changes to the Internal Revenue Code
The key change that this act will bring about is that the IRS must develop a voluntary certification program for PEOs. At the moment, the program has yet to be created, but is expected to be in place by late June of 2016. After completing the program and becoming certified, a PEO will be a Certified Professional Employer Organization (CPEO). According to the National Association of Professional Employer Organizations (NAPEO), this means the following:
- CPEOs can collect and remit federal employment taxes, and their customers aren’t liable for those taxes
- CPEO customers will qualify for specified federal tax credits
- Whenever a CPEO or their customer makes a contribution to a state employment fund, the CPEO receives the federal tax credit
- FICA and FUTA wage bases won’t restart when a customer joins or leaves a PEO mid-year
The Long-term Impact of the SBEA
The fact that the PEO industry is being acknowledged on this level is tangible proof that it’s growing and shows the progress that’s been made. It also shows that this industry is becoming more legitimate and is a viable solution for businesses across numerous industries. And while as of mid-2013, roughly 250,000 small to mid-sized businesses partnered with PEOs, the SBEA would suggest that this number is likely to keep growing into the future.
Benefits for Employers
Once the SBEA gets rolling, it should greatly simplify the lives of business owners who outsource to a CPEO. Employers can fulfill their tax obligations without having to worry about the incessant changes made to employment-related laws. Instead, they can leave it in the hands of a CPEO and won’t have the burden of handling employment taxes or incurring penalties from the IRS.
Business owners can also be assured that the third party they choose to outsource to meets fairly extensive qualifications. For example, for a PEO to become certified, they must have certain experience requirements, have a solid background, maintain a minimum of a $50,000 bond, pay an annual fee and assume sole liability when handling federal payroll taxes.
This means that employers can run their businesses without having to babysit a CPEO or deal with any repercussions if mistakes happen to be made on the CPEO’s end. It also simplifies the tax collection process, which should eliminate a lot of headaches for employers.
The bottom line is that the SBEA is significant breakthrough in the PEO industry. It means that the industry is being taken much more seriously and it should have considerable advantages for both PEOs and business owners.