The IRS released an advance version of Rev. Proc. 2016-33 providing the detailed procedures under a certification program for professional employer organizations—“certified professional employer organization” or CPEO.
Rev. Proc. 2016-33 [PDF 78 KB] provides the detailed procedures for applying to be certified as a CPEO, and states that a future revenue procedure will address requirements for a CPEO to remain certified and the procedures relating to suspension and revocation of CPEO certification.
The revenue procedure includes:
The application process under the CPEO program include rules that all submissions must be made electronically; that each member of a controlled group seeking to be certified must submit a separate application; application of a $1,000 user fee; proof of a bond or surety letter; and submission of annual audited financial statements among other items.
The revenue procedure further states that the IRS will investigate the accuracy of statements and representations made by a CPEO applicant as well as conduct background checks.
Rev. Proc. 2016-33 also lists the standards and processes to be used by the IRS to grant certification as a CPEO, as well as rules for follow-up notification by an applicant when there are material changes relevant to its application for certification. Finally, the revenue procedure sets forth procedures for when an application may be withdrawn, the process to be followed by the IRS in issuing a notice of certification and the effective date of certification, and rules for disclosure of an organization certified as a CPEO and when certification will be denied.
Temporary regulations issued in May 2016 set forth the requirements for CPEOs, and describe the certification requirements necessary for a person to become and remain a CPEO. Under this regime, a professional employer organization (PEO)—sometimes referred to as an employee leasing company—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. The terms of a PEO arrangement typically provide that the PEO is the employer (or “co-employer”) of the client’s employees and is responsible for paying the employees and for the related federal employment tax compliance.
A PEO also may manage human resources, employee benefits, workers compensation claims, and unemployment insurance claims for the client. The client typically pays the PEO a fee based on payroll costs plus an additional amount. In most cases, however, the employees working in the client’s business are the common law employees of the client for federal tax purposes, and the client is therefore legally responsible for federal employment tax compliance.
The May 2016 regulations implement a 2014 legislative mandate requiring the IRS to establish a voluntary certification program for these organizations. To become and remain certified under the new program, PEOs must meet tax status, background, experience, business location, financial reporting, bonding and other requirements described in the regulations. The application process will open on July 1, 2016.
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