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Last year the IRS issued guidance explaining the application filing process for Certified Professional Employer Organizations (CPEO) and the employment tax and other obligations of the CPEO.

In Revenue Procedure 2017-14, the IRS now sets forth the detailed requirements for maintaining CPEO status including annual verification, bonding, audited financial statement and reporting requirements.

Background

As we previously reported, CPEOs will be recognized as the employing unit for federal employment tax purposes. Choosing to become a CPEO offers several benefits to Professional Employer Organizations (PEOs) and their clients. For instance, employment tax costs are reduced by allowing the CPEO to consider year-to-date Social Security (FICA) and federal unemployment (FUTA) taxable wage bases when it enters into a co-employment relationship with its clients. The issue of liability is also resolved for CPEO clients since they are not responsible for federal employment taxes a CPEO fails to remit. (Public Law No: 113-295; H.R.5771)

Maintaining certification

To maintain certification, a CPEO must meet all applicable requirements, and, except as otherwise provided, the information and documents required must be submitted electronically via the online account created by the CPEO or responsible individual, as applicable. The individual submitting information and documents on behalf of the CPEO through the CPEO's online account must be authorized by Section 6103(e) to inspect the returns and return information of the CPEO.

— User fee. The individual that submits the verification on behalf of the CPEO will be automatically directed to pay a user fee in the amount of $1,000 through www.pay.gov. Payment confirmations are provided through the www.pay.gov portal. No CPEO annual verification will be processed until a user fee in the amount of $1,000 is received. Once processing of the annual verification has begun, the user fee will not be returned.

— Background check and tax compliance check. The IRS may investigate the accuracy of statements and representations made by a CPEO and its responsible individuals by conducting background checks, including checks on tax compliance, criminal background, professional experience, credit history, professional sanctions, and other relevant facts. By submitting an annual verification, a CPEO and its responsible individuals agree to provide the IRS with such additional information as the IRS may request to facilitate its background investigations.

Bond requirements

In addition to the bond that must be posted within 30 days of the notice of certification, a CPEO must continue to post a bond (or bonds) from a qualified surety for the payment of federal employment taxes using Form 14751, CertifiedProfessionalEmployer Organization Surety Bond for each period beginning on April 1 of any calendar year and ending on March 31 of the following calendar year (the bond period).

The amount of the bond (or bonds) with respect to the bond period must be at least equal to the greater of 5% of the CPEO's liability during the preceding calendar year (up to $1 million) or $50,000.

Submission of annual audited financial statements.

By the last day of the sixth month after the end of each fiscal year of the CPEO and beginning with the first fiscal year that ends after the CPEO's effective date of certification, a CPEO must submit a copy of its annual audited financial statements for the fiscal year. With its annual audited financial statements, a CPEO must submit an opinion of a CPA that such financial statements are presented fairly and in accordance with generally accepted accounting principles (GAAP).

The CPA opinion must be an unmodified opinion (i.e., it cannot be a qualified opinion, an adverse opinion, or an opinion subject to a disclaimer of opinion) and accompanied by a written declaration, signed by the CPA, that he or she is currently qualified as a CPA.

Either the CPA opinion or a Note to the Financial Statements covered by the CPA opinion must state that the CPEO's financial statements reflect positive working capital (as defined by GAAP), or, only if the requirements of Revenue Procedure 2017-14 are met, reflect negative working capital, and, in either case, set forth in detail a calculation of the CPEO's working capital as reflected in the financial statements.

Reporting requirements

— Commencement and termination of contracts. A CPEO must report the commencement or termination of any CPEO contract between the CPEO and a customer, or any service agreement described in Section 31.3504-2(b)(2) between the CPEO and a client, and the name and EIN of such customer or client, using Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement. Except as otherwise provided, a CPEO must submit Form 8973 within 30 days of the commencement of any CPEO contract or service agreement described in Section 31.3504-2(b)(2).

To provide a newly certified CPEO with sufficient time to complete Forms 8973 for clients with whom it has had service agreements prior to certification as a CPEO (existing clients), a CPEO has six months from the date of its notice of certification to submit Forms 8973 with respect to the commencement of any CPEO contracts with existing clients (including the conversion of a service agreement) or the commencement of any service agreements with existing clients (including the continuation by a newly certified CPEO of a service agreement described in Section 31.3504-2(b)(2) with an existing client).

A CPEO must submit Form 8973 to the IRS within 30 days of the termination of any CPEO contract or service agreement before the end of the last year or period listed on the most recent prior consent for the customer or client, unless and until the CPEO submits a Form 8973 to report the termination of such CPEO contract or service agreement. For more information, see Form 8973 and its instructions.

— Employmenttax reporting. A CPEO that is treated as an employer of a covered Employee under Section 3511 must meet all reporting and recordkeeping requirements described in subtitle F that are applicable to employers, in a manner consistent with such treatment.

— Specifically, with any Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, and Form 941, Employer's QUARTERLY Federal Tax Return, that it files, a CPEO must file Schedule R (Form 940), Allocation Schedule for Aggregate Form 940 Filers, and Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, respectively, providing all the information required by the form and its instructions.

In addition, Form 940 and, except with respect to the first calendar quarter for which the CPEO is certified, Form 941, along with all required schedules, including Schedule R, must be electronically filed. A CPEO may file the Form 941, along with all required schedules, including Schedule R, on paper with respect to the calendar quarter that begins on the effective date of certification.

The IRS may waive the electronic filing requirements in case of undue economic hardship. The principal factor in determining undue economic hardship will be the amount, if any, by which the cost of electronically filing Form 940 and Form 941 and all applicable schedules) exceeds the cost of paper filing.

— Reporting of material changes. A CPEO must notify the IRS of any change that materially affects the continuing accuracy of any agreement or information that was previously made or provided to the IRS (material change), including a modification or update to previously provided information, as well as new information (for example, a new responsible individual). A CPEO must notify the IRS of a material change no later than 30 days (45 days in the case of a new responsible individual) after the date of the material change. Notification must be provided through the online account of the CPEO by which the initial application was submitted, or through such other means as the IRS prescribes in further guidance

— Reporting to customers. A CPEO must meet the following reporting requirements with respect to its customers:

a. A CPEO must notify a customer in writing if its CPEO contract has been transferred to another person (or if another person will report, withhold, or pay, under such other person's EIN, any applicable federal employment taxes with respect to the remuneration of any individuals covered by its CPEO contract with the customer) and provide the customer with the name and EIN of such other person no later than 10 days after the transfer or other applicable event.

b. A CPEO must provide its customers with the information necessary to claim the credits specified in Section 3511(d)(2) (e.g., Work Opportunity Tax Credit) and any other credits specified in future guidance, and the information necessary to properly report employee tips, as provided in Section 6053(c)(8).

c. If a CPEO's certification is suspended or revoked, the CPEO must provide written notice to each of its customers within 10 days of the effective date of such suspension or revocation.

d. If any covered employees are not, or cease to be, work site employees because they perform services at a location at which the 85% threshold described in Section 7705(e)(3) is not met, the CPEO must notify the customer in writing within 30 days following the end of the applicable calendar quarter that the customer may also be liable for the federal employment taxes imposed on remuneration remitted by the CPEO to such covered employees.

e. The discovery by the CPEO of tax fraud or criminal activity in violation of federal, state, or local laws by a responsible individual.

f. The charging or conviction of the CPEO, or a related entity or a responsible individual of the CPEO, with or for any federal, state, or local criminal offense.

g. The commencement of an active IRS criminal investigation of the CPEO, or the discovery by the CPEO of an active IRS criminal investigation of a related entity or a responsible individual.

h. The occurrence of a transaction by which a person or group of persons gain control or effective control, directly or indirectly (including through control of the owner of the CPEO), of 50% or more of the stock or other ownership interests in a CPEO (determined by vote or value).

i. The sale, transfer, or disposition of all or substantially all of the CPEO business, or the reorganization, spin off or similar division, liquidation, or closure of the CPEO business, directly or indirectly (including through sale, transfer, disposition, reorganization, spin off, or division of the owner of the CPEO) regardless of whether the event is taxable or tax free.

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