Professional employer organizations (“PEOs”) and other entities performing payroll administration and tax reporting responsibilities for their business clients and employing businesses that use their services should review the updated Internal Revenue Service (“IRS”) requirements to be and remain a Certified Professional Employer Organization (CPEO) under the voluntary CPEO Program the IRS established and administers under the Tax Increase Prevention Act of 2014. Revenue Procedure 2023-18 updates the IRS’ current rules and procedures to become and remain certified as a Certified Professional Employer Organization (CPEO) and the procedures relating to suspension and revocation of CPEO certification.
Voluntarily becoming and remaining certified as a CPEO means that a PEO has met the detailed background, experience, business location, financial reporting, tax compliance, and bonding requirements described in the statute and regulations of the CPEO program.
To be eligible for certification as a CPEO, a PEO:
- must be a business entity,
- must have at least one physical business location within the United States,
- should have a history of financial responsibility, organizational integrity, and tax compliance (federal, state, and local),
- and should be managed by individuals (a majority of whom are U.S. citizens or residents) who have knowledge or experience regarding federal and state employment tax compliance and business practices relating to those compliance requirements.
Like its predecessors, Revenue Procedure 2023-18 requires PEOs must meet and comply with detained requirements for becoming and remaining certified as a CPEO and PEOs performing payroll services as a CPEO assume additional tax liability. In addition to the detailed requirements to show suitability to qualify as a CPEO, CPEOs also face annual reporting and other requirements to preserve their certification. PEOS that currently are, or are interested in becoming CPEOs should carefully review these requirements to ensure their ability to meet and comply with the conditions.
Although CPEO certification is voluntary, many PEOs find the burdens of certification helpful if not necessary to meet the expectation of their preferred customers. Many businesses outsourcing payroll and other tax services require or prefer use CPEOs when outsourcing payroll and other tax services because if the CPEO and business agree and the CPEO timely files the required Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement with the IRS at the start of the contract, the CPEO generally becomes solely liable for paying the customer’s employment taxes, filing returns, and making deposits and payments for the taxes reported with regard to remuneration it pays to work site (but not nonwork site) employees under the payroll outsourcing arrangement. The CPEO will file aggregate employment tax returns for all its customers using the CPEO’s employer identification number (EIN) with the appropriate Schedule R, Allocation Schedule for Aggregate Filers attached that allocates to each customer the information reported. The CPEO deposits and pays the tax liabilities of those customers using the CPEO’s EIN, according to the CPEO’s deposit requirements. CPEO customers cannot view federal tax deposits and payments made by the CPEO using the Electronic Federal Tax Payment System (EFTPS). In other words, an appropriate payroll outsourcing arrangement with a CPEO allows the business both to outsource the performance of the functions and much of the liability for the proper performance of those activities to the CPEO. A CPEO and its customer may both be liable with regard to remuneration the CPEO pays to non-worksite employees, however. For additional information on employers outsourcing their payroll responsibilities under the Internal Revenue Code, see Outsourcing Payroll and Third Party Payers.
PEOs apply to become CPEOs using the IRS’ Online Registration System for PEO certification which requires the applying PEO to complete the following:
- Individual Identity Verification
- Responsible Individual Personal Attestation (RIPA)
- Create a Controlled Group
- CPEO Application
Revenue Procedure 2023-18 modifies and supersedes both Revenue Procedure 2016-33 and Revenue Procedure 2017-14. It addresses the procedures for applying to be certified as a Certified Professional Employer Organization (CPEO), the requirements for a CPEO to remain certified, and the procedures relating to suspension and revocation of CPEO certification. Revenue Procedure 2023-18 is scheduled for official publication in Internal Revenue Bulletin 2023-13, on March 27, 2023. Its provisions become effective today effective March 10, 2023. CPEOs and PEOs contemplating certification, as well as the businesses outsourcing or considering outsourcing to them should carefully evaluate the updated guidance and its implications on their responsibilities and liabilities. When conducting these evaluations and contracting, all parties should fully understand the implications of the arrangement. Likewise, parties involved in these arrangements also should keep in mind that the Internal Revenue Code characterization of relationships to workers and allocations of responsibility and liability for payroll or other tax obligations do not determine the consequences of their arrangement for most other legal purposes. Rather, the characterization of an outsourcing business and a PEO or other workforce vendor as an employer, joint employer, agent or other responsible party and each party’s potential respective obligations and exposures under Federal or state wage and hour, discrimination, safety, leave, union and other labor and employment laws is governed by the applicable statutes, regulations and rulings. PEOs and businesses using PEO or other outsourcing, staffing, subcontracting or similar arrangements should carefully evaluate the consequences of their proposed arrangements under all relevant laws. For additional information on employers outsourcing their payroll responsibilities, see Outsourcing Payroll and Third Party Payers.
More Information
We hope this update is helpful. For more information about the these or other health or other legal, management or public policy developments, please contact the author Cynthia Marcotte Stamer via e-mail or via telephone at (214) 452 -8297.
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About the Author
Recognized by her peers as a Martindale-Hubble “AV-Preeminent” (Top 1%) and “Top Rated Lawyer” with special recognition LexisNexis® Martindale-Hubbell® as “LEGAL LEADER™ Texas Top Rated Lawyer” in Health Care Law and Labor and Employment Law; as among the “Best Lawyers In Dallas” for her work in the fields of “Labor & Employment,” “Tax: ERISA & Employee Benefits,” “Health Care” and “Business and Commercial Law” by D Magazine, Cynthia Marcotte Stamer is a practicing attorney board certified in labor and employment law by the Texas Board of Legal Specialization and management consultant, author, public policy advocate and lecturer widely known for 35+ years of workforce and other management work, public policy leadership and advocacy, coaching, teachings, scholarship and thought leadership.
A Fellow in the American College of Employee Benefit Counsel, Vice Chair of the American Bar Association (“ABA”) International Section Life Sciences and Health Committee, Past Chair of the ABA Managed Care & Insurance Interest Group, Scribe for the ABA JCEB Annual Agency Meeting with HHS-OCR, past chair of the ABA RPTE Employee Benefits & Other Compensation Group and current co-Chair of its Welfare Benefit Committee, Ms. Stamer’s work throughout her 35 year career has focused heavily on working with employer and other staffing and workforce organizations, health care and managed care, health and other employee benefit plan, insurance and financial services and other public and private organizations and their technology, data, and other service providers and advisors domestically and internationally with legal and operational compliance and risk management, performance and workforce management, regulatory and public policy and other legal and operational concerns. As an ongoing component of this work, she regularly advises, represents and defends employers, PEOs, staffing, employee leasing and other businesses about worker compensation, payroll and other tax, wage and hour and other compensation and employee benefit, occupational health and safety, contracting, compliance, risk management and other internal and external controls in a wide range of areas and has published and spoken extensively on these concerns. She also has decades of regulatory and other government affairs experience with these concerns including defending these and other businesses before the IRS, EBSA, WHD, EEOC, OCR, HHS, state labor, insurance, and other authorities, and evaluating and responding to federal, state and local statutory, regulatory and enforcement actions by federal and state legislators and regulators. A prolific author and popular speaker, Ms. Stamer also is widely recognized for her decades of pragmatic, leading edge work, scholarship and thought leadership on workforce, compensation, and other operations, risk management, compliance and regulatory and public affairs concerns.
For more information about Ms. Stamer or her health industry and other experience and involvements, see www.cynthiastamer.com or contact Ms. Stamer via telephone at (214) 452-8297 or via e-mail here.
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