This article was updated on Sept. 6, 2018.
How can a PEO benefit your business?
Eight out of 10 small businesses do not have a dedicated HR professional who is formally trained. But as benefits administration, compliance, tax filings and HR duties become increasingly complex, more and more small business owners should understand professional employer organizations and the PEO industry trend.
This HR model can benefit your business in a variety of ways — in fact, according to the National Association of Professional Employer Organizations (NAPEO), "the employee turnover rate for PEO clients is 10 to 14 percentage points lower per year than it is for comparable companies in the U.S. overall: 28 to 32 percent annual employee turnover for companies that used PEOs for at least four quarters, compared to approximately 42 percent for all companies." And a low turnover rate can have a major impact on a company's chances of survival.
The Benefits of PEOs
PEOs provide certain administrative tasks that are required for HR-related functions (such as payroll and compensation, taxes, training and development) as a "co-employment" partner. PEOs can also offer guidance in areas such as risk and safety management. In a co-employment arrangement, small business owners don't have to worry about all aspects of HR management. Instead, they can focus on strategic objectives and key day-to-day tasks. When outsourcing to a PEO, business owners are still responsible for managing business operations and daily tasks. They also retain the ability to hire new employees and dismiss poor performers.
Here are additional reasons why the PEO industry trend is growing in the HR space:
- As PEOs manage thousands of employees, they are well-positioned to provide access to high-quality, cost-effective employee benefits and services similar to that of a Fortune 500(r) company.
- PEOs offer guidance on employer-related compliance when it comes to regulations mandated by the Americans with Disabilities Act (ADA), the Occupational Safety and Health Administration (OSHA), the Equal Employment Opportunity Commission (EEOC) and more.
- A PEO can assist with HR challenges during periods of rapid expansion, enabling businesses to concentrate on growth-related issues.
For these and many other reasons, it's no surprise that, according to NAPEO, PEOs "provide comprehensive HR, benefits, and compliance assistance solutions for 156,000 to 180,000 small businesses and between 2.7 and 3.4 million worksite employees" across America.
Finding a PEO
To locate a PEO in your area, you can simply head over to the "Find a PEO" page on NAPEO's website. During the vetting process, pay close attention to the PEO's track record in terms of stability and financial responsibility, and be sure to request references. You should also consider the quality of service a prospective co-employer will provide.
Selecting a PEO
Know the difference between a certified and noncertified PEO*. The SBEA (Small Business Efficiency Act) amended the Internal Revenue Service code to provide clear statutory authority for PEOs that are certified by the IRS to collect and remit federal employment taxes under the professional employer organization's employer identification number (EIN) for wages paid to worksite employees.
Certified PEOs are solely responsible for the payment of federal employment taxes. If a company uses a non-certified PEO that doesn't pay its taxes, the company could be liable for the unpaid federal employment taxes, late penalties and interest related to its employees. Because certified PEOs are solely responsible for the payment of federal employment taxes, they must meet specific requirements regarding tax status, background, experience, business location, financial reporting, and more. The certification program also requires a PEO to post a bond each year of up to $1 million guaranteeing payment of its federal employment tax liabilities.
While PEOs may not be right for every small business, they have the potential to provide you with savings in terms of costs, time and resources.
*On June 1, 2017, the IRS certified ADP TotalSource® as a Certified Professional Employer Organization under the Small Business Efficiency Act. The IRS does not endorse any particular certified professional employer organization. For more information on Certified Professional Employer Organizations, go to www.IRS.gov.
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