What is a certified PEO and what are its benefits? Here's what you need to know to choose the best outsourcing partner for your business.

Before you consider partnering with a professional employer organization (PEO) or co-employer, you should get a handle on two questions: What's the difference between certified and noncertified PEOs, and how might a certified PEO be better?

Here's what you need to know to choose the best partner for your business.

CPEOs and PEOs Are Similar ...

A CPEO and a PEO have the same basic benefits. According to the Internal Revenue Service*, they both agree to "take over some or all of the employer's federal employment tax withholding, reporting and payment obligations." They can also offer other services, such as managing a business's human resources functions, benefits administration and payroll processing. Risk and safety management are also areas where they can offer guidance.

Both CPEOs and PEOs work as co-employers, contractually sharing certain employer responsibilities. They both relieve business owners of the administrative tasks of HR, allowing owners to better focus on core business strategy and sales.

... But Certification Sets CPEOs Apart

It's the certification that brings added value. Certifications provide proof of viability and reliability.

To become certified, PEOs must jump through hoops for an IRS certification*. They must prove tax compliance and provide extensive information on financials and other background information like criminal background. This certification guarantees that the business is not subject to the double IRS taxation entailed by joining a noncertified PEO.

Organizations can also consider whether a PEO is accredited. To become accredited through the Employer Services Assurance Corporation (ESAC), the official accreditation and financial assurance organization for the PEO industry, a PEO must prove that it meets "established standards for ethical conduct, professional competency, and financial and operation reliability."

One thing to remember: Certifications and accreditations are not business licenses. They're not mandatory to provide services and advertise as professional employer organizations.

The Power of Certification and Accreditation

More specifically, PEO certifications and accreditations bring the following three benefits:

  • They engender trust: PEO certification is not a "one and done." It must be renewed periodically. The same hoops must be jumped through for a CPEO to become recertified. This proves to the certifying body and the CPEO's clientele that the CPEO is a consistent performer that meets its fiduciary and other responsibilities. Should a CPEO fail to meet financial and other standards, its certification could be suspended or even revoked.
  • They are verifiable: Both the IRS* and the ESAC make it easy to verify whether or not a PEO is certified or accredited. The IRS updates and publishes a list by the 15th of every month, while the ESAC provides a tool to verify certifications and compliance.
  • They increase financial security: It's unlikely that a business owner would bank with an institution not insured by the Federal Deposit Insurance Corporation (FDIC). If anything were to happen to the bank that caused a loss of funds or other assets, the owner would have recourse through the FDIC. There's similar risk in working with PEOs. If noncertified PEOs use questionable management practices or fail, owners are on their own. But with a $16 million guarantee on PEOs, the ESAC eases business owners' concerns about turning over key responsibilities.

At the end of the day, a certified PEO will prove to be your best and safest bet when you're looking for a PEO partnership.

*The IRS does not endorse any particular certified professional employer organization.

Tags: HR Administration and Outsourcing PEO Tax and Payroll Reporting Tax Compliance Large Business Midsize Business Small Business Research & Insights Articles Finance HR