Fifteen years ago, I was asked to consider hiring a PEO for Wealth Legacy Group®, Inc. “A what?” I replied. “A PEO,” I was told again by my friend. “What is that?” I asked, and wonder if you might have asked the same question. With all the acronyms thrown around, what is your guess? (Hint: it’s not “Pigs Eat Onions,” although that is a creative response.) Let’s fill you in on the details, with a few extra things thrown in!
What Is a PEO and Why Use One?
PEO stands for a “Professional Employer Organization.” PEOs are used primarily to outsource the administrative hassle of managing human resource issues that can bog down a company, and save money on accessing benefits using leverage. How do they do that?
Benefits of a Professional Employer Organization:
- Provides employees with access to employee benefits comparable to a Fortune 100 company
- Allows an employer to pay a flat dollar amount towards benefits, or simply be the host provider and let employees pay for the benefits they wish to have … on a pre-tax basis
- Minimizes risk to the business (see below)
- Helps the business owner maintain compliance with all relevant Federal and State regulations pertaining to the business
- Reduces administrative costs and minimizes human resource tasks
- Typically lowers the cost of employee health insurance, unemployment insurance, and worker’s compensation insurance
How Can a Professional Employer Organization or PEO Minimize Risk and Reduce Expenses?
A Professional Employer Organization or PEO can minimize risk for the company because the PEO technically co-employs the employees who work for the business. In this “co-employment” arrangement, the PEO is the employer of record for tax purposes. They file W2 forms for employees, but the business still retains control and oversight over its employees. A PEO is the employer of record for hundreds of different businesses, across broad and divergent occupations and job sectors. Some PEOs have a pool of hundreds of thousands of employees, which gives them the market clout to significantly lower the cost of health insurance and unemployment taxes for the business owner.
The Main Drawbacks of a Professional Employer Organization
Two drawbacks of a Professional Employer Organization are the cost and reporting. Typically, they charge a flat dollar amount per employee, or a percentage of payroll. Some of the PEOs require the use of a suite of services, while others will let you “cherry pick.” Some bury their costs, while others are more transparent. If you have enough “earnings credit rate” at certain banks, your bank will pay for some or all of your PEO costs. (If you don’t know what an “earnings credit rate” is and how this can work, please contact me. For some companies, it is literally “found money” which can be worth thousands of dollars each month!)
The PEO is required to remit and file taxes on behalf of the company. If the PEO does not fulfill its obligations, the company will bear the financial and legal ramifications for the PEO’s failure to file in a timely manner, or to file at all. One way to minimize this risk is for the company to monitor all tax payments and tax filings by the PEO. A better way to minimize the risk is discussed in the next section.
Make Sure the PEO is Certified by the IRS
The passage of the Tax Increase Prevention Act of 2014 established a voluntary certification program for PEOs that is run by the IRS. A company who hires a certified Professional Employer Organization that fails to fulfill its obligations will not be held responsible for the PEO’s failures.
There are several good PEOs – Insperity, Tri-Net (both publicly traded) and the largest privately held PEO, Oasis Outsourcing. Oasis Outsourcing has a large presence in San Diego, with specialists and handy training rooms. In addition, one of our strategic partners is a Professional Employer Organization specialist that can help a business determine which PEO might be best for their situation. The best news is that the company does not need to pay any fees to this strategic partner. Instead, the strategic partner is compensated by the PEO.
PEOs are not just for small companies, although their “sweet spot” is typically 8-100 employees. Netflix used a PEO until they reached 1,500 employees, and other large companies use a PEO for a segment of their business and employees.
If you are interested in discussing the possibilities of hiring a Professional Employer Organization for your business without a sales pitch, please contact us. Co-employing employees to stay out of trouble with the Feds and State, and getting the benefits of a Fortune 100 company while helping reduce your costs. Sounds like a great “trifecta!”
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Written by R. J. Kelly – February 2017