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What’s The Difference Between a PEO and a CPEO?

So you know what a PEO is (or maybe you don’t yet), but WHAT is this CPEO acronym people are throwing about now? And what do you need to know about it?

Let’s start with the basics.

Professional Employer Organizations (PEOs) are firms that take on HR, payroll, and benefits administration duties for their customers, usually small businesses. Clients enter into a relationship with the PEO where the latter becomes their workforce’s employer-of-record for tax-filing purposes. Come payday, employees are paid under the PEO’s employer identification number (EIN), not their company’s. They also handle various tax reporting responsibilities for their clients and are typically paid a fee based on payroll costs.

The difference between a PEO and a CPEO is actually quite simple. 

A CPEO is a PEO that has been certified by the Internal Revenue Service. To become certified, the PEO must meet certain qualifications and requirements.

So what are those requirements? 

To be eligible for certification as a CPEO, a PEO must be a business entity and must have at least one physical business location within the United States. 

Most importantly, though, to become a CPEO, the PEO must have a history of financial responsibility, organizational integrity and tax compliance (federal, state, and local). The must also be managed by individuals (a majority of whom are US citizens or residents) who have knowledge or experience regarding federal and state employment tax compliance and business practices relating to those compliance requirements. The application process also includes a full background check and tax audit.

Why should I know the difference? 

The real reason that you should know the difference between a PEO or CPEO is if you are thinking about switching to OR from a PEO. 

For companies switching to or from a PEO mid-fiscal year, this arrangement results in a wage base reset. A useful example to explain the reset is federal unemployment taxes (FUTA). The FUTA tax rate is 6.0 percent (without state unemployment credits) and only applies to the first $7,000 paid to an employee annually. Once an employer pays that, they are off the hook until the following year. If employees are suddenly paid under a new EIN, though, that $7,000 resets to zero—and the employer has to pay those taxes off again. FUTA is just one of several taxes in this scenario that the employers would have to double pay for.

If a company joins or leaves a CPEO midyear, however, their wage base won’t reset—and they will not have to double pay certain taxes. This means that leaving a PEO for another HR solution is easier (and cheaper) than ever before if the PEO is certified by the IRS, and it give businesses greater control over their HR—and the future of their workforce.

You can find a list of CPEOs here.


Are you currently using a PEO, but are ready to transition off of it? If so, check out our latest eBook, How to Graduate From Your PEO.

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