Small Business Efficiency Act: what it means to business and to the PEO industry
The Small Business Efficiency Act (SBEA) (S. 479) has awaited Congressional approval for too long. Originally introduced in 2008, it is now in front of the Senate Committee on Finance. As supported by Presidents Bush and Obama, it directs the Internal Revenue Code:
- To enable professional employer organizations (PEOs) to secure certification by the IRS as employers for the purpose of employment taxes - to pay wages and to collect and remit payroll taxes for the business employer.
- To establish requirements for IRS certification, including financial review and reporting by an outside CPA – “not later than the last day of the second month beginning after the end of each calendar quarter.”
- To require certified PEOs (CPEOs) to post a surety bond up to $1 million.
- To guarantee remission of collected employment taxes.
The 113th Congress, however, remains static and impassive on all matters under its scrutiny.
Why bother?
Professional employer organizations are here to stay. They saved many a small business. The National Association of Professional Employer Organizations (NAPEO) lists 300 members serving businesses in 50 states, managing 85% of the industry’s $81 billion in revenues. They administer human resources, process compensation, collect and pay taxes, negotiate and provide employee health and retirement benefits, comply with employment laws, and oversee workers’ comp safety programs. In doing so, they reduce the small business’s labor burden and share the benefits of volume discounts.
The SBEA simply but definitively clarifies federal tax law in order to bring certainty to the PEO’s ability to pay wages and collect employment taxes as promised. It recommends the creation of a certification program that focuses on solvency and accountability.
According to NAPEO, the average client is a business with 19 worksite employees. But, as health care costs increase and workers’ comp compliance becomes increasingly complicated, PEOs are attracting companies with employees of 500 or more. Client businesses include retail chains, construction companies, hi-tech start-ups, small manufacturers, and service providers. Doctors, lawyers, dentists, and other professionals, as well as employers with multi-site operations, can benefit from a PEO relationship.
What does it mean to small business?
SBEA actually serves the interests of the Federal government by guaranteeing the Treasury that employment wage taxes will be paid by businesses within PEO contracts. The Treasury Inspector General for Tax Administration (TIGTA) sees a remedy for the waste of IRS resources verifying and enforcing tax compliance by PEO clients.
The CPEO status will reduce the errors and processing cycles by speeding up the collection of employment taxes in a climate of trust and responsibility. With the IRS more confident in the accuracy and traceability of the reporting, the small business is relieved of the grief and administrative burden. “Small and medium sized businesses want to focus on growing their business and let the professionals manage complex state and federal regulations related to benefits and taxes,” said U.S. Congressman Kevin Brady (R-TX).
What does it mean for the PEO industry?
SBEA clarifies and raises the bar on the performance of the professional employer organization. The Employer Services Assurance Corporation (ESAC) has espoused the same criteria for some time – a surety bond and independently audited financial statements. So, ESAC accredited members will easily pass the IRS certification process. The SBEA would even credit business clients for payroll taxes already paid through a mid-year contract with a PEO.
As co-sponsored by U.S. Congressman Mike Thompson (D-CA), “Small businesses are the backbone of our economy and they shouldn’t be held back because of Washington regulations and piles of government paperwork. By passing this bill and removing bureaucratic burdens, we can let small businesses focus on what they do best – growing their business, producing quality products and creating good-paying jobs.” Clarifying, streamlining, and securing the tax collection process in the eyes of the IRS, the SBEA will certainly increase the motivation for small business owner interest in PEO partnerships.
