Definition
A professional employer organization (PEO) is a company that enters a co-employment relationship with a business, taking over payroll, tax filing, benefits, and HR compliance tasks for the client's workers. The client keeps day-to-day control of the work. PEOs are typically paid a fee based on payroll costs.
Also known as: PEO, co-employment
How it works
A business signs a client service agreement with a PEO. The PEO becomes co-employer of the client's worksite employees for defined purposes, typically payroll, benefits, workers' compensation, and HR compliance support. The PEO usually runs payroll and files employment tax returns, often under its own EIN, and offers benefit plans purchased on a pooled basis across its clients.
The client still decides who to hire, what work to assign, and how to manage performance. Fees are commonly a percentage of payroll or a per-employee charge. Because tax filing responsibilities shift, the IRS operates a voluntary certification program, created by the Tax Increase Prevention Act of 2014, for certified PEOs (CPEOs). A CPEO is solely liable for the employment taxes on pay it makes to worksite employees.
Example
A 40-person marketing agency in one state hires a PEO to run payroll, offer a shared health plan, and manage workers' compensation. The agency's owners continue to hire, assign work, and manage staff directly.
How it differs from similar terms
Professional Employer Organization vs Employer of Record. A PEO co-employs workers alongside a client that keeps its own entity. An EOR is the sole legal employer, usually to hire where the client has no entity.
Professional Employer Organization vs Human Resource Information System. A PEO is a service arrangement that shares employer duties. An HRIS is software the employer uses to store and manage employee data.
Related terms and guides
- GuideHow to Choose a PEO
Frequently asked questions
What is a certified PEO (CPEO)?
A CPEO is a PEO that the IRS has certified under a voluntary program created by the Tax Increase Prevention Act of 2014. Certification means the PEO met background, experience, financial, tax compliance, and bonding requirements. Customers can check a CPEO's status in the IRS public listings.
Who is liable for employment taxes under a CPEO arrangement?
For pay a CPEO makes to worksite employees, the IRS states the CPEO is solely liable for paying employment taxes, filing returns, and making deposits. The CPEO files under its own EIN and uses Schedule R to allocate data. Rules differ for non-worksite employees and for non-certified PEOs.
Does a PEO take over management of employees?
No. A PEO shares administrative and compliance duties, such as payroll, benefits, and tax filing. The client business continues to hire, direct work, set schedules, and manage performance. The split of responsibilities is defined in the client service agreement. Each party's duties are set by contract, so clients should review the agreement carefully.