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What is a Certified Professional Employer Organization (PEO)? (All You Need To Know in 2023)

What is a Certified Professional Employer Organization (PEO)? (All You Need To Know in 2021)

If you are in the HR industry or a small business owner looking to hire a professional HR services provider, you must have heard about a professional employer organization (PEO).

Working with a PEO offers businesses the chance to completely outsource their HR responsibilities to a company (the PEO) with better resources, structure, and expertise in handling the staffing, payroll, employee benefits, and other HR functions of the company.

The PEO model is quite a popular choice for owners of small and medium-sized businesses who prefer to focus more on their core business goals and spend less time handling HR, administrative, and compliance-related duties.

A CPEO means a certified professional employer organization and is the ultimate solution as far as PEO solutions go. While a CPEO is also a co-employment arrangement with the original employer or business owner (with the same services as a PEO), it provides businesses with more secured services and guaranteed benefits. In other words, it is better to team up with a CPEO than a PEO. Read on to get more details on this.

Why a CPEO Instead of a PEO?

To properly put this in perspective, let's consider the description of a CPEO according to the IRS. According to the Tax Increase Prevention Act of 2014, which kicked into effect on December 19, 2014, the IRS established a voluntary certification program for professional employer organizations (PEOs), which is the CPEO Program. This program allows them to earn the certified designation after meeting a number of specified criteria.

“Pursuant to section 7705(a) of the Internal Revenue Code, the term “certified professional employer organization” (CPEO) means a person that applies to be certified as a CPEO and that the Internal Revenue Service (IRS) has certified as meeting the applicable requirements.”

When a PEO becomes certified, the employment tax liabilities of both the CPEO and the employer change. The PEO assumes responsibility for the client company's tax and payroll administration. PEOs offer HR services to businesses, including employee benefits administration, payroll processing, and tax reporting. A PEO is said to be certified when it satisfies all the regulatory requirements for handling these duties. Ordinary PEOs do not go through this voluntary certification process and as such are not certified.

Since the PEOs have a co-employment arrangement with their client companies, these companies can report their wages and payroll taxes under the PEO's federal employer identification number (FEIN). This means that they both share employee liabilities. In fact, the bulk of it shifts to the PEO because they are the ones responsible for processing and reporting payroll taxes for the client companies.

If the PEO is certified, then the employer can rest assured that the PEO is going to deliver the best results, having gone through the IRS certification program. Additionally, if anything goes wrong with these duties, the CPEO is held liable. You are not guaranteed this protection when you work with an uncertified PEO. In fact, the IRS will hold you, the primary employer responsible for late remittance of taxes and incomplete payments.

Partnering with a CPEO automatically brings you under a safe umbrella where you get to enjoy economies of scale - access to more benefits options at lower rates. But that's not all. Like PEOs, employers that partner with a CPEO also get access to full HR services from the CPEO. Currently, not many CPEOs are certified in the U.S. For the current list of certified PEOs, you can check the IRS listing here.

Eligibility Requirements as Stated By the IRS

To be eligible to apply for the certified designation (CPEO), a PEO must satisfy the following requirements:

  • It must be a business entity

  • It must have at least one physical business location within the U.S.

  • The PEO company must show a history of financial responsibility, organizational integrity, and tax compliance at federal, state, and local government levels

  • The PEO should be managed by individuals who are US citizens or residents in the U.S. These individuals must be knowledgeable or experienced in matters relating to federal and state employment tax compliance as well as business practices relating to those compliance requirements.

  • Provide financial information, including annual audited financial statements prepared by a CPA

  • Provide an assertion and CPA examination level attestation regarding federal employment tax compliance

Why Should You Consider Working with a Certified PEO?

Other factors that make CPEOs better choices than PEOs include:

1. Peace of Mind

Knowing that the CPEO has gone through a rigorous certification exercise, employers can confidently use their services to administer their payroll, process payroll taxes, and deliver best-in-class HR solutions, including competitive employee benefits packages.

2. They're Better Structured and Well-run

The majority of client companies that most CPEOs serve are small and medium-sized businesses. Partnering with a CPEO allows them to enjoy the structure, resources, and extended functions that the PEO offers. Most small businesses turn to PEO solutions because they can't afford to hire an in-house HR team yet or they do not have the time to do it themselves.

3. CPEOs are Regulated; PEOs are Not

CPEOs go through rigorous background checks and must submit quarterly financial reports. These requirements must be met for the CPEOs to remain in good standing with the IRS throughout the lifespan of their business. PEOs, on the other hand, are not regulated. Employers therefore can be confident that their taxes will be processed timely and accurately. Failure to comply with these requirements can lead to suspension or revoking of the certification.


A certified PEO is a PEO that has been certified by the IRS as fit for offering PEO services. They must have provided extensive information about their financial activities, tax records, and organizational structure. A CPEO is responsible for handling payroll administration and federal employment tax reporting.

When you work with a CPEO, they pay the federal employment taxes on behalf of your company. If you use a non-certified PEO and they fail to pay these taxes, you risk bearing the responsibility for the unpaid federal employment taxes as well as the applicable penalties for late payment.

The Mission is a leading partner in the PEO, HR, payroll, and benefits outsourcing marketplace. We provide PEO and HR services to small and medium-sized organizations and government contractors, serving as a trusted partner in integrated human resource compliance, risk management, employee benefits, and employment practices liability insurance (EPLI).


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