Your company partnered with a PEO and almost everything is great. Employees have stronger and more affordable employee benefits, HR issues are handled correctly, and leadership can focus on the company’s core competencies. However, due to the timing of the change, you incurred extra costs by double paying employer taxes that you didn’t expect. This is completely AVOIDABLE by carefully timing your change, or by selecting a CPEO (certified professional employer organization).
Employers have numerous payroll withholding taxes and payment obligations. Withholding taxes are withheld from employee wages (“pay-as-you-earn”) and sent to the appropriate taxing authority by the employer. Employers also pay from their own funds for certain taxes. The tax revenues are used to fund national, state and local programs. How does switching to a new PEO impact each of these tax payments?
FUTA (Federal Unemployment Tax Act) and SUTA (State Unemployment Tax Authority) – Employers are responsible for FUTA and SUTA tax payments from their own funds. Depending on the state in which you do business, there are a couple exceptions for SUTA. Be sure to double check. The amount paid is based on employees’ wages and other factors. Transferring to a PEO mid-year triggers a repayment of these taxes. Avoid these costs by switching to a PEO in January or you can switch anytime during the year if you work with a CPEO.
FICA (Federal Insurance Contributions Act) – These tax payments impact employees and employers. This federal law requires withholding Social Security tax, Medicare tax and Medicare surtax (only imposed on employee portion for those earning over $200,000). Medicare is withheld from wages at a flat rate of 1.45% with no wage maximum. Social Security is withheld from wages at a flat rate of 6.2% with a wage maximum that changes each year (2017 is 127,200). Employees and employers that transfer to a PEO mid year will have their wage base restart and repayment will be required. By selecting a CPEO, you can switch at any time in the year and avoid these costs. If you will be working with a PEO, then switch in January to avoid double payment on those employees earning with taxable earnings over $127,200.
FIT (Federal Income Tax) – FIT is a pay-as-you-go tax that is based on employees’ taxable wages. Employers calculate the withholding amount based on an employee’s most recent W-4 form declaring marital status, number of exemptions claimed by the employee, number of withholding allowances and more. The amount withheld by the employer is remitted to the IRS under each employee’s name and social security number. There is no double payment of taxes if switching PEOs.
SIT (State Income Tax) – SIT is tax withheld by the employer based on employees’ taxable wages in certain states. Like FIT, employers calculate the withholding amount based on an employee’s most recent W-4. The amount withheld by the employer is remitted to the State under each employee’s name and social security number. There is no double payment of taxes.
Never Pay Twice with a CPEO
Becoming a CPEO is a voluntary certification program from the IRS. Switching to a PEO (not certified), employees are transferred to a new federal tax ID and taxes already paid need to be paid again because their tax wage base gets “restarted.” Now, companies that partner with a CPEO (certified professional employer organization) can switch at any time in the year and not be penalized.
MidwestHR, a top PEO in Illinois, is in the process of finalizing our application to become one of the first CPEOs in the country. Securing our CPEO status has been a top priority because we believe no company should be required to pay taxes twice when they decide to work with us. We are always looking out for the best interests of our clients and believe our certification will benefit them greatly. Give us a call 630-836-3000 to see how we can help your company.