Preface: Professional employer organizations permit an option for businesses to outsource the human resource functions of their business. Read further to learn why a professional employer organization benefits certain enterprises.
Professional Employer Organizations and Your Business
Credit: Donald J. Sauder, CPA | CVA
As an employer, you understand the various responsibilities of hiring, keeping, and managing your workforce. The human resource responsibilities can require more time than many business owners should give. Professional employer organizations are co-employer organizations that perform the human resource function for businesses; they are an outsourcing of the responsibilities of human resources.
Professional employer organizations rules differ from state to state, but are similar. There are more than 800 professional employer organizations in the United States, with more than two million employees participating.
With a professional employer organization your business has no responsibility for payroll filings, benefit packages, and tax reporting of forms 941 or W-2. Professional employer organizations can often obtain better rates than a mid-size employer when shopping for benefits packages. Professional employer organizations also keep your business in compliance with federal workplace legislation.
Some states recognize professional employer organizations as co-employers, assuming responsibilities for legal rights and duties of employees at the employees’ working location. These states also make your business responsible for any unpaid payroll taxes not funded to the IRS. So if you use a professional employer organization, check them out thoroughly. Request their audited financial statement to assess the financial strength of the organization and interview management to gain the level of trust necessary for a good outsourcing relationship.
Specifically, professional employer organizations handle only the human resource function– payroll, tax and workplace compliance, and record keeping. The client company is still in charge of managing employee responsibilities, on-site supervision, and tools for employees; the employees are outsourced for human resource management only. Professional employer organizations permit your business to have a professional human resources department even if you are only a small business, but you will pay a premium on your leased labor for this benefit. Businesses that contract with professional employee organizations think this additional cost is a wise expense. The main difference to your employees is the name on the W-2 for tax filings.
One specific benefit of professional employee leasing organizations is in specialty employment tax areas, such as FICA taxes. Employees who are exempt from social security tax for religious reasons may be subject to FICA taxes if working for an employer. A specialty professional employee leasing organization structured for this exemption from FICA tax may permit the employer to save the FICA payment to the IRS and permit the employee to keep the savings, too. This can be a combined tax savings of 15.2% per year on wages up to the social security tax limit. The cost to involve a qualifying professional employer organization is small compared to the combined benefit to the employer and employee.
If you think a professional employer organization may be a fit for your company’s human resource management, talk with your trusted tax advisor. Compare the additional expenses and the dollar savings on reduced administrative burdens.
In summary, professional employer organizations permit an option for businesses to outsource the human resource functions of their business. These organizations handle payroll filings, tax compliance, record keeping, and compliance with federal workplace rules. Some businesses can benefit from professional employer organizations. Talk with your tax advisor if you have interest in this option for your business.