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What Are the Tax Advantages of a PEO?

As a small or mid-sized business owner, you’ve likely spent countless hours (and maybe even some late nights) processing payroll and remitting required payroll taxes – including federal, state, and local income taxes, Social Security, Medicare, and unemployment taxes. It’s an important responsibility, but also one that can take precious time away from strategic initiatives and efforts that help grow your business.

When you partner with a professional employer organization (PEO), tax obligations related to payroll shift from you to the PEO. Whereas you would normally be responsible for calculating, withholding, and filing payroll-related taxes, with a PEO, your IRS requirements related to income taxes and FICA – in addition to unemployment (FUTA and SUTA) – become the PEO’s responsibility.

In this article, we will explore more about how partnering with a PEO can lead to significant benefits when it comes to payroll and employment-related taxes.

Various business tax paperwork spread out across a desk with a laptop, eyeglasses, and notebook.

Is a PEO responsible for payroll taxes?

First, it’s important to understand how a PEO arrangement works. When you enter into an agreement with a PEO, the PEO becomes a co-employer for your company. You retain full control of the day-to-day operations and management of your business and employees, while the PEO such as G&A Partners handles back-office administrative tasks on your behalf. In almost all cases, this means that payroll taxes are reported under the PEO’s federal employer identification number (FEIN). (There are some exceptions to this, which we’ll share later.)

As part of the co-employment relationship, your PEO is responsible for handling payroll administration and remitting payroll taxes on your behalf.

Additional payroll-related responsibilities your PEO may manage include (but are not limited to):

  • Providing technology to track your employees’ time and attendance.
  • Calculating and withholding applicable federal, state, and local income taxes.
  • Calculating and withholding payroll taxes for unemployment and Federal Insurance Contributions Act (FICA), which includes Social Security and Medicare.
  • Calculating and withholding benefits-related deductions and required garnished wages.
  • Preparing and distributing paychecks or direct deposits.
  • Reporting and filing all employment-related taxes.
  • Creating quarterly and annual reports.
  • Filing tax returns and reports with the IRS and/or local agency.
  • Creating and distributing W-2s to employees.
  • Providing self-service options for employees to update their tax withholdings (W-4).

As we noted earlier, your professional employer organization will typically file your payroll taxes under the PEO’s FEIN. There are some states that require your company, not the PEO, to retain and report under their own FEIN. No matter where your business operates, a reputable and experienced PEO will know how to take care of all your tax filing obligations.

What are the tax advantages of a PEO?

When you partner with a PEO, you are no longer responsible for remitting payroll-related taxes, such as income, FICA, or unemployment taxes. And while there aren’t any tax breaks associated with working with a PEO, you will benefit from another savings – time.

Think about it this way: If one month were added to the year, what more could you accomplish with your business?

Small Business Trends reports that small-business owners spend five hours per pay period on payroll. That’s 21 days per year – the approximate number of business days per month. That’s a significant lift, and just one of many responsibilities you take on as a business owner.

Another major benefit of a PEO managing your payroll and other HR administrative tasks is a reduction in payroll errors and increased accuracy of payroll tax filings. Employees expect timely and accurate paychecks, and when employers don’t deliver, this can erode trust and negatively impact company culture. And if businesses don’t meet payroll-related tax requirements, they can be fined by the IRS or state agencies.

At G&A Partners, we’ve assembled a team of experienced payroll specialists who understand the intricacies of payroll tax requirements. These same experts are also available to answer your employees’ questions about payroll, taxes, and various other withholdings from their paychecks.

In addition to cyclical reporting and filing, a PEO processes and distributes W-2s at the beginning of each calendar year. When your employees have questions or need additional copies of a W-2, the PEO handles those requests, too.

To learn more about the tax advantages of a PEO, contact G&A Partners.

How does a PEO handle taxes?

Because you’re in a co-employment relationship with your PEO, tax filing is handled under their federal employer identification number, or FEIN. The PEO will gather from you the documentation needed to take care of payroll deductions and tax filing at the federal, state, and local levels.

Your PEO partner can also provide cyclical payroll reports that detail hours paid, gross and net income, deductions for each employee, and taxes charged to your business. And they are responsible for reporting directly to federal, state, and local agencies.

It’s worth noting that a PEO is only responsible for payroll-related taxes. Corporate taxes are still handled by your business.

Once you’ve partnered with a PEO, your employees will receive their paychecks and W-2s from the PEO’s account. In addition to the name on the check, employees should notice quick, responsive answers to questions regarding payroll, taxes, and other deductions.

How G&A Can Help

If you’re ready to find out more about the benefits of a PEO, including how to simplify your payroll process, reach out to G&A Partners. A leader in HR services for more than 25 years, we offer comprehensive HR administration services and expertise, Fortune 500-level employee benefit plans, and award-winning client service. Schedule a consultation today, so you can get back to growing your business.