When Congress approved the Achieving a Better Life Experience Act (ABLE) in 2014, they intended the legislation to protect businesses who utilized professional employer organizations. Now that the IRS has announced it will begin accepting applications from companies that want to become certified professional employer organizations (CPEOs), it’s time for companies to start thinking about who they use for things like small business payroll and benefits administration.
The most important thing small businesses need to know about ABLE is the protection it affords. By classifying workers as employees of a CPEO for tax reporting purposes, the legislation puts the responsibility of payroll reporting on the vendor rather than the employer. The amount of protection this affords is substantial.
Prior to ABLE, an employer might have paid its payroll provider enough money to cover salaries, benefits and payroll taxes, then simply assumed the vendor was meeting its responsibilities. In the event the vendor did not submit payroll taxes on time, the employer was still financially liable. Imagine what could happen if a payroll services vendor took client money and skipped town. Not only would that employer be out whatever amount was paid to the vendor, but it would also still be responsible for making good on back payroll taxes.
ABLE changes that. The law now affords extra protection for employers that use CPEOs by classifying workers as employees of the CPEO for tax reporting purposes. Workers are classified as employees of the company they work for in virtually all other aspects.
In order for small business payroll company to be certified under ABLE, it must meet a stringent set of requirements. First, the prospective CPEO must pass background and tax compliance checks that look into both criminal activity and past reporting history. Next, vendors must secure a surety bond that is equal to at least 5% of annual tax liabilities up to, but not exceeding, $1 million.
Vendors must also:
CPEOs are subject to annual user fees of up to $1,000 annually to remain certified. Those fees are likely to go up at some point in the future.
As for small and medium-sized businesses looking for CPEOs, they can begin checking with the IRS in a couple of months. The agency will be compiling a list of vendors with proper certification and, eventually, additional lists of companies whose certifications have been revoked or suspended.
In light of ABLE now being officially implemented by the IRS, it might be a good time for small businesses to start looking for new payroll providers who make the effort to be certified. It stands to reason that vendors who are certified will have a competitive advantage in that they will be able to offer their clients a level of protection non-certified companies cannot.
It should also be noted that certification is not mandatory. A small business payroll and benefit company can decide to continue as a non-certified entity without any penalties. However, it is plausible to believe that courts will not look as kindly on such companies in the event of litigation, given the fact that they do have the opportunity to certify if they want to.
The result of ABLE will hopefully be one of reducing the risk to employers while also increasing ethical standards among payroll and benefits companies. We will see if that happens.