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Lowering Your Employer Tax Liability with a PEO

Lowering Your Employer Tax Liability with a PEO

Minor payroll errors can be costly. If employees do not receive their proper pay, they will not be happy. If it happens frequently, they may see this as a sign that they need to find another job. Payroll errors also risk fines from state and federal agencies. If your company does not withhold the proper amounts, the IRS could hold you liable for those amounts, plus fines and interest. 

When you have a Professional Employer Organization (PEO) assume this responsibility, it takes the burden off your internal team and places it on your PEO. Just using an outsourced payroll company will not shift the burden in the same way it will when you partner with a PEO. 

The Problem with Payroll Processing

82 million Americans have experienced a problem with their paycheck during their career. Some of these errors occur from software, while others occur from human error. Because the employer holds the responsibility of remitting payroll taxes, any errors which occur are also the responsibility of the employer.

Roughly one third of all employers make payroll mistakes every year. The IRS will levy fines and penalties for many payroll errors, including:

  • Failure to withhold taxes
  • Failure to pay taxes
  • Failure to file taxes on time
  • Failure to provide employees with timely W-2 documentation

Working with a PEO gives you the confidence that their payroll team is on top of the tax withholding and the deadlines set by the IRS so your business can avoid fines. If you keep this complex payroll processing task in house, you risk more mistakes and more fines. You have to pay an employee to handle the payroll, the tax withholdings, and address any areas of concern. With a PEO, they handle all of that for you, freeing up your in house team to focus on the tasks they were originally hired to do.

Administrative Services Only (ASO) companies provide your business with a variety of HR services including payroll processing. But an ASO takes no responsibility for any issues that arise. That falls squarely on you. A PEO, conversely, takes the lead if an issue arises and is incentivized to act in the best interests of your business. 

Beyond that benefit, a PEO provides many other cost-saving items, including more affordable healthcare. This is made possible through co-employment.

The Co-Employment Solution

When you partner with a PEO, a co-employment relationship is formed. The PEO itself becomes the employer of record for tax purposes. At the same time, the PEO will exercise no control over the actions of your employees. Taking this step allows your PEO to file taxes for your business, withhold appropriate payroll taxes, and administer your employees' annual W-2 forms. 

A PEO will file taxes under their Federal Employer ID Number (FEIN). If an issue were to arise and if the IRS were to levy fines and interest, the PEO would be on the hook as the employer of record. This further reduces your worry and concern over payroll processing.

What needs to be absolutely clear is that co-employment does not mean you lose control of your business. In fact, it encourages the opposite. By shifting the burden of payroll processing and all of the complexities that come with it to your chosen PEO, you can redirect your internal team to focus on revenue-generating tasks. This can increase the efficiency of your employees and keep your business moving in the right direction. You always retain control over the direction of your employees including whether to hire, fire, or discipline them.

A PEO has Incentives for Accuracy

Unlike payroll processors or ASOs, a PEO has skin in the game if an error occurs. This creates an incentive for a PEO to ensure absolute accuracy with your payroll processing. If you keep all of your payroll processing needs in house, that means your business will assume all responsibility for fines and interest, should an error occur. Even with an ASO or other payroll processor, your business still bears responsibility.

With a PEO, however, you can shift the burden of responsibility off your business; your PEO now has the stress of ensuring absolute accuracy of your payroll needs. As a result, a PEO is the safest option for your business. Working with a PEO gives you access to industry professionals who will ensure accuracy with your payroll and assume responsibility for any errors. 

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