As an employer, you understand the various responsibilities of hiring, retaining, and managing your workforce. The human resource responsibilities can require more time than many business owners should allocate. Professional employer organizations are co-employer organizations that perform the human resource function for businesses; an outsourcing of the human resource responsibility.
Professional employer organizations rules differ from state to state, but the commonality stays the same. 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 – 941’s or W-2’s. Professional employer organization gain economies of scale when shopping for benefits packages and can often obtain better rates than a small or mid-size employer. Professional employer organizations also keep your business in compliance with federal workplace legislation too.
Some states recognize professional employer organizations as co-employers, assuming the 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 retain a professional employer organization, make sure you do your due diligence. 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, record keeping – the client company is still in charge of managing employee responsibilities, on-site supervision, and tools for employees, i.e. the employees are outsourced for human resource management only. Professional employees permit your business to have a professional human resources department even if you are only a small business. You will pay a premium on your leased labor for this benefit. Businesses that contracts with professional employee organizations deem this additional cost to be a prudent 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, i.e. FICA taxes. Employees who are exempt from social security tax for religious reasons, maybe 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 15.3%, per year on wages up to the social security tax limit. The cost to involve a qualifying professional employee organization is nominal compared to the combined benefit to the employer and employee
If you think a professional employer organization maybe a fit for your company’s human resource management, talk with your trusted tax advisor before pursuing this avenue. Calculate the additional expenses, and the savings on reduced administrative burdens.
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, recordkeeping, and compliance with federal workplace rules. Some business can benefit from professional employer organizations. Talk with your tax advisor if you have interest in this option for your business.