The co-employer relationship occurs when a company uses a professional employer organization or PEO. Co-employment means that, contractually, the PEO takes on certain employment/HR responsibilities. This reduces the company’s liabilities, regulatory workload, and, sometimes, the cost of providing benefits.

A PEO provides full-service human resource outsourcing for startup companies. A PEO can take on most of a startup’s HR functions and will add all of the startup’s employees to its payroll. 

Of course, working with a PEO will require a sizable fee. 

There are several benefits to working with a PEO, including the fact that the startup management team is able to focus on the business side of things while the PEO takes care of HR, state and local tax filings, and benefit price negotiations. 

However, it’s important to remember that even when working with a PEO, the startup is still responsible for managing its employees on a day-to-day basis. You are still in charge of hiring and managing. 

The PEO will go about as far as you want them to. And it’s important to make that clear from the start.

The importance of working with a certified PEO

You do need to be careful if the PEO you work with is not certified by the IRS to submit taxes or do taxes correctly. A startup can actually get into pretty serious trouble if the PEO is not submitting taxes properly. 

While this is a basic function for them, not all PEOs are certified by the IRS.

If they don’t have the official designation of “certified PEO” and you’re unsure if they are certified, it’s important to reach out to your CPA, check their website, or do a Google search to ensure they’re certified. 

Don’t make the mistake of working with an uncertified PEO.

Because even if you pay your payroll taxes to the PEO, if they don’t relay those payroll taxes to the IRS or state agencies, your company is still responsible. 

That could mean massive penalties and a large amount of money you now have to pay twice. 

The other benefit of working with a certified PEO is that you’re able to leave them anytime during the year and it won’t involve the messiness that could come with working with a PEO that isn’t certified. 

Certified PEOs have a higher standard and are required to provide an off-ramp for services and make it as easy as possible. 

The power of the co-employer relationship

The co-employer relationship can be very powerful and extremely helpful for a startup. 

The key is ensuring you are working with a certified PEO, and making clear the boundaries of where their role begins and your role ends. 

If you have any other questions on HR tools for startups, or startup taxes, please contact us.