A service provider that contracts with employer-clients to perform human resource functions and related obligations on a client's behalf, including federal employment tax withholding, reporting, and payment functions. (PEOs are also referred to as employee leasing companies.) Other services offered by PEOs may include:

A PEO is commonly paid a fee by its client that reflects payroll costs and an additional amount. The PEO and its client often document their respective rights and responsibilities in a client service agreement.

Employees working in the client's business typically remain the client's common law employees for federal tax purposes and federal employment tax compliance.

Under 2014 legislation, the Internal Revenue Service (IRS) was required to establish a voluntary certification program for PEOs (Stephen Beck, Jr., Achieving a Better Life Experience (ABLE) Act of 2014, Pub. L. No. 113-295 (2014); 26 U.S.C. §§ 3511 and 7705). The IRS implemented this mandate through final regulations and related guidance that included requirements a person must satisfy to become a certified PEO (CPEO). CPEOs are treated as the employer of work site employees for federal employment tax purposes and may claim tax credits for work site employees if certain conditions are met.

For more information on PEOs and the CPEO certification process, see: