When evaluating PEOs, you’ll encounter terms like CPEO, ESAC accreditation, and IRS certification. These aren’t just marketing buzzwords—they’re critical indicators of a PEO’s financial stability, operational standards, and commitment to compliance.
Understanding what these certifications mean and why they matter can protect your business from significant risks.
What is CPEO Certification?
CPEO stands for Certified Professional Employer Organization. It’s a voluntary certification program administered by the IRS, established through the Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (ABLE Act).
To achieve and maintain CPEO status, PEOs must meet stringent requirements regarding:
Financial Responsibility: CPEOs must pass rigorous financial examinations, maintain specified bonding or financial assurance, and undergo annual audits by independent CPAs. This ensures they have the financial resources to meet payroll tax obligations.
Tax Compliance: CPEOs assume responsibility for payroll tax withholding, payment, and reporting for their clients. They’re held accountable to the IRS for these obligations, reducing your risk exposure.
Background Checks: The IRS conducts thorough background checks on CPEO owners, officers, and responsible individuals to verify they have no history of tax fraud or serious tax non-compliance.
Quarterly Assertions: CPEOs must file quarterly assertions with the IRS confirming they continue to meet all certification requirements.
Annual Examinations: Independent CPAs must examine CPEOs annually and provide attestation reports to the IRS verifying compliance with certification requirements.
Why CPEO Status Matters to Your Business
Tax Liability Protection: This is the most significant benefit. When you work with a CPEO, the IRS recognizes the CPEO as the employer for federal employment tax purposes. This means the CPEO is solely responsible for these taxes—not you.
If a non-certified PEO fails to pay employment taxes on your employees’ behalf, the IRS can come after your business for those taxes, penalties, and interest. With a CPEO, this risk is eliminated.
Financial Stability Assurance: CPEO certification requirements ensure the PEO has sound financial practices and sufficient resources. This reduces the risk of the PEO going out of business unexpectedly, leaving you scrambling to find alternatives.
Compliance Confidence: The rigorous CPEO certification process and ongoing monitoring provide confidence that the PEO maintains high operational and compliance standards.
IRS Recognition: CPEO status demonstrates the PEO has passed the IRS’s highest verification standard, providing peace of mind that you’re working with a legitimate, well-run organization.
What is ESAC Accreditation?
ESAC (Employer Services Assurance Corporation) is an independent organization that accredits PEOs based on financial and operational standards. While not government-administered like CPEO certification, ESAC accreditation indicates a PEO has demonstrated:
- Financial responsibility and stability
- Positive operational performance
- Adherence to industry best practices
- Commitment to client service excellence
ESAC-accredited PEOs undergo annual financial examinations and must meet specific criteria regarding financial reserves, operational processes, and service delivery.
CPEO vs ESAC: What’s the Difference?
CPEO Certification:
- Administered by the IRS
- Government-backed program
- Provides tax liability protection
- More rigorous financial requirements
- Annual CPA examinations required
- Quarterly reporting to IRS
ESAC Accreditation:
- Administered by private organization
- Industry-driven standards
- No tax liability protection
- Strong financial and operational standards
- Annual examinations required
- Demonstrates commitment to quality
Ideally, choose a PEO with both CPEO certification and ESAC accreditation. This combination provides maximum protection and confidence in the provider’s financial stability and operational excellence.
Risks of Working with Non-Certified PEOs
While some excellent PEOs operate without CPEO certification (often smaller regional providers), working with uncertified PEOs carries specific risks:
Tax Liability Exposure: If the PEO fails to pay employment taxes, you could be held responsible for those taxes, penalties, and interest—potentially hundreds of thousands of dollars.
Financial Instability: Without certification requirements, you have less assurance about the PEO’s financial health. If the PEO goes bankrupt or closes suddenly, you face significant disruption.
Compliance Uncertainty: Non-certified PEOs may have less rigorous compliance processes, increasing your risk of employment law violations or regulatory problems.
Less IRS Oversight: Without CPEO status, there’s no IRS monitoring of the PEO’s financial practices or tax compliance.
This doesn’t mean you should automatically reject non-certified PEOs, especially well-established regional providers with strong reputations. However, you must conduct extra due diligence:
- Verify financial statements and stability
- Check liability insurance coverage
- Confirm they have proper bonding
- Review their tax compliance history
- Get strong client references
How to Verify CPEO Status
The IRS maintains a public list of all certified PEOs. You can verify a PEO’s CPEO status by:
- Visiting the IRS website’s CPEO directory
- Searching for the PEO’s name or EIN (Employer Identification Number)
- Confirming their certification is current and not suspended
Always verify certification directly with the IRS rather than relying solely on the PEO’s claims. Some companies misrepresent their status or let certification lapse.
ESAC Verification
Similarly, you can verify ESAC accreditation by:
- Visiting the ESAC website’s member directory
- Searching for the PEO
- Confirming current accreditation status
Questions to Ask About Certification
When evaluating PEOs, ask:
- “Are you a Certified Professional Employer Organization (CPEO)?”
- “Are you ESAC accredited?”
- “How long have you held these certifications?”
- “Have you ever had certification suspended or revoked?”
- “Can you provide proof of current certification?”
- “What liability insurance do you carry?”
- “What happens to my tax liability if you fail to pay employment taxes?”
Pay attention to how confidently and completely PEOs answer these questions. Any hesitation or evasion is a red flag.
Making the Right Choice
While CPEO certification and ESAC accreditation aren’t absolute requirements, they significantly reduce your risk. For most businesses, especially those new to PEOs, working with certified providers offers important protections and peace of mind.
If you’re considering a non-certified PEO (perhaps due to specialized industry expertise or better pricing), ensure you:
- Thoroughly verify their financial stability
- Confirm adequate liability insurance
- Get detailed references
- Have your attorney review the contract carefully
- Understand you retain potential tax liability
Need help identifying reputable, certified PEOs for your business? Contact PEO Consulting Partners. We work exclusively with financially stable, accredited providers and can explain each option’s certification status and what it means for your specific situation.