• More than ever before, Bottom-Line-Conscious companies are outsourcing HR functions by making use of professional employer organizations. PEO's perform a wide variety of tasks ranging from payroll management and employee benefit design and administration to tax filings and compliance with state and federal workplace legislation.
• Given the myriad tasks they perform, PEO's are recognized as coemployers since they assume certain legal rights and duties related to employee performance. The rights and duties are outlined in a contract between the PEO and the client company.
• The IRS considers the PEO to be the employer of record and as such responsible for paying trust fund, income and employment taxes. State rules vary. A prospective PEO client should familiarize itself with its state's position on unpaid employment and unemployment taxes in a PEO relationship.(See revenue ruling 75-41, 1975 CB 323 and IRC section 3401(d)). Case law has upheld this determination even when the PEO failed to live up to its obligation to pay those taxes (General Motors Corp. v. United States, 91-1 USTC 50,032 ED Mich. 1990)).
• The most attractive advantage a company gains when entering into a PEO relationship is the ability to offer employees a much wider selection of benefits, often at considerably lower cost. Due to the large number of employees, PEO's and their clients enjoy the economies of scale usually reserved for only the largest employers.
• In selecting the right PEO, companies should consider factors such as the PEO's ability to offer core services, its stable financial history, an experienced staff of HR specialists and a track record with companies of similar size and industry.

Source: Journal of Accountancy, July 1999

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