How to Delegate Payroll, Employee-Related Tax Filings, and Associated Employer Duties to a Professional Employer Organization

Caroline Rule, JD, and Russell A.S. Wirth

Many small- to medium-size businesses struggle with the burdensome costs of administering payroll, employee-related federal and state tax requirements, and other employee benefits. A related group of companies that finds itself in this situation may choose to establish a professional employer organization (PEO). Each of a group of related companies will become a client of the PEO, which will itself employ the small number of staff members needed to administer all these requirements of an employer for all the PEO's clients. The PEO's responsibilities may include issuing pay checks; computing and paying Social Security tax; withholding and paying federal and state income tax; withholding and paying federal and state unemployment tax and filing attendant forms; paying disability insurance tax if required under state law; providing workers' compensation insurance; and managing issues such as employees' 401(k) contributions. The PEO will charge each client for these payments together with an administrative fee. (The companies may also become individual clients of an unrelated pre-existing PEO, but it may be preferable to keep the PEO limited to the group of related companies.)