PEO
A PEO (professional employer organization) is a company that co-employs your employees under a service agreement, while you keep direction and control of the work.
The PEO typically runs payroll, files employment tax returns for those employees, and offers benefits under its own plans. Co-employmentCo-employment. Co-employment is a contractual arrangement in which a professional employer organization (PEO) and its client company each hold defined employer responsibilities for the same employees.Click to open the term splits employer responsibilities between two parties rather than eliminating either one. The service agreement spells out which tasks move to the PEO, and the split varies by contract and state. You still need to know who files, deposits, and answers agency notices. Entering or leaving a PEO is a material change in tax, benefits, and responsibility, not a routine provider switch.
What stays with you, and what can shift?
A certified PEO (CPEO) has met IRS requirements covering bonding, audited financial statements, and ongoing reporting. A CPEO files Form 8973 to tell the IRS your service contract started or ended, and splits certain aggregate Form 941Form 941. Form 941 (Employer’s Quarterly Federal Tax Return) reports wages paid, federal income tax withheld, and both shares of Social Security and Medicare tax.Click to open the term amounts by client on Schedule R. Tax accounts, benefit plans, and workers’ compensationWorkers’ compensation. Workers’ compensation is state-mandated insurance that pays medical expenses and partial lost wages when an employee is injured or becomes ill because of their job.Click to open the term coverage can shift with employer-of-record status. Payroll software is different: a tool an employer of recordEmployer of record (EOR). An employer of record (EOR) is an organization that becomes the legal employer of a client business’s employees, while the client directs the daily work.Click to open the term uses to run its own payroll.
| RESPONSIBILITY | WITH A PEO |
|---|---|
| Legal entity and EIN | Stay with you |
| Hiring, scheduling, and day-to-day supervision | Generally stay with you |
| Payroll tax filings | The PEO typically becomes employer of record on these filings |
| Health and retirement plans | Often sponsored by the PEO |
| Federal employment tax liability | Generally stays with you under an ordinary PEO; a CPEO is generally solely liable only for wages it pays worksite employees under its contract |
| Mid-year exit | Reporting moves to your EIN and state accounts, which usually means two Forms W-2 |
- Third party payer arrangements: Professional Employer Organizations
- Instructions for Form 941 (03/2026)
General information, not legal or tax advice. Apply current federal and state rules with qualified guidance.