The Small Business Efficiency Act, recently signed by President Obama, is a much-needed boost not only to its namesake, small businesses, but to the companies that assist them.
Professional employer organizations provide small and mid-size businesses with comprehensive human resources services for their employees, including administration of health benefits, payroll, workers’ compensation and employment-related taxes. PEOs also play a critical role in assisting businesses with regulatory compliance, including those required by the Affordable Care Act.
PEOs have been operating for 30 years, but their growth has accelerated in the past few years, with gross revenues of $92 billion in 2012. Up to 900 PEOs operate in all 50 states, and now the SBEA creates a process that will reinforce and streamline their interactions with the federal government.
The SBEA authorizes changes to the Internal Revenue Code to establish “Certified Professional Employer Organizations.” To become IRS-certified, a PEO would have to meet financial standards (including bonding and independent audit requirements) and satisfy reporting obligations set by the IRS. Once certified, a PEO would take on sole liability for the collection and remission of federal employment taxes for the employees of its clients.
Companies that contract with certified PEOs will never be liable for those taxes and can thus focus on their core business — and prosper. According to a recent study by HR analytics expert Laurie Bassi, businesses in a PEO arrangement grow 7 to 9 percent faster, have 23 to 32 percent lower employee turnover, and are 50 percent less likely to go out of business than companies not using a PEO.
PEOs are committed to the success of small and mid-size businesses by assuming some of their more troublesome administrative duties. In so doing, the companies benefit, because they can take advantage of the economies of scales offered by a PEO arrangement, and their employees benefit, because they can receive a much wider array of services and resources.
Small and mid-size businesses (those with under 500 employees) are vital to the health of the United States. They account for 99.7 percent of U.S. employer firms and are behind 64 percent of new private-sector jobs. They account for 43 percent of private-sector payroll and 46 percent of private-sector output.
With the SBEA, the federal government seconds what PEOs have known all along: Small businesses are this country’s future.
Brent Tilson (BS'89) is the president and CEO of Tilson, chairman of the National Association of Professional Employer Organizations, and a member of the Kelley School of Business Dean's Council.