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PEOs have traditionally been considered the employer of record for remittance of federal income and unemployment taxes. Section 3401(d) of the Internal Revenue Code provides that an entity is an "employer" for federal employment tax purposes if the entity has legal control of the payment of wages. This definition of "employer" under Section 3401(d)(1) has also been applied to FICA and FUTA taxes. Otte v. United States, 419 U.S. 43 (1974).


PEOs Create Efficiencies in the Unemployment Compensation System

Collection of unemployment taxes from small businesses is burdensome and costly for the government; in addition, small businesses face the financial and personnel cost in complying with federal and state tax rules and regulations. When a PEO remits its client’s wage-related taxes, it relieves the government of the burden of collecting unemployment obligations from a myriad of small businesses. In addition, PEOs have professional payroll personnel on staff, which benefits many small businesses who contract with PEOs by providing assistance with wage-related requirements, including the timely remittance of unemployment taxes.

Additionally, unemployment compensation claims may be reduced as a result of the PEO relationship. The enhanced access to benefits provided by PEOs creates a more stable workforce. As a part of a suite of human resource management services, many PEOs offer small to mid-sized companies services that entice the client’s employees to continue working for the client, thus reducing the number of unemployment claims made.