The Small Business Efficiency Act and Its Importance to AMERICA’S SMALL BUSINESSES

The President signed the Small Business Efficiency Act (SBEA) shortly after Senate approval. It was previously approved by the House of Representatives as a provision in the ABLE Act to off-set the costs associated with that proposal, then incorporated into the tax extenders legislation.  This bill passed both chambers with large (and rare) bipartisan support.

Passage of the SBEA is the culmination of many, many years of hard work by many people. Our Congressional champions – Representatives Kevin Brady (R-TX), Mike Thompson (D-CA), along with Senators Chuck Grassley (R-IA), and Bill Nelson (D-FL) worked tirelessly to find a legislative vehicle for the SBEA. Every NAPEO member who met with their Member of Congress, sent a letter, or weighed in, own part of this success.  It is a victory for all those who worked so hard for so long to get this done. It at last provides certainty and legitimacy for us at the federal level.

What Does the SBEA do?

• Creates a certification process for PEOs within the IRS;
• Gives certified PEOs (CPEOs) the clear statutory authority to collect and remit federal employment taxes;
• Eliminates the wage base restart for PEO clients join or leave a PEO relationship; and,
• Codifies that customers of CPEOs will qualify for specified federal tax credits that the customers would be entitled to claim if there were no PEO relationship.

Next Steps

• The IRS must issue regulations to implement the SBEA. The regulations to implement the certification program must be issued by July 1. Any additional regulations implementing the SBEA must be issued by the IRS no later than January 1, 2016.
• The SBEA becomes effective on January 1, 2016.

UPDATE

The IRS plans to begin accepting applications for PEO certification beginning July 1, 2016.  See IRS Announcement.

On November 18, 2011, Senator Grassley (R-IA) and Senator Bill Nelson (D-FL) introduced the Small Business Efficiency Act into the Senate (S. 1908).  This bill is the Senate version of the House Bill, H.R. 2466.  Senator Pryor (D-AR), Senator Portman (R-OH), Senator Bingaman (D-NM) and Senator Conrad (D-ND) have also joined as co-sponsors.

The House version was introduced by Representative Kevin Brady and Representative Mike Thompson and is co-sponsored by Representatives Rob Andrews, Tim Bishop, Dennis Cardoza, Sean Duffy, Blake Farenthold, Nan Hayworth, Wally Herger, Ralph Hall, Sam Johnson, Pete Olson, William Owens, Erik Paulsen, Ted Poe, Tom Reed, Paul Tonko,and Allen West.

The Small Business Efficiency Act of 2011, H.R. 2466/S.1908, would provide clear rules for Professional Employer Organizations (PEOs) that are voluntarily certified by the IRS to collect and remit federal employment taxes for their small business clients. It will provide certainty for small businesses that use certified PEO services and will allow those small businesses to do what they do best- focus on their core business, grow their businesses, and create more jobs.

Learn more about how Professional Employer Organizations support small business.

The National Association of Professional Employer Organizations (NAPEO) is the trade association for and voice of the professional employer organization (PEO) industry. NAPEO has more than 300 PEO members operating in all 50 states, representing more than 85 percent of the industry’s $81 billion in revenues. PEOs help small- and medium-sized businesses with human resources, compensation, and employee benefits issues. Through the economies of scale, PEOs improve compliance with federal and state employment taxes, benefits laws, and often provide retirement and health benefits to workers that were not available prior to the PEO arrangement.

NAPEO has endorsed The Small Business Efficiency Act of 2011 (H.R. 2466/S. 1908), sponsored by Representatives Kevin Brady (R-TX) and Mike Thompson (D-CA), along with Senators Charles Grassley (R-IA) and Bill Nelson (D-FL). These bills clarify current federal tax law to eliminate any uncertainty about the ability of PEOs to assume liability for paying wages and collecting federal employment taxes for workers. The bill creates a voluntary certification program for PEOs (CPEOs) that meet standards of solvency and responsibility, and that maintain ongoing certification by the IRS. To be certified by the IRS, a PEO must meet stringent standards, including having no criminal record, having no unpaid taxes, and obtaining financial reviews from independent CPAs. In addition, the CPEO would post a bond for the payment of employment taxes. CPEOs must also accept sole liability for the collection of federal employment taxes with respect to worksite employees performing services for PEO clients.

WHY SHOULD CONGRESS PASS THE SMALL BUSINESS EFFICIENCY ACT?

It Protects Small Businesses: On November 8, 2011, the Treasury Inspector General for Tax Administration (TIGTA) released to the public a report on the IRS implementation of the small business health care tax credit. A key finding of this report was that small businesses working with PEOs may inappropriately become the target of IRS compliance programs, resulting in a waste of IRS resources and unnecessary IRS enforcement activities against small businesses. The Small Business Efficiency Act would address many of the concerns raised by TIGTA and provide clarity on the use of PEOs to remit federal employment taxes. Businesses that contract with certified PEOs would be assured that they would not be liable for employment taxes when the PEO has accepted that responsibility. That is why the National Federation of Independent Business said, “PEOs provide important resources to small businesses and we believe with this clarification, our member businesses will be more likely to take advantage of the services of PEOs.”

 It Promotes Good Government: CPEOs would facilitate tax administration by reducing the number of returns processed and by reducing errors in calculating employment taxes. In addition, the bill would improve compliance by accelerating the timing of collection of employment taxes because CPEOs deposit taxes more quickly than their small business clients. Both Presidents Obama and Bush have included comparable proposals in their budgets and TIGTA has called for legislation that would certify PEOs with conditions like those contained in the Small Business Efficiency Act.

The National Association of Professional Employer Organizations (NAPEO), the national trade association for the PEO industry with approximately 350 PEO members operating in all 50 states, representing more than 90% of the industry’s $68 billion in revenues, has endorsed HR 2466, the Small Business Efficiency Act of 2011.  NAPEO’s PEO members range in size from start-up PEOs to large, publicly held companies with years of success in the industry.

NAPEO stated: “Federal tax law has not kept pace with changes in human resource management and current law regarding the withholding and remitting of employment taxes is outdated, ill suited, and not easily applied to the PEO arrangement. Statutory clarity is needed to update the Internal Revenue Code regarding the rights and responsibilities of a PEO to withhold and remit employment taxes. Clarification of the PEO and small business client regarding tax responsibilities will improve compliance and provide certainty for the small business clients. The Small Business Efficiency Act (H.R. 2466) introduced by Congressmen Kevin Brady (R, TX) and Mike Thompson (D, CA), would clarify the rights and responsibilities of PEOs with regard to withholding and remitting payroll taxes and improve tax compliance.  NAPEO has endorsed this legislation.“

The Small Business Efficiency Act of 2011, H.R. 2466, would provide clear rules for Professional Employer Organizations (PEOs) that are voluntarily certified by the IRS to collect and remit federal employment taxes for their small business clients. It will provide certainty for small businesses that use certified PEO services and will allow those small businesses to do what they do best- focus on their core business, grow their businesses, and create more jobs.

Learn more about how Professional Employer Organizations support small business.

Representative Kevin Brady and Representative Mike Thompson invite their colleagues to join as a co-sponsors of this important legislation to help America’s small businesses and their employees.

Representatives Rob Andrews, Tim Bishop, Dennis Cardoza, Blake Farenthold, Nan Hayworth, Wally Herger, Sam Johnson, Pete Olson, William Owens, Erik Paulsen, Ted Poe, Tom Reed, Paul Tonko, and Allen West join Representatives Brady and Thompson as co-sponsors of the Small Business Efficiency Act of 2011.

Letter from cosponsors Rep. Kevin Brady and Rep. Mike Thompson: Ease Regulatory Burdens for Small Business and Improve Tax Compliance:

Letter of support from NFIB Senior Vice President of Public Policy, Susan Eckerly