Title 26 — Internal Revenue CodeRelease 119-73
§7705 Certified Professional Employer Organizations
Title 26 › Subtitle Subtitle F— Procedure and Administration › Chapter 79— DEFINITIONS › § 7705
Summary
A certified professional employer organization (CPEO) is a company that handles payroll and employment taxes for other businesses and has been approved by the IRS. To get certified, it must meet IRS standards on things like tax history, experience, and annual financial audits, use accrual accounting, and keep the IRS informed of changes. It must post a bond for payment of employment taxes — the greater of $50,000 or 5 percent of its prior-year employment tax bill, capped at $1,000,000 — and provide audited financial statements plus a quarterly CPA-checked statement that it is paying its employment taxes. The IRS can suspend or revoke the certification if these rules are not met, and it publishes the names of certified organizations and of those whose certification was pulled. A "work site employee" is someone who works for a customer under a written contract where the CPEO takes responsibility for paying wages, handling employment taxes, providing benefits, and keeping records — whether or not the customer pays the CPEO — and at least 85 percent of the workers at that work site must be covered by such contracts. Being a CPEO does not change who counts as the employer for other tax purposes except as needed for the special payroll rules.
Full Legal Text
Title 26, §7705
Internal Revenue Code — Source: USLM XML via OLRC
(a)For purposes of this title, the term “certified professional employer organization” means a person who applies to be treated as a certified professional employer organization for purposes of section 3511 and has been certified by the Secretary as meeting the requirements of subsection (b).
(b)A person meets the requirements of this subsection if such person—
(1)demonstrates that such person (and any owner, officer, and other persons as may be specified in regulations) meets such requirements as the Secretary shall establish, including requirements with respect to tax status, background, experience, business location, and annual financial audits,
(2)agrees that it will satisfy the bond and independent financial review requirements of subsection (c) on an ongoing basis,
(3)agrees that it will satisfy such reporting obligations as may be imposed by the Secretary,
(4)computes its taxable income using an accrual method of accounting unless the Secretary approves another method,
(5)agrees to verify on such periodic basis as the Secretary may prescribe that it continues to meet the requirements of this subsection, and
(6)agrees to notify the Secretary in writing within such time as the Secretary may prescribe of any change that materially affects the continuing accuracy of any agreement or information that was previously made or provided under this subsection.
(c)(1)An organization meets the requirements of this paragraph if such organization—
(A)meets the bond requirements of paragraph (2), and
(B)meets the independent financial review requirements of paragraph (3).
(2)(A)A certified professional employer organization meets the requirements of this paragraph if the organization has posted a bond for the payment of taxes under subtitle C (in a form acceptable to the Secretary) that is in an amount at least equal to the amount specified in subparagraph (B).
(B)For the period April 1 of any calendar year through March 31 of the following calendar year, the amount of the bond required is equal to the greater of—
(i)5 percent of the organization’s liability under section 3511 for taxes imposed by subtitle C during the preceding calendar year (but not to exceed $1,000,000), or
(ii)$50,000.
(3)A certified professional employer organization meets the requirements of this paragraph if such organization—
(A)has, as of the most recent audit date, caused to be prepared and provided to the Secretary (in such manner as the Secretary may prescribe) an opinion of an independent certified public accountant as to whether the certified professional employer organization’s financial statements are presented fairly in accordance with generally accepted accounting principles, and
(B)provides to the Secretary an assertion regarding Federal employment tax payments and an examination level attestation on such assertion from an independent certified public accountant not later than the last day of the second month beginning after the end of each calendar quarter.
(4)For purposes of the requirements of paragraphs (2) and (3), all certified professional employer organizations that are members of a controlled group within the meaning of section 414(b) and (c) shall be treated as a single organization.
(5)If the certified professional employer organization fails to file the assertion and attestation required by paragraph (3) with respect to any calendar quarter, then the requirements of paragraph (3) with respect to such failure shall be treated as not satisfied for the period beginning on the due date for such attestation.
(6)For purposes of paragraph (3)(A), the audit date shall be six months after the completion of the organization’s fiscal year.
(d)The Secretary may suspend or revoke a certification of any person under subsection (b) for purposes of section 3511 if the Secretary determines that such person is not satisfying the agreements or requirements of subsections (b) or (c), or fails to satisfy applicable accounting, reporting, payment, or deposit requirements.
(e)For purposes of this title—
(1)The term “work site employee” means, with respect to a certified professional employer organization, an individual who—
(A)performs services for a customer pursuant to a contract which is between such customer and the certified professional employer organization and which meets the requirements of paragraph (2), and
(B)performs services at a work site meeting the requirements of paragraph (3).
(2)A contract meets the requirements of this paragraph with respect to an individual performing services for a customer if such contract is in writing and provides that the certified professional employer organization shall—
(A)assume responsibility for payment of wages to such individual, without regard to the receipt or adequacy of payment from the customer for such services,
(B)assume responsibility for reporting, withholding, and paying any applicable taxes under subtitle C, with respect to such individual’s wages, without regard to the receipt or adequacy of payment from the customer for such services,
(C)assume responsibility for any employee benefits which the service contract may require the certified professional employer organization to provide, without regard to the receipt or adequacy of payment from the customer for such benefits,
(D)assume responsibility for recruiting, hiring, and firing workers in addition to the customer’s responsibility for recruiting, hiring, and firing workers,
(E)maintain employee records relating to such individual, and
(F)agree to be treated as a certified professional employer organization for purposes of section 3511 with respect to such individual.
(3)The requirements of this paragraph are met with respect to an individual if at least 85 percent of the individuals performing services for the customer at the work site where such individual performs services are subject to 1 or more contracts with the certified professional employer organization which meet the requirements of paragraph (2) (but not taking into account those individuals who are excluded employees within the meaning of section 414(q)(5)).
(f)The Secretary shall make available to the public the name and address of—
(1)each person certified as a professional employer organization under subsection (a), and
(2)each person whose certification as a professional employer organization is suspended or revoked under subsection (d).
(g)Except to the extent necessary for purposes of section 3511, nothing in this section shall be construed to affect the determination of who is an employee or employer for purposes of this title.
(h)The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.
Legislative History
Notes & Related Subsidiaries
Statutory Notes and Related Subsidiaries
Effective Date
Section applicable with respect to wages for services performed on or after January 1 of the first calendar year beginning more than 12 months after Dec. 19, 2014, see section 206(g)(1) of Pub. L. 113–295, set out as an
Effective Date
of 2014 Amendment note under section 3302 of this title. Certified Professional Employer Organization Certification Program Pub. L. 113–295, div. B, title II, § 206(g)(2), Dec. 19, 2014, 128 Stat. 4071, provided that: “The Secretary of the Treasury shall establish the certification program described in section 7705(b) of the Internal Revenue Code of 1986, as added by subsection (b), not later than 6 months before the
Effective Date
determined under paragraph (1) [see section 206(g)(1) of Pub. L. 113–295, set out as an
Effective Date
of 2014 Amendment note under section 3302 of this title].”
Reference
Citations & Metadata
Citation
26 U.S.C. § 7705
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73