Professional Employer Organizations FAQ
- PEO Basics
What is a professional employer organization (PEO)?
A professional employer organization (PEO) is a business that has an agreement or a contract with one or more employers (client companies) to manage the employers’ human resources matters, such as worker’s compensation, payroll and payroll taxes, employee benefits, and unemployment insurance.
Are PEOs required to have a special license or to register in the State of Indiana?
Pursuant to Indiana Code 27-16, a Professional Employment Organization (PEO) doing business in Indiana must register with the Indiana Department of Insurance. Visit the Indiana Department of Insurance’s website for more information about PEO registration: http://www.in.gov/idoi/2360.htm.
How do PEOs work?
PEOs work through a co-employment relationship with the client company. “Co-employment” means that the employees work for both the client company and the PEO. The client company maintains control of all business decisions and operations, while the PEO manages all personnel-related functions, such as payroll and related taxes, benefits administration, common human resources functions, worker’s compensation, I-9s, W-2s, etc.). The PEO becomes the employer of record of the client company’s employees for tax and insurance purposes.
Who is responsible for state unemployment insurance taxes in the client company-PEO relationship?
As the employer for employment taxes and employee benefits, the PEO assumes responsibility and liability for payment of state unemployment insurance taxes. However, please note that, due to the co-employment relationship, the client company is ultimately responsible for a portion of unemployment insurance taxes paid on every employee’s wages – whether the client company considers those employees to be “theirs” or the employees of one of the PEO’s other client companies.
What if the PEO does not pay the client company’s taxes? Who is ultimately responsible?
The client company and the PEO are jointly and severally liable for any unpaid unemployment insurance taxes until those taxes are paid in full. A 2% penalty rate is assessed on top of the merit rate if the tax debts remain unpaid.
What options do PEOs have to report to the Department and to pay unemployment insurance taxes?
Indiana law allows a PEO to choose one of two options for reporting to the Indiana Department of Workforce Development and for paying unemployment insurance taxes: (1) PEO level or (2) client level. See below for Frequently Asked Questions about PEOs that report at the PEO level and PEOs that report at the client level.
How can an employer determine whether a PEO reports at the client level or at the PEO level?
The Department recommends that an employer request information about how the PEO reports to the Department from the PEO when the employer is negotiating a service agreement with the PEO. The Department also recommends that the employer periodically request information about how the PEO reports to the Department from the PEO throughout the tenure of the service agreement because a PEO may be able to change how it reports to the Department. A client company can view its SUTA accounts by logging onto the Employer Self Service System to determine if its legal information has been updated (client level reporting) or if its old account is in a void and transferred status (PEO level reporting).
Can a PEO change how it reports to the Department?
A PEO that reports at the client level cannot change its election. However, a PEO that reports at the PEO level can change to reporting at the client level by contacting the Department.
What document is an employer required to file with the Department when it joins a PEO?
When an employer joins a PEO, it must submit SF46800 SUTA Account Number Termination or Transfer Request to the Department. Once form SF46800 is filed, the employer is considered a client company of the PEO.
Is the PEO required to file any document with the Department when an employer joins a PEO or terminates the co-employment relationship?
The PEO must submit SF52099 PEO Addition/Deletion Form to the Department when a new client company is added to the PEO and when a client company terminates from the PEO.
What document is the client company required to file when it terminates its co-employment relationship with a PEO?
If the client company will continue to employ individuals in the State of Indiana, the client company must submit a SF2837 SUTA Account Number Registration and Disclosure Form. If the client company will no longer employ individuals in the State of Indiana, it must submit SF46800 SUTA Account Number Termination or Transfer Request.
Where can I go to get more information about PEOs?
For more information, or for questions that are not answered in the sections below, please contact the Department's PEO liaison at ProEmployerClearance@dwd.in.gov.
- PEO Level Reporting
What happens when a client company joins a PEO that reports at the PEO level?
If the PEO reports at the PEO level, the PEO has one account for reporting unemployment insurance taxes for all of its client companies. When an employer joins a PEO, the employer becomes a client company of the PEO. The Department will process an acquisition for the PEO and a disposition for the client company because the PEO has become a co-employer of the client company’s employees. Upon termination of the co-employment relationship between the PEO and the client company, the Department will process a partial disposition for the PEO and a partial acquisition for the client company because the client company must acquire back its employees from the PEO when the co-employment relationship is severed. At that time, the Department will assign a new State Unemployment Tax Account (SUTA) number to the client company.
Termination from a PEO has several important implications to the new SUTA account of the employer, both current and future. On a basic level, the implications include experience balance transfers, assigned merit rates based upon experience, liability for unpaid unemployment insurance tax debts of other client companies of the PEO, and benefit charges for remaining employees of the PEO. Please review the questions and answers below for more information.
What is a partial acquisition?
For purposes of unemployment insurance tax laws, a partial acquisition is when one entity acquires a percentage of another entity’s business. In a PEO-client company relationship, this happens when a client company leaves the PEO. Because the PEO was a co-employer of the employees with the client company, the client company must acquire its employees back when it leaves the PEO. Thus, the Department must hold a partial acquisition.
What is a partial disposition?
For purposes of unemployment insurance tax laws, a partial disposition is when one entity disposes of a percentage of its business to another entity. In a PEO-client company relationship, this happens when a client company leaves the PEO. Because the PEO was a co-employer of the employees with the client company, the PEO must dispose of the client company’s employees when the client company leaves the PEO.
How is a client company’s State Unemployment Tax Account (SUTA) affected when it enters into a co-employment relationship with a PEO?
The Department will transact a complete acquisition from the client company’s account to the PEO’s account. The Department will notify the PEO and the client company of the acquisition by sending each of them a Notice of Acquisition/Disposition. All of the client company’s experience balance will transfer into the PEO’s experience balance, which will result in the client company’s account being put into a non-revivable status. Upon termination of the co-employment relationship between the PEO and the client company, the Department will process a partial disposition for the PEO and a partial acquisition for the client company because the client company must acquire back its employees from the PEO when the co-employment relationship is severed. At that time, the Department will assign a new SUTA number to the client company.
How is the PEO’s State Unemployment Tax Account (SUTA) affected when it adds a client company?
The experience balance of the client company (whether positive or negative) will be transferred to the PEO’s account. The date that the acquisition occurred will determine how the merit rate will be calculated. If the acquisition is effective during the current year, it will not result in a recalculation of the current year’s rate. If the effective date of the acquisition was prior to the current year, the Department will recalculate the PEO’s merit rate and will send a notice of the merit rate recalculation to the PEO. The PEO will also be responsible for subsequent benefit charging of the employees it acquired from the new client company, as well as predecessor liabilities that remain unpaid by the client company.
What are the deadlines for properly reporting the initiation or termination of the PEO-client company co-employment relationship to the Department?
Both parties (meaning both the PEO and the client company) are to notify the Department of the initiation or termination of the PEO-client company agreement no later than 15 days after the end of the quarter in which the agreement became effective or terminates.
Who is responsible for paying any delinquent unemployment insurance taxes owed by the client company before the client company joined the PEO?
Once the client company joins the PEO, both the client company and the PEO are jointly and severally liable for any unpaid unemployment insurance tax debts owed by the client company (also called a “predecessor liability”) until those debts are satisfied in full. A 2% penalty rate is assessed on top of the merit rate if the taxes remain unpaid after their due date.
This means that, if you are an existing client company of a PEO and that PEO takes on a new client company that owes delinquent unemployment insurance tax debts, you will be jointly and severally liable for those delinquent unemployment insurance tax debts until they are satisfied. “Jointly and severally liable” means that the delinquent unemployment insurance tax debts are your debts until either you, the PEO, or another client company (or a combination thereof) pay off the debts in full. This also means that, if you are a prospective client company and you join a PEO that owes delinquent unemployment insurance tax debts, you will become jointly and severally liable for those debts until they are satisfied.
If I join a PEO, will I be responsible for another employer’s delinquent unemployment insurance tax debts?
Yes. When you join a PEO, you enter into a co-employment relationship with the PEO and all of the PEO’s other client companies. As a result of the co-employment relationship, you take on the unemployment insurance tax debts of the PEO and all of its other client companies. This means that, if you are an existing client company of a PEO and that PEO takes on a new client company that owes delinquent unemployment insurance tax debts to the Department, you will be jointly and severally liable for those delinquent unemployment insurance tax debts until they are satisfied. “Jointly and severally liable” means that the delinquent unemployment insurance tax debts are your debts until either you, the PEO, or another client company (or a combination thereof) pay off the debts in full. This also means that, if you are a prospective client company and you join a PEO that owes delinquent unemployment insurance tax debts, you will become jointly and severally liable for those debts until they are satisfied.
How can a prospective client company determine if a PEO or one of the PEO’s other client companies has unpaid unemployment insurance tax debts that are owed to the Department prior to entering into the co-employment relationship?
The prospective client company can ask the PEO to request a letter of good standing to provide to the prospective client company. The PEO can send its request for a letter of good standing to the Department at ProEmployerClearance@dwd.in.gov.
Can delinquent unemployment insurance tax debts be established during the client company’s co-employment relationship with a PEO?
Yes. Delinquent unemployment insurance tax debts, or “predecessor liabilities”, can be established during the co-employment relationship. This can happen under a number of circumstances. Most often, a delinquent unemployment insurance tax debt is created during the co-employment relationship when the PEO takes on a new client company that owes delinquent unemployment insurance tax debts or when the Department makes a determination that delinquent unemployment insurance tax debts are owed by the PEO and its client companies.
If the client company terminates its relationship with the PEO, it will be jointly and severely liable for payment of the predecessor liabilities that were established on or before the date of termination by the PEO or any of the PEO’s other client companies. “Jointly and severally liable” means that the delinquent unemployment insurance tax debts are your debts until either you, the PEO, or another client company (or a combination thereof) pay off the debts in full. Once the client company terminates the co-employment relationship, the client company is not liable for any unemployment insurance tax debts established after the date of termination by the PEO or one of its client companies.
What notices will a terminated client company receive from the Department other than the Notice of Acquisition/Disposition?
The former client company will receive SF535 Statement of Benefit Charges and SF640R Separating Base Period Notices for all employees under the PEO. When a client company joins a PEO, it becomes a co-employer of all of the other client companies’ employees in the PEO. This means that all of the client companies’ employees are commingled under the co-employment relationship with the PEO. Additionally, when a client company leaves a PEO, it acquires back a percentage of the PEO through the partial acquisition process described above. This means that the client company is a permanent successor to the PEO and all of its clients under Indiana law. As a result of these two events (the co-employment relationship and the partial acquisition that results when that relationship is terminated), the former client company will receive SF535 Statement of Benefit Charges and SF640R Separating Base Period Notices for all employees in the PEO. The former client company will receive these notices as a potential base period employer and the PEO will receive the notices as the separating employer. For purposes of this explanation, a “base period employer” is an employer who is potentially liable for a percentage of the employee’s unemployment insurance claim based on wages paid to the employee during the employee’s unemployment insurance claim base period. The former client company is potentially liable as a base period employer in this situation for the PEO’s employees because the former client company is a successor to the PEO, meaning that the former client company acquired a percentage of the PEO when it terminated the co-employment relationship.
If you are a former client employer who has received a Separating Base Period Notice for employees who work for a PEO, you can check the box on the Notice that corresponds to your previous relationship with the PEO. The PEO, as the separating employer, is responsible for responding to the Separation Base Period Notice and providing details about the employee’s separation from the PEO. If the employee is awarded unemployment insurance benefits, you will pay for a portion of the charges as a successor base period employer and those charges will appear on the SF535 Statement of Benefit Charges. This will happen for as long as the wages of the employee are usable in his/her claim. Once the wages of that employee are no longer usable to set up a claim for unemployment insurance, you will no longer see charges to your account.
I terminated my co-employment relationship with a PEO. Why am I receiving benefit charging notices and separation notices related to individuals who are not employed by me?
When you joined the PEO, you entered into a co-employment relationship with the PEO and all of the PEO’s other client companies. Because of the co-employment relationship, you were responsible for a portion of unemployment insurance taxes paid on every employee’s wages – whether you considered those employees to be “yours” or the employees of one of the PEO’s other client companies. When you terminated your co-employment relationship with the PEO, you acquired back a portion of the PEO and are now considered to be a successor of the PEO under Indiana law. As a result of these two events (the co-employment relationship and the partial acquisition that results when that relationship was terminated), you will receive SF535 Statement of Benefit Charges and SF640R Separating Base Period Notices for all employees in the PEO. You will receive these notices as a potential base period employer and the PEO will receive the notices as the separating employer. For purposes of this explanation, a “base period employer” is an employer who is potentially liable for a percentage of the employee’s unemployment insurance claim based on wages paid to the employee during the employee’s unemployment insurance claim base period. You are potentially liable as a base period employer in this situation for the PEO’s employees because you are a successor to the PEO, meaning that you acquired a percentage of the PEO when you terminated the co-employment relationship.
When you receive a Separating Base Period Notice for employees who work for a PEO, you can check the box on the Notice that corresponds to your previous relationship with the PEO. The PEO, as the separating employer, is responsible for responding to the Separation Base Period Notice and providing details about the employee’s separation from the PEO. If the employee is awarded unemployment insurance benefits, you will pay for a portion of the charges as a successor base period employer and those charges will appear on the SF535 Statement of Benefit Charges. This will happen for as long as the wages of the employee are usable in his/her claim. Once the wages of that employee are no longer usable to set up a claim for unemployment insurance, you will no longer see charges to your account.
Upon termination of the co-employment relationship, can the client company use its prior SUTA number?
No. Upon termination of the co-employment relationship, the Department will transact a partial disposition out of the PEO’s account. The employer (formerly the client company) will qualify for a new SUTA as a partial acquirer of the PEO. At this time, the employer should not use the Employer Self Service System to establish a new account. The client company should submit SF2837-SUTA Account Number Registration and Disclosure Form if it will continue employing individuals in the State of Indiana so that the Department can assign create a new SUTA and assign a merit rate to the employer.
How is the percentage of transfer calculated when the co-employment relationship is terminated?
The percentage is calculated based upon the percentage of the workforce that transfers out of the PEO and to the client company. Generally, if the client company had a large number of employees relative to the size of the PEO before it entered into a co-employment relationship with the PEO, it will acquire a higher percentage of the PEO when the client company exits the PEO. If the client company had a small number of employees relative to the size of the PEO before it entered into a co-employment relationship with the PEO, it will likely acquire a smaller percentage of the PEO when the client company exits the PEO.
What merit rate is the Department legally required to assign to a terminated client company of a PEO reporting at the PEO Level?
The former client company (now an employer) will inherit the merit rate of the PEO for the year in which the partial acquisition took place (meaning the year in which the client company terminated the co-employment relationship). The percentage of the PEO’s experience balance that transfers to the former client company will be a part of the former client company’s merit rate calculation for subsequent years.
- Client Level Reporting
What happens when a client company joins a PEO that reports at the client level?
If the PEO is reporting at the client level, the PEO establishes or continues to report under a client company’s existing unemployment insurance tax account for the duration of the co-employment relationship. Pertinent legal information is updated including changing the name and address of the client company to the PEO’s name and address, entering the client company’s business name as the “Doing Business As”, or DBA, and changing the Federal Employer Identification Number (FEIN) to the PEO’s FEIN. The client company’s SUTA number remains intact. Upon termination from the PEO, the business name, address, and FEIN are restored back to the client company’s original information.
How will the Department establish an account for a client company that does not have an existing State Unemployment Tax Account (SUTA) when that client company joins a PEO that reports at the client level?
The Department will establish a new SUTA for the client company that contains the legal information of the PEO, such as the PEO’s name, address, and Federal Employer Identification Number. The client company’s name will be listed as the “Doing Business As”, or DBA.
How are the PEO and the client company notified when the Department establishes a client level reporting account for the client company?
The Department will notify both the PEO and the client company by a standard letter.
What merit rate is the Department legally required to assign to the client company’s account when the client company terminates its relationship with a PEO reporting at the client level?
If the client company had a State Unemployment Tax Account (SUTA) prior to joining the PEO, the merit rate will remain the same for the year in which the co-employment relationship was terminated. In other words, that former client company will maintain the PEO’s merit rate for the year in which the co-employment relationship was terminated. If the client company did not have a SUTA prior to joining the PEO, the Department will assign the client company the new employer rate that is set by Indiana law. Other conditions may exist that affect the merit rate assigned to the former client company including, but not limited to, the assessment of a penalty rate due to non-compliance, the processing of a single enterprise, or an acquisition.
What happens to the client company’s account when the co-employment relationship with a PEO reporting at the client level is terminated?
When the Department receives a report that the co-employment relationship between the client company and a PEO reporting at the client level has terminated, the Department will update the legal name, Federal Employer Identification Number (FEIN), and address to that of the client company after any and all outstanding unemployment insurance tax debts are satisfied.
