Taxes Can Be Taxing for PEOs Without PrismHR

By PrismHR

By Chris Babigian & James Tehrani

Tax Day 2024 has come and gone, and most employees won’t be thinking about taxes again till next April.

For employers, however, managing payroll taxes is a never-ending process, and compliance is paramount. The IRS assessed businesses with penalties totaling $8.6 billion in 2023 for issues with federal employment taxes, according to recently released data.

Compliance is also complicated and often fluid based on shifting political objectives, legislative swings, trends and budgetary needs. In addition to federal taxes, employers deal with thousands of state and local payroll taxes, each with their own distinct requirements. And the rules of the game are ever-changing, with new, eclectic taxes and nuanced modifications popping up every year.

From child-care contributions to mobility taxes and much more, small and medium-sized businesses (SMBs) count on Professional Employer Organizations (PEOs) to help keep them in compliance. That’s why PrismHR is constantly monitoring new legislation to help!

Let’s look at some of the recent tax-related updates to see just how quickly complexity can enter the mix:

Vermont Child Care Contribution Tax

The Vermont Child Care Contribution Tax is one of the newest payroll taxes set to take effect this year. Starting July 1, employers in the state will be liable for the 0.44% CCCT on employee wages. An interesting dimension of the tax is that employers can shift up to 25% of the CCCT (0.11%) to any or all employees at their discretion.

The newly established Child Care Contribution Special Fund will manage proceeds from the tax designed to subsidize family child-care costs in the state.

Proliferation of Special Funds

The CCCT, though unique to Vermont, is part of a broader trend of jurisdictions increasingly instituting new payroll taxes to fund special projects in lieu of or in addition to a traditional income tax. Some other recent examples include:

  • Washington Cares Fund: Billed as a “first of its kind” program, the Cares Fund is a 0.58% employee tax that went into effect on July 1, 2023, to support long-term-care services.

  • Eugene (Oregon) Community Safety Payroll Tax: An employee and employer tax that began in 2021, the Community Safety tax was designed to address a shortage in funding for police, fire, mental health and homeless services. This tax consists of a flat employer rate of 0.21% as well as an employee tax with a variable rate based on earnings.

  • Portland (Oregon) Metro Supportive Housing Services: Employees expected to earn over $200,000 who live or work within the district are subject to a 1% withholding. Designed to support people living below the poverty line, employers were required to begin withholding on subject employees in 2022.

Paid Family Medical Leave

While many new payroll taxes are funding unique initiatives, the Paid Family Medical Leave is the latest copycat trend.

Over the next several months, employers and employees in Maryland, Delaware and Maine will be subject to their state’s iterations of the PFML payroll tax. Minnesota will join them in 2026. This follows on the heels of recent adoption in Oregon and Colorado in 2023 and many other jurisdictions before that, including some with alternative or private plan approaches.

Many Paid Family Medical Leave programs have similar structures, but each has its own distinct rates, wage bases, reporting requirements and opt-out mechanics. Most, but not all, have employee and employer components as well. In many jurisdictions, employers are only subject to their portion if they can be classified as a large employer. Those standards vary by state.

For instance, in Oregon, the standard for a “large employer” is a company with 25 or more employees, which is determined based on monthly averages. In Colorado, the standard is 10 or more employees who were employed at least 20 weeks in the prior year.

Constant Change

Keeping up with tax laws is a constant struggle. Year over year, pre-existing taxes are also revised and restructured based on several factors mentioned earlier. Some examples from the past 12 months include:

  • Kenton (Kentucky) Occupational License Tax: As of Jan. 1, this tax is now composed of three distinct subcomponents—“General,” “Mental Health” and “Senior Citizen”—each with different rates and accrual caps.

  • Colorado Paid Family Medical Leave: Colorado modified the definition of taxable wages just for paid family medical leave purposes. This change also went into effect Jan. 1 to create a distinct wage base for PFML that, unlike the State Unemployment Tax Act (SUTA), does not exempt Section 125 contributions from withholding.

PEO Complexities

In addition to managing the usual complexities of payroll tax compliance, PEO service providers also must clear one additional hurdle—determining whether any new tax is calculated and reported under the PEO employer or SMB client. While seemingly simple, rules vary and can often lead to unintended results if a jurisdiction hasn’t properly considered the impact of the PEO relationship.

For example, New York directs PEOs to calculate the MCTMT by SMB client, but then report the tax under the PEO umbrella. Conversely, the PFML statute in Oregon was silent on the PEO relationship. This prompted NAPEO to back pending legislation clarifying the roles and responsibilities of each party.

The PEO Value Proposition

For SMBs, self-navigating the ever-changing payroll tax nuances from state to state can be a tricky and risky proposition. SMBs turn to PEOs to help them navigate these potential pitfalls. Can your technology provider help with taxes?

If not, that’s why PrismHR is here. Our technology helps more than 80,000 small businesses stay in compliance while removing the guesswork for PEOs through our technology and decades of experience and expertise. Taxes can be taxing, but they don’t have to be with PrismHR.

Learn more about how PrismHR can help manage tax compliance.

Chris Babigian is PrismHR’s compliance strategy manager. A graduate of Boston University School of Law with a focus in taxation, Chris spent five years handling motions, appellate briefs and trial discovery for a civil litigation firm. In 2014, Chris transitioned to PrismHR, where he translates regulatory requirements into software solutions.

James Tehrani is PrismHR’s digital content marketing manager. He is an award-winning writer and editor based in the Chicago area.