5 Tips to Avoid State Fines When Exiting a PEO

June 4, 2024 | Denise Gelfand

Exiting a Professional Employer Organization (PEO) can be a complex process filled with potential pitfalls that could result in costly state fines if not managed correctly. It’s crucial to understand the nuances of state regulations for tax reporting, unemployment insurance, and legal compliance. This article provides five key tips to help businesses avoid state fines and maintain compliance when exiting a PEO.

1) Identify Your State’s Reporting Requirements

Determine if your state is a PEO reporting state or a client reporting state. In PEO reporting states, the PEO is the employer of record and utilizes its EIN and SUTA rate for state unemployment tax filings. In client-reporting states, the client retains their EIN and SUTA rate, with the PEO filing under the client’s SUI account.

2) Complete Payroll Tax Registrations

In PEO reporting states, it’s imperative to initiate the registration process for your state UI identification number as soon as you decide to terminate the PEO relationship. If you had an SUI number previously, ensure it is reinstated so you are ready for filings and payments once the transition is complete.

In client reporting states, ensure the PEO has completed all necessary quarterly filings attributed to your account and confirm your new payroll provider will manage these filings going forward.

Obtain all pertinent records from the PEO before transitioning, including payroll records and tax withholding information.

3) Close Accounts in States with No Employees

States require quarterly and annual filings for accounts that remain open, regardless of employee presence. The state doesn’t care if you’re paying someone there or not. As long as you have an active account, you’re liable for quarterly and annual filings. To avoid paying fines and penalties for non-filing, close your account with any state where you no longer have employees.

4) Get a Registered Agent in the Remaining States

Many states require a physical in-state address for receiving important legal documents. While you can use an in-state employee as a registered agent, it is not recommended for several reasons. First, the employee can relocate, leading to complications in document delivery. Second, it can compromise your employee’s privacy. Finally, it can pose confidentiality concerns having an employee receive sensitive legal documents about the company or another employee.

We highly recommend utilizing a service that maintains registered agents in every state, understands the nuances of registered agent duties, and ensures legal compliance.

5) Determine Which States Require Secretary of State Registration

After setting up standard payroll tax accounts, such as withholding and unemployment accounts, verify if you need a Secretary of State or foreign qualification registration in any state where you have employees. This registration is required in about 30 states regardless of whether you’re using a PEO or a standard payroll provider.

 

Ensuring compliance with these regulations is crucial to avoid potential fines and maintain smooth business operations. Utilizing a platform like AbstractOps can automate tax registrations, state filings, and registered agent requirements, thereby eliminating the financial risk and uncertainty of state compliance.

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