Becoming a Professional Employer Organization (PEO) or Employer of Record (EOR) can allow you to provide value to your customers and generate meaningful revenue, but there are several compliance requirements to keep in mind while creating your new offering. Here are 7 important things to consider should you decide to become a PEO or EOR.
The very first thing you should do, if you haven’t already, is to consider the type of company you’re going to create, from a legal perspective. When you launch a PEO/EOR you’ll want to ensure that your corporate structure and reporting requirements are clear. For example, if you want to share liability with your customers you’ll want to establish yourself as a PEO, or if you want to take on the legal liability completely you’ll want to become an EOR.
While most PEOs and EORs set up their new entity as a Limited Liability Company (LLC), you will want to do what’s best for your specific scenario so we encourage you to touch-base with your corporate counsel as well as your accountants.
Once you determine your corporate and accounting structure, then you’re ready to register for a new FEIN (Federal Employment Identification Number). The FEIN is how government agencies keep track of a business. The FEIN essentially serves as the “business entity” that the employees of your PEO/EOR program are employed by. You may already have an FEIN for your existing business, but when you create a PEO or EOR program, we recommend that you create a net-new FEIN.
By creating a new and different FEIN, you can separate the workers on your PEO or EOR from your internal employees. This is mainly because your needs for payroll, benefits, and more might differ for your internal employees compared to your external employees. You may also wish to insure your new entity differently from how you insure the entity that your internal employees are on.
When you launch a new PEO or EOR your offer letters, waivers, and onboarding documents will be different from what you collect from your internal employees. You should work with your employment counsel to create templates for the paperwork that you want to collect from each employee on the PEO/EOR.
It’s easy for employees to complete and sign their paperwork directly in the onboarding experience with Zeal’s custom paperwork functionality. Standard items like withholding paperwork can also be collected in the employee onboarding experience. Zeal’s onboarding component makes it simple to display and collect the correct forms for each employee based on their work and home location.
If you are operating as a PEO, the customer that partners with you is also sharing the employment responsibility of the worker. You should consider having your counsel draft contracts detailing the shared responsibility in the employment relationship.
As an employer, you are responsible for verifying that your employees are eligible for employment in the United States. The process of doing this is called the Employment Eligibility process, which comes with the requirement for the employee and the employer to complete a Form I-9 and review identification documents to determine eligibility.
To make this process simple, Zeal has launched a Remote I-9 product, which allows employers to effortlessly complete the Employment Eligibility process.
As an employer, it’s important for you to manage notices and documents from tax agencies, garnishment agencies, and other government entities. An easy way to streamline handling physical mail is to register for a virtual mailbox service such as LegalZoom Virtual Mail.
A virtual mailbox provider will receive and scan each document for you, delivering you a digital version of your mail. This makes it easy for you to act when you receive important notices. For example,child-support garnishment notices, require fast turnaround for employers to implement, and come with hefty penalties for non-compliance.
As a PEO or EOR, Federal and state regulations may require you to offer health insurance and 401K to workers.
For example with healthcare insurance, Applicable Large Employers (ALE’s) are companies who employ the equivalent of 50 or more full-time employees. ALE’s must offer a healthcare insurance plan to at least 95% of their workers. With Zeal’s integrated benefits offering, you can rely on Zeal to provide the benefits, reporting, ACA and COBRA compliance, and much more.
In California, the CalSavers Act requires employers with 5 or more employees to provide a 401K program or to join the state-program. With Zeal’s integrated 401K program it’s no additional effort on your part to offer a world-class 401K program to employees.
As you expand geographically with your PEO/EOR services, you will need to register for taxes for every new tax jurisdiction you employ workers in. Each tax you register for will come with codes, rates, and deposit frequencies for your taxes.
An Agent of Record service such as Middesk, makes it easy for you to outsource tax registration processes. Simply input into Middesk the taxes you need to register for, and Middesk assists with the end-to-end registration process.
Zeal’s modern payroll platform alerts you each time you need to register for a new tax based on an employee moving locations, or working at a new work-site. This allows you to have a single source of truth for tax registrations.
This is not a comprehensive list of considerations for becoming a PEO or EOR, but if you follow these tips and use a payroll platform, like Zeal, that’s tailor-made for HR service providers then you should be able to create your program with ease. If you’re interested in creating a PEO or EOR, contact us and we can provide you with additional guidance.
Mistakes that trigger compliance audits/fines include: failing to complete/re-verify I-9/E-Verify for employees, misclassifying employees as contractors (or vice versa), not withholding appropriate taxes, failing to report new hires, not paying minimum wage or overtime, failure to provide required pay-stubs, missing child-support garnishments for contractors, incorrect 1099 or W-2 filings. Fines vary but can be significant (e.g., more than $28,000 per ineligible W-2 hire).
If your business model, client demands, or regulatory environment changes and you decide to transition workers from 1099 to W-2 (or the reverse in rare cases), you need a solution that handles new onboarding (tax/wage/eligibility paperwork), modifies pay/deductions workflows, updates your pay-roll tax engine, and adjusts your billing/invoicing logic. A flexible platform built for both classification types ensures you avoid patchwork systems. Zeal supports both W-2 and 1099 at scale.
For on-demand marketplaces and staffing operations where speed matters (shifts change, high turnover), you should aim to complete onboarding (document collection, eligibility check, tax forms) in minutes, not days. A streamlined and unified mobile/remote onboarding flow helps. Zeal supports mobile remote I-9/E-Verify and e-signature onboarding to accelerate this.
Many general payroll vendors are built for “one employer, one location, one schedule” scenarios — not high-volume, many-workers, multi-location gig models. They often lack: onboarding workflows tailored to high-volume staffing, automated classification support (W-2/1099), multi-jurisdiction tax engines, fast payouts (instant, paycards), billing and receivable integration, and worker self-service portals. By contrast Zeal is built for staffing/gig scale.
In on-demand or staffing operations where a worker may live in one state, work in another, or travel across multiple jurisdictions in a week, compliance becomes significantly more complex. You must manage: minimum wage requirements differing by state/city, overtime rules by jurisdiction, tax withholding/residency/work-state issues, unemployment/worker‐comp jurisdictional issues. A robust solution will dynamically capture worker location info at onboarding and at each shift, determine applicable rules, and automate pay accordingly.
For W-2 employees you must ensure:
Also ensure you capture worker’s multiple work locations or shifts if they cross jurisdictions (for tax/withholding purposes).
At minimum you should:
You may also want to collect a Form I-9 from your workers and have their employment eligibility verified through E-Verify. While this is not required we are seeing that enforcement of employment eligibility varies by administration.
Worker classification hinges on the “employee vs independent contractor” analysis. Under U.S. Department of Labor (DOL) final rule effective March 11, 2024 (regulation at 29 CFR 795), six key factors apply:
In staffing/gig firms you must apply this test consistently and document your decision. Misclassification can lead to compliance violations and major fines (for example, for missing minimum wage or overtime protections when a worker should have been W-2).
For staffing companies and marketplaces working with gig or on-demand labor, the onboarding phase is a critical risk point. Key risks include: mis-classifying a worker (i.e., treating a W-2 employee as a 1099 contractor), failing to complete a compliant I-9 / E-Verify check for W-2 workers, not collecting correct tax forms (W-4 for employees, W-9 for contractors), lacking documentation of worker certifications or licenses, and failing to collect or monitor multijurisdictional data (worker’s residence, work location, shift locations) that will affect tax & wage compliance. Additionally, companies can use the onboarding process to mitigate other compliance risks such as displaying labor posters and onboarding to faster payment methods. By automating onboarding workflows you reduce manual errors, accelerate worker start-time, and build a more compliant foundation.
Share this:
Zeal is a financial technology company, not an FDIC insured depository institution. Banking services provided by Bangor Savings Bank, Member FDIC. FDIC insurance coverage protects against the failure of an FDIC insured depository institution. Pass-through FDIC insurance coverage is subject to certain conditions.
Mastercard® Debit Card is issued by Bangor Savings Bank, Member FDIC, pursuant to license by Mastercard International Incorporated. Mastercard is a registered trademark, and the circle design is a trademark of Mastercard International Incorporated. Spend anywhere Mastercard is accepted.
.avif)
