If you join or leave a PEO partway through the year, some payroll taxes can start counting again from zero, and your company can pay them twice in one year. For most employees the extra cost is small. For anyone paid more than $184,500 a year, it can be thousands of dollars, and your company does not get it back. A January 1 date avoids the problem.

A PEO (professional employer organization) is an outside company that runs your payroll, taxes and benefits paperwork. Many PEOs report your employees' pay under the PEO's own tax ID. That switch of tax ID is what causes the restart.

The short version

  • What can restart: three taxes stop each year once an employee's pay reaches a cap. Each employer counts toward the cap from $0. The three are Social Security tax, federal unemployment tax (often called FUTA) and state unemployment tax (often called SUTA). Medicare tax has no cap, so it never restarts.
  • When: when your employees' pay moves to a different company's tax ID in the middle of a year, for example when you join or leave a PEO.
  • What it costs: about $42 per employee in federal unemployment tax, plus a few hundred dollars per employee in state tax if the state count restarts too. For anyone paid well above $184,500, Social Security tax can add thousands more per person.
  • Who pays: your company. A PEO typically pays the taxes with money you send it, and your company's extra share is not refunded.
  • The main way out: a PEO the IRS has certified can carry the federal count over, if a few conditions are met. State tax depends on your state and on whose state account the PEO uses.
  • What to do: aim for a January 1 start or exit date. If you want January 1, 2027, check your contract's notice deadline now. Ask the questions below before you pick a date, and run the numbers with your accountant.

How it works, in plain words

Social Security tax is 6.2% from your company and 6.2% from the employee, and it stops once an employee earns $184,500 in 2026. For 2027 the cap rises to $192,300, according to the Social Security Administration. Federal unemployment tax stops after the first $7,000 of each employee's pay. Your state's unemployment tax stops at its own cap, for example $7,000 in California and $9,000 in Texas. The federal figures come from the IRS employer tax guide. Together, Social Security and Medicare are the payroll taxes often called FICA.

The IRS counts each employer separately. If an employee's pay moves to a new tax ID on July 1, the new employer starts counting at $0, even though your company already paid the tax for the year. Only certified PEOs have a rule that lets the count carry over.

A certified PEO is one the IRS has reviewed and approved. For a certified PEO, federal law carries the Social Security and federal unemployment counts over, both when you join and when you leave. It does not cover state unemployment tax.

Flowchart: if your PEO switch takes effect on January 1, there is nothing to restart. If it is mid-year, check whether the PEO is IRS-certified. With a certified PEO that meets all four conditions (85% of staff at each site on the contract, contract reported to the IRS, certification not suspended, your company and the PEO share no owners), the federal count carries over, and for state tax you ask whether the PEO uses your state account or its own. If any condition is missed, or the PEO is not certified, plan for the count to restart and ask your accountant.
When does the payroll-tax count restart?

Example with made‑up numbers

Example with made-up numbers. Real payrolls differ. A 20-person company in California moves to a PEO that is not certified on July 1, 2026. Every employee has already earned more than $7,000 this year. One manager earns $240,000 a year, so $120,000 by June 30. Nobody else earns near $184,500.

Extra employer tax for a 20-person California company, July 1, 2026 switch (made-up numbers)
TaxPer employeeEmployeesExtra cost
Federal unemployment, 0.6% of $7,000$4220$840
California unemployment, 3.4% of $7,000, if the state count restarts$23820$4,760
Social Security, 6.2%, the manager only$3,4411$3,441
Total if every count restarts$9,041

Example with made-up numbers. Real payrolls differ. Uses 2026 rates and caps. Assumes the usual federal unemployment rate of 0.6% and California's rate for new employers. Not tax advice.

With a certified PEO that meets the conditions, the two federal lines drop to $0. The state line still depends on whose state account the PEO uses. With a January 1 date, all three lines are $0.

The manager's line is the big one. Without a restart, the new employer would tax only her next $64,500 of pay ($184,500 minus $120,000), then stop at the cap. With a restart, it taxes all $120,000 she earns from July to December. That is $55,500 more pay taxed at 6.2%.

The manager can claim her own extra Social Security tax back on her tax return, the IRS says. Your company cannot. Employees whose pay was reported under two tax IDs also get two W-2s for the year.

The catches

  • A certified PEO's carry-over has conditions. The PEO must report your contract to the IRS, its certification must not be suspended, at least 85% of your staff at each location must be on the contract (part-time staff on under 17½ hours a week and seasonal staff who work 6 months a year or less don't count against you; details below), and your company must not share owners with the PEO. If any one fails, plan for the federal count to restart.
  • Mid-year joining counts too. Joining a non-certified PEO in June can restart the count, the same as leaving one.
  • January 1 works only if every new-year paycheck is under the new tax ID. The caps count pay by the date it is paid. A paycheck for late-December work paid on January 2 counts toward the new year, so the PEO (if you are joining) or you (if you are leaving) should run it.
  • State tax is a separate question. A certified PEO does not fix it.

Questions to ask the PEO in writing

  1. Are you on the IRS list of certified PEOs? Yes: the federal count can carry over if the conditions are met. No: plan for the federal count to restart on a mid-year date. You can check the IRS list yourself.
  2. Will you report our contract to the IRS when it starts and when it ends? Yes: one condition is met. No or not sure: the carry-over may not apply.
  3. Do our employees at each location pass the 85% test? Yes: they are covered. No: nobody at a location that fails gets the carry-over.
  4. In each of our states, do you report unemployment tax under your state account or ours? Your company has its own account with your state's unemployment-tax agency, and so does the PEO. If the PEO says it uses your company's account: the state count generally keeps going, so no state restart. If it says it uses its own account: the state count can restart at $0, unless your state lets the PEO count the pay you already gave. Our guide to PEO unemployment insurance explains the two setups.
  5. Will you count the pay we already gave this year toward the state cap? Some states, such as Texas, allow this. Yes: no state restart. No: plan for the state line in the example.
  6. When we leave, will you give us each employee's pay and taxes so far this year, by state? Yes: your next payroll can check the counts. No: you can't tell what is owed twice.

How long a PEO takes to set up a company before January 1 varies, and we have no reliable figure. Ask the PEO for its timeline in writing, and count back from your notice deadline. For a January 1, 2027 date, 60 days' notice means notice by November 2, 2026; 30 days means by December 2. Notice windows and exit fees are covered in PEO contract terms and when to leave a PEO.

If you would like help comparing PEOs, including which ones are certified, we can connect you with our independent broker. Request a Consultation through our PEO quotes page. It takes several business days, because the broker gathers quotes on your actual employee list. The consultation is free to you. If you sign through the broker, he shares part of his fee with us.

The detail, for your accountant or broker

The 2026 numbers

2026 payroll tax caps
TaxRateYearly cap per employeeCan the count restart?
Social Security6.2% employer + 6.2% employee$184,500Yes, unless a certified PEO's carry-over applies
Medicare1.45% employer + 1.45% employeeNo capNo, nothing to restart
Federal unemployment0.6% for most employers (6.0% before the state-tax credit)$7,000Yes, unless a certified PEO's carry-over applies
California unemployment3.4% for new employers$7,000Depends on whose state account the PEO uses
Texas unemployment2.70% for new employers$9,000Depends on whose state account the PEO uses. A licensed Texas PEO may count earlier pay when you join

2026 figures from the IRS, the Social Security Administration, California EDD and the Texas Workforce Commission. Checked October 19, 2026.

An employee at or above the Social Security cap pays $11,439 for 2026, and so does the employer. For 2027 the Social Security Administration has set the cap at $192,300.

Federal unemployment tax is 6.0%, but most employers get the full 5.4% credit by paying their state unemployment tax on time, so they pay 0.6%, or $42 per employee. In a state that owes the federal government money for unemployment benefits, the credit is smaller and employers pay more. The Labor Department names those states each November, and the IRS posts the list.

The certified‑PEO conditions

The carry-over covers only "work site employees." A work site is a place where your people regularly work, such as your restaurant or office. An employee there qualifies only if at least 85% of the people working for you at that site are on the certified PEO's contract. Put the other way: if more than 15% of your staff at a site are left off the contract, nobody at that site gets the carry-over.

The IRS rule leaves some workers out of the 85% math entirely, so leaving them off the contract doesn't count against you. They are people who usually work under 17½ hours a week, usually work 6 months a year or less, have worked for you under 6 months, are under 21, or are covered by a union contract. A part-time hygienist on 20 hours a week counts. A seasonal crew member who works April to September usually does not.

For remote staff, a home counts as a work site only if you require the person to work there. If someone has no regular place of work, the rule uses the place you assign their work from. The rule says no more than that, so ask the PEO in writing which site each remote employee is assigned to. If you have remote, part-time or seasonal staff, ask the PEO in writing whether each site passes.

The other conditions:

  • The contract is reported to the IRS. The PEO files a form (Form 8973) to tell the IRS when your contract starts and ends. Without it, the carry-over doesn't apply.
  • The certification is not suspended. A contract signed while the IRS has suspended the PEO gets no carry-over.
  • Your company and the PEO don't share owners. If they are linked by more than 10% ownership, the rule doesn't apply.

Non‑certified PEOs

To the IRS, a non-certified PEO handles payroll for you, and your business usually stays the employer. Many still pay your employees and file the taxes under the PEO's own tax ID, the IRS notes. No federal rule lets a non-certified PEO carry the count over. Plan for a restart when pay moves to a different tax ID mid-year, and ask your accountant whether anything in your situation changes that.

State unemployment tax

Each state sets its own cap, rate and rules. Check your state's agency for yours. Two examples:

  • California: the first $7,000 of each employee's pay. New employers pay 3.4% for two to three years, says California's EDD. Your own rate is on your state rate notice.
  • Texas: the first $9,000, and 2.70% for new employers in 2026, per the Texas Workforce Commission. Texas law lets a licensed Texas PEO count the pay you already gave your employees when they join it. It is optional, and it covers joining only. Otherwise a Texas employer generally can't count another employer's pay toward the cap.

If you have employees in several states, each state's cap and rules apply separately; see multi-state PEOs. For the full exit process, see what happens when you leave a PEO, and for what a PEO files for you, PEO tax compliance. This is general information, not tax advice.

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