Who Files Payroll Taxes With a PEO? 6 Facts You Need to Know

Managing payroll taxes in the US is a complex process, even for seasoned professionals. Keeping up with tax law and regulations is the second biggest challenge for tax professionals across the country, according to a 2025 industry report.

With a Professional Employer Organization (PEO), you offload a lot of the compliance and calculations that come from managing US payroll. But what about filing payroll taxes? What does the PEO do, what are you responsible for, and how does that vary by state?

Here are six key facts that explain how payroll tax filing works with a PEO, and what to look for when choosing a provider.

1. The PEO becomes the employer of record for tax purposes

A PEO is a company that enters into a co-employment relationship with your business. In that arrangement, the PEO legally employs your workers alongside you, which means it takes on responsibility for key employer obligations, including payroll tax compliance.

For tax filing purposes, the PEO is the employer of record. That distinction matters because it determines who calculates, withholds, remits, and reports payroll taxes to federal, state, and local agencies.

Your workers remain under your day-to-day direction, which means you manage their work, set their schedules, and make hiring decisions. The PEO manages the compliance infrastructure that sits underneath all of that.

2. The PEO files federal taxes under its own EIN, but state filing varies

At the federal level, a PEO uses its own Employer Identification Number (EIN) to submit all federal payroll tax returns, including Form 941 quarterly, Form 940 annually, and all federal tax deposits.

At the state level, however, the filing structure varies by state. States are classified into three categories:

1. PEO-level reporting states: The PEO files and pays state taxes under its own EIN and SUI account. Clients in these states typically need to close their existing state accounts to avoid duplicate filing notices
2. Client-level reporting states: The PEO files under your company's state-assigned account. This applies in states including California, Massachusetts, Ohio, Pennsylvania, and around 20 others. You'll need to provide account credentials and, in some states, grant the PEO a Power of Attorney or Third Party Administrator (TPA) authorization before they can file on your behalf
3. Hybrid reporting states: The PEO files under a client account linked to its own FEIN. This applies in Arkansas, Kansas, Louisiana, Maine, and Tennessee

With Deel, your onboarding team will confirm the setup required for each state where you have employees.

3. The PEO handles federal, state, and local tax obligations

Under a standard PEO arrangement, the PEO assumes responsibility for calculating, withholding, and remitting:

1. Federal payroll taxes: Including Social Security (OASDI), Medicare (FICA), and federal income tax withholding
2. Federal unemployment tax (FUTA): Filed annually via Form 940
3. Employer's quarterly federal tax return: Form 941
4. State income tax withholding (SIT): Applicable in states that levy state income tax; Deel files under its own SIT account in most states, with state-specific requirements in client-reporting states
5. State unemployment insurance (SUI): Rates, requirements, and filing method differ by state
6. Local payroll taxes: City and county-level taxes where applicable

A quality PEO tracks regulatory changes across all the jurisdictions where your employees work and applies updated rates automatically. This way, your tax calculations reflect current law without anyone on your team manually monitoring state agency bulletins.

Deel’s PEO handles federal, state, and local tax compliance across all 50 states. For state and local filings, the specific setup depends on each state's reporting classification.

4. W-2s are generated by the PEO

Because a PEO is the employer of record for tax filing purposes, W-2 forms are generated and issued by them annually.

Deel’s PEO also handles W-2 previews before year-end, giving payroll administrators the chance to catch discrepancies before forms are finalized and distributed. Deel supports W-2 issuance, W-2 previews, and Form W-3 (the transmittal form that accompanies W-2 submissions to the Social Security Administration).

5. Your liability isn't eliminated entirely

While the PEO takes on the operational and compliance responsibility for payroll tax filing, your business doesn't disappear from the liability picture entirely. According to IRS guidance, using a third-party payer like a PEO doesn't eliminate a common law employer's responsibility for ensuring that all federal employment tax obligations are met.

If the PEO fails to remit taxes it has collected, the IRS can still pursue responsible individuals within your organization. This makes two things non-negotiable when evaluating a PEO: make sure you understand exactly how liability is allocated in your service agreement, and verify that your provider has the financial infrastructure and compliance track record to back up the obligations it's taking on.

6. Multi-state payroll is where PEO support really pays off

For companies with employees in multiple states, payroll tax compliance compounds quickly. Each state has its own income tax withholding requirements, unemployment insurance rates, filing schedules, and registration processes. Many have county and city-level taxes on top of that.

A PEO that supports multi-state payroll handles state registration management, monitors regulatory changes at the state and local level, and files the right returns in each jurisdiction so you're not manually tracking dozens of state agencies as your headcount grows.

This is especially valuable when you're hiring in new states for the first time. State employer registration can take weeks to process, and missing a deadline triggers penalties. A PEO that already operates in those states can onboard employees faster and ensure you're compliant from day one.

Deel supports payroll and tax compliance across all 50 states, covering state registration management, federal and state tax filing, and local withholding and payroll tax returns. It also handles new hire reporting to the appropriate state agencies within required timeframes.

What to ask before signing with a PEO

Once you understand the mechanics of PEO tax filing, the right evaluation questions become clearer:

• Does the agreement specify that the PEO assumes full liability for covered federal employment taxes?
• How does the PEO handle state registration in states where you don't currently operate?
• What happens if you have employees in a state the PEO doesn't yet support?
• How does the PEO communicate regulatory changes that affect your payroll?
• What's the process for correcting payroll and tax filing errors?

Working with a PEO shifts the operational and legal burden of payroll tax filing to a specialist — one whose core infrastructure is built around getting those calculations, filings, and remittances right across every jurisdiction where you operate.

But this valuable structure only works if you choose a PEO with the infrastructure, in-house expertise, and geographic coverage to back it up.

How Deel's PEO supports tax filing

Deel’s PEO handles federal, state, and local payroll tax filing across all 50 states, including Form 941, Form 940, W-2 issuance, state withholding and unemployment returns, and local payroll tax requirements, with continuous compliance built into the platform so regulatory changes are applied automatically.

Watch the video below to gain a better understanding of how Deel's PEO operates.

Ready to see how a PEO handles payroll compliance for your team? Talk to a Deel expert.