It's what we call those kinds of companies whose business has to do with processing payments between two other parties, especially when there are legal, tax, financial, or other issues involved.
In normal situations, it's easy to see who's the vendor and who's the customer. The vendor provides goods and/or services to its customer, and the customer pays the vendor. Similarly, a company that has employees and/or contractors pays them for their services to the company. The employees are considered part of the company, so the way they're paid and the legal and tax issues involved are different from paying contractors (vendors), but it's still easy to tell who's doing what for whom; just follow the cash.
But there are companies whose business has to do with the payments themselves. In these cases, the cash must flow through these Payment Processing Firms because of the services they provide processing the payments, even though the PPF has nothing to do with the goods or services that the money is paying for. It does not mean that the PPF is a subcontractor or is in the industry of either of the other parties. It just handles the payments.
Different PPF's can be used to process different kinds of payments, such as customer to vendor, or company to employees. Different kinds of payment processing services can be done at each of these levels. There are two kinds of PPF services; the difference depends on who's using the PPF's services. One kind handles the "front end" of money coming to a vendor from a customer. The PPF's client is the vendor, the one getting paid by the customer; the vendor uses the PPF to process the payments coming in to the vendor from its customer. Examples of front end PPF's are billing services, collection agencies, and factors.
PPF's are also used to process the "back end" of money a company is paying its employees or contractors (or even vendors). In this case, the PPF's client is the company, the one who's paying the other party; the company uses the PPF to process the payments going out from the company. Examples of back end PPF's are paycheck processors, PEO's (employee leasing firms), umbrellas, and RMPCS.
A simple example would be an invoicing (billing) service. A vendor might use a PPF to process invoices, bill the customer, collect the payments, and forward them to the vendor. The PPF's customer is the vendor. The vendor's customer doesn't care that his payments are going to a PPF, and notices this only to the extent of the PPF's name and address indicated for the payments. The customer is mostly unaware of the PPF.
A collection agency is similar to the billing service above but more specialized and only used when needed. A creditor (vendor) assigns a debt to a collection agency, which then collects from the customer. The customer originally didn't even know about the collection agency, and it's the vendors decision whether and when to use it. The collection agency is not in the business of providing the vendor's goods or services to the customer, but the customer must pay the collection agency because the account has been assigned to it and because of the nature of its service. This PPF's customer is the creditor/vendor in this case.
A slightly more sophisticated example is factoring. The factor buys invoices at a discount, advances partial payment, and takes its fee out of the rest. To use this service, a vendor applies to the factor, who checks the customer's credit and then decides whether to accept the customer and how much it should charge in fees. The vendor then prepares its invoice that it would normally send the customer, but it indicates on the invoice that the customer must pay the factor instead of the vendor. The vendor sends a copy of the invoice to the factor, and the factor advances partial payment to the vendor so the vendor doesn't have to wait for the customer to pay. The factor works diligently to collect from the customer (often doing a better job than the vendor might have the time or resources to do). When the customer finally pays the factor, the factor takes its fee (which usually depends on how long the factor had to wait for its payment) out of the portion the factor had not advanced to the vendor, and sends the rest to the vendor. If the customer doesn't pay by a deadline (such as 90 days), the factor has recourse against the vendor and makes the vendor pay back its advance. If it's a non-recourse factor and the customer doesn't pay by the deadline, the factor charges its highest fee and sends what's left (if anything) to the vendor. Since non-recourse factors are taking the risk of nonpayment, they charge higher fees. The point here is that the factor is not in the business of providing the goods or services the vendor provides the customer, but the money must flow through the factor because of the nature of the factor's service as a PPF. The factor's customer is the vendor. The vendor's customer doesn't care that the vendor is using a factor, and usually does not even have any say in the matter; the factor sends a notice to the customer informing it that the vendor's account is assigned to the factor so the customer has to pay the factor instead of the vendor directly. The customer deals with the factor only in terms of the payments; if the customer has a problem with the goods or services provided by the vendor, that's not the factor's problem. The cash flows from customer to factor to vendor, but for tax purposes, the customer is paying the vendor directly, and out of that payment the vendor pays the factor its fees.
The simplest and most well-known example of a back end PPF is paycheck processing services such as ADP and PayChex. The company pays this kind of PPF to process payroll and send the paychecks to the employees, and the PPF also typically does the payroll tax withholding, depositing, and reporting. But the employees remain the company's employees, they are not employees of the PPF. The PPF reports the payroll taxes and sends the W-2's using the employer's tax ID number, not its own. For legal and tax purposes, the employer-employee relationship is unchanged and the company is considered to be paying its employees and the tax authorities directly, and paying the PPF its fees separately, even though actually the cash must flow through the PPF, as the company pays the PPF the total amount, out of which the PPF deducts its fees and then processes the rest for payroll and pays the employees and tax authorities itself. The PPF is not in the business of whatever the company does, and the employees still work for the company, not the PPF. The only time the employees are aware of the PPF is when they get their paychecks and their W-2's, and these show the same amounts they would if they were produced directly by the employer. The PPF's client is the employer, not the employees. This, again, is a back end service because the PPF's client is the party that's paying the other party, while in a front end service, the PPF's client is the party being paid.
In the above example, the primary responsibility for paying and reporting the payroll taxes remains with the employer, not the PPF, so the PPF cannot treat or pay the workers in any way other than as employees of the employer. If a PPF is not merely a paycheck processor but also handles other kinds of payments from the company to others such as vendors, it would pay and treat them the same way the company would, e.g. reporting payments on 1099's as required. The next example is different.
A PEO (Professional Employer Organization, also called an employee leasing firm) is a special kind of PPF that does what a paycheck processing service does plus a lot more. It is intended to take on almost the entire administrative burden of being an employer. Its client is the company that wants the PEO to handle its employees. In fact, the PEO assumes primary responsibility for the tax issues and many of the legal issues of employment. To do this, the company's employees are transferred to the PEO, which becomes the actual employer of record as far as the tax authorities are concerned. The company is then considered to "lease" its employees from the PEO, hence the name "employee leasing firm". As the official employer, the PEO also provides employee benefits, often a better benefit package at less cost because the PEO has the entire pool of employees of all its clients to make a bigger group. The client company may also provide its own benefits in addition to those of the PEO, to the extent allowed or required by employee leasing laws, but in practice this isn't done much because it's unnecessary since the PEO generally provides better benefits. The client company could, however, continue to do whatever other things an employer would do that the PEO doesn't do, and of course the company remains the employer as far as supervising its employees, providing the workplace, doing business as usual. Often, PEO's provide additional services that would normally be done by the "Human Resources" department of its clients. Still, the PEO, like any other PPF, is not in the business of whatever the company does, it's just handling the payments and certain other services for the employer. Even a non-profit corporation could use a PEO, even though the PEO itself is designed to make a profit. And as with any "back end" PPF, its client's customers don't even know that the PPF is being used; it's none of their business.
Since the PEO takes on the tax responsibilities involved in handling the employees, we also call it a Tax-Responsible PPF, or TRPPF. Since a TRPPF has this responsibility, it must be quite familiar with the appropriate legal and tax requirements, but it also may choose to handle its responsibility in any legal manner. This may give it the opportunity to provide better service at lower cost. A TRPPF could very well be organized differently from its client, and therefore could treat its personnel differently than its client would, if appropriate. For example, even a sole proprietor (or partnership) with no employees could use a PEO, even though such a client would not have any of the usual employer responsibilities. The company and its people might want some of the advantages of treating its people as employees (better benefits, more familiar and regular withholding and paychecks, etc.) without the hassle. The proprietor or partners would still be considered self-employed in regard to any payments (or profits or losses) they receive directly from the company, but they would also be employees of the PEO. Conversely, a TRPPF could provide services similar to a PEO but could be set up differently, as long as it pays its people (and handles the taxes) correctly for its type of organization, even if its client were an employer. This would still relieve its client from most of the same kinds of employer responsibilities as a PEO would, if the client is no longer paying its people directly and relies on the TRPPF to do that, as would normally be the case. TRPPF's therefore may be set up as whatever kind of company can most easily and efficiently perform the desired services. PEO's are set up as employers because their creators are most familiar with that setup.
An "umbrella" is another kind of TRPPF similar to a PEO but sort of a hybrid. Most umbrellas are W-2 umbrellas and that's where they're similar to PEO's; in fact, they probably evolved from the PEO concept. However, umbrellas cater to companies' desire to outsource the handling of their contractors, rather than employees. They also cater to the contractors directly. Especially after the passage of §1706, which increased the risk (for certain occupations only) that the IRS might decree that a company's contractors should've been treated as its employees, umbrellas have been seen as a way to address this and other problems. This is ironic, since §1706 does not apply to two party deals (contractor and client with no intermediary), but many companies don't want the hassle of dealing with individual contractors directly. The umbrellas are actually a hybrid because in some ways they act as a subcontractor, rather than a pure PPF, while in other ways they act as a TRPPF. Our company in fact grew out of the umbrella-like services we provided for RMPCP, and we are similar to both an umbrella and a PEO, but different. Umbrellas typically provide the payroll and benefits services of a PEO but not the HR services, and they also carry the kinds of liability insurance that a subcontractor would be expected to have. In some ways they are closer to a subcontractor than a PEO, except that they take no responsibility for the work their people do, unlike a true consulting firm. Some of them also handle tax deductible expense reimbursements, which PEO's do not. A few also allow consultants to be their subcontractors instead of requiring them to become their employees, so they would not be providing the PEO type of service in that case. Also, most umbrellas provide invoicing, collection, and factoring services, so in that sense they provide a mixture of both front end and back end services. They do at least the invoicing and collection to make sure they get paid, since the contractor is usually a one person business and thus otherwise the contractor as business might be tempted to pay the contractor as worker directly rather than through the umbrella's back end service. This way the umbrella's front end invoices and collects for the umbrella's back end service which then finally pays the contractor. Umbrellas market to contractors and sometimes to companies, but generally do not help contractors find clients or vice versa. They are usually sought out by a contractor who has found a client who doesn't want to deal with the contractor directly, or sometimes the other way around, or by a contractor when a "broker" or "job shop" has found a client but the contractor wants to use the umbrella's services rather than become the broker's employee. Normally, the cash flows from the client (which may actually be a "consulting firm" or "broker") to the umbrella to the contractor, but the umbrella isn't really in the consulting or other technical business which the contractor is providing for the client.
RMP Corporate Services LLS and its underlying affiliates comprise a TRPPF similar to an umbrella but better. To eliminate any confusion or potential conflict of interest, we've split from RMPCP, our computer consulting firm, which was and is our first client. This enables us to serve additional clients in almost any industry, not just technical services like computer consulting. We combine the most important services of both PEO's and umbrellas, and more. Through our affiliate, RMP Billing LLC, we can even accept payment via MasterCard and Visa. Because of our umbrella and consulting background, we're more familiar with §1706 and the whole contractor vs. employee issue than most any PEO, and we're also more familiar with the deductible expenses such as per diems. But because of our split, we're not just an umbrella, so we can handle your employees as well as contractors. Thus, we can provide more comprehensive and complete service than either PEO's or umbrellas. Also, because we evolved through many forms of business as we grew, and we tend to keep up with the latest innovations in this area, we know more ways to do things (and we even offer form of business consulting to entrepreneurs). Thus, our knowledge of the relevant tax issues probably exceeds that of most any PEO, umbrella, or computer consulting firm or similar technical business. We probably understand these issues better than most lawyers or accountants who have not studied them specifically, and you'll find very few if any lawyers or accountants who have studied them all. This gives us the ability to provide a better combination of services, all from one firm, at better quality and lower cost. You can use just some of our services to start with, and add others later.