What Are PEO Payroll Services? Comparing PEO Payroll to Traditional Payroll Services

What is a PEO for payroll?

Hiring a PEO for payroll means adopting a co-employment model. In such a practice, the PEO assumes responsibility for managing a business’s payroll administration and payroll taxes using its own tax identification numbers.

The PEO is responsible for payroll-related tasks, including:

• Paying wages to full- and part-time employees
• Administering payments to vendors and contractors (if applicable)
• Depositing and filing payroll taxes
• Issuing payroll forms, such as employee W-2s

In this arrangement, the business maintains responsibility for day-to-day operations and management. However, the PEO processes payroll and ensures compliance in all applicable states and municipalities.

“PEOs report federal and many state payroll taxes under the PEO’s tax identification number,” explained Andrew Lubash, founding partner and principal of PrestigePEO. “In some instances, the PEO’s state unemployment rate may be lower than that of the client company, thus generating savings.”

To reduce risks, businesses should partner with an IRS-certified PEO accredited by the Employer Services Assurance Corp. (ESAC). These companies are required to maintain strict financial and tax reporting requirements, provide financial assurance, and adhere to industry best practices.

What are the differences between standard payroll services and PEO payroll services?

Many of the best online payroll services can competently and accurately handle issuing your employees’ pay. However, PEO payroll services can manage additional responsibilities.

Here are five key differences between a standard payroll service and a PEO payroll service:

• Employer of record: Standard payroll services process your payroll, but you remain the employer of record. In contrast, PEO payroll services operate on a co-employment model, meaning the PEO becomes the employer of record for tax and benefits purposes.
• Liability: With standard payroll services, employers retain sole responsibility for their employees and compliance. In contrast, when you partner with a PEO, the PEO shares liability. The best PEO service providers are well-versed in federal, state, and industry-specific legal risks and compliance obligations.
• Workers’ compensation: If you use a standard payroll service, you’re responsible for obtaining workers’ compensation coverage that meets your state’s requirements. A PEO, however, handles all aspects of workers’ compensation insurance and workers’ compensation claims for you.
• Administrative HR tasks: Standard payroll services typically handle few, if any, HR duties. PEOs, on the other hand, can provide comprehensive HR services, including employee onboarding and training; health insurance administration; 401(k) and retirement plan management; employee recruitment; and regulatory compliance assistance.
• Employee benefits: PEOs can offer competitive employee benefit packages with group policy rates — benefits small businesses typically can’t access through a standard payroll service.

How much does PEO payroll cost?

PEO payroll service costs can vary depending on several factors, including employee salaries, any additional HR services you require and the benefits you choose to offer.

Most PEOs charge using one of the following two models:

Payroll percentage

Some PEOs charge a percentage of your total payroll each pay period. This fee typically covers wages; local, state and federal payroll taxes; workers’ compensation; and employer practices liability insurance (EPLI).

According to Alexander Kehoe, co-founder and operations director of Caveni Digital Solutions, the costs calculated by payroll percentage vary and tend to be tied directly to the amount of payroll processed with the company.

“In our experience, 3 to 5 percent has been fairly standard in our dealings, but smaller companies should be wary of companies asking for between 10 and 15 percent,” Kehoe said.

Per employee, per month

Some PEOs charge a flat fee per employee, per month. This fee is calculated directly by the PEO when you sign up. According to Josh Knauer, businesses receive a bigger per-employee discount the more employees they have.

“Rates usually start between $100 and $150 per month, per employee and can get as low as $50 to $80 per month, per employee for larger companies,” said Knauer, founder and general partner at JumpScale and an executive-in-residence at Columbia University Ventures/NYSERDA. “That fee usually covers all basic HR services offered by the PEO.”

Why should you use a PEO for payroll?

Here are some of the benefits of using a PEO for your business’s payroll:

PEOs can reduce liability and save time.

One of the most significant advantages of using a PEO for payroll services is that it takes a large portion of the administrative work off your team’s plate, according to Michael Frederick, CEO of Flatirons Development. “This makes it easier for businesses to focus more of their time on their day-to-day operations rather than managing simple payroll operations,” Frederick explained.

Frederick also stressed that PEOs can help ease liability concerns. “At the same time, since a PEO payroll service assumes all responsibilities related to filing taxes for a company’s employees, this takes a significant amount of liability away from small or medium-sized business owners,” Frederick added. “This can be especially beneficial if a company is still in the early stages of establishing itself.”

They can save you money on benefits.

Using a PEO for payroll can help you lower the cost of employee benefits.

PEOs support workers across many client companies. So, they have greater buying power when negotiating group rates for health insurance, workers’ compensation, 401(k) retirement plans and other benefits. These group rates are often significantly lower than what a small business could access on its own.

PEOs help minimize risk and maintain legal compliance.

PEOs help ensure your business stays compliant with the many complex and ever-changing regulations that affect payroll and employment practices. By outsourcing these responsibilities, companies can focus more on their core operations.

Why should you not use a PEO for payroll?

While utilizing a PEO platform offers significant benefits, it may not be the best fit for every business. Here are some reasons you might not want to use a PEO for payroll:

PEOs may incur higher per-employee costs.

According to Frederick, one downside of using PEO payroll services is that the cost per employee is often higher than when a business manages payroll in-house.

“Unfortunately, while this extra cost can often be managed by larger companies, small and medium-sized enterprises might often have trouble covering the extra cost per employee,” Frederick cautioned.

In some cases, it may be more cost-effective for small or midsize businesses to consider other payroll solutions. However, this decision should be made on a case-by-case basis, as there are many situations where a PEO is still the best option for a small company.

They may reduce your control over internal processes.

Another potential drawback of using a PEO is that you lose control over some internal workflows. Customer service shortfalls and a lack of personal touch in communications between the PEO and your employees can also be concerns.

If your business is tightly knit and values personalized service and flexibility, a PEO may not be the best fit.

PEOs may not be suited for larger companies.

Some PEOs can serve large enterprises. But, Lubash cautioned that companies with thousands of employees often have fully staffed payroll, HR, risk management and retirement services departments — thus, they may not benefit from the economies of scale PEOs typically offer.

Should you choose a standard payroll service or a PEO payroll service?

When deciding between a payroll service or a PEO for your business’s payroll, ask yourself these questions. Do you want to:

• Remain the sole employer of your employees?
• Maintain sole liability or shared liability over your employees?
• Handle workers’ compensation or outsource it?
• Access more competitive employee benefits?
• Spend time and money to manage payroll?

If you want to remain your staff’s sole employer and have the time and resources to manage payroll with a standard payroll service, that will likely be your best option. Many excellent payroll providers are available — and some even offer optional PEO plans.

Partnering with a PEO can be a great solution if you want additional support with payroll processing, workers’ compensation claims or legal compliance. Small and midsize businesses that can’t manage payroll or HR functions in-house often benefit from a PEO partnership.

What do you need to run payroll through a PEO?

You’ll need the following information and decisions in place to run payroll through a PEO:

• Employer identification number (EIN) and state tax ID: Your business needs a unique identifier to file taxes. For federal filings, you must have an EIN to process payroll and submit payroll taxes. In some states, an EIN is sufficient; in others, a separate state tax ID is also required.
• Employee information: Each employee must complete Form W-4 so you can calculate how much federal income tax to withhold from their paychecks. Employees should also complete applicable state withholding forms.
• Payroll schedule: Decide how often you’ll pay your employees. Standard payroll schedules include weekly, biweekly, semimonthly and monthly. Make sure your schedule complies with state laws and industry standards.
• Tax withholding and pay stub details: Calculate and withhold the correct taxes from each paycheck. Also, ensure employees understand how to read their pay stubs — this helps build trust and improve satisfaction.
• Tax payment and filing: This is the final step in payroll processing. Tax due dates vary, so track them carefully. If you’re using a PEO for payroll, ask about its tax-filing process and whether it will assist you or assume liability if an error is made.

What are additional services provided by PEOs?

In addition to handling payroll, PEOs can provide the following additional services:

• Administration of health insurance and other employee benefits
• Employee onboarding and training
• 401(k) and retirement plan administration
• Workers’ compensation coverage and claims management
• Recruitment support
• Regulatory compliance assistance
• Other general HR services

Casey Conway contributed to this article. Some source interviews were conducted for a previous version of this article.