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Should you manage payroll processing on your own or hire a service to help you?
There’s always the option for small business owners to manage payroll processing on their own, but the thought of gathering employee information, issuing paychecks, and recognizing required taxes and withholdings can be daunting. When considering the alternatives to DIY payroll, you have multiple options, including standard payroll services and payroll software.
But if your business needs other services in addition to payroll — such as human resources, compliance and tax services — consider working with a professional employer organization (PEO).
Editor’s note: Need a PEO service for your business? Fill out the below questionnaire to have our vendor partners contact you with free information.
When a business hires a PEO for payroll, the PEO becomes a co-employer and assumes the responsibility of managing the client’s payroll administration and employee taxes by using its own tax identification numbers, rather than the client’s.
The PEO is responsible for payroll-related tasks, including paying wages, depositing employment taxes and issuing employee W-2s. PEO payroll services help administer payments to full- and part-time employees and, occasionally, to vendors and contractors. Your business still maintains responsibility for day-to-day operations and management.
When a business engages the services of PEO, it relies on the PEO to accurately process payroll and ensure compliance in all states and municipalities, according to Andrew Lubash, founding partner and principal of PrestigePEO. “PEOs report federal and many state payroll taxes under the PEO’s tax identification number,” Lubash told business.com. “In some instances, the PEO’s state unemployment rate may be lower than that of the client company, thus generating a savings.”
To reduce risks, clients should ensure they partner with an IRS-certified PEO that is also accredited by the Employer Services Assurance Corp. (ESAC), because these PEOs are required to maintain strict financial and tax reporting requirements, provide financial assurance and adhere to industry best practices.
There are five key differences between a standard payroll service and a PEO payroll service:
The cost of PEO payroll can vary depending on several factors, including employee salaries and benefits. Most PEOs charge a flat fee per employee or a percentage of each employee’s salary.
The more employees you have, the greater the discount per employee you’ll be offered, according to Josh Knauer, founder and general partner at JumpScale and an executive-in-residence at Columbia University Ventures/NYSERDA. “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,” Knauer said. “That fee usually covers all basic HR services offered by the PEO.”
The costs calculated by the percentage of payroll vary and tend to be tied directly to the amount of payroll you do with the company, according to Alexander Kehoe, co-founder and operations director of Caveni Digital Solutions. “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.
Consider the following benefits of using a PEO for your business’s payroll:
One of the major benefits of using a PEO for payroll-related services is that the PEO takes a large portion of the work away from a business’s employees, 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 said.
“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,” he added. “This can be especially beneficial if a company is still in the early stages of establishing itself.”
Using a PEO for payroll can help you save money on the benefits you offer your employees. Because PEOs work with many employees from different clients, you can take advantage of their buying power when searching for group rates on health insurance, workers’ compensation insurance, retirement plans and other employee benefits. These rates are generally significantly lower than if you were to seek them out on your own.
PEOs can ensure that your business complies with the many complicated and ever-changing regulations that affect both payroll and general employment services. Working with a PEO allows companies to focus on their core lines of business.
Utilizing a PEO platform has significant benefits, but it might not be the best option for your business. Here are some reasons you may not want to use a PEO for payroll:
Frederick said one downside of using PEO payroll services is that the cost per employee is often higher than it is when a business manages payroll on its own.
“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 said.
Therefore, sometimes it might be more beneficial for small and midsize businesses to look for alternatives. However, this decision should be made on a case-by-case basis, as there are many situations where a PEO is the best option for a small company.
Another major drawback of using a PEO is that you lose control of some internal processes. Customer service shortfalls and a lack of personal touch in communication between PEOs and employees are two factors that can lead a company to keep its payroll and HR services in-house. If your firm is tightly knit and values the personal touch and flexibility of having someone handle their payroll in-house, a PEO may not be the right fit.
Hiring a payroll service provider rather than a PEO may give you the best of both worlds. You will lighten the load of your in-house team while retaining control over your processes and systems. This will also allow you to stay current on any changes to payroll laws and regulations.
Although some PEOs can serve large enterprises, Lubash said companies with thousands of employees are more likely to have fully staffed payroll, human resources, risk management and retirement services departments and may not benefit from the economies of scale offered by PEOs.
When you’re deciding between a standard payroll service and a PEO, it’s best to consider the size and needs of your business.
When you’re deciding between using a payroll service or a PEO for your business’s payroll, ask yourself these questions:
If you want to remain your staff’s sole employer and you have the time and resources to process payroll with a standard payroll service, that will likely be your best option. There are several highly rated online payroll service providers on the market, and some even offer PEO plans as well.
Partnering with a PEO can be a great option if you want additional assistance with processing payroll, managing workers’ compensation claims and maintaining legal compliance. Small and midsize businesses that can’t manage payroll or HR functions independently often benefit from a PEO partnership.
You’ll need the following information to run payroll through a PEO:
In addition to handling payroll, PEOs can provide these additional services:
We researched the best PEO services to find the top options for small businesses. We examined several essential factors, such as comprehensive HR services, customization and automation options. Ultimately, we selected the following PEO services as our best picks:
Some other our other PEO best picks include:
Julie Thompson and Joshua Stowers contributed to this article. Some source interviews were conducted for a previous version of this article.