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

What is a PEO for payroll?

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. 

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

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

• Employer of record: Standard payroll services provide payroll processing for your business, but your business remains the employer of record. PEO payroll services provide payroll processing with the PEO as the employer of record. This type of structure is known as a co-employment model.
• Liability: With standard payroll services, employers retain sole responsibility for their employees and compliance, whereas businesses that partner with a PEO share the liability with the PEO. The best PEO service providers are well versed in federal, state and industry-specific legal risks and compliance obligations.
• Workers’ compensation: If you choose a standard payroll service, it is your responsibility to have workers’ compensation coverage that meets your state’s requirements. If you partner with a PEO, the PEO can take care of obtaining the correct workers’ compensation insurance and handling all workers’ comp claims for you.
• Administrative HR tasks: Standard payroll services typically do not handle many administrative responsibilities, but PEOs can provide complete HR services, including employee onboarding and training, health insurance administration, 401(k) and other retirement plan management, recruitment, and regulatory compliance assistance.
• Employee benefits: PEOs can offer competitive employee benefit packages with group policy rates. This is something small businesses typically don’t have access to with a standard payroll service.

How much does PEO payroll cost? 

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. 

• Payroll percentage: This is a percentage of the total payroll for each pay period, plus local, state and federal taxes; workers’ compensation; and employer practice liability insurance.
• Per employee per month: This fee is calculated directly by the PEO when you sign up. 

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.

Why should you use a PEO for payroll?

Consider the following benefits of using a PEO for your business’s payroll:

It can reduce your liability and time spent on payroll-related services.

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.” 

It can save you money by offering competitive employee benefits.

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.

It can help you minimize risk and maintain legal compliance.

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. 

Why should you not use a PEO for payroll?

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:

It can have a higher per-employee cost.

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.

You lose control over some internal processes.

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.

PEOs are better suited for smaller organizations.

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. 

Is it more beneficial to choose a standard payroll service or a PEO payroll service?

When you’re deciding between using 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?
• Do you want sole liability or shared liability over your employees?
• Do you want to handle workers’ compensation or pass it to another party?
• Do you need access to more competitive employee benefits?
• How much time and money can you spend managing employee payroll?

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.

What do you need to run payroll through a PEO?

You’ll need the following information to run payroll through a PEO:

• Employer identification number (EIN) and state tax ID: Your business needs a unique identifier, and for federal filings, you must have an EIN to process payroll and submit payroll taxes. For some states, an EIN is all you need; for others, a state tax ID is also necessary.
• Employer information: It’s crucial to have each employee complete Form W-4, which allows you to calculate how much federal income tax to withhold from your employees’ paychecks. Employees should also complete their respective state withholding forms.
• Payroll scheduling: You need to decide how often you will pay your employees. Standard payroll schedules include weekly, biweekly, semimonthly and monthly. Make sure your schedule follows state laws and industry requirements.
• Tax withholding: Your business must calculate and withhold the correct taxes from each paycheck. Once your calculations are accurate, ensure that your employees understand how to read their pay stubs. This can improve employee trust and satisfaction in the long term.
• Pay taxes: This is the final step of payroll processing. Due dates vary for various taxes, so it’s a good idea to note each date. If you’re using a PEO for payroll, ask about the tax filing process and if there are any guarantees or liabilities if an error is made. 

Additional services provided by PEOs

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

• Administration of health insurance and other employee benefits
• Employee onboarding and training
• 401(k) and retirement plan administration
• Workers’ compensation insurance
• Recruitment
• Regulatory compliance assistance
• Other human resources services

The best PEO service providers for payroll 

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:

• TriNet: We picked TriNet because it has customizable PEO plans based on your industry. TriNet also has an industry-specific customer service team that’s available 24/7 to help you get the most out of your plan. Learn more in our review of TriNet.
• Deel: We chose Deel because of its global payment features. Deel can help you set up an internal HR department, onboard workers internationally, and provide payment to employees in multiple currencies. Learn more in our review of Deel.
• Rippling: We chose Rippling for its comprehensive automated HR workflows. The platform syncs with each personalized HR process, allowing you to quickly scale at your own pace. Learn more in our review of Rippling.
• Insperity: We selected Insperity for its comprehensive HR features, including compliance. The platform offers a broad range of employee training resources and is an excellent choice for small and midsize businesses. Learn more in our review of Insperity.

Some other our other PEO best picks include:

• Justworks
• ADP TotalSource
• Papaya Global

Julie Thompson and Joshua Stowers ​​contributed to this article. Some source interviews were conducted for a previous version of this article.