PEO Software: How to Choose the Best One for Your Business

What is a PEO?

A PEO is a company that provides third-party HR, benefits administration and payroll support to small businesses. PEOs are a low-cost alternative to hiring an entire internal HR department. They can run payroll, find benefits options, process W-2s or 1099s, and ensure you adhere to HR compliance laws. PEO software doesn’t take sick days or ask for vacation time, and your business isn’t liable for its work. You can tailor a PEO’s services to match your business needs.

PEOs work under a co-employment model where they become an employer of your employees. 

“As a co-employer, [the PEO] takes over certain responsibilities from you,” explained Brian Cairns, CEO of ProStrategix Consulting. “It varies depending on the agreement, but the most important distinction is that they pay your employees under their employer identification number.”

This co-employer arrangement saves your company money on benefits. Because it represents many companies, the PEO can negotiate better rates and benefits for insurance and retirement plans than your business could offer on its own. The National Association of Professional Employer Organizations found that businesses in a PEO arrangement grow 7 to 9 percent faster, have more than 10 percent lower turnover, and are 50 percent less likely to go out of business. 

How to choose a PEO

PEOs cater to various business needs, so finding the right one for your organization can be challenging. You’ll need to investigate any potential partner’s PEO services and features to choose the best option. 

These five tips can guide your decision-making process:

1. Consider the PEO’s technology. Does the PEO offer online services? Which software packages does it use? How do its software choices integrate with your existing systems? You’ll need to decide if a PEO’s technology makes more sense than your current solutions for payroll, accounting and more.
2. Explore the PEO’s benefits. The PEO should handle or partially automate business-critical tasks, including payroll, HR and risk management. Evaluate how well any PEO you’re considering handles these functions and determine if it will be worth the investment.
3. Decide if the PEO’s benefits suit your employees’ needs. Many PEOs offer employee benefits like insurance packages. If the PEO will handle your employees’ insurance plans, ensure its options meet your staff’s expectations and your own. Some PEOs also offer corporate wellness programs, retirement plans and similar employee perks to make your business more appealing to top talent.
4. Analyze the PEO’s prices. Weigh any potential PEO’s prices against the benefits you’ll receive. Estimating your ROI is the best way to remove uncertainty from the decision-making process. Which services are critical, and how much do they cost? Are they in your budget? What services would you sacrifice for a less expensive PEO?
5. Check any PEO’s references. Online reviews are helpful, but true conversational references are worth more. Talk to business managers — especially those in your industry or a similar field — who have worked with the PEO you’re considering.

What to consider when choosing PEO software

Consider how any potential PEO handles the following essential HR services: 

Payroll

Your PEO’s software should include payroll services or integrate with your existing payroll platform. When a business uses a PEO payroll service, the company becomes a co-employer and assumes the responsibility of managing your business’s payroll administration. A co-employment model can help time-crunched small business owners pay wages, deposit employment taxes and issue employee W-2s.

Employee benefits packages

Employee benefits packages can help your business attract and retain top talent. The most popular employee benefits include health insurance coverage, paid time off and flexible sick leave. One of the primary reasons many small business owners use PEO software is to provide high-quality benefits to their employees at a lower cost. Your PEO benefit options will vary depending on your business’s size and goals. 

Affordability

A low-cost PEO generally charges a per-employee fee or a percentage of your total payroll. In many cases, there isn’t a free trial where you can evaluate the service. A PEO’s contract length depends on your business’s size and needs. Some PEOs offer long-term contracts; others don’t require one.

Usually, 30 to 60 days’ notice is required before canceling the service. Some companies let you leave anytime and for any reason, while others charge you a fee for leaving. Search for a PEO with a money-back guarantee, especially if you’re a small business owner new to PEOs.

How can a PEO help your business?

Operating a small business is challenging, and it’s easy to get bogged down in administrative work. Outsourcing various HR tasks to a PEO can free up time for building your business. 

A PEO can streamline the following functions and take them off your plate: 

• Recruitment
• HR services
• Onboarding and offboarding
• Health and welfare management
• Payroll processing
• Benefits administration
• Legal compliance
• Workplace safety compliance
• Employee training and development programs

What are some of the top PEOs?

The following three companies are excellent PEOs for small businesses to consider. 

1. ADP 

ADP provides exemplary customer service to small businesses of all types and sizes. This IRS-certified PEO includes the following offerings:

• HR administration
• Talent management
• Employee benefits
• Payroll and regulatory compliance
• Comprehensive 401(k) plans
• Employee wellness programs

Read our review of ADP TotalSource for more information.

2. Insperity 

Insperity is an excellent PEO for small businesses. It operates on a per-employee pricing structure and can provide the following features:

• Onboarding resources
• Recruitment tools
• Benefits packages
• Time and attendance tracking
• Payroll processing
• Employee training
• Risk management services

Read our review of Insperity for more information.

3. Paychex

Paychex is a great PEO partner for larger businesses that need more extensive resources. It can provide the following:

• Extensive HR support
• Onboarding and recruiting resources
• Handbook and HR policy development
• Termination and dispute assistance
• Employee screening and training
• Health, retirement, vision and dental packages
• Customizable service bundles

Read our Paychex review for more information.      

What are the pros and cons of PEO software?

PEO software solutions and services aren’t suitable for every business. Before you decide if working with a PEO is the right move, consider the pros and cons of PEOs.

PEO pros

• Cost-effectiveness: If you can’t afford to hire an HR professional, a PEO can be a cost-effective way to outsource HR duties. If you have an HR specialist or a small HR staff that needs additional support or resources, a PEO can provide what they need.
• Fewer headaches: A PEO can take on your HR and administrative tasks. There’s little room for human error in HR, and the service assumes liability for any complications or issues that may arise.
• Time savings: Implementing a PEO service’s software allows you to dedicate your time to other areas of your business needing your attention to ensure growth and success.

PEO cons

• Lack of personal interaction: While using PEO software, your business risks losing the interpersonal aspect of managing employees. There’s nothing more important than face-to-face interaction and communication. Software can’t pick up on anything beyond logic and data.
• Security concerns: Your PEO software solution hosts all your employee data in one centralized location, making it a gold mine of data for hackers. If the PEO’s network is hacked, your business could face severe consequences.

Risks of working with a PEO

Beyond the general “cons” outlined above, businesses should thoroughly understand the unique risks of working with a PEO:

1. There’s potential for workers’ comp fraud and misuse with PEOs.

PEOs have been used to reduce workers’ compensation fees for business clients, costing legitimate employers, employees and healthcare providers millions annually. Some cases of PEO fraud have involved filing taxes improperly, exaggerating workplace injuries and incorrectly classifying employees.

One example of a PEO misusing services to commit tax fraud was the case of Larry W. Kimes, former manager of AccounTex Financial Services LLC, and Charles Pircher, a manager of multiple PEOs based in San Antonio, Texas. Kimes and Pircher were each sentenced to more than 10 years in federal prison and ordered to pay $132 million in restitution for stealing client money instead of using it to pay payroll taxes and insurance premiums.

2. You could be subjected to a misclassification audit.

As the PEO’s co-employment partner, you share responsibility for ensuring your business operates within the laws of its state. One common error is worker misclassification. Here are three steps you can take to avoid this error:

• Verify each employee’s classification. To avoid being audited for employee misclassification, understand the legal distinction between employees and contractors. This includes reviewing all federal, state and local classification laws.
• Provide appropriate treatment. Don’t treat contractors like employees, even when you work with them regularly. The services of an independent contractor can be great. Still, it’s recommended you establish an independent contractor engagement program.
• Enforce employer tax obligations. Tax evasion may occur when workers are misclassified. Employers pay taxes on employees, not independent contractors. If a worker is an independent contractor, they are responsible for paying their self-employment and income taxes.

3. Your company may be vulnerable to security breaches.

The most significant risk of using a PEO is that you are entrusting your employees’ private information to another company, according to Will Ellis, IT security consultant and founder of Privacy Australia. Before choosing a PEO, ask the company how it protects its clients’ data.

“Ensuring that a private network is used rather than a public network and inquiring about encryption are two important things to consider so that you can further increase security and privacy for your employees,” Ellis advised. “Security of your data and employees’ information should always be a priority.”

Skye Schooley and Matt D’Angelo contributed to this article. Source interviews were conducted for a previous version of this article.