Are the Benefits of Using a PEO Really Worth It?

The pros of using a PEO

When deciding how best to manage your company’s HR processes, it’s essential to consider the pros of using a PEO and evaluate whether those benefits are the right fit for your business. The best PEO services provide many HR-related services, such as payroll processing and payroll tax management, health insurance, workers’ compensation insurance and retirement savings plans.

Below are some of the top advantages of partnering with a PEO.

Substantial cost savings and ROI

One of the biggest reasons small business owners consider a PEO is the potential for real cost savings. According to NAPEO, companies that use a PEO see an average return on investment of about 27 percent each year. Put simply, for every $1,000 a business spends on PEO services, it saves around $1,273 — a net benefit of $273. 

In addition, commonly cited NAPEO benchmarks show that PEO clients spend about $1,395 per employee while saving roughly $1,775 per employee annually. NAPEO also notes that employees at PEO-supported businesses tend to earn more — about $2,500 more per year than their peers at similar companies.

Protection from legal risks

PEO partnerships can also protect your business from costly risks. For example, the IRS collects billions of dollars in payroll fines from small businesses each year. A reputable PEO can reduce that risk by handling payroll taxes and, in many cases, covering the cost if they make a mistake. Always confirm this guarantee before signing a contract — if it’s not included, you could still be on the hook.

PEOs also help with HR compliance. Compliance failures can lead to lawsuits and fines, and the average lawsuit for Family and Medical Leave Act (FMLA) violations runs about $80,000, according to risk management company ESIS. Beyond financial penalties, compliance issues can damage employee trust and increase turnover. Outsourcing HR to a reliable PEO gives your business an added layer of protection.

Finally, a PEO reduces risk simply by saving you time. The resources you free up by outsourcing HR can be redirected toward improving margins and cash flow. In many cases, the time saved is even more valuable than the direct cost savings, which is why outsourcing can deliver such strong ROI for small and midsize businesses.

Workers’ compensation management

Another benefit of using a PEO is that the PEO takes care of time-consuming tasks like vetting and purchasing workers’ compensation insurance policies, according to Bryan Bowles, founder and CEO of Transactly.

“Prior to utilizing a PEO, we had to manually sit through the annual audits, which consumed a significant amount of our accounting staff’s time,” Bowles explained. “In addition to the time savings, we’ve noticed a significant cost savings as compared to purchasing a policy directly.”

PEOs have experience with workers’ comp programs, so they have policies in place for situations you may not have yet encountered at your business. One example of this is return-to-work programs that help employees transition from medical leave back to work through modified, low-risk or light-duty jobs.

Better employee experience

PEOs also add value to your business by improving the employee experience. Since a PEO handles much of the administrative HR work, your internal HR team can focus more on company culture and employee engagement.

Additionally, PEOs offer great employee benefits that many small businesses couldn’t afford on their own, from health, dental and vision insurance to conveniences like online access to paycheck stubs, direct deposit and employment verification.

The impact is measurable: NAPEO data shows that PEO clients have 12 percent lower employee turnover rates compared to similar businesses. For small businesses with 10 to 49 employees, 52 percent of PEO users offer retirement plans versus only 23 percent of those that don’t work with a PEO.

Enhanced recruiting

Partnering with a PEO can enhance your recruiting efforts. The comprehensive employee benefits package you can offer through a PEO makes your business more attractive to potential hires. Whether your benefits package becomes a focal point of your recruitment process is up to you, but every improved benefit is an upgrade to the employee experience, and job seekers notice these things when they compare workplaces.

Additionally, the PEO can handle a chunk of the recruiting and hiring workload, making the process substantially more efficient. You’re also likely to retain good employees by having a more rewarding work environment, and you’ll have more resources to go after top talent that can make the whole business run better. It’s a major win-win.

Peace of mind

When you outsource HR to a trusted PEO, you get peace of mind. Administrative tasks and compliance issues are handled by experts, freeing you from the stress of payroll and benefits management. Instead of worrying about paperwork, you can focus on running and growing your business.

And the numbers back this up. NAPEO research shows PEO clients grow more than twice as fast as comparable businesses (4.3 percent annual growth versus 1.6 percent), are 50 percent less likely to go out of business, and see 16 percent higher profitability than non-PEO companies.

The cons of using a PEO

Before partnering with a PEO, it’s important to do your homework. A PEO arrangement means entering into a co-employment agreement where certain responsibilities are shared.

In this setup, the PEO becomes the employer of record for things like payroll, benefits and tax reporting, while you still control daily operations, hiring, firing and core business decisions. Both sides carry legal responsibilities toward employees, so you need to clearly understand how those duties are divided before signing on.

Here are some of the drawbacks to consider when deciding if a PEO is right for your business.

Less personal attention

A PEO manages HR for your business, but it also serves many other clients. Because there’s no exclusivity, your company might not always get the same personal, timely attention you’d expect from an in-house HR team. That can sometimes mean slower communication or delayed responses.

Loss of data ownership

Another drawback of partnering with a PEO is that it typically owns your loss run and payroll data. Jon Brodsky, CEO of YouNow and former CEO of Finder, said this was a deal-breaker when evaluating a PEO at his previous company.

“Because the PEO would own the data, we would have had to start from scratch when we were ready to get insurance and benefits on our own, which would have likely meant higher rates for us,” Brodsky said. “So, we decided to take the short-term pain of administering our own healthcare and receiving slightly less-than-favorable rates on our insurance to have the best long-term potential cost savings.”

Potential tax liabilities

PEOs handle payroll and file payroll tax returns, which can be a major benefit, according to Tammy Dain, founder and CEO of Rabble. But if something goes wrong, your business may still be held responsible.

“Since employees are considered co-employees of both the PEO and your business, the IRS still considers you liable if there are any errors in those filings,” Dain explained. “Thus, it’s incredibly important that you have verified the PEO’s practices with regard to taxes. It is completely within your right to audit the payroll tax returns that the PEO has filed on behalf of your employees.”

This risk can be greatly reduced by working with an IRS-certified PEO. Under the Certified Professional Employer Organization (CPEO) program, certified providers assume full responsibility for federal employment tax liabilities, shielding client companies from penalties and interest. Estimates vary between 3 and 15 percent, but only a small share of PEOs hold IRS certification, making it important to check a provider’s status before signing on.

Loss of control

A PEO can administer nearly every aspect of your HR, saving you a lot of time and energy. However, it can also cost you some level of control. PEOs aren’t ideal for business owners who want complete control over their HR processes. One partial way around this is by partnering with a PEO provider that offers customizable packages rather than preconfigured service bundles. This allows you to maintain control over certain HR tasks and still receive assistance for others.

Understanding professional employer organizations

A PEO is an outsourcing company that provides HR services for SMBs through co-employment agreements. By partnering with a PEO, small business owners can devote more time to their revenue-generating operations because they have more time to lead and focus on driving employee performance, according to Brian Michaud, executive VP of ADP’s smart compliance solutions and human resources outsourcing.

“A PEO offers built-in protections and helps ensure holistic compliance, from payroll to HR (i.e., discrimination and harassment) to insurance,” Michaud explained. “PEOs allow owners to focus on knowing and executing on their business, rather than needlessly worrying over potential fines and lawsuits that can come unexpectedly.”

What to know before choosing a PEO

Partnering with a PEO can be a big decision, so it’s important to know what to look for. Before you sign on, make sure you understand how co-employment works, what certifications to check for and which red flags to avoid.

• Understand co-employment: A PEO becomes the employer of record for payroll, benefits and taxes, while you retain control over daily management and business decisions. This shared structure works well for many businesses, but you should be comfortable giving up some HR responsibilities before committing.
• Check certifications: Look for IRS-certified PEOs (CPEOs) or providers accredited by the Employer Services Assurance Corporation (ESAC). These programs require strict financial and compliance standards, giving you peace of mind that the provider is stable and trustworthy.
• Watch for red flags: Be cautious if a PEO can’t provide financial statements, client references or clear explanations of fees and responsibilities. Limited transparency, unusually low pricing, or vague contract terms are all warning signs.
• Know the costs: PEOs usually charge either a flat fee per employee or a percentage of payroll. Ask upfront about setup fees, add-ons and termination clauses so you don’t get surprised by hidden costs.
• Review compliance support: A strong PEO helps you navigate complicated regulations like OSHA workplace safety rules, Affordable Care Act (ACA) requirements and state-specific employment laws. This kind of guidance can save you from costly violations and reduce the stress of keeping up with ever-changing regulations.

A reputable PEO can save you time, money and compliance headaches — but only if you choose the right partner. Taking time to evaluate providers carefully will help you avoid problems down the road.

PEO vs. in-house HR

The most common alternative to partnering with a PEO is to hire an HR professional or build your own HR team. Both models have pros and cons, and the better fit depends on your company’s size, needs and budget.

Advantages of in-house HR:

• More personal touch: Face-to-face support from an internal team can boost employee satisfaction and strengthen connections between staff and leadership.
• Full control: You decide how HR policies are managed and don’t have to share responsibilities with an outside provider.

Disadvantages of in-house HR:

• High cost: Salaries, benefits and overhead for a dedicated HR staff can be a heavy burden for small businesses.
• Limited expertise: Smaller teams may lack the depth of knowledge needed to manage complex issues like compliance, payroll taxes or employee benefits.
• Scalability challenges: As your business grows, you may quickly outgrow the abilities of a small in-house HR team.

For SMBs that want access to experienced HR professionals, help with legal compliance and affordable employee benefits, a PEO is often the stronger choice, as long as you’re comfortable with the co-employment model. On the other hand, very large organizations, companies that only need help with one or two HR functions, or businesses that want complete control may find in-house HR a better fit.

Ultimately, whether you choose a PEO or build an in-house HR team comes down to your company’s size, resources and goals. Weighing the pros and cons carefully will help you pick the option that keeps your people supported and your business growing.

Skye Schooley contributed to this article. Source interviews were conducted for a previous version of this article.