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Updated Jan 18, 2024

What Is a PEO?

Many small businesses can’t afford a full-time HR team. Professional employer organizations offer an alternative.

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Skye Schooley, Senior Lead Analyst & Expert on Business Operations
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A full-time human resources (HR) team to run payroll processing, benefits management and a host of other tasks is an investment many small businesses can’t afford. That’s where professional employer organizations (PEOs) step in. PEOs operate in every state, providing numerous services and employee benefits to small and midsize businesses (SMBs). These services can help increase a business’s growth, financial success and employee satisfaction.

What is a PEO?

A PEO is a third-party HR provider that assumes co-liability for its client’s workforce. Whether managing unemployment and payroll taxes or providing workers’ compensation insurance, PEOs offer numerous employee benefits that can provide more HR stability for your small business.

PEOs are great options for small businesses with understaffed HR teams because they take all the necessary HR responsibilities off their plates. Businesses that work with a PEO enter a co-employment arrangement. This means that while businesses are still responsible for running their own operations, their employees technically are also working for the PEO and are reported under the PEO’s employer identification number (EIN).

Editor’s note: Looking to partner with a PEO? Fill out the below questionnaire to have our vendor partners contact you with free information.

What does a PEO do?

PEOs can offer several HR services, depending on what you need. Some PEOs offer preset service packages. Others let you create a custom plan with the specific functions you need. Here are some of the things a PEO can do for you:

HR services

PEOs allow SMBs to outsource their HR and administrative needs. These typically include standard HR services, like creating employee handbooks and policies, onboarding new hires and terminating employees. These services can be tedious and time-consuming, so having a PEO take care of them for you can be advantageous.

Payroll and benefits administration

It’s best to think of PEOs as independent companies that manage daily HR functions like payroll. They can process employee payroll and take care of payroll taxes. They also offer employee benefits, such as 401(k) plans, health insurance and workers’ compensation. Some PEOs administer benefits directly to your employees and others work with a benefits broker to administer your benefits.

FYIDid you know
PEOs can leverage group health insurance to offer your employees competitively priced insurance options.

Legal compliance

The partnership between a business and a PEO is known as co-employment, which means that the PEO becomes a co-employer of your business. While you continue to manage your employees’ work and daily responsibilities, the PEO manages compliance, legal and HR-related policies. This co-employment arrangement relieves small business owners of some liabilities and allows them to focus their time on growing the company and generating revenue.

Many small business owners may cringe at the idea of a co-employment agreement but it’s not as daunting as it may sound. Your business remains the primary employer while the PEO handles specific HR tasks outlined in the service agreement. This allows the PEO to manage employee benefits, payroll and tax and government-related filings. They can also help ensure employment law compliance.

Training and development

Another feature that some PEOs offer is employee training and development. At the very least, most PEOs offer courses to help you with legal compliance like sexual harassment prevention training. Many PEOs also offer in-person and online development courses to help your employees improve or develop new skills.

What doesn’t a PEO do?

While a PEO can provide a variety of HR functions, it is not responsible for your actual business operations. You will maintain ownership and responsibility for ensuring your business continues to operate.

A PEO does not provide your business with labor like a staffing agency. Some PEOs offer assistance with employee onboarding but they do not staff your company.

Top PEO service providers

To help you find the best fit for your business, we researched and analyzed the best PEO service providers on the market. Here are our best picks:

Company

Key Feature

Full Review

TriNet

Personalized plans for industry-specific needs 

TriNet review

Deel

Supports international workers and multiple currencies 

Deel review

Insperity

Broad range of employee training courses

Insperity review

Rippling

Comprehensive automated workflows

Rippling review

TriNet

We picked TriNet due to its customizable PEO plans based on your industry. TriNet also has an industry-specific customer service team available 24/7 to help you get the most out of your plan.

Deel

We chose Deel as the best software 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. 

Insperity

We selected Insperity for its comprehensive HR features, including compliance. Excellent for SMBs, the platform offers a broad range of employee training resources.

Rippling

We chose Rippling for its comprehensive automated workflows for HR. The platform syncs with each personalized HR process, allowing you to scale at your own pace quickly. 

How much does a PEO cost?

While the cost of a PEO varies, most have one of two cost structures: 

  1. Per employee: Some PEOs that bill per employee (roughly $40 to $160 per employee per month) also charge a base fee. They are usually monthly costs that you negotiate directly with the PEO.
  2. A percentage of payroll: With this cost structure, you pay a percentage of your total payroll (roughly 3 percent to 12 percent) for each pay period. This percentage includes workers’ compensation, employer practice liability insurance, and local, state and federal taxes.

The cost of a PEO is not fixed because it depends on the company and its services, according to Matt Diggity, CEO and founder of Diggity Marketing.

“Generally, there are two methods of charging ― per employee or payroll percentage,” he said. “Charges per employee mostly range between $1,000 and $1,500 per year. This approach has the benefit that while devising a business’s yearly financial plan, you have an accurate expense of [your] PEO.”

Meanwhile, payroll percentage continuously changes according to your payroll amount that month. It’s important to remember that PEO costs vary based on service offerings, the number of employees you have and the negotiated rate. These costs are usually less than those of hiring your own team to manage your HR.

PEOs can also charge for their services in other ways, such as by retaining the Section 125 benefit as a co-employer or with SUTA taxes, according to Michael Roloson, director at PEO Focus.

“If you take into account all fees across the board, you can get a better picture of the total costs,” Roloson said. “It’s important not to evaluate purely on costs. Entering into a PEO relationship is about adding value and efficiency to your organization.”

Roloson believes that by first identifying the PEOs that can bring the most value to your business, you will be positioned better to negotiate contract terms.

What are the pros and cons of using a PEO?

While there are a lot of benefits to outsourcing HR activities, you surrender some control. Here are the primary pros and cons of using a PEO.

PEO pros

PEO cons

It eliminates your need to handle many routine administrative tasks.

You give up some control over HR functions.

It can save you time.

It can delay communication.

It grants you access to affordable, comprehensive benefits and insurance coverage.

It can be expensive to form or leave the partnership.

It helps you maintain legal compliance.

The PEO has full control over benefits and insurance.

Depending on the size of your business and the services your prospective PEO offers, opting for a PEO over in-house HR might be a beneficial move for your small or midsize company. Generally, a business and PEO relationship is established as a co-employment agreement. The PEO usually handles tax withholdings, employee wages, HR services and benefits administration, so you can focus on managing your employees and running your business.

Did You Know?Did you know
Companies that invest in a PEO see 7 to 9 percent faster growth, up to a 14 percent decrease in employee turnover.

How to choose a PEO provider

A PEO provider plays an integral role in your company, so it is crucial to choose one that best matches the needs of your business. You can follow five steps to choose the right PEO service provider:

  1. Identify your HR needs. List all the HR functions you will need to outsource to a PEO provider.
  2. Research your options. Look at the various PEO service providers on the market and analyze their features, services and tools.
  3. Consider your industry. Some industries have strict legal requirements when it comes to managing HR. If this sounds like you, consider looking for a PEO catering to your industry.
  4. Narrow down your top PEOs. Make a shortlist of the top providers you are interested in. Reach out to each company and inquire about what they have to offer. Be sure to ask about features, pricing, contracts and customer support.
  5. Choose your PEO provider. After comparing your top options, choose the PEO provider that best matches your business’s needs. 
TipBottom line
Before choosing a PEO, ensure that they are a member of the National Association of Professional Employer Organizations (NAPEO), are IRS certified and can provide professional references.

PEO FAQs

A staffing company provides temporary employees while a PEO is a full-time co-employer. The staffing company usually handles business operations, including day-to-day management, production, marketing and sales. PEOs typically manage employment operations, including tax affairs, HR services and benefits administration. Roloson said that a PEO does not provide any workers but rather partners with its clients as they enter a co-employment partnership where both parties employ the workers. “Through the co-employment model, the company can then leverage the PEO for their HR expertise, payroll, administrative technology and employee benefit programs,” he said. “The company can still dictate the culture that it chooses to instill as a small or medium-sized business while also gaining access to the expertise and economies of scale that a larger partner can bring to the table.” [Related article: What Services Can a PEO Provide to Your Small Business?]
Depending on the size of your business and what the PEO offers, switching to a PEO can be a good thing. According to Shraga Jacobowitz, CEO of ARC PEO Consultants, most PEOs provide an implementation representative to assist with onboarding. Jacobowitz said this onboarding process has a few stages:
  1. Company decisions (health insurance plans, funding strategies and other HR policies)
  2. Employee data input and online portal building
  3. Orientation meetings with employees
  4. Employee enrollment in HR platforms
  5. Training on using the online portal, such as payroll processing, reports and transactional items
A PEO can free up time and resources for employers, allowing them to focus on growing their businesses. This is one of the key benefits of a PEO in a business’s early stages of growth. A PEO also plays a decisive role in managing a company’s employee affairs. PEOs can offer unique pricing on certain healthcare benefits, sometimes lower than what your business would pay outside of the PEO, according to Nicholas Tzoumas, president of Clearscope. “At the same time, in addition to the costs associated with these premiums, workers’ compensation premiums and payroll processing, there are also administrative costs assessed by the PEO,” Tzoumas said. “When comparing PEO versus non-PEO options, employers (or their benefits consultant) need to compare the costs inclusive of the PEO admin fees.”
PEOs make money by charging a monthly fee. Some PEOs have a flat fee per employee while others charge a percentage of each employee’s salary. The cost you pay a PEO should save you time and money by outsourcing HR services.
PEOs can work with union and nonunion clients. Any employees under a PEO contract are included in the CBA of the client. PEOs follow the CBA terms and employees can choose whether they would like to participate in union activities.
A PEO generally does not affect company culture unless you are seeking to make a change. PEOs can provide strategies to help you reshape your company culture to meet your business and branding goals.

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

author image
Skye Schooley, Senior Lead Analyst & Expert on Business Operations
Skye Schooley is a dedicated business professional who is especially passionate about human resources and digital marketing. For more than a decade, she has helped clients navigate the employee recruitment and customer acquisition processes, ensuring small business owners have the knowledge they need to succeed and grow their companies. In recent years, Schooley has enjoyed evaluating and comparing HR software and other human resources solutions to help businesses find the tools and services that best suit their needs. With a degree in business communications, she excels at simplifying complicated subjects and interviewing business vendors and entrepreneurs to gain new insights. Her guidance spans various formats, including newsletters, long-form videos and YouTube Shorts, reflecting her commitment to providing valuable expertise in accessible ways.
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