PEO vs. Payroll: Comparing Professional Employer Organizations to Standard Payroll Service Providers

The choice between hiring a PEO vs. payroll provider of another type should be made with several things in mind. Here’s what to know and consider.

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close up of peo consultant doing payroll for client

Payroll management can rank high among the tasks business owners dread most. Often it’s time-consuming, tedious, confusing, and just plain not fun. So much so that 53% of companies recently surveyed said they outsource some or all of their payroll operation.¹

This decision frees up company time and streamlines the process. Many organizations hire a payroll service to handle this responsibility. But there’s more than 1 path companies can take with payroll providers. They can choose either a standard payroll service provider (PSP) or a professional employer organization (PEO).

What’s the difference between them, and how does an organization decide which is best for their specific situation? Here we’ll compare and contrast PEO vs. payroll services alone.

What is PEO?

A professional employer organization is a company that provides a wide array of HR services for employers. Popular options are handling employer and FICA taxes, accounting, audits, government compliance, health insurance and other employee benefits, and payroll services. Those that are certified PEOs offer additional PEO advantages.

When an organization decides to partner with a PEO service, it will sign a contract agreeing to a co-employer status. This co-employment designation allows the PEO to act on the company’s behalf (and be responsible for the legal liability) regarding pay and payroll administration.

What is a payroll service provider?

A payroll service provider also handles payroll and pays federal payroll taxes. However, they don’t enter into a co-employment agreement. The legal responsibility of paying employees remains the employer’s.

Differences between a PEO and PSP

Organizations considering payroll service providers should understand the differences between using a PEO and a PSP. This knowledge helps them decide which option will fit them best. They differ in 4 key ways.

The type of services provided

A PSP payroll provider usually has a narrower service offering than a PEO. PSPs provide standard payroll services like processing payroll and keeping the company’s tax responsibilities up-to-date.

PEO providers handle a full range of payroll-related services and more, spanning the HR administration gamut. They offer recruiting and termination services, health insurance options, and management of other critical HR tasks.

PSPs may also offer health insurance options, but they are typically not as attractive as PEO options.

Employer of record designation

A PEO payroll services provider enters into a co-employment agreement with their clients. This gives them more control over HR-related services like company benefits.

A PSP arrangement is more like a vendor-customer relationship. While they may handle payroll processing and other tasks, the company remains the sole employer of record.

Overall cost

PEOs typically cost more out of the gate than PSPs. Over time, however, PEOs may be more cost-effective. For example, a PEO payroll service can usually access better health insurance plans. Even small savings per employee can add up to big cost savings in the big picture.

How workers’ compensation is handled

PSPs may offer your organization options for workers’ compensation insurance. However, this means that you, the employer, remain responsible for your workers’ comp for your employees.

PEOs provide your company’s workers’ comp through their service.

PEO vs. payroll provider: How do companies know which option is best for them?

When a business owner decides on payroll outsourcing for their company’s payroll administration processes, they must choose the option that best fits their needs. Several factors should play into the decision-making.

How much control do you want to maintain?

PEOs, with their long list of services and co-employment arrangement, shoulder more of an organization’s load than PSPs. They also take more control. Companies wanting to keep control of the benefits and employee decisions may be better suited for a PSP. Organizations that want to offload these tasks may be better off choosing a PEO.

Can you handle significant upfront costs?

A PEO’s setup and other fees can be steep, sometimes making it difficult for smaller companies to pay. If these expenses are burdensome, a PSP may be the better choice. However, business owners looking for long-term savings in health benefit options may find PEOs to be worth the initial investment.

How robust is your current HR department?

A fully staffed HR team may be able to handle many of the administrative services PEOs would provide. That could render PSP on a partial or as-needed basis a better choice. On the other hand, a small team or single-person HR department may benefit greatly from partnering with a PEO.

The bottom line on choosing between a PEO and PSP comes down to your business

Making decisions about payroll-related services can be challenging at first. Yet, outsourcing can free up time, streamline processes, and save on overall costs in the long term. Business owners considering hiring or switching payroll companies should start the process by determining their organizations’ needs and what type of payroll provider relationship would suit them. Once that’s defined, deciding which option best sets the company up for success should be fairly straightforward.

Business has its challenges, and we’re here to help. Visit Workest daily for more relevant, timely information on HR, business, and employee management.

1 How organizations can prepare for the payroll of the future

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