PEO vs Payroll Services: What's the Difference?

Which is the better option for small businesses: a payroll service provider (PSP) or a professional employer organization (PEO)? Either option can help lighten a small business owner’s burden, but they function differently and offer overlapping yet unique services.

If you own a small business, you are no doubt familiar with the struggle to stay afloat while attracting and retaining quality team members. Add all the human resources and legal tasks associated with running a business and managing employees, and it’s easy to feel overwhelmed. That’s why a PEO or payroll outsourcing company may be an excellent option to lighten your load and make your life easier.

What exactly is a PEO?

A PEO is an organization that serves as a co-employer and takes on not only payroll services but also many other HR tasks for small businesses. These extended HR functions usually include offering health insurance, worker’s comp insurance, employee handbooks, and filing IRS-required employment taxes under their EIN (Employer Identification Number) instead of yours. For many small employers, this is a huge boon that saves them time and headaches--and ultimately money as well.

How can they do all of this? The way PEOs are structured, they group together like businesses under one co-employer umbrella, so they have the buying power of a large corporation. This bargaining power allows them to access more reasonable rates on things like health insurance that are often out of financial reach for small businesses and their employees. Another distinction — the PEO bears the entire legal and financial responsibility for your employment practice. It means you can offload a lot of the stress when it comes to managing your staff while also outsourcing many of the HR functions that take up too much time such as benefits administration and payroll processing.

PEOs function as an HR outsourcing solution for smaller companies. Mind you, this doesn’t mean PEOs are involved in the day-to-day running of their partner businesses. Rather than being intrusive, their role is a supportive one, there when their clients need them and quietly keeping the wheels turning behind the scenes.

What can a PEO do for small businesses?

As a co-employer and de facto HR team, PEOs can help small businesses with nearly all of the tedious, legal mumbo jumbo HR teams deal with and make it possible for small businesses to provide a much more desirable and comprehensive benefits package for their employees. For example, PEOs offer:

• Payroll processing: Like a payroll service provider, a PEO takes on the tasks of payroll administration, figuring out and managing withholding taxes, and filing payroll taxes on their co-employer’s behalf.

• Employee benefits: PEOs take the power of the collective to make attractive employee benefits attainable for small businesses that otherwise may not be able to afford them. By standing in as the large employer, grouping small co-employer businesses together, PEOs can go to the table as an entity with more bargaining and buying power than most any small business could on its own. Thus, employers are able to offer their teams benefits such as 401k, health insurance, and workers’ compensation insurance without breaking the bank for either them or their employees. A good PEO will also help with benefits open enrollment, onboarding, and offboarding, and also track paid leave, sick time, and the like.
• Risk management: It bears repeating: small businesses often struggle to stay afloat while trying to maintain good employee culture. On top of that, running a business comes with many risks involved, from potential accidents to required state and federal tax filings to financial risks. A PEO helps ensure their small business co-employers are legally compliant, and they can also help with workplace safety and security. As a co-employer, a PEO also assumes some of the legal burden in case something goes awry. Because of their structure, they are able to bring down business costs associated with risk management, such as workers’ compensation. Partnering with a PEO can help small business owners breathe easier, knowing they have added protection against risks.
• HR services, consulting, and paperwork: As the Employer of Record, a PEO will work to make sure all legal requirements are met. In addition, they often provide frameworks for necessary employee handbooks, including ACA (Affordable Care Act) and ADA (Americans with Disabilities Act) compliance handbooks. PEOs employ HR experts and often employment lawyers who are able to answer HR questions for small business owners and their employees. Typically, PEOs provide invaluable support for onboarding or terminating employees, tracking PTO (paid time off), and regulating compliance concerns.

What does a payroll service provider do?

Another option for small to large companies is a payroll service provider. This is a way to outsource all payroll tasks so everything is handled in a timely, legally compliant, and efficient manner. A PSP processes payroll according to your payroll schedule, including making the necessary deductions in each paycheck for employee withholding and other taxes and any benefit premiums.

As a contracted service, a PSP can file W2 and W3 forms for their clients and calculate quarterly taxes and unemployment taxes, and also file tax returns under the business’s EIN.

While a payroll company can surely save small businesses time and take care of a lot of the grunt work and legal requirements involved in payroll, there is no shared liability — the business owner bears all the legal responsibility for its employment practices.

Does a PEO or PSP cost more?

A PSP usually costs less upfront, as they provide fewer services and take on limited if any, legal liability. PSP arrangements often involve a flat monthly fee for each company based on its size. PEOs charge a per-employee cost that is greater upfront. However, a PEO also provides many services and takes on risk management and legal burdens that very well may end up costing the small business much more and not just money but also time.

With a PEO, small businesses can offer employee benefits that can aid in the recruitment and retention of quality staff — saving owners time and money from onerous hiring and training processes. The access to benefits s alone, in addition to sharing legal liability, often makes the investment over time a worthy one. Nobody plans for things to go wrong, but the safety net a good PEO provides can give small business owners something priceless: peace of mind.

Which service is best for my small business?

There is no pat answer here. Many factors to help you make this decision include:

Company size: If your company is large enough to hire its own skilled HR team, a PEO may not be necessary or the best option.

Legal know-how: If your team has sufficient knowledge in employment law to maintain compliance for your company and provide answers to the sticky wicket legal questions often are, then good for you! You may not see much additional advantage to the higher initial costs of a PEO vs. a payroll service provider.

Is Decent a good PEO choice for my small business?

Of course, we would love to say we are absolutely the best choice, this again comes down to the size of your business and its specific needs. We are currently the only PEO that created our own health plan, one with a $0 medical deductible and always free primary care. There are co-pays, but all costs are transparent from the get-go.

Other PEOs often started with a payroll service provider model and built on the additional services, but that means they often only offer health insurance through the big providers--and rarely with affordable options for either employer or employees. We break down several different PEO options based on each company’s needs in this article.

Times are tough all over, and small businesses are under pressure to provide ideal safe workplaces and desirable perks for their employees. Employees working for small businesses often bear the brunt of making a living while taking on the additional expenses of costly benefits their employers cannot always provide.

Both PSPs and PEOs can provide immense value and time savings to small businesses. Each business owner must consider the value of each option and decide for themselves what the ideal option for them is.

Need a little more guidance about PEOs, check out the article Why small businesses are turning to PEOs or contact a sales team member at hello@decent.com.