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Managing payroll yourself will likely take more effort than it’s worth, especially as you start to grow your company and need to pay a large number of employees and contractors. You have two main options if you don’t want to do payroll yourself: outsource to a professional employer organization (PEO) or use payroll services.
In either case, you’ll hand off this tedious task to a professional who will ensure your payroll is error free and improve the experience for workers. However, since the models are quite different, it’s important to make sure you choose the right one to stay within your budget, maintain the level of control you want over your business operations, and gain the services you need.
What Are Payroll Services?
As the name suggests, payroll services offer just payroll. Startups often don’t need help with payroll because they’re able to use software to calculate wages, taxes, and deductions for the few employees you have. However, as your company grows, you may need support with payroll processing to ensure you remain compliant with taxes. The solution could be a payroll services provider. You may choose this option if you decide you don’t need much more than basic admin support.
When you contract a payroll services provider, the company pays employees in accordance with the schedule you set and makes deductions for taxes and benefits as legally required. In fact, you can choose the provider to be the reporting agent for all the communication between your company and the IRS. This would include filing quarterly business tax returns and federal unemployment (FUTA) tax returns using your employer identification number (EIN) as well as submitting W-2 and W-3 forms.
Although you’ll have a point of contact with your payroll services provider, you should find you don’t need to communicate with the company often, as the process should run smoothly the majority of the time. However, you may sometimes need to pass on any concerns your employees have about paychecks, benefits, or time off.
What Is a PEO?
A professional employer organization (PEO) is a third party that acts as your co-employer. It offers assistance with a range of HR services, payroll being just one of these. Other services may relate to:
- Taxes
- Benefits and insurance
- HR administration
- Onboarding
- Paid time off
- Workers’ compensation claims
- Unemployment insurance
As a co-employer, your PEO becomes the employer of record (EOR), meaning it hires employees on your behalf and leases them to work for you. This will make you a large employer, gaining you access to health, workers’ compensation, and other business insurance plans that may be impossible for a small or midsize company to access on their own. This is because insurers take on less risk when the employer is a large company.
A PEO also takes over employment tasks for the business, including employee benefits. However, the role doesn’t extend beyond HR: you’re still responsible for the regular functioning of the business, including employee management.
Lastly, a PEO will provide support for employee claims related to things like workers’ compensation, discrimination, harassment, and other grievances or disputes. The PEO will have HR professionals available to provide the exact type of assistance you or your employees need. For instance, it can act as a mediator between you and an employee, being impartial to find a solution that is acceptable to both parties.
What Is an International PEO?
International PEOs provide the same support as regular PEOs but on a global level. An international PEO has experts on its team who have knowledge of employment law in multiple countries, meaning the company will ensure you’re compliant when you employ abroad.
If you want to expand your business presence into another country or save money by hiring talent abroad (especially if it is possible to carry out the work remotely), it’s worth partnering with a global PEO.
The Main Differences Between a PEO vs. Payroll Services
PEO and payroll services differ in a few key ways.
Services Provided
With payroll services, you typically only receive payroll processing and tax filing. A PEO provides much more, such as ensuring compliance with employment law, administering benefits, and even handling aspects of hiring and terminations.
Although some payroll services do provide access to health insurance plans, they are far more limited than what’s available through a PEO.
Delivery of Payroll Services
Even the way the two options provide payroll services differs. Payroll services, in contrast, are reactive. Employees should expect to receive their paychecks on time and the company will stay compliant with benefit contributions and taxes. If you face any issues, though, you’ll need to reach out to the provider.
Another difference is that a PEO uses its own EIN when filing unemployment taxes, whereas payroll services use your EIN. Similarly, a PEO will use its own account to issue paychecks to employees, whereas payroll services will use your account. When you use someone else’s EIN, you have more protection from audits and penalties from the IRS.
Cost Differences
As you would expect, a PEO costs much more than payroll services because you receive a much more comprehensive package of services. It’s important to bear in mind that the upfront costs for a PEO are higher but the return on investment also tends to be much higher. This is due to the money you save on insurance premiums (which may be as much as 20% to 30%) and admin costs.
Payment plans also differ. For instance, payroll services are usually available for a fixed monthly price plus a fee per employee or contractor. This will be around $150 to $200 a year if you just want payroll, but as much as $1,500 a month if you want many add-on services.
A PEO is more likely to charge a percentage of your payroll — somewhere between 2% and 15% — although it may charge a fee per employee. The price you pay will typically include state unemployment insurance, health benefits, and workers’ compensation. There may also be a setup fee you pay just once.
Length of Contracts
Working with a PEO is considered a permanent arrangement. You’ll usually sign a contract for at least a year, but you’ll want to avoid switching to another PEO if possible to avoid the setup costs and the complications from changing to a different EIN, rehiring your employees (since the PEO is the EOR), and finding new insurance coverage.
Payroll services, in contrast, are usually available through monthly or annual contracts. This makes it less disruptive to switch to a different provider, especially if you time it right.
Liabilities and Obligations
As co-employers, PEOs share liabilities with the companies they work with. This incentivizes them to ensure they make no errors and to minimize risks in the workplace, such as by improving security, making smart hiring and firing decisions, addressing compliance issues, and securing appropriate workers’ compensation plans.
The downside to this arrangement is that your company will be subject to regulations for large employers. This includes the Family and Medical Leave Act (FMLA), the Employer Shared Responsibility Provisions of the Affordable Care Act (ACA), and the Affirmative Action Program. The good news is the PEO will handle all these compliance requirements for you.
In contrast, payroll services don’t share employer responsibilities with your company. This means nothing changes in terms of regulations — but it also means that you assume full liability. Even if the provider makes mistakes in compliance, your company may be on the hook. Although the provider may offer resources to help you manage risks, it will be your responsibility to implement them.
Impact on Company Culture
There is almost no risk of payroll services having an impact on company culture — it’s the same as using any other contractor to provide services to your business. As the PEO is technically the employer of your staff, though, there is some risk that the arrangement could change company culture. Employees will be interacting with the PEO (rather than someone at your company) whenever they have queries about payroll and benefits. Plus, the PEO may make HR decisions that affect employees.
Having said that, it’s important to note that the impact on company culture is likely to be positive. Companies that use a PEO have 12% lower employee turnover, are 50% less likely to go out of business, and have a growth rate that is double that of companies without a PEO.
What’s Right for Your Company?
Whether a PEO or payroll services is the right option for you will depend on your situation. You’ll likely decide that payroll services are the way to go if you:
- Don’t need more support than with payroll and taxes at the moment or you’d prefer to choose individual providers for each HR service you want to receive
- Want to maintain control over HR but don’t have enough resources to do everything yourself
- Don’t want to commit to a long-term contract
However, a PEO could be the better choice if you:
- Want to hand off the majority of your HR tasks to a third party, such as if you don’t have an in-house HR team or you’re spending too much time on administrative tasks
- Would like to have a single company handling all your HR tasks
- Are looking to lower your operating costs by obtaining more affordable insurance
- Want to access better benefits packages to attract top talent
- Can afford to invest in a PEO now to see long-term returns
- Are committed to growth
- Are concerned about staying compliant
How to Work with a Payroll Services Provider
There are some requirements you’ll need to meet before you can start receiving payroll services. The most important is to have already registered your business with the relevant authorities in every state where you have employees. You’ll also need to have your own EIN — since you’ll be using this for payroll and taxes. Unfortunately, payroll services providers don’t typically offer any support with this process.
Combining HR Service Providers
If you decide to choose payroll services over a PEO, you may find you need to contract several HR service providers to meet your other needs. Some possibilities include:
- Administrative Services — Offered by an administrative services organization (ASO), you’ll receive many of the same services as you would with a PEO, with the difference that you’ll remain the employer of your workers. This may be useful if you need support with HR functions but prefer to stay responsible for your employees.
- Temporary Staffing — If your business needs to scale up quickly or only needs workers for a short time, a temporary staffing service is a good solution to provide you with workers who have the skills you require.
- Recruitment — An external recruiter can help you source, interview, and hire the permanent employees you need for your team.
- Benefits Administration — A third party can create benefits packages that meet your employees’ needs, ensure you’re compliant with employment law, handle enrollment, and process claims.
If the number of services you need start building up, you should consider using a PEO instead.
Choosing the Right PEO
You’ll find that there are many PEOs to choose from — it’s crucial to pick the right one for your company.
Start by considering what services your business needs. The whole point of using a PEO is to gain a comprehensive package of services that goes beyond just payroll — but you also don’t want to pay for services you’ll never use. It’s ideal if the PEO is able to create a customized package of services that fit your business needs.
Next, consider the contract terms the PEO is offering. You want a price within your budget, quality guarantees, and a reasonable termination process.
It’s also a good idea to choose a PEO with experience in your industry. For instance, companies with employees carrying out physical work will benefit from a PEO who is experienced in providing workers’ compensation to similar businesses in the industry.
Lastly, it’s important to choose a PEO that meets IRS standards. Those that do are called certified professional employer organizations (CPEOs).
Using a Professional Employer Organization
An alternative to using payroll services alone is to partner with a Professional Employer Organization (PEO). While payroll providers focus primarily on processing wages and tax filings, a PEO offers a broader employment solution that can include HR administration, compliance support, benefits access, and risk management under a co-employment model.
For businesses weighing PEO vs payroll services, the right choice often depends on how much support you need beyond payroll. A PEO can be a strong fit for companies looking to reduce administrative burden, improve benefits offerings, and stay compliant as they grow.
With over 20 years of experience supporting global employers, Remote People helps companies evaluate these options objectively and choose the employment model that best aligns with their workforce strategy. Request a proposal to explore whether a PEO or payroll service is the right fit for your business.
