What Is a PEO? A Complete Guide for Businesses

PEO is an abbreviation for a professional employer organization, which is a specialized entity that offers comprehensive HR services. If you run a business, learning about it can help you streamline your operations, be more efficient, and grow faster.

These organizations can perform various tasks and handle different operations ranging from payroll management to compliance assurance. They are mainly employed by small and mid-sized businesses that want to delegate administrative tasks and focus on core operations.

In this article, we’ll learn the meaning of PEO, the way it works, the types of services it can provide, and the benefits of using it.

Key Takeaways

• PEO is shorter for a professional employer organization, and it’s a professional entity that specializes in providing various HR and administrative support to businesses.
• It works by taking on some of the tasks, such as payroll and benefits management, while leaving business owners with full control of their core operations.
• Common services that PEOs provide include payroll and tax administration, employee benefits management, HR and compliance support, and risk management.
• PEOs are especially good for small and medium-sized businesses, as they can reduce their HR workload, give access to enterprise-level benefits, improve compliance, and help them save time.
• When choosing a PEO for you, assess your needs, look for certifications and accreditations, analyze the pricing, and evaluate available benefits.

What Is PEO?

PEO stands for “professional employer organization,” and it’s a type of entity to which businesses outsource certain operations. It mainly offers HR services, such as payroll processing, tax withholding and administration, employee benefits management, and regulatory compliance assistance.

By delegating these tasks to a PEO, a business owner can instead allocate more time and resources to their core operations. This allows them to improve their products or services, find more clients, improve relationships with existing ones, polish their sales funnels, and more.

Meanwhile, they maintain full control over their daily operations and workforce management. This includes finding and hiring talent, firing employees, and managing their day-to-day activities.

On the other hand, PEOs can handle tasks like filing taxes using their own EIN (Employer Identification Number) or managing employee benefits. This type of professional relationship between a business and a PEO is called a co-employment model.

Such organizations are particularly common in the U.S. due to the complexity of labor laws. They are particularly useful to small and mid-sized businesses (especially those that operate in multiple states), giving them access to enterprise-level HR services.

So, in essence, PEOs lower administrative burden and reduce risks associated with non-compliance while still leaving business owners with complete decision-making power.

How Does a PEO Work?

A PEO works through a co-employment relationship model. This is a contractual arrangement between a business and a PEO it hires, which results in sharing some of the responsibilities between the two parties.

It’s important to note that a business owner doesn’t lose any control over their operations; instead, they just delegate certain tasks, mainly related to HR processes.

In essence, a PEO can be looked at as an administrative worker hired by the company to perform various functions needed to ensure smooth day-to-day business operations. Using this analogy, the rest of the company remains an “on-site employee,” which performs regular tasks and duties.

Some of the more common tasks for which PEOs are hired include processing payroll, as well as withholding and paying taxes. Since these responsibilities are then taken away from the employer, they can focus on enhancing their business. Employers are still in charge of managing their workforce, setting schedules, making decisions about hiring and laying off, etc.

It’s important to note that employers aren’t relieved of their tax obligations, even if they have an arrangement with a PEO. If a PEO withholds and pays taxes under its EIN, the employer must still ensure that everything’s been done correctly; otherwise, they can run into problems during audits by the IRS.

What Services Do PEOs Typically Provide?

PEOs can provide various services, depending on the needs of your business and the arrangement that you have with them; the most common ones being:

1. Payroll and Tax Administration

Payroll processing is one of the core services that professional employer organizations provide. It encompasses everything from calculating wages and determining deductions to giving payments to employees.

Depending on the arrangement, a PEO can also do the taxes instead of the employer and handle federal income tax and state tax filings using their own EIN. This helps businesses reduce the risk of errors or non-compliance when filing taxes.

Using an accredited PEO for tax administration is especially recommended for small and medium businesses that operate in multiple states and need to ensure compliance with many laws simultaneously.

2. Employee Benefits Management

PEOs often manage benefits for many employees, which is why they can negotiate favorable terms. By using a PEO, you can typically gain access to much better health, dental, vision, disability, retirement, and similar plans than if you were to negotiate them on your own.

In addition to securing you better rates, PEOs will handle the enrollment process, all the required paperwork, and the necessary administrative operations associated with benefits management.

3. HR and Compliance Support

PEOs can help with miscellaneous HR tasks and provide guidance on relevant regulations. For example, they can help with the development of employee handbooks and documentation for new hires, offer recommendations regarding employee relations and performance management, and more.

On the other hand, they can advise you on federal and state employment laws and regulations, like the Affordable Care Act (ACA) or the Family and Medical Leave Act (FMLA). This helps you stay compliant while running your business, avoiding potential penalties and legal troubles.

4. Risk Management

Professional employer organizations can assist you in mitigating numerous risks associated with running a business. They can help you develop and implement workplace safety programs and training regimes, provide frameworks for incident reporting, manage workers’ compensation insurance, and more.

For example, PEO professionals can help you create a safer work environment that’s compliant with the Occupational Safety and Health Administration (OSHA) guidelines, enabling you to pass any potential inspections. This can result in reduced insurance costs and limited claims.

Benefits of Using PEO

Now, let’s take a look at some of the biggest benefits of using a PEO:

• Cost efficiency and reduced HR workload. Businesses can delegate HR operations to PEOs, which means they can reduce dedicated HR staff or remove it completely. This can save a significant amount of money that would otherwise be spent on hiring and paying HR professionals, while you’ll still have access to professional services.

• Access to enterprise-level benefits. PEOs can give small businesses access to benefits that global corporations and Fortune 500-level companies have. Since professional employer organizations have pooled buying power, they can secure comprehensive health insurance and retirement plans, and many other benefits.

• Improved compliance and risk reduction. Employment regulations are complex, and they are consistently changing. Keeping up with the latest rules and updates can be stressful and time-consuming, especially when mistakes can lead to fines and legal liability. PEOs can do all that for you, helping you mitigate liability.

• Time savings for business owners. Managing payroll and benefits, doing paperwork, and keeping track of rules and regulations all take a lot of time. By outsourcing all of these tasks to a PEO, you can put all of your efforts and energy toward improving your business strategies and generating revenue.

PEO vs. Other HR Models: What’s the Difference?

PEO isn’t the only type of service to which you can outsource certain tasks and responsibilities. There are other models that businesses can leverage to streamline their operations, such as:

• Administrative services organizations (ASO). ASOs are great for businesses that don’t need the comprehensive assistance that PEOs provide. They provide help with administrative tasks without the co-employment relationship model. As a result, business owners retain most of the responsibility.

• Employer of record (EOR). EORs are typically used by businesses that operate in a global market. They assume full responsibility, since they act as the sole employer for the workforce. These entities are in charge of payroll management, tax filing, benefits, and compliance support.

• Temporary staffing agency. Staffing agencies are typically contacted on a temporary or contractual basis. They provide businesses with a workforce for specific periods of time (e.g., for seasonal work, one-off projects). These agencies handle recruitment, screening, and sometimes even payroll.

Here’s a concise table outlining the differences and main characteristics of every model:

Who Should Consider Partnering With a PEO?

Now that we’ve explained PEO services and highlighted the benefits of using them, let’s see who has the most to gain from partnering with one:

• Small businesses. Small businesses often don’t have enough staff or resources for a dedicated HR team. On the other hand, they still need to manage payroll and benefits, and ensure compliance with relevant laws. As a result, it’s often better to contact a PEO for a small business and outsource these tasks to them.

• Startups that are scaling quickly. Fast-growing startups often have to onboard new employees quickly and tackle numerous compliance challenges associated with expansion. This is particularly notable in startups that are expanding into new states, in which case they can benefit from the expertise provided by experienced PEOs.

• Companies that want access to premium benefits packages. If small and medium-sized companies want to compete for top talent, they often need to offer compelling benefits. Hiring a PEO can give these companies access to high-quality yet affordable packages for their employees.

How to Choose the Right PEO for Your Business

PEOs can do many things for your business, and there are many types of them. That’s why it’s essential to choose the one that suits your needs the most.

Here are some of the key factors to consider when choosing the right PEO for your business:

• Assess your needs. Before you begin research, analyze your business. Determine your pain points, figure out what kind of assistance you need, and you’ll know which type of PEO to look for.

• Check for accreditation. Accreditation adds trustworthiness to a PEO, demonstrating its commitment and stability. ESAC-accredited or IRS-certified PEOs (CPEOs) represent a good starting point in your search, especially if you don’t have experience with these organizations.

• Look at the pricing. PEOs typically charge either a flat fee per employee or a percentage of your payroll. Once you start looking into a specific organization, carefully analyze its entire pricing structure to ensure there are no hidden fees or costs.

• Evaluate available benefits. If you’re after enticing benefits, look at their availability at the PEO, as well as the insurance carriers.

Simplify Administrative Work with Paystub.org

If you want to improve record-keeping and payroll management without a PEO, you can use document generators at Paystub.org. Our software is designed to help you make various business documents quickly and effortlessly, even if you’ve never used it before.

Here are the generators that we offer:

• Pay stub generator
• Form W-2 generator
• Form 1099 generator
• Invoice generator

Final Thoughts

Knowing what a PEO is allows you to leverage these organizations and delegate tasks that take too much of your effort for not enough gain. PEOs provide support to businesses, freeing up time and resources for them to focus on their products or services. They can do various tasks, ranging from payroll and benefits management to compliance assurance.

When choosing a professional employer organization, make sure to pick the one that aligns with your needs. Some businesses only need payroll management, while others want access to premium benefits packages. Finally, don’t forget to give our document generators a go if you want a quick and simple way to simplify your record management.

What Is PEO FAQs

1. What is the difference between a PEO and an EOR?

The main difference between a PEO and an EOR is in the type of professional relationship you have with them. A PEO is effectively a client with which businesses enter into a co-employment model. An EOR becomes a legal employer of your staff, assuming all associated legal responsibilities and liabilities.

2. How much does a PEO cost per employee?

How much a PEO costs per employee varies, and is often calculated as a percentage of your total payroll or as a flat fee. Percentages are typically in the range of 2–12%, while a flat monthly fee per employee is often between $40 and $200.

3. Are PEOs only for small businesses?

PEOs aren’t only for small businesses. While small and mid-sized businesses can usually gain the most benefit from leveraging PEO services, large companies can also hire them to outsource various HR and administrative functions.

4. Is co-employment risky for employers?

Co-employment isn’t risky for employers if the arrangement is made with a reputable and certified PEO. There can be risks if the organization runs into financial problems or doesn’t fulfill its obligations appropriately. That’s why it’s recommended to vet a PEO and choose the one accredited by the IRS or ESAC.

5. How do I know if my business needs a PEO?

Your business may need a PEO if you spend too much time and resources onpaperwork and HR duties. You may also find it difficult to keep up with employment regulations or offer appropriate benefits to your employees, in which case you can delegate these tasks to a PEO.