In-Depth Analysis: PEOs & Payroll Service Providers -Which One Fits Your Business?
Updated: October 4th, 2023
Managing payroll isn’t a walk in the park; it’s a complex task where even small mistakes can lead to big trouble. Things like getting job classifications wrong, messing up deductions, missing deadlines, and security breaches can result in hefty fines and legal issues.
To give you an idea, the National Small Business Association (NSBA) conducted a survey and found that small business owners spend $12,000 annually on regulatory costs. The survey says one in three small business owners reports spending more than 80 hours a year meeting requirements.
That’s where HR outsourcing solutions come in, such as PEO and Payroll Service Providers (PSP), to take on the troubles of payroll. But how do you choose the right provider, and which one is better for your business?
In this article, we’ll discuss the difference between the two, what they offer, their cost, and how to choose the right one for you.
What Is a PEO?
A Professional Employer Organization (PEO) provides an all-in-one HR solution for businesses of all sizes. They act as an employer of record for your organization, sharing a lot of the responsibilities and liabilities of running a company. This includes payroll, benefits, risk management, employee training and development, and much more.
A co-employment agreement is created through a client service agreement (CSA) between you and the PEO company you decide to work with. This collaboration allows you to focus on your core work while the provider handles most HR tasks, ensuring compliance with employment laws since they are experts in filing taxes.
They offer workers’ compensation insurance, payroll tax management, and valuable advice for you and your employees. PEOs help you cut costs by getting these benefits for your employees instead of paying for and managing them yourself.
PEOs can voluntarily apply to the Internal Revenue Service (IRS) to become a Certified Professional Employer Organization (CPEO), which means they have met a demanding background check and have the experience, tax compliance, and financial reporting requirements set for the PEO industry. If you work with a CPEO, you will get financial security and tax breaks that clients of other HR outsourcing models might not give you.
Delving Into Payroll Service Providers
Payroll Service Providers (PSP) take care of the nitty-gritty of your company's payroll processing and related duties. Their job is to make sure employees get paid accurately and in a timely manner, handling tasks like calculating and deducting taxes, managing benefits, and other payroll expenses. This means they follow the schedule you set for them.
Many businesses opt to outsource their payroll to these experts because it streamlines things and lightens the workload regarding payroll processes. When they do, they free up time and energy to focus on other parts of their business.
However, a standard Payroll Service Provider doesn't provide any employee benefits or administrative help, such as worker's compensation. You might be required to hire a human resources consultant for additional administrative services, which comes at an additional cost.
Key Differences Between PEO & Payroll Service Providers
The two have many significant differences in the level of services they provide and the legal risk they share with your business. When you hire a PSP, they primarily focus on payroll processing, tax compliance, and W-2s, but they won't share any liability or legal burden with you. This means they contact the IRS and file taxes, but you are the only one responsible if a mistake happens. They also don’t offer any HR guidance or training for your employees when it comes to handling payroll and dealing with the IRS.
However, a PEO supports all aspects of HR services, including payroll. As a co-employer, the PEO files and remits all the employment taxes under their employer identification number (EIN) instead of a client company, saving you from having to pay the State Unemployment Tax Act (SUTA). This means that they provide training for the employees on this important subject as well as share a lot of the responsibility of dealing with the IRS, especially if there is a mistake.
If you plan to expand globally or have international business operations, global PEOs can offer valuable support with the different HR and legal requirements since they have their own international experts. However, a PSP's expertise doesn't expand outside of the country where they were hired.
What about the cost of PEOs and PSPs?
When deciding between a PEO and a PSP, evaluating the financial implications is crucial. A PEO will likely be the more expensive option since they provide many more services, share legal liability with you, and are involved in most business operations. They might be more expensive for smaller and mid-sized companies compared to the larger ones.
Consider the associated fees and potential savings in time and resources, and compare the cost of hiring dedicated HR staff to help with PSP since their services will focus on payroll administration. Analyze the long-term financial impact of both types of providers on your business to make an informed decision.
How Do I Choose Between PEO & PSP?
Making this decision depends on what kind of partnership you are looking for, what your business needs, and a few other factors. Working with a PSP may be a better choice if you have less than five employees or only need to outsource your payroll management.
On the other hand, a PEO will provide you with support in all human resources tasks; you won't need to spend a lot of resources navigating the landscape of employment laws and regulations, especially if you have a startup business or you want to branch out.
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