Payroll vs. PEO - Making the Right Choice for Your Business

Payroll vs. PEO – Making the Right Choice for Your Business

Any smart business owner is keen on increasing accuracy, reducing administrative burden, and freeing up their workforce to concentrate on more strategic and revenue-generating activities. Outsourcing payroll processing is, therefore, an appealing option for many business owners.

In your research, chances are you came across the two standard options, Payroll Service Providers (PSPs) and Professional Employer Organizations (PEOs). Although the two aim to streamline payroll processing, they do it in different ways.

This article compares payroll service providers and PEOs on different fronts to help you make the right choice for your business.

1.    The Service Provided

A Payroll Service Provider handles the administrative and compliance needs of a business. That includes paying employees according to your set payment schedule and making appropriate deductions like taxes and benefit premiums. Although they manage the payroll, your business remains the employer of record.

On the other hand, a Professional Employer Organization is a third-party company responsible for more workforce management functions beyond payroll administration and compliance. They handle most of the duties an Internal HR team would. With this option, you enter a co-employment agreement that allows the Professional Employer Organization to control some daily decisions while taking much of the liabilities.

2.    Contractual Obligations

The contract that a business enters with a PEO lasts a year or longer. Such a contractual obligation gives predictability and stability. Unfortunately, if you choose to opt-out, you’ll need to rehire employees, give them benefits and look for an alternative payroll management provider. On the other hand, PSPs can offer shorter contracts that allow you to switch if you are dissatisfied with a provider.

3.    Cost

PEOs are generally a more expensive choice than PSPs. They hit the ground running and play a part in every part of the business, from training or compliance. Most of them charge an extra administrative fee that is often a percentage of your overall payroll costs.

Although these companies charge differently, they expect to incur between 3-15% of wages as an extra administrative cost. Besides, sometimes you may even pay for services you don’t use. With PSPs, the total cost is way less.

4.    The Amount of Control

Professional Employer Organizations control your employee’s benefit carriers and plans since they are the employer of record. Meaning, this option does not allow businesses to pick and choose an insurance offer they prefer. They also control your employees such that they have the right to recruit and fire. Hiring may occur more often than firing, but giving such a critical authority to a third party may not be something many businesses want to consider, particularly if they have been pro-actively running business operations.

Luckily, with Payroll Service Providers, you remain the employer and can make decisions for your workers, such as benefits. Besides, you have control over who works in your business and can choose to accept or reject your provider’s recommendations.

5.    The Effect on Culture

When your business enters an agreement with a PEO, it means that the onboarding process will now be under the third party company. The Professional Employer Organization assumes most of the HR responsibilities that your in-house team was managing. Even employees will receive paychecks from them. Unfortunately, these could lead to disconnect from the company, especially if the transition is not seamless and the provider does not share your values. This may have a negative influence on your workplace culture.

However, with a PSP, you are only outsourcing pay options management and self-service administration. The employees may not even notice any change. Besides, employees get accurate and on-time pay which can significantly boost their morale, thus benefiting your culture.

Final Thoughts

We have outlined the major differences between PEOs and PSPs and how each serves your business. A Payroll Service Provider (PSP) emerges as a perfect option, especially when you want to realize the advantages of outsourcing payroll functions but have control over your employees and benefits.

ASAP Payroll understands your business needs and commits to reducing inefficiencies in payroll management and making the process less of a hassle. Get in touch for professional assistance.

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