PEO Vs. Payroll: What Are the Differences?

PEO Vs. Payroll: What Are the Differences?

Outsourcing an important business process such as payroll is not a new practice for small business owners. With the constant need for accuracy and efficiency in undertaking payroll responsibilities, small business owners find they need support. This has given rise to outsourcing to Professional Employer Organizations (PEOs) and Payroll Service Providers (PSPs), who help minimize the chances of payroll compliance risks.

If you’re unsure whether to outsource to a PEO or payroll provider, it’s important to first know what your business needs to make the best decision. This article expands on the major differences between a PEO and a PSP to help elevate your payroll efficiency and optimize the success of your business.

Services Offered 

A Professional Employer Organization is responsible for both payroll and HR-related services for small and medium-sized businesses. Your PEO may help in functions such as hiring, termination, health insurance, and employee compensation. Working with a PEO places you in a co-employment arrangement where you delegate some HR roles, which alleviates the pressure of managing your business.

As for the payroll provider, they will largely take care of the administration and processing of your payroll, including deducting taxes and premium benefits. A PSP can also help in filing your W-2 and W-3 forms, as well as preparing and filing your quarterly business returns and federal unemployment tax returns (FUTA). With a PSP, there is no co-employment, although you will sign a payroll agreement that outlines the services the vendor will provide and the service fee you’ll pay.

Cost of Service 

When comparing the two, the PEO tends to be more expensive as you’re getting more than just payroll services. Generally, it may cost you up to 15% of your gross wages for services offered, which bumps up your administrative costs. There are also other costs as well as set up charges, so it’s prudent to check the contract before signing. Overall, the costs will depend on factors such as the size of your business, types of services needed, and insurance costs.

On the upside, hiring a PEO can be a cost-saving strategy in the long run in terms of economies of scale. There is the benefit of negotiating for better rates for employees’ compensation, health insurance, and state unemployment which would otherwise be hard to achieve as an individual employer.

With a payroll provider, it will be significantly cheaper since the pricing is flexible. It will only cost you between $150 and $200 per employee per year. The drawback to this option is that adding services such as quarterly and year-end reporting and Affordable Care Act reporting will lead to additional costs making a PEO the preferred choice.

Contract and Termination 

If you choose a PEO, you’re committing to a longer contractual agreement lasting a year or more. And with the PEO being your co-employer, the firm will have to comply with large-employer rules such as employee handbook rules, although they will ease the burden of HR duties for you.

On the other hand, you don’t necessarily have to sign a contract with PSPs, although you will enter into a payroll agreement indicating both your responsibilities but for shorter periods. This type of flexibility ensures you are not stuck with an unsuitable provider.

However, terminating the contract with your PEO can be a major headache in terms of costing more time and money to make necessary adjustments like setting a new payroll and finding another provider.

The Amount of Control 

The PEO has control over employee benefits carriers and plans as they act as the employer on record. It also means you give up the ability to choose the insurance provider you want. They also have the power to hire and fire your employees, which can cause friction between you and the PEO.

However, their involvement ensures your firm benefits from minimal tax compliance burden as they do the filing and paying using their EIN and not yours. Also, your arrangement allows you to enjoy the best premiums the market can offer.

With a PSP, you are the only employer on record, allowing you autonomy over managing your employees, including benefits and hiring and onboarding. You are also solely responsible for filing and submitting your taxes under your EIN.

Company Culture

PEOs are credited for an increased number of worksite employees (WSEs) employed at a compounded annual rate of 7.6% from 2008 to 2020. This is more than 7 percent higher than the compounded employment annual growth rate of the U.S labor force for the same period. This notable statistic reveals the right PEOs have an eye for hiring and retaining the right talent, which in turn impacts workplace culture and also reduces turnover rates.

The right PEO handles the bulk of your employees’ benefits packages and HR processes which go a long way to impact your employees’ satisfaction and morale. On the other hand, the wrong PEO may generate an impersonal and hostile work environment which may lead to a massive employee exodus.

However, hiring a PSP allows you more control over the type of culture you want to nurture for your employees. You will only be delegating the payroll administration, which can be a valuable addition as there will be no disgruntlement by employees over untimely and inaccurate compensation. However, be mindful if you decide to extend additional HR roles to the provider, as this can be a cause for conflict and de-motivation in your firm.

Choose the Best Payroll Service 

Ultimately, you’re best placed to understand what your business requires to achieve the most efficient payroll service. Whichever payroll provider you choose should give you the best value for your money and leverage as an employer and competing business in your industry.

If you’re looking to work with a payroll partner that can customize your payroll and HR needs, consider ASAP Payroll and get to learn more about our payroll outsourcing services. To start working with us today, feel free to get in touch.

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