Modernizing payroll processing delivers big returns for small businesses. Whether using a corporate payroll service provider (PSP) or professional employer organization (PEO) for payroll, you can save time, increase accuracy, and improve employee experiences. The outsourcing models differ, yet both automate payroll administration and tax filings.
As you evaluate PEO vs. payroll services, consider how each option can support your company's unique payroll, compliance, and human resources (HR) needs. This guide defines the PEO payroll meaning, explores use cases, and highlights differences between PEO and payroll providers.
Key differences: PSP and PEO payroll explained
Hiring a PEO for payroll or a PSP affects your pay processing and tax filing workflows. Depending on your goals, business size, and HR expertise, you may prefer one solution over the other.
Here's a quick look at how PEO vs. payroll services differ:
- Unlike a payroll service that files employment taxes under your employer identification number (EIN), when using PEO payroll services, the PEO provider remits taxes under its own EIN.
- PEO companies share employer responsibilities and liabilities, whereas corporate payroll services aren’t co-employers and don't assume legal risks.
- While a PEO for payroll issues paychecks from its account, a payroll service issues checks from your company's account.
- PEOs are responsible for tax liabilities and filing, whereas corporate payroll services prepare tax forms, but liability remains with your company.
- PEO payroll companies offer ongoing compliance support for labor laws, while payroll services primarily focus on payroll processing and tax filing.
What is a PEO?
Professional employer organizations are full-service HR companies that manage payroll, employment taxes, workers' compensation, and benefits administration. Therefore, PEO payroll refers to the payroll services provided by a professional employer organization.
Unlike a stand-alone service for payroll, PEO providers use a co-employment model. This approach makes the PEO the employer of record (EOR) for administrative purposes, such as sponsoring health insurance plans and remitting payroll taxes.
When choosing a PEO, small businesses can review IRS guidelines or its list of certified professional employer organizations (CPEOs). These are firms that meet rigorous IRS standards.
[Read more: 5 Things You Need to Know About Choosing a PEO]
How does a PEO work?
When you partner with a PEO company for payroll and HR services, your business enters into a co-employment agreement. The PEO is the EOR and files payroll taxes under its EIN. Your business controls daily functions, like managing staff and assigning tasks, but the PEO provider may set HR policies.
In addition to PEO payroll services and workers' compensation coverage, PEOs handle state unemployment insurance (SUI). Small businesses often select this model for its low-cost PEO health insurance and simplified HR administration.
The debate of PEO versus payroll services often centers on whether you want comprehensive HR support or basic payroll processing.
What is a PSP, and how does it work?
Technology companies and payroll firms offer corporate payroll services. Both systems typically integrate with popular accounting programs, like QuickBooks, and automatically calculate wages, taxes, and deductions.
Free or self-service payroll software may require business owners to file and report employment taxes. In contrast, a full-service payroll provider remits payroll-related tax filings on your behalf.
Human resources outsourcing (HRO) and payroll providers like Gusto or OnPay may provide new-hire reporting, onboarding tools, or other basic HR services. Some also assist with benefits administration. However, unlike agreements with PEO payroll companies, the PSP isn't a co-employer.
[Read more: How to Choose the Right Payroll Software for Your Business]
PEOs vs. payroll providers: The main differences
You can increase efficiency using a PEO for payroll or corporate payroll service. However, the different management models affect pricing, services, and benefits. Let's compare PEO and payroll providers to see how their solutions differ.
Cost of services
Outsourcing payroll processing to a software provider costs less monthly than using a PEO for payroll. Since your company receives comprehensive HR support plus payroll, PEO services have higher fees. Some firms, like TriNet, ADP, and Paychex, offer payroll, PEO, and HR packages.
With a PEO company for payroll and HR, the fee is typically a percentage of your payroll. It ranges from 2% to 15% and includes SUI, workers' compensation, and health benefits. Alternatively, providers may charge a flat fee per employee. An example of this pricing model is Justworks. Its monthly cost ranges from $59 to $109 per person. In addition to HR and payroll PEO services, Justworks has a payroll-only plan.
Selecting a self-service software subscription is significantly cheaper. The DIY option from Patriot Software is $20 monthly plus $4 per employee or 1099 contractor. Full-service payroll solutions deduct and pay taxes on your behalf. For instance, Roll by ADP costs $39 monthly plus $5 per employee or independent worker.
Although PEO payroll services cost more than standard options, you could see a higher return on your investment. Small businesses reduce their insurance premiums by using a PEO versus an insurance broker or corporate payroll service, and PEO HR services may lower your onsite administrative costs.
[Read more: Is It Time to Automate Your Business? Here Are Tools That Can Help]
PSP and PEO payroll services
Both PEOs and PSPs supply software with core payroll features. While the platforms automate payroll processing, the approach differs significantly regarding responsibility, support, and complexity management.
Here's how these differences affect payroll processing, tax filing, and compliance:
- Payroll administration: PEO payroll companies take an active role in HR management, whereas corporate payroll services are more like tools for completing the job. PEOs may proactively address discrepancies or adjustments. Meanwhile, payroll platforms give you more control over the process but require more effort.
- Software: Payroll apps automate pay runs and integrate with popular accounting and time-tracking tools. Conversely, with a PEO for payroll and HR, you can access a comprehensive human resource information system (HRIS), an all-in-one HR software platform.
- Payroll tax responsibilities: Full-service payroll providers calculate, withhold, and file employment taxes under your EIN and may furnish year-end tax forms. The PEO payroll service model transfers liability to the PEO company, which files taxes under its EIN. This responsibility shift may protect you from IRS audits or penalties.
- Compliance: Corporate payroll services provide software and resources to help you comply with labor laws and regulations, but ultimately it's your responsibility. On the other hand, PEO payroll services actively mitigate risks and share employee-related liabilities.
Contractual obligations
The agreement between your business and the vendor is another difference between a PEO versus a PSP. PSPs usually offer monthly or annual contracts, and you can complete the onboarding process through a self-guided setup or with the provider's support.
PEO payroll companies require longer terms, with a year as the minimum. The setup process is also more extensive than going through a payroll provider. When you engage a PEO for payroll and HR, the firm rehires your employees under its EIN. You must update employee handbooks to comply with large employer rules, like the Americans with Disabilities Act and the Affordable Care Act.
Leaving a PEO is also more complex than switching payroll providers. To compensate staff after using a PEO for payroll, you must get an EIN, rehire your employees, and secure workers' comp and SUI coverage. Changing payroll systems involves transferring data and timing it correctly, but there are fewer tax-related tasks to complete.
Workplace culture
Using a PEO for payroll has slightly more risk of altering your current culture than a payroll provider. With corporate payroll services, your staff has minimal interaction with the outsourced firm. If your contract includes benefits administration, employees may engage with the payroll company more frequently.
The PEO provider's role is substantial. In addition to PEO payroll services, the firm becomes your company's HR department. It may direct HR policies, manage insurance claims, and administer benefits. The PEO company's name could appear on employee paychecks, and your staff will contact PEO payroll and HR teams for benefits, payroll, and related issues.
These changes can confuse or worry employees. Still, companies with a PEO have 12% less employee churn than those without, according to a recent National Organization of Professional Employer Organizations (NAPEO) report. These firms also experience better growth rates, suggesting that successfully coordinating the PEO payroll and HR transition can pay off.
[Read more: PEO vs. ASO: Which HR Service Do You Need?]
HR services and employee benefits
Both corporate payroll services and PEO providers assist with HR tasks, like new-hire reporting. Yet, PSPs offer different subscriptions or add-ons, whereas PEOs have all-inclusive packages. Alternatively, HROs have comprehensive features, including payroll, minus the co-employment model. If you need HR and payroll, consider comparing PEO and HRO services.
Here's how PEO vs. payroll providers differ:
- Benefits administration: PEO companies sponsor the benefits plans and run the show. Some PSPs offer benefits administration, but your business is the plan sponsor.
- Workers' compensation: You're responsible for obtaining, managing, and complying with work comp obligations when using a payroll service. In contrast, the PEO payroll and HR company includes these services in its fee.
- Risk management and compliance: Corporate payroll services may offer resources, but they don't share employee liabilities. Since PEOs co-employ your workforce, they share employment responsibilities and help manage legal, regulatory, or safety risks.
- Additional HR services: Top PEO companies are total outsourced HR solutions, offering advisory support, hiring, handbook development, and training tools. Payroll providers may have HR add-ons or step-up plans, but these solutions are more DIY, where PEO HR embeds within your business processes.
Should you choose a PEO or a PSP?
The debate of PEO versus payroll services often centers on whether you want comprehensive HR support or basic payroll processing. Since many payroll providers now offer HR tools, choosing between PEOs and PSPs is more complex.
To make the right choice, consider completing a cost-benefit analysis to see which solution delivers a greater return on investment. Check out the following business use cases for PEO payroll companies and software services.
Why you may want to use a PEO for payroll
A PEO payroll provider is your company's outsourced human resources team. If your small business has limited HR capabilities (or if you, as the owner, manage it yourself), think about using a PEO for payroll, benefits administration, and compliance.
Consider a PEO for payroll if the following apply:
- You need to offload most or all HR tasks. Using a PEO for payroll and HR makes sense if you're spending too much time on administrative tasks, don't have an in-house HR employee, or lack HR expertise.
- You want to offer affordable employee benefits. If costs keep you from improving your benefits package, consider employing a PEO company to access comprehensive plans from national insurance providers. This is a key difference between a corporate payroll service and a PEO payroll solution.
- Your business faces legal or compliance issues. Multistate workers, employee classification, or safety issues can overwhelm small teams. PEO payroll and HR firms employ experts to manage risks. NAPEO found that companies are 50% less likely to go out of business when partnered with a PEO.
[Read more: How PEO Services Can Enhance Your Employee Experience and Retention]
When to work with a payroll provider
Corporate payroll services range from payroll-only applications to comprehensive all-in-one HR systems. You can delegate many tasks while maintaining control over operations. This flexibility lets you choose solutions that fit your goals and requirements.
Consider a payroll service over a PEO if the following apply to your company:
- Your in-house team manages HR. Suppose you have two HR professionals. In this case, you may prefer to outsource transactional tasks to an HRO or payroll provider because PEO HR services could be redundant.
- Annual payroll and head counts are expanding rapidly. PEOs can be less economical for companies nearing $2 million in yearly payroll or employing 100 or so employees. An artificial intelligence-powered payroll system can save money and increase efficiency.
- Flexibility and administrative control are essential. Unlike PEO payroll services, when using a PSP, you retain complete control over payroll and HR policies, benefits, and employees.
The best PEOs and payroll providers
The top PEO companies and corporate payroll services help your business accurately pay employees (and the government) on time. While the solutions differ, there's no shortage of budget-friendly options. Consider the plans and features providers offer when comparing PEO versus payroll pros and cons.
Research PEO payroll services and stand-alone platforms, such as these:
- TriNet: Find TriNet PEO, payroll, and HR subscriptions to manage payroll and tax compliance as your company grows.
- Insperity: This PEO service provider caters to midsized businesses and offers customizable PEO or HRO packages.
- Paychex: Choose full-service PEO, payroll, or HR packages from Paychex to solve your small business or enterprise challenges.
- Justworks: This PEO payroll service provider offers a payroll-only plan, a basic PEO package, or a full-service PEO subscription.
- ADP: With affordable text-only payroll or full-service plans and ADP TotalSource, its PEO solution, this provider has a complete range of payroll options.
- Rippling: Customize your workforce management system or select Rippling PEO services to automate your business.
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