A professional employer organization (PEO) provides a range of services to companies that want to outsource human resources administrative tasks. They are staffed by professionals specializing in human resources, taxes, compliance law, and accounting. Many PEOs employ certified employee benefits specialists and certified payroll professionals.
According to the National Association of Professional Employer Organizations (NAPEO), more than 15% of businesses with 10-99 employees rely on PEOs for payroll, record keeping, and other HR functions.¹ PEOs and their clients are considered co-employers. Thus, in many cases, employee checks come from the PEO and not their company. Understanding how PEO pricing works, including PEO costs and expenses, helps businesses get the most out of their relationship.
PEOs can save companies time and money. This article covers PEO services and factors that affect costs so employers can make informed decisions about working with one.
Types of services PEOs provide
The exact range of services that a PEO will provide an employer varies depending on the agreement between the parties. Typically, a PEO will:
- Calculate and pay wages and salaries; collect and deposit employment taxes.
- Help the employer maintain compliance with federal, state, and local employment laws and regulations.
- Provide benefit packages for employees, including benefits such as health insurance and retirement plans.
- Recruit, hire, and fire staff.
- Perform background screening and drug testing.
- Administer unemployment benefits and workers’ compensation.
A PEO generally manages the core administrative functions that would otherwise be handled by an in-house HR department. That leaves the employer free to focus on growing their business.
PEO cost components
To find the right PEO, it’s necessary to understand PEO pricing models:
- Per employee. When a PEO charges per employee, fees range from about $900 to $1,500 per employee per year.
- As a percentage of total payroll. A typical range of fees for this method is about 2% to 12% of total annual wages and salaries.
PEOs offer all-inclusive pricing which provides access to all their services. Or, they may charge per service. Pricing also depends on whether a business chooses a basic payroll and benefits administration package or if it needs additional services such as employee training and coaching.
Some PEO prices are fixed because they are mandatory. These include contributions that PEOs make on behalf of the company’s employees for:
- Federal and state unemployment tax.
- FICA (Medicare and Social Security) tax.
- Workers’ compensation insurance.
If a PEO is contracted, the taxes are paid to the PEO which then pays the taxes to the government.
PEOs also charge administrative fees for various services such as:
- Employee leasing fees.
- Benefit administration fees.
- Payroll administration and processing fees.
- Tax processing fees.
Factors that affect PEO costs
Several factors affect PEO costs, including the number of employees and the services needed.
- The number of employees: PEOs charge either a flat fee per employee or a percentage of the total annual payroll.
- Pricing structure: If a PEO is paid based on a percentage of payroll, costs will be higher if it calculates charges based on gross payroll, including pre-tax contributions, rather than on an adjusted amount.
- Industry: If employees are highly paid, PEO costs will be higher as well.
- Location: Location affects how much employees are paid, which, in turn, will affect PEO fees.
- Termination fees: Most partner PEOs allow companies to end agreements with 30 days’ notice, but some charge a termination fee.
- Benefits offered: PEOs that offer a wider range of benefit choices may charge higher benefit administration fees.
Cost savings for using a PEO
Although PEOs charge fees for their services, employers typically save money by partnering with them. Businesses save the costs that would have been spent to handle HR administration in-house. The NAPEO study reported that employers save an average of 27% of their HR costs by using a PEO.²
Although employers of all sizes use them, there are significant savings for small businesses choosing PEOs. Because of their size, PEOs can take advantage of the economies of scale. That lowers processing costs and gives them access to employee benefits at a lower price than would be available to a small business.
More than half of the savings that come with using PEOs are the result of the employer not having to hire new employees for HR support. That further affects the bottom line because the business owner or staff members don’t waste time on HR administrative tasks. Additional savings come from lower costs for health benefits, workers’ compensation, and unemployment insurance.
There are also long-term savings that are substantial but harder to calculate, including:
- Reduced turnover because of greater workforce satisfaction due to access to desirable employee benefits.
- Less risk of fines, penalties, or employee claims because of PEOs’ knowledge of compliance.
- The NAPEO study reported that companies that partner with PEOs are more likely to stay in business than those who don’t use them.
PEOs offer many advantages, especially for small and midsize businesses. From streamlined business operations to savings on health care benefits, PEOs make good partners for many businesses.
Employers and HR professionals must understand the different kinds of PEO pricing structures to negotiate the best pricing plans. Although they may be billed at an all-inclusive rate, it’s necessary to be aware of how the cost to use a PEO breaks down.