The Difference Between PEO and Payroll

As a busy entrepreneur, outsourcing payroll and human resource operations may be in your best interest. Payroll service providers (PSPs) or professional employer organizations (PEOs) may help you streamline your processes and offer enhanced employee benefits.

What Is a Payroll Service Provider?

If your business has employees, you are responsible for paying their wages. Payroll is the payment of wages and the entire payroll management process. This encompasses payroll administration, documentation of compensation, and calculation of hours, wages, deductions, and net or gross pay.

A payroll service provider (PSP) is an outside party that you can hire to assist with or manage all aspects of your payroll process. Payroll providers use technology to minimize and streamline time-consuming administrative tasks and processes. They can also offer the following services:

• Automatic payroll processing

• Timekeeping

• Tax withholding and wage garnishment

• Tax filing

• Compliance monitoring

• Payroll reporting

• Product support

• Employee engagement

Business owners are often too busy to attend to the necessary payroll details. Alternatively, you might not have the expertise to perform payroll in the most efficient or effective manner. Hiring a third-party payroll company reduces your administrative burden and ensures payroll is calculated accurately and paid on time. You may even save money using a payroll service provider if they can help identify cost and tax-saving opportunities. Some companies choose not to use a PSP because it can mean losing some control over the process.

What Is a Professional Employer Organization?

Payroll is not the only administrative component of running a business. Many aspects of employee support and human resource functionalities require detailed and timely attention. If your business needs more comprehensive payroll and human resource support, a Professional Employer Organization (PEO) may be the solution.

A PEO is a third-party company that streamlines payroll and human resource services for your business and employees. Each PEO offers a different array of services. Some offer basic HR solutions, such as payroll management, benefits administration, tax support, compliance strategy, and risk management. Other companies provide additional services, such as employee onboarding, handbooks, policies, data analytics, real-time feedback, and insight into business operations.

How Does a PEO Work?

When you engage a PEO, your business enters a co-employment relationship with the PEO. This means that your business and the PEO divide the employer's responsibilities and share employment-related liabilities. The PEO performs important human resource functions and manages various administrative processes for a company. They process wages, payroll, benefits, withholdings, and taxes under their federal employee identification number (EIN) and may also provide employee training.

While a PEO manages human resource functions on your behalf, it does not control your business. Your company is the worksite employer and maintains authority over the employees. They can advise you on risks, workplace improvement, and employee management, but the operational and strategic business decisions remain in your court. The PEO is complementary to your internal human resource team. Working with a PEO allows you to stay focused on overarching business goals and the growth of your business.

Advantages of a PEO

PEOs are ideal for small to midsize businesses and startups that want to streamline and outsource both payroll and human resource tasks. Working with a PEO allows you to:

• Improve employee benefits. PEOs have access to comprehensive benefits at affordable prices and can streamline employee enrollment.

• Maintain compliance. PEOs pay close attention to ever-evolving state and federal employment laws and ensure your business maintains payroll and benefits compliance.

• Maximize efficiencies and save money. A PEO can save your business time and money by focusing on streamlining processes and maximizing efficiencies. They can improve hiring practices, lock in optimal rates with benefits providers, offer tax advice, and file and manage cumbersome paperwork.

Ultimately, a PEO effectively manages the HR and payroll tasks you do not have the time or expertise for, allowing you to focus on expanding your company.

Disadvantages of a PEO

While a PEO may provide significant advantages, they do have some downsides, including:

• Control—some businesses choose not to work with a PEO because it limits their control over the human resource processes, benefits, and decision-making.

• Compliance—while a PEO can help monitor and maintain compliance, they do not typically assume all compliance risks or guarantee compliance.

• Flexibility and customization—some PEOs may lack flexibility or customization.

• Cost—PEOs charge fees that can range from 2% to 12% of payroll wages, and those costs may also fluctuate based on the pricing model.

• Data privacy—sharing data with a third party can raise concerns about data security and privacy.

No two PEO companies are the same. Therefore, it is important to research the available options to determine which company might best suit your business needs and to limit any disadvantages.

What Is the Difference Between a PSP and a PEO?

Several differences set PSPs and PEOs apart. The main difference is that a PSP solely provides payroll and tax support services, while a PEO offers a complete range of payroll and human resource functions. Payroll providers may also be less expensive than PEOs since they offer fewer services.

Another difference is how payroll taxes are reported. Working with a PEO creates a co-employment relationship between your business and the PEO. As a co-employer, the PEO shares liability with your business for employment-related matters. The PEO remits the payroll taxes and filings under its own employer identification number. If you are working with a PSP, you maintain the responsibility of remitting and reporting all payroll taxes through your business's employer identification number. There are many PSP and PEO companies on the market. Consider the costs, benefits, and services offered to determine whether a PSP or PEO is best for your company.