How Do You Record Wages When Using a PEO (A Complete Guide)

Delina Chantel Yasmeh
Published by Delina Chantel Yasmeh | Author
Last updated: June 21, 2024
Methodology
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Hiring a professional employer organization (PEO) to handle the wage recording process and navigate the strict legal regulations surrounding the accounting of payroll management can make business management easier and less expensive.

According to the National Association of Professional Employer Organizations (NAPEO), PEOs provide services to more than 200,000 small and mid-sized businesses, employing 4.5 million people.

Working with our team of certified financial experts, we spent months researching the wage recording duties of a PEO and the benefits of hiring an expert to handle your payroll system.

Today, we'll walk you through the process of recording wages using a PEO and the details you need for an efficient payroll management system.

Quick Summary

  • A PEO records wages for your employees during a specified accounting period.
  • A PEO simplifies payroll management by handling various duties such as developing payroll policies, managing taxes, classifying employees, and dealing with payroll paperwork.
  • According to the National Association of Professional Employer Organizations (NAPEO), the PEO industry’s 208,000 clients represent 17 percent of all employers with between 10 and 99 employees.
  • I can attest to the importance of employing a PEO for payroll management as it allows business owners to focus on core activities, suggesting a strategic move for long-term savings and efficiency.

How Do You Record Wages with a PEO?

Man writing on a sheet

You record wages with a PEO by designating all your payroll duties to the PEO.

Employer Services Assurance Corporation (ESAC)-accredited PEOs help companies manage their payroll by carefully monitoring costs, deadlines, and taxes [1].

The PEO has to record the sum of money earned by each employee during the specified accounting period in the wage and workers' compensation records.

To ensure an efficient wage recording process, the PEO has to:

  • Identify whether an employee is paid on a salary or an hourly basis.
  • Deduct the appropriate amount for Social Security, Medicare, and other taxes.
  • Ensure that employees are paid on time.

Details You Need for PEO Payroll

Pointing out on a piece of document

You need the following four details to have a smooth payroll management system:

  • EIN: For federal filings, your firm requires a distinctive tax identification number. And to process payroll and file payroll taxes, you must have an EIN [2].
  • Employee information: Each employee must submit a completed Form W-4. Using that form, you can determine how much federal income tax to deduct from your employees' paychecks.
  • Withholding tax: Your firm is required to determine and deduct the appropriate amount of taxes from each paycheck. As soon as your calculations are precise, confirm that your staff can interpret their pay stubs.
  • Payroll frequency: Drawing from our experience, your company's payroll frequency will impact how frequently you pay your employees. Therefore you must decide whether to make weekly, bimonthly, or monthly payroll schedules. Ensure your timetable respects state law and industry criteria.

Other Payroll Duties of a PEO

Apart from the core services of recording the wages of a client company, a professional employer organization also has more payroll responsibilities.

These PEO services include the following:

1. Payroll Policies

Shaking hands with a professional business person

A payroll policy is a principle of action that guides how your employees are paid. For example, are they paid on a biweekly or monthly basis?

Are the payments made via direct bank deposits or cheques?

A PEO can review all your employees and develop a convenient payroll policy for your company.

As a co-employer, the PEO makes sure that other aspects, like paid leaves and health insurance, are included in your payroll policy.

2. Taxes

Hiring a PEO means they'll file your taxes for each payroll period.

The PEO calculates the amount to withhold from each employee's paycheck to cover Social Security and Medicare.

Also, all companies must file taxes with the IRS and provide comprehensive reports.

You can have the PEO handle this for you to ensure your filings are submitted in a timely fashion to avoid costly and risky penalties.

3. Employee Classification

An agreement between two parties holding a file

Employee classification helps to know how your employees are paid, either monthly or per hour.

As your co-employer, the PEO will take these administrative responsibilities and accurately identify these workers in payroll calculations so that they get the appropriate compensation on the anticipated date.

In my consulting years, I have seen that a PEO also ensures strict compliance by verifying that your company stays on top of governmental requirements for hourly employees, such as minimum wage and overtime regulations.

4. Payroll Paperwork

As a co-employer in your business entity, a PEO handles all payroll paperwork, including W-2s, W-3s, and unemployment forms.

Benefits of Using a PEO For Payroll

Writing on a document

The benefits of using a PEO for payroll include the following:

1. Reduced Payroll Liability

A PEO payroll service relieves many business owners of a considerable amount of obligation by taking on all tasks associated with payroll responsibilities and paying taxes for a company's employees.

2. Reduced Compliance Risks

Payroll processing has complicated and dynamic regulations that must be followed to stay compliant.

Hiring a PEO to record wages and manage your payroll allows the co-employment team to navigate the red tape on your behalf.

"Make sure to collaborate with a PEO certified by the IRS, which adheres to stringent tax reporting guidelines, to ensure financial security and tax compliance for your business."

- Jon Morgan, CEO, Co-Founder & Editor-in-Chief of Venture Smarter

3. Reduced Cost

One benefit of being in a PEO relationship for payroll is that you may reduce the cost of the perks you provide to your employees.

PEOs deal with several employees from various businesses, so you may benefit from the purchasing power they offer.

FAQs

How Do You Account For Wages?

You account for wages by debiting the wages, salaries, and company payroll taxes you paid for a specific accounting period.

What Does PEO Payroll Cost?

Peo payroll costs between $100 and $150 per month. This amount varies based on payroll percentage and the per-employee per-month fee (PEPM).

 


References:

  1. https://www.esac.org/
  2. https://www.irs.gov/businesses/small-businesses-self-employed/employer-id-numbers#

About The Author

Author
Delina Chantel Yasmeh, J.D./Tax LL.M, specializes in Mergers and Acquisitions at Deloitte and PwC, managing billion-dollar transactions. Educated in Accountancy at California State University and holding advanced degrees from Loyola Law School, she is highly skilled in tax law. Delina also dedicates time to pro bono work for women and children.
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Growth & Transition Advisor
LJ Viveros has 40 years of experience in founding and scaling businesses, including a significant sale to Logitech. He has led Market Solutions LLC since 1999, focusing on strategic transitions for global brands. A graduate of Saint Mary’s College in Communications, LJ is also a distinguished Matsushita Executive alumnus.
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