What Is a PEO? (How Does It Work, Who Is for & Benefits)

Delina Chantel Yasmeh
Published by Delina Chantel Yasmeh | Author
Last updated: February 23, 2024
Methodology
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As a new company owner, you may lack the resources and technological know-how to carry out specific business procedures like payroll, benefits, onboarding, and compliance with HR legislation.

Thankfully, PEOs are available to assist you in getting around such issues.

After weeks of research and working with our team of certified business experts, we've developed this insightful guide on PEOs: what they are, how they work, and what they can do for your company.

Here’s everything you need to know.

Quick Summary

  • A professional employer organization (PEO) is a vendor that takes up partial employer responsibilities of the client company.
  • A PEO handles specific administrative duties such as payroll, taxes, and employee benefits.
  • Given that 45.9% of employees are within the small business sector as per the US Small Business Administration, PEOs play a crucial role in supporting these businesses by managing payroll, benefits, and HR services, allowing owners to focus on growth and operations.
  • From my perspective, exploring PEO services could significantly streamline a company's HR operations, offering a strategic advantage, especially for small businesses looking to optimize resources and focus on growth.

What Is a PEO?

Shaking hands with a chosen PEO

A professional employer organization (PEO) is also known as a co-employer who assumes specific responsibilities of the employer and the risks involved.

In the United States, a PEO is responsible for handling payroll, benefits, and other HR services for a client's workforce [1].

A PEO often has a team with substantial knowledge in human resources, legal, tax, client services, and accounting.

Companies collaborate with PEOs to save benefit administration expenses and optimize payroll processes.

You can also use a global PEO to efficiently branch to a worldwide market without creating another corporation in a foreign state.

A global PEO may also help organizations navigate the obstacles of employing overseas personnel legally, paying them according to local rules and regulations, and, if necessary, firing them lawfully to decrease risk.

How Does a PEO Work?

Using a laptop to compute and doing PEO work

A PEO works by providing specialized services to a client firm, thus drastically cutting staffing expenditures for client firms.

PEOs hire people directly and manage administrative chores linked with employment. Meanwhile, the client company retains day-to-day management over the staff.

The PEO acts as the "Employer of Record" for insurance and tax reasons while handling other compliance duties.

A signed agreement between the PEO and the client firm will govern the PEO services.

This agreement will often include the following co-employment provisions:

  • Payroll services
  • Filing taxes and compliance
  • Worker benefits like health insurance, compensation, employee training, better company culture, and retirement policies
  • Administration of HR services

"Despite hiring a PEO, all workers in a company continue to receive work duties and directions from the client firm."

-Jon Morgan, Co-Editor & Co-Founder of Venture Smarter

Who Should Use a PEO?

Large, medium, and small-scale business entities should use a PEO to help with their human resources, financial, and legal administrative functions.

Other entities that can use a PEO include freelancers, startups, and nongovernmental organizations (NGOs).

Let's look at how working with an employer services assurance corporation helps each business structure.

1. Large Businesses

Holding hands in the middle of the table

Big firms, like Fortune 500 companies, can profit considerably from hiring a PEO for worldwide growth or recruiting and hiring employees who reside abroad while fully complying with local laws.

This is especially true when giant corporations grow across numerous nations.

This is often a far faster and less expensive approach for major firms than establishing a legal organization overseas.

2. Small and Medium Businesses (SMEs)

In the US, PEOs offer services to more than 173,000 SMEs [2]. Global PEO solutions might be a viable worldwide growth option for ambitious and expanding small businesses.

Using a PEO to develop internationally can help you, a small business owner, offer products and services in new countries while gaining access to a more cost-effective and competent staff.

3. Startup Enterprises

Startups frequently require scalable human resource solutions. Companies must be able to rapidly 'ramp up' workforce capacity as their firm expands.

PEOs, with their global exposure and professional recruitment networks, may swiftly expand their staff while keeping costs to a minimum.

4. Freelance or Contractors

Calculating money off the chart

You can access a comprehensive workforce from different countries if your business is based online.

While it may be tempting to hire such employees as freelancers or contractors, this is frequently illegal under tax and labor rules.

However, a global PEO may recruit such individuals from anywhere worldwide, guaranteeing that the company is not penalized by tax or labor authorities.

5. NGOs

NGOs or non-profits typically need to recruit workers from different countries.

Because of this, it can be difficult for the NGO's HR department to comprehend all the payroll, tax, and compliance regulations applicable in those locations.

This is where a global PEO comes in to recruit these employees according to the rules of the different countries.

Benefits of a PEO

For a small business owner, hiring a professional employer organization has the following benefits:

1. Efficient Payroll Tax and Compliance Filing

A man computing from a collection of files

A PEO act as an administrative services organization that administers payroll and benefits for small businesses and other enterprises.

Entrepreneurs can spare time to concentrate on other elements of their firm by outsourcing these activities to a PEO.

Most significantly, you will reduce the possibility of lousy payroll procedures, which can have serious consequences.

Poor payroll administration, for example, may result in the organization establishing a bad reputation and an inability to attract and retain top personnel.

Additionally, payroll and benefits administration may be handled more efficiently and effectively by PEOs due to their vast experience and resources.

2. Professional Recruiting

Recruiting can be time-consuming and costly, especially for small organizations that lack comprehensive HR solutions.

This is why PEOs are an excellent solution for staff recruitment and HR tasks.

PEOs specialize in finding and hiring top personnel, and by managing portions of the recruitment process, they may save small business owners both time and money.

By entrusting these hiring procedures to a PEO with powerful HR outsourcing, organizations can ensure that only the best candidates are evaluated for positions.

Furthermore, PEOs assist in ensuring that applicants are adequately vetted and that they comprehend and comply with the job objectives.

3. Cost-effective Management

A woman in the middle

Contracting payroll, compliance, and worker benefits to a PEO may save your firm time and money.

Furthermore, PEOs frequently have contacts with third-party suppliers, which can assist businesses in saving money on workers' compensation insurance.

Consequently, transferring payroll and benefits to a PEO may assist firms in lowering administrative expenses and freeing up time to concentrate on other operations.

4. Higher Employee Performance

Because of the co-employment duties, a PEO may assist businesses in developing and implementing effective employee performance evaluations.

This might involve assisting with employee assessments, teaching management staff how to conduct evaluations, and providing employees with tools to help them grow within the organization.

A PEO may also assist with employee education and growth, such as developing and managing online learning systems and assisting firms in developing clear training objectives to enhance staff productivity.

Professional employer organizations may also assist businesses with specific legal employment concerns, such as payroll issues and legislation governing paid time off.

If you're unsure about the legalities or laws of a scenario, PEOs may occasionally provide HR professionals or attorneys to answer queries and avoid risks.

6. Retirement Plans

A professional employer organization can offer workers helpful retirement choices like 401(k) plans.

These plans may help individuals save money for retirement and even allow businesses to design practical schemes that may help retain employees for a long time, lowering job turnover rates.

How To Choose a PEO

Reviewing files to know who's fit for a PEO position

When choosing for a high-value PEO, here are the things you should consider.

1. Assess the PEO Benefit Package

PEOs may assist your small business in gaining access to the sorts of package benefits enjoyed by more prominent corporations, making your firm more appealing to top employees.

Determine what each possible PEO partner provides, and go with the one that offers long-term benefits fit for your company and employees.

2. Evaluate the PEO's Financial Standing

Talking with a business partner

The PEO you engage will handle various employment-related financial tasks for your company, such as submitting federal employment taxes.

As a result, it is critical to ensure that the PEO has sufficient operating capital and money in reserve.

Because an independent third party undertakes financial audits of PEOs, you can request a copy of this audit. It will reveal where the firm stands financially and whether the PEO keeps up-to-date and correct financial records.

3. Check the Track Record

A reputable and genuine PEO with a proven track record will gladly provide a reference list. Request clientele who have collaborated with the PEO for at least a year.

After you have a list of references, contact them and inquire about their interactions with the PEO.

Related ArticleHow Do You Record Wages When Using a PEO

FAQs

What Does PEO Mean?

PEO means professional employer organization. A PEO is a vendor who takes up partial roles of the employer of a payroll company.

What Is the Role of the PEO?

The role of the PEO is to handle specific administrative and human resource tasks of a company. The co-employment relationship between the PEO and the payroll company comprises services such as payroll management, tax filing, employee leasing, and other staff benefits.

How Much Does a PEO Cost?

A PEO costs between 2-11% of the client firm’s total wages. This equates to typically $500-$1500 per employee each year.

References:

  1. https://www.irs.gov/tax-professionals/certified-professional-employer-organization
  2. https://www.napeo.org/what-is-a-peo/about-the-peo-industry/industry-statistics

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