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Payroll Company vs PEO: Who Should You Partner With?

Updated: Jan 27, 2023

Small business owners always have the option to manage and process their payroll on their own. However, the idea of constantly gathering employee information, issuing paychecks, properly administering the correct taxes and deductions, and staying in compliance with federal and state regulations can be an intimidating task to any business owner. When considering keeping payroll in house, you have several options such as traditional payroll services and payroll software. Yet, if your business desires more than just payroll, a professional employer organization (PEO) may be able to help with other business needs like HR, compliance, benefits and taxes.

What is a PEO?

When deciding between a payroll company and a PEO, it is important to understand the differences between the two. Since most people already have a general understanding of what a payroll company does, it would be best to explain what a PEO does. When a business partners with a PEO, you enter into a co-employment agreement where the PEO assumes the responsibility of managing the client’s payroll and employee taxes by using the PEO’s own tax ID number, rather than the client.

The PEO would be primarily responsible for all payroll related tasks such as, paying employee wages, making the correct deductions to payroll, filing, and depositing employment taxes, and issuing W-2s for employees during tax season. Although there is a co-employment agreement, your business will still be responsible for the day-to-day operations and management.

A PEO is an expert in terms of payroll and tax regulations, making them an excellent resource for small business owners. PEOs can also help business owners save hundreds of thousands of dollars. Since the PEO reports federal and state taxes under the PEOs tax identification number, the PEO’s state unemployment rate is often below that of the client company, passing on savings to the client. The same can be said when looking at work comp rates or employee benefits. Since all the business activities goes through the PEOs EIN, the PEO can leverage their employee pool to get employee benefits or work comp rates at a cheaper price.

What’s the difference between a standard payroll service and a PEO?

One of the main differences between a standard payroll service and a PEO is with a payroll company, employers retain the sole responsibility of their workers and are liable for paying wages and taxes. Standard payroll service providers do not handle administrative duties compared to PEOs. PEOs can provide a full suite of human resource solutions including health insurance, employee onboarding, 401k and retirement plans, workers comp, new hire recruiting, and regulatory and tax compliance.

As stated before, with a payroll service provider, the business owner is responsible for the payroll, taxes, insurance, and compliance. For example, if a payroll services provider makes a mistake, the business owner is still held liable and the owner must fix the issue. On the other hand, if the business owner were partnered with a PEO, it would be the PEOs responsibility to fix any mistake since they are the ones directly dealing with the IRS and paying your employees.

Why Should You Use a PEO?

PEOs not only save business owners time, but money. A PEO gives business owners time to focus on the day to day and allow you to actively grow your company. PEOs are usually a lot more detail oriented and more efficient than standard payroll companies. This is because a PEO runs client’s payroll and taxes through the PEO tax identifier number, meaning if they make a mistake on taxes for example, the PEO is responsible for settling with the IRS not the client company. This takes a significant amount of liability away from small to medium sized business owners.

Another huge advantage of a PEO is that they offer more robust human resource solutions. Payroll companies just stick to strictly payroll while PEOs also entail insurances, employee benefits, workers comp, retirement accounts, and regulatory and tax compliance, making PEOs a perfect one stop shop for small businesses.

Small businesses tend to have limited resources making it a challenge to expand. However, with a PEO, small business owners can save enormous amounts of money. One of the ways a PEO can help save thousands is with employee benefits. Since PEOs have access to thousands of employees from their clients, they are able to leverage the number of employees and get benefits and insurance packages at a much lower rate, thus saving small business owners money.

Arguably one of the most important reasons why business owners want to work with PEOs is because of the many complex and rapidly changing regulations placed on payroll, taxes, and general employment services. PEOs are experts in terms of navigating through new and changing regulations, even across state and international borders. Using a PEO service can help relieve stress and a large workload that comes with compliance related tasks.

Additional Services Provided by PEOs

· Human Resources Services

· Health Insurance

· Employee Benefits

· Employee Onboarding

· 401k and Retirement Plans

· Workers Comp

· Regulatory Compliance

· Tax Filing and Administering

As shown throughout, there are a lot more services that a PEO can provide than just administering payroll. Growing, less established firms often find themselves buried under administrative paperwork and can find a significant benefit by partnering with a PEO. Spending too much time on back office tasks can take time and energy away from addressing the firms needs, hurting the growth of the company.

There are many advantages to PEOs, which can provide several back office services to increase time and cash flow. PEOs provide much more services than traditional payroll companies giving business owners a suite of services that will truly help them succeed.

Partnering with a PEO like CornerstonePEO may be in your best interest. CornerstonePEO covers everything from HR and employee benefits to payroll and workers comp. Our industry leading PEO services offer innovative, cost effective, easy to understand business solutions for companies of any size and industry. Contact us to learn more.


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