You might have heard about PEOs and wondered what they could do for your small business. They offer a lot of benefits, but they come at a price. So, what is a PEO? Is it a good option for your business, or is there a better option out there?
What is a PEO?
PEO is the abbreviation for professional employer organization. A PEO is a company that you can outsource your business’s payroll and HR tasks to. PEOs can run payroll, pay taxes, maintain workers’ compensation insurance, and provide benefits. Your employees are listed under the PEO for tax purposes, making the PEO a co-employer.
The PEO will charge you a percentage of your employees’ salaries. The cost ranges from 2% to 11% of what you pay employees. For example, if you have five employees who earn $30,000 each per year and your PEO charges 2%, you will pay the PEO $3,000 per year for its services.
A PEO typically requires you to sign a long-term contract for their services, such as a one-year contract.
PEO services
A small business PEO can do many payroll and HR functions for you.
As mentioned before, the PEO and you are co-employers. You share responsibility for the employees. You retain the right to manage employees. The PEO takes care of wages, taxes, and benefits.
The organization can provide PEO payroll services. You tell the PEO how many hours each employee worked. Then, the PEO will calculate employee paychecks and tax liabilities. The PEO will pay your employees with checks or direct deposit. When it’s time to file and deposit taxes, the PEO will do this for you.
The PEO for small business can provide benefits to your employees. Benefits a PEO might be able to provide include health insurance, wellness programs, disability insurance, and retirement plans. The PEO can often provide group rates for what would be expensive benefits.
The PEO will also take care of workers’ compensation insurance. To get your insurance premiums, your employees will be combined with the other employees the PEO co-employees.
When you work with a PEO, you are responsible for sending them all paperwork on time. You might need to send time cards, benefit forms, new employee information, or updates when an employee experiences a life event like a divorce. If a mistake happens because you didn’t send paperwork in time, the PEO is not at fault.
Should your business use a PEO?
Using a PEO sounds like a great choice, right? What could be better than having someone else handle your payroll, taxes, and benefits?
Well, due to the various PEO services pros and cons, a PEO might not be the best choice for your small business. You should also consider online payroll software.
Payroll software: an alternative
Doing payroll yourself with the help of online software can save you time and money.
With online payroll software, you can run payroll anytime and anywhere. All you need is an internet connection. Because you can do everything yourself, you don’t have to wait for someone else to complete your payroll. You are the sole employer.
If tax filing and depositing are daunting to you, no worries. You can use a full-service payroll software. The software provider will handle federal, state, and local taxes for you.
Payroll software costs less per year than a PEO. Some software companies, like Patriot Software, charge per employee. You can run payroll as much as you want, and how much you pay employees doesn’t matter. One business owner, Jim Sherman of Firehouse Subs, saved 87% per year when he left his PEO and started using payroll software.
During my last year with a PEO, I spent $4794.37 in payroll processing fees. During my first year with Patriot Software’s payroll services, I spent $610.18.”
You might also save money on workers’ compensation premiums and state unemployment tax. When you use a PEO, your business and employees are lumped together with all the other PEO users. If several businesses have a lot of workers’ comp or unemployment claims, everyone’s rates go up.
If your business has few claims, you could be paying too much for state unemployment tax and workers’ comp. When you have your own state unemployment tax account and workers’ compensation policy, you could save money. For example, Jim Sherman shared:
My PEO SUTA rate was 3.4%. My current rate, on my own with Patriot Software, is 0.59%.”
The payroll software company will not handle benefits for you. If you want to offer health insurance, a retirement plan, or any other benefits, you will need to handle these yourself. Because small businesses often don’t need as many benefits as large businesses, you might qualify for special programs, discounts, and tax credits. For example, you can offer Small Business Health Options Program (SHOP) plans.
Payroll software has a low time commitment. After your initial setup, running payroll only takes a couple of minutes and a few clicks. The software takes care of all calculations. If you use direct deposit to pay employees, the software will take care of this, too. If you have the software company handle payroll taxes for you, payroll will take no time at all. The cost of payroll services that include tax handling will be marginally more, but it may be worth your time savings.
Even if you are inexperienced at payroll, you can still use payroll software. It is designed to be easy to use. If you do catch some snags, you can use customer support to set up and learn to use the software.
Experience the value of SaaS payroll services yourself. Get a free trial of Patriot’s Full Service Payroll software. We will handle payroll calculations and taxes for you. What are you waiting for? Start saving your time and money.
This article has been updated from its original publication date of October 13, 2017.
This is not intended as legal advice; for more information, please click here.