Update: We've written a white paper comprehensively outlining PEOs. If you'd like to download it for free, you can do so here.
Have you ever heard the term PEO? If not, you're not alone.
But PEOs can be incredibly helpful to small- and medium-sized companies, so here's our version of a 101.
What is a PEO?
The acronym PEO stands for Professional Employer Organization. PEOs work with small businesses to help them manage payroll-related taxes, certain human resources functions, access to benefits, and other employer-related administrative functions necessary to running a business. PEOs handle all of these tasks so you can focus on what matters most: growing your business.
Here are a few examples of things PEOs will be able to help you:
- Payroll tax registration in every state in which you have employees
- Securing mandated insurances like Unemployment and Disability, etc
- Securing other employment-related insurance like EPLI Accessing medical, dental and vision coverage for your team at discounted rates
- Utilizing employee handbooks and other documents that will help you create a safe work environment
- Accessing 401(k) that is inexpensive and easy to use Filing payroll taxes and other employment-related government paperwork
How Does A PEO Work?
PEOs can take on all of these responsibilities for you because of something called co-employment. By contract, a PEO will hire your employees as well, which allows it to consolidate certain tax and insurance functions.
PEOs help small businesses access top-notch benefits assist them with various compliance worries.
Why is being one entity an advantage? Because by doing this, the PEO can negotiate more affordable employee benefit rates on your behalf and handle a lot of the government paperwork. While other HR providers might be able to help you prepare some paperwork, in many cases the PEO can go as far as submitting it and dealing with any exceptions and bumps that arise.
Should I Use a PEO?
Although there is no right answer to this question, there are a few advantages that PEOs can bring to your business.
Cost Savings on Employee Benefits
Because a PEO groups many employees together, it looks like one big entity when it is negotiating with health insurance providers. As you may know, any company that has under 50 employees normally has to pay what health insurance carriers call "small group prices." These rates can be up to 30% higher than what companies with more than 50 employees are paying. Through a PEO, your employees will be part of an entity with thousands of employees. This means more negotiating power with the health insurance companies and rates that are often even less than what medium-sized companies (50+ employees) can get on their own.
Cost Savings through Hiring
Because a PEO will manage a lot of your employment-related paperwork for you, as well as provide HR support, most companies can delay making hires to handle this in-house. And when they do make an HR hire, that hire can focus on things that make your company an amazing place to work, instead of just keeping the ship afloat.
Protect Against Risk
More than 33% of small businesses get fined every year for making payroll mistakes. And that's just for payroll! The reality is that government compliance is fairly complicated and there are lots of paperwork to file and insurances to secure. While you can do this on your own, you probably didn't start your company to become a compliance expert and the cost of getting things wrong can be pretty high.
PEOs are experts on employment-related compliance. They know all the paperwork you need to file and, in most cases, they can file it for you.
Get Hours Back in Your Day
Running your own business can sometimes be a race against the clock. There's always more to do and not enough hours in the day to get it done. If you partner with a PEO though, there's a lot they can take on from you when it comes to employment-related administrative work, which can often mean getting multiple hours back every day or week.
How Much Does a PEO Cost?
The way that a PEO makes money is by charging you to handle these services. Many companies charge per employee while others might charge a percentage of total gross payroll. So if they charge $100 per employee per month and you have a 25-person team, you’ll be paying $2,500 per month, or $30,000 a year.
Get the full guide on how PEOs work for small businesses.
While PEOs aren’t cheap, they normally cost less money than they save you on employee benefits. At Justworks for example, our monthly fee depends on how many employees you have. Customers often save hundreds per month by getting less expensive access to employee benefits. This means that in total, Justworks companies are typically saving thousands of dollars a year by using Justworks as their PEO instead of working with an insurance broker.
Justworks is a PEO. Like other PEOs, Justworks will help you save significantly on employee benefits, automate your payroll and take care of all your government compliance. Unlike other PEOs though, we've gone out of our way to build amazing software.
Our members work at fast-moving companies where they don't want to have to call somebody every time they need to add a dependent to their benefits policy, or add someone to payroll. To service them best, we've built simple, fast and automated software they can access online on their computer or on their phone and manage things as they need.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.