PEO vs. Payroll Services: The Ultimate Guide for Businesses

Most small businesses and emerging startups spend a lot of time and resources in becoming operationally efficient. A significant portion of this efficiency comes from streamlining the HR and payroll process.

Recently, many companies have started outsourcing some of these functions to PEOs (professional employer organizations) and PSPs (payroll service providers) to achieve the same. These organizations help companies with HR functions, like global payroll processing, employee benefits, employment taxes, and compliance.

However, the scope of work delegated to both differs significantly, highlighting the differences between PEO services and payroll services. 

In the following section, we’ll brief you on what a PEO and payroll service is, how they work, their differences, and which one is more suitable for your business.

What is a PEO?

A PEO, or professional employer organization, enters into a co-employment relationship with a company to share and manage its HR and administrative responsibilities. In other words, when a company partners with a PEO, it outsources its tasks. Both companies are responsible for the responsibilities decided upon per the agreement.

Summing up the features: 

The client company continues its business operations, offers products and services, and oversees the arrangement.

The PEO takes care of the client company’s HR and payroll processes, employment taxes, workers' compensation, employee benefits, HR guidance, etc.

Comprehensive HR outsourcing services like PEOs are particularly popular among smaller businesses that may not be efficient in managing complex hiring and onboarding processes.

How Does a PEO Work?

Now that you know what a PEO is, let’s dive deeper into how PEO services work. Generally, a PEO arrangement includes

1. Joint employment:

Working with a PEO is considered a co-employment situation.

2. HR services:

PEO oversees various HR functions, including payroll services, employee benefits, workers' compensation, compliance with employment laws, training and development, and assistance with all employee-related matters. Some of these functions are explained below.

3. Payroll:

A PEO company processes all wages and generates pay stubs for the client company. This also includes deducting payroll taxes and other withholdings. 

4. Employee benefits:

One of the significant benefits of partnering with PEOs is economies of scale. PEO services often work simultaneously with a pool of companies, bringing together various employees and clients.

5. Compliance:

PEOs are also responsible for staying compliant with labor laws and regulations, safety standards, and anti-discrimination laws.

6. Expert advice:

Several HR experts work at PEOs. This HR expertise supports all aspects of human resources, best practices, and the latest developments in HR legal requirements.

7. Risk management:

Companies often partner with PEOs to seek risk management and workers' compensation assistance. PEOs implement safety programs and provide insurance coverage against potential risks and liabilities.

Let’s see how a PEO service differs from a standard payroll service.

What is a Payroll Service Provider?

As the name suggests, a payroll service provider either helps or assumes all payroll functions on behalf of the client company. In other words, companies outsource their payroll functions to payroll service providers to save time, file taxes timely, and ensure compliance. Being compliant and punctual with taxes also helps them to save on expensive tax penalties. 

You may assume that these services only cater to standard payroll calculations, but there is much more than what meets the eye. Read on to learn more.

How Does a Payroll Service Work? 

While payroll service providers do the calculations, they also minimize redundant administrative tasks and free up a lot of time for your employees to engage in more productive work. Below is a gist of how they work.

Automated payroll processing:

The primary benefit of these is that they save time calculating wages. By automating the process, these services allow employees to focus on more critical tasks. Some payroll service providers may offer flexible payment options, including paychecks, direct deposits, and pay cards.

Tax withholding and reporting:

Payroll solutions also ensure accuracy in withholding taxes based on employee income and tax status. They withhold the appropriate federal and state income taxes and FICA taxes (Social Security and Medicare).

Moreover, these service providers also oversee the filing process on behalf of the client. They can be trusted with tax filing via forms like W-2, Form 1040, 1099-NEC, etc.

Compliance:

Payroll service providers always stay updated with the latest tax laws, rules, and other payroll-related regulations. This ensures that their calculations and filings comply with the legal requirements. 

Employee self-service support:

Many payroll service providers offer self-serve support for employees where they can access their pay stubs, taxes, and other information via an online portal.

PEO vs. Payroll Service: The Differences

While both services appear to handle HR-related activities, their scope, business model, and reach differ significantly. 

Scope of Services 

PEOs offer a more comprehensive range of HR services beyond just payroll processing. They also manage employee benefits administration, risk, and compliance and oversee training and development.

On the other hand, a payroll service provider is limited to only payroll functions. It offers processing, tax calculations, and distribution of wages.

Co-Employment Model

When companies partner with PEOs as their employer of record, they get into a co-employment relationship for HR and administrative functions. The model is one with shared responsibility and liability for both the employer and the PEO.

Contrarily, payroll solutions of services typically never involve co-employment arrangements. They are simply outsourced payroll-related functions and don’t assume any more HR responsibilities with a co-employer status.

Regulatory Compliance

As the scope of PEO services is broader, they take on a more prominent role in staying compliant with laws and regulations. PEOs ensure compliance with labor laws, employment regulations, workplace safety, workers’ compensation, and employee benefits administration.

On the other hand, payroll solutions restrict their compliance with payroll calculations and tax reporting. Thus, their scope of ensuring compliance is narrower compared to PEOs.

Global Reach

More often than not, many PEOs offer global services. These international PEOs can assist companies with international business operations, complex HR functions in multiple countries, overcoming cultural barriers, and compliance with international labor laws.

Contrastingly, payroll support may vary in terms of global reach. Some may provide for cross-border payroll processing, workers compensation and tax reporting, while others only operate locally. 

Deciding Which One to Choose

Opting for a Professional Employer Organization or a payroll service provider depends on your business requirements and resources. Given below is a list of factors to consider before making the call.

Internal capabilities

If you’re seeking comprehensive HR functions and not just payroll processing, partnering with a PEO as your employer of record would be a better choice. If you only need help with payroll-related functions, payroll solutions would suffice.

Company size 

Suppose you’re a small business without a dedicated HR department. In that case, a PEO might be a better choice as it will assist you with all HR and administrative processes while staying compliant with laws.

On the other hand, payroll management can be a good fit, particularly if you have minimal HR complexities, a solid HR department, and straightforward payroll processing needs.

Global presence

If you have international business operations or plan to expand globally, an international PEO can be a valuable support for navigating the diverse HR and legal requirements. Some payroll service providers also offer international payroll processing, but their scope might be more limited than global PEOs.

Cost

PEOs typically pool their services, making them cost-effective for businesses requiring multiple HR services. However, costs can vary depending on the services provided. A payroll service often offers more straightforward pricing, focusing primarily on payroll processing tasks.

Hire and Pay Your Global Team Easily with Skuad

A Professional Employer Organization or a payroll service has incredible benefits in offloading a significant portion of your HR responsibilities. While PEOs offer more comprehensive services spanning the entire HR and administrative functions, payroll service providers specialize in payroll-related processes. The one you should opt for, hence, depends on your requirements.  

Partnering with a Global PEO like Skuad is better if you have a distributed workforce. They can seamlessly manage your international HR functions, employee benefits administration and compliance processes. 

Skuad, a reputed employer of record/global PEO platform, enables you to build a global workforce in over 160 countries without any HR complexities or setting up legal entities. With our unified platform, you can hire and onboard employees with a single click and stay 100% compliant with local employment laws. Talk to our experts today.

FAQs

Which of the two provides the most benefits?

Compared to payroll service providers, Professional Employer Organizations offer a more comprehensive list of advantages, including payroll services, employee benefits management, employee training and development, tax reporting, and other administrative tasks.

How much does a PEO cost?

The cost charged by a Professional Employer Organization can differ depending on what services you want to avail yourself of. However, the cost typically determines your number of employees, the services you opt for, and the average wage level.

Is a PEO the same as an EOR?

Many people use the terms interchangeably; however, there are significant differences between a PEO and an EOR.

PEOs primarily concern your HR and administrative functions for legally established companies that work with them as a ‘co-employer.’

On the other hand, EORs help companies with their HR functions, like hiring, onboarding, and compliance, without them having to establish a separate legal entity and a co-employment contract.