How Do PEO and Payroll Services Differ?

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PEO and Payroll Services

With the newly emerging small business and numerous start-up companies, business owners are constantly on the lookout for improving their operational profit. To efficiently manage costs and processes, most smart business owners have opted for outsourcing with PEOs (Professional Employer Organisations) and PSPs (Payroll Service Providers). 

While many owners choose to manage the payroll processing single-handedly themselves, hiring PSPs or PEO payroll services is always recommended to stay one step ahead. These organizations offer HR services like taxes and compliance, gathering information of employees, calculating payroll, and issuing monthly paychecks. When these tasks are outsourced, businesses can keep up with the market’s pace while becoming more efficient. 

PEO payroll services and PSPs are two of the most standard options that most businesses can opt for. However, both these entities work differently based on what one needs. Each business has its unique requirements. Before making a choice, one must understand how they function and what are the major nuances between them.

What is PEO Services and How Does it Work?

PEO stands for Professional Employer Organization. It is a third-party firm that provides core HR services like payroll management, compliance, etc. 

PEOs are primarily responsible for tasks related to payroll, including payment of wages, issuing employee W-2s, and depositing employment taxes. PEO payroll services help allocate regular payments to full-time and part-time employees, and even to independent contractors/vendors. However, the responsibility for the daily management of operations lies with the client.

PEOs are often deemed as co-employers of a company. This is because PEOs act as added support and help increase the profit margin of companies, empowering them to gain a strong foothold in the market. They comprise executives trained in human resource management and administration, taxation,  legal domains, accounting, and client servicing. Hiring PEO services help reduce administration and servicing costs while seamlessly managing payroll complexities. 

Businesses worldwide now hire PEO firms because they specialize in helping companies hire remote talent globally in a cost-effective manner. They are well-versed with the local hiring laws of the state/country the client chooses to hire from. 

Furthermore, PEOs can also manage health benefits and insurances for client organizations, remote contractors, and employees. This is highly beneficial for startups that usually don’t have the resources to create affordable health insurance schemes or insurance plans. Hiring a PEO allows you to access these plans for your employees. Being in a large-scale organization, a PEO involves lesser risks and is comparatively less expensive for insurance companies to cover.

PEO and co-employment

When a company partners with a PEO, it becomes the co-employer. This arrangement distinguishes PEOs from other outsourcing services. While the client still holds authority over employment and termination of their employees and daily business operations, the PEO handles other crucial operations like allocating wages, offering employee benefits, etc. Essentially, PEOs manage their client’s payroll and employee taxes. 

This codependency is created by the distribution of the responsibilities and liabilities between the client company and the PEO. While the client is busy handling business operations, the PEO provider handles internal HR duties to ensure compliance and mitigate risks. 

How does a PEO work?

While hiring a PEO, clients have to sign a co-employment agreement that gives authority to the PEO to control and take responsibility for several HR tasks. After becoming co-employer, a PEO first files and remits all taxes under their own employer identification number (EIN) instead of their clients’. This saves their clients from paying the state unemployment (SUTA) tax.

Professional Employer Organisations hire employees for their clients on their payroll. The employee gets deemed as ‘employer on record’ for the PEO company. So, while the employees receive KRAs from the client they work under the HR guidelines set by the PEO. Thus, the PEO handles their payroll and compliance whereas their client company focuses on growing its business.

A PEO handles the following things for client organizations:

  • Payroll: PEO services are primarily sought out by companies for managing payroll operations like allocating salaries, calculating tax deductions, and maintaining records of payment for employees.
  • Employee Benefits: PEOs partner with local insurance firms to provide several employee benefits like health care, transport, and other workplace benefits.
  • Human Resource and Legal formalities: PEOs have thorough knowledge about local hiring laws. By keeping abreast with the constantly changing laws and legalities, PEOs help companies to comply with the relevant laws and regulations. 
  • Added benefits: PEOs additionally provide several benefits like incentives,  performance-based compensations, managing disability pay, overtime expenses, etc.

What is a global PEO?

As the name suggests, Global PEOs help companies hire at a global scale. Global PEOs usually have a thorough knowledge of global hiring laws to help companies expand overseas. 

A Global Professional Employer Organization offers the following benefits:

  • Updates their clients about the local hiring laws globally: Hiring quality talent can be quite complex and challenging on a global scale. Global PEOs always stay updated with the newest hiring trends and laws. Hence, they can align the hiring, payroll, and other aspects accordingly. 
  • Helps clients plan finances: A Global PEO does extensive research before their client expands their business to a new country to effectively forecast how much money is required. Using tangible data, PEOs provide sound financial solutions to clients. 
  • Help protect company data: In this age of technological advancement, data is a precious asset. A Global PEO is aware of the local complexities related to data use and recommends changes in accordance. They take all necessary measures to protect client data. 
  • Offers complimentary benefits to employees: Like other PEOs, global PEOs also provide several employee benefits like medical cover, life cover, etc. This allows client companies to create goodwill in the global market. 
  • Makes Remote hiring affordable: Hiring remote talent is undoubtedly expensive. Global PEOs help clients save money by providing a thorough report on how much they should pay to remote employees in specific countries.

What Is a Payroll Service Provider and How Does it Work?

A PSP or a Payroll Service Provider is responsible for the seamless payroll processing, compliance of tax, and other administrative needs of organizations. They manage payroll and allocate payments to employees per the payment schedule set by their clients. They make sure to include relevant deductions like taxes and benefit premiums from employee paychecks.

PSPs also prepare, file, and pay federal unemployment tax returns (FUTA) and quarterly business tax returns under the company’s EIN, furnish and file the W-2 and W-3 forms, and help resolve tax issues by communicating with the IRS on the client’s behalf.

How does it work?

Once a PSP is hired, clients sign an agreement indicating the amount they are willing to pay monthly and the services they’ll receive. Clients are allotted a representative from the PSP firm to resolve any queries and concerns related to payroll. 

Generally, employees contact their employers for any queries related to their payroll and benefits, while the employers contact the PSP on the employee’s behalf. 

PEO Payroll Services Requirements

To make sure that your payroll is running without any problems, there are certain mandates that you are required to fulfil. The prerequisites for efficient operation of PEO payroll services in businesses are as follows:

  • State tax ID and Employer Identification number (EIN): Every business has a unique identification number known as the EIN or Employer Identification Number required for federal filings and other purposes. It is also a mandate for submitting payroll taxes. In some states you will be required to present both your EIN and State tax ID for the business. 
  • Payroll Scheduling: Prior to setting up a payroll service, first determine the payroll frequency. This will determine the payment schedule for paying your employees. Keep the requirements of the state law and the industry before setting the schedule. The standard payment schedules are as follows:-
  1. Weekly
  2. Bi-weekly
  3. Semi-monthly
  4. Monthly              
  • Employer information: Make sure that every employee fills up form W-4 so that you will be able to calculate the federal tax deductions from their paychecks. Employees are also required to fill up the withholding forms of their respective state. 
  • Tax withholding: As a business, you will be required to calculate tax deductions from each paycheck of your employees and make sure that the calculations are accurate. In order to establish a level of trust with your employees, ensure that they understand how to read the pay stubs.

Differences Between Standard Payroll Services and PEO Payroll Services

Most businesses, avail of payroll services to ensure that their company's payroll is processed correctly. Additionally, having one less task to worry about gives them the liberty to focus on business growth and development. 

Here are the key differences between a standard payroll service and a PEO payroll service : 

Point of difference PEO Payroll Services Payroll Service Provider (PSP)
  1. Employer of record
PEO payroll services become the employer of record for the client company once they provide payroll services. PEOs generally follow this co-employment structure. Standard payroll services seek to provide payroll processing for your business, where the business is the employer of record.
  1. Liability
Businesses partnering with a PEO share the liability with them. PEO service providers are aware of the state, federal, and industry-specific obligations, and associated legal risks. When it comes to standard payroll services, employers have the sole responsibility for employees and their compliance.
  1. Workers' compensation
Partnering with PEO services ensures that the clients will obtain the right workers' compensation insurance and manage the workers' comp claims as well. Choosing a standard payroll service makes it your responsibility to obtain the correct worker's compensation (workers' comp) coverage on the basis of the state's requirements.
  1. Administrative HR tasks
PEOs provide complete HR services, including managing employee onboarding & training, managing retirement plans, like the 401(k), health insurance administration, regulatory compliance assistance, and recru1itment. Standard payroll services generally do not handle administrative responsibilities.
  1. Employee benefits
PEOs offer good employee benefits packages with group policy rates. Standard payroll services do not provide any employee benefits.
  1. Cost
Taking all the additional benefits into consideration, accounting for PEO payroll is more likely to be an expensive choice. This is because it is multidimensional and takes an active part in the growth of the business. With a PSP, you may be required to hire additional HR consultants as they do not provide administrative services. This could potentially be costly in the long run.
  1. Compensation Insurance
PEOs offer compensation insurance to employees once an agreement is signed. Companies must manage the compensation insurance themselves if they opt for PSP.
  1. Contract and Termination
PEOs require companies to sign a contract with them for a specific period. PSPs do not require contracts for companies. They are more flexible as companies can opt-out at any time.

How to Choose Between Standard Payroll Service and a PEO Payroll Service?

Choosing a payroll service is entirely dependent on the business’ requirements. One should always think ahead, evaluate the services offered, and weigh the pros and cons. 

Here are certain things to consider before choosing a payroll service:

  • Whether you want to stay the sole employer of your employees.
  • Whether you are comfortable with shared liability over your employees.
  • If you wish to pass the responsibility of handling the workers' compensation to a third party.
  • Whether you require more competitive employee benefits.
  • The amount of money you can spend on payroll management.

If you want to be the sole authority governing your staff and partner with a standard payroll service, a PSP is the ideal option for you. However, if you want to focus on the growth of your business and you wish to outsource tasks like processing payroll, legal compliance, and handling workers' compensation claims, partnering with a PEO is a more lucrative option. 

Why Should You Use a PEO for Payroll?

A PEO is an additional support system for your company. Not only does it manage payroll processes smoothly, but it also protects clients from potential legal hassles and risks. 

PEO payroll services are your best bet because they offer additional privileges exclusive to your PEO contract along with the standard HR services. Although the upfront costs may seem high, PEOs are more financially feasible for businesses because of their long-term benefits. 

PEOs can:

  • Help reduce liability and streamline payroll-related services: Initially, small-scale and midsize companies must focus on their growth. Hiring PEO services takes payroll management's responsibility off their shoulders. This makes it much easier for businesses to focus on daily operations. PEOs also file taxes for your employees, thereby making your job easier. 
  • Help cut costs by offering competitive employee benefits: PEOs can help cut down on costs on the benefits companies offer to their employees. Being a large organization that works with several employees from multiple clients, they have substantial buying power for health insurance, compensation insurance, retirement plans, etc. Naturally, they can offer such benefits to employees at much more affordable rates. 
  • Helps manage and minimize the risk of legal compliance: This is one of the biggest reasons why companies should opt for PEOs. There are several complicated regulations and laws affecting employment services and payroll. A PEO constantly learns about the latest regulations governing hiring, payroll, etc., thereby reducing the chances of legal complexities for businesses. 

Conclusion

As a business owner, you’ll know what’s best for your company's growth. So, before choosing a PEO payroll service, make sure to understand your requirements well and consider the pros and cons of PEOs and PSPs. 

And if you decide to outsource your payroll management to a third-party provider, do check out Multiplier! Our in-house experts understand the intricacies of payroll management, and hence, we assure to offer the best-in-class services to you!

FAQs

  1. What are the disadvantages of opting for PEO payroll services?

There are quite a few benefits of availing of PEO payroll services, but there are downsides as well. Firstly, it can have a significantly higher per-employee cost. While this isn’t an issue for larger companies, smaller and mid-sized enterprises might struggle to cover the extra expense. Another major disadvantage of PEOs is that companies tend to lose control of certain internal processes.

  1. What is an Employer Of Record?

An Employer of Record is a company or an organization legally responsible for employment, employee payments, management of employee taxes, insurance, benefits, and liabilities.

  1. Can larger companies opt for PEO?

Many large-scale companies might have difficulty keeping themselves up-to-date with state and federal labor laws. Given the scope of work of larger organizations, it’s best to outsource payroll management and related tasks to a PEO.

Hiring and onboarding using Multiplier ensures you hire remote talent with locally compliant, fool-proof job contracts, offer emphatic benefits and disburse salaries accurately with absolutely nil errors in payrolls.

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