Call center employees
A professional employer organization (PEO) can be a sensible option for small and growing businesses that are looking to outsource various tasks. — Getty Images/Wavebreakmedia

Outsourcing your payroll and HR functions to a PEO lets you focus your time and energy on growing your business.

As a small business owner, it’s easy to get bogged down by employment regulations, a complicated payroll, and managing health insurance plans. That’s why you may want to consider outsourcing these functions to a PEO.

[Read more: Human Resources for Small Business: What You Need to Know]

What is a PEO?

A professional employer organization (PEO) is a company that contracts with small businesses to take on functions like payroll, taxes, and employee benefits. The PEO essentially becomes a “co-employer,” combining the employees of several small ventures to offer lower costs, more efficient paperwork, and better compensation packages.

The PEO partners with a small business and becomes the legal and tax-related employer for that company’s employees. The PEO performs administrative functions, such as payroll and offering benefits coverage, on behalf of the small business.

By working with multiple small businesses, the PEO can negotiate more comprehensive and less expensive benefits, insurance, and workers’ compensation. The cost of using a PEO will vary depending on how many employees you have and the exact features you need.

Benefits of using a PEO

A PEO offers many benefits, especially if you’re a small business owner with limited time and resources. Here are some reasons you might want to use a PEO:

  • Better employee benefits: It’s hard to find and retain good employees if you don’t offer a competitive benefits package. Since PEOs act as co-employer for many different employees and companies, they can offer a comprehensive benefits package at a more affordable price.
  • Legal protections: As your business continues to grow, HR tasks become more complicated, and making a mistake can result in costly fines or even a lawsuit. Most PEOs offer employment liability insurance and legal protections if you’re sued by an employee. And since your employees are paid under the PEO’s federal employer identification number, the Internal Revenue Service holds them responsible for federal payroll taxes, not you.
  • Time savings: Using a PEO will save you from administrative tasks like filing paperwork, researching labor laws, and processing payroll. This can give you more time and energy to focus on growing your business.
  • Build a stronger business: Using a PEO could give your business the competitive edge it needs to thrive. One study found that businesses using a PEO were 50% less likely to fail, and they had a 15% lower employee turnover rate compared to industry averages. And companies using a PEO reported an average revenue increase of more than 70%.

[Read more: A Guide to Employee Record Retention]

If you’re considering using a PEO, the first step is to determine the specific features and services you need.

How to choose a PEO

If you’re considering using a PEO, the first step is to determine the specific features and services you need. Once you know what you’re looking for, you can start talking to different companies. If you use the National Association of Professional Employer Organizations (NAPEO), you can search for a list of accredited companies by state.

Most PEOs either charge a flat rate based on the number of employees you have or a percentage of your total payroll. It’s important to understand exactly what you’re paying for so you can determine whether it fits your business’s needs and budget.

It’s also a good idea to find out what kind of software or technology the PEO provides. The right PEO should use cloud-based technology with a user-friendly interface and a mobile app. That way, you can manage your payroll, HR, and talent management from any device.

[Read more: 8 HR Technology Trends for Innovation in 2023]

Alternatives to using a PEO

There are some downsides to working with a PEO — they can be costly, and it can be hard to understand exactly what you’re paying for. And adapting to a PEO’s company policies can change your company culture.

If you’re unsure about whether using a PEO is the right choice for your business, here are two alternatives to consider:

  • Employer of record (EOR): An EOR is a good option for companies that are looking to hire internationally. The EOR can help establish legal entities around the world and manage the challenges that come with international hiring. An EOR can help with global payment processing, global compliance, and terminating employees.
  • Administrative service organization (ASO): You can use an ASO to outsource administrative tasks like payroll, benefits, and HR management. The main difference between an ASO and PEO is that ASOs don’t act as co-employers, so you retain more control over your business.

CO— does not review or recommend products or services. For more information on choosing the best PEO, visit our friends at business.com.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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