employees at work
A professional employer organization, or PEO, is a widely-used option for small and midsized businesses looking to hire employees but outsource many of the associated tasks. — Getty Images/PeopleImages

In the beginning stages of building your business, you probably wore multiple hats. But as your business continues to grow, this can start to become a disadvantage. Trying to manage too many things at once can drain your energy and take you away from the most critical aspects of running your business.

At this point, it becomes necessary to outsource certain operations, and using a professional employer organization (PEO) is a great way to do this. A PEO handles many of the administrative tasks so you can focus on growing your business.

While the employees are still considered yours, the PEO will become the official employer of record. This means the PEO is responsible for paying your employees and handling taxes, benefits and insurance. But they don’t manage your employees on a daily basis or have any impact on their day-to-day work activities.

Using a PEO could be a good choice, but it will require doing some research first. Listed below are three things you need to know about PEOs.

The PEO industry is growing at a rapid pace

The National Association of Professional Employer Organizations (NAPEO) found that 15% of all employers with between 10 and 99 employees use a PEO; and the PEO industry is growing at a rate that’s 14 times higher than that of the U.S. economy.

Annual wages in the PEO industry total $176 billion across 3.7 million employees. This is roughly the same number of employees as those employed by Walmart (in the United States alone), Amazon, Wells Fargo, Apple, IBM, FedEx, Google, Starbucks and AT&T.

175,000 small and midsized businesses partner with a PEO. Interestingly, the actual number of PEOs have stayed mostly the same since many PEOs have merged, been acquired, or gone out of business.

The National Association of Professional Employer Organizations (NAPEO) found that 15% of all employers with between 10 and 99 employees use a PEO.

PEOs can reduce your risk and liability

There are hundreds of state and federal regulations on small businesses, which makes it difficult to ensure compliance with each of them. If you don’t feel confident that you can comply with all these regulations on your own, you may want to consider using a PEO.

Here are just a few of the most common regulations you’ll have to comply with:

  • Benefits: Employees are entitled to certain workplace benefits. For instance, the Fair Labor Standards Act requires that non-exempt, white-collar employees be paid time-and-a-half for any hour worked past 40 hours a week. And, if you have more than 50 employees, they’re entitled to 12 weeks of protected, unpaid leave as provided by the Family and Medical Leave Act (FMLA). There are additional, more specific details pertaining to this act depending on certain situations, as well.

[For more on employee classification, see How W-2 Employees Are Taxed Differently Than 1099 Contractors.]

There are certification programs for PEOs

If you’re going to outsource payroll to another company, you want to know that the company is trustworthy. Fortunately, there are several certifications available for PEOs.

For instance, the IRS created a Certified Professional Employer Organization (CPEO) designation. If a PEO is a CPEO, it means it has submitted financial and background information to the IRS. Thus, the IRS has designated it as being financially sound. You can find a full list of certified PEOs on IRS.gov.

A PEO can also become an Employer Services Assurance Corporation (ESAC). To qualify, participating PEOs submit financial and operations updates in order to receive ongoing certification. You can find an accredited PEO in your area on the ESAC website.

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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