What is a PEO?

A Professional Employer Organization (PEO) is a company that co-employs your existing staff, sharing HR responsibilities and liabilities. You maintain control over day-to-day operations and management. The PEO handles payroll, benefits, workers' compensation, compliance, and HR administration.

The key word is "co-employ." Unlike an Employer of Record (EOR), which becomes the sole legal employer, a PEO enters into a co-employment relationship. You're both employers. You manage the work; they manage the HR infrastructure.

PEOs are primarily used by small to mid-sized businesses (10-500 employees) that want enterprise-level HR capabilities without building an internal HR department. They're common in the U.S. and less common internationally.

How co-employment works

When you partner with a PEO, your employees become co-employed. They work for your company but are also employed by the PEO for tax and insurance purposes. This arrangement allows the PEO to pool employees from multiple client companies, creating a larger risk pool for benefits and insurance.

Here's how it works in practice. You hire an employee. The PEO becomes the employer of record for tax purposes, meaning they file payroll taxes under their EIN. They process payroll, withhold taxes, and remit payments to tax authorities. They provide benefits (health insurance, 401(k), etc.) through their master policies. They handle workers' compensation insurance and claims.

You maintain control over hiring, firing, compensation, job duties, and day-to-day management. The employee reports to you, works on your projects, and follows your direction. The PEO handles the administrative and compliance side of employment.

What PEOs provide

PEOs offer a comprehensive suite of HR services. Payroll processing is the foundation—they handle payroll calculations, tax withholding, direct deposits, and payroll tax filing. Benefits administration includes health insurance, dental, vision, 401(k), FSA/HSA, and other employee benefits, often at better rates than small businesses can negotiate independently.

Workers' compensation insurance is a major component. The PEO provides coverage, manages claims, and handles safety compliance. This is often cheaper than buying workers' comp independently because the PEO's larger risk pool gets better rates.

Compliance support includes staying current with employment law, handling unemployment claims, maintaining required posters and notices, and ensuring payroll tax compliance. HR support includes employee handbooks, policy development, performance management tools, and access to HR advisors.

Some PEOs also offer recruiting support, onboarding tools, time and attendance tracking, and learning management systems. The exact services vary by provider and pricing tier.

PEO vs EOR vs contractor management

PEO is for existing employees where you already have a legal entity. You want better benefits, HR support, and compliance help without building an internal HR team. Common in the U.S. for small to mid-sized businesses.

EOR is for hiring employees in countries where you have no entity. The EOR becomes the legal employer, handles local compliance, and manages payroll and benefits. Used for international expansion.

Contractor management is for independent contractors who remain self-employed. You organize contracts, milestones, invoices, and payments without employment infrastructure.

Costs and pricing models

PEO pricing varies widely based on company size, services, and benefits packages. Most PEOs use one of two pricing models: per-employee-per-month (PEPM) or percentage of payroll.

PEPM pricing charges a flat monthly fee per employee, typically $40-200/employee/month. A company with 10 employees might pay $400-2,000/month. This model is predictable and easier to budget.

Percentage of payroll charges 2-12% of total payroll. A company with $500,000 annual payroll might pay $10,000-60,000/year. This model scales with payroll but can be expensive for high-wage employees.

Beyond PEO fees, you pay employee salaries, benefits premiums, and workers' compensation insurance. The PEO negotiates better rates on benefits and workers' comp, which can offset some of the PEO fees.

Benefits of using a PEO

The primary benefit is access to enterprise-level benefits at small business scale. PEOs pool employees from hundreds of client companies, creating a large risk pool. This allows them to negotiate better rates on health insurance, 401(k) plans, and other benefits than a 10-person company could get independently.

Compliance support is another major benefit. Employment law is complex and constantly changing. PEOs have dedicated compliance teams that stay current with federal, state, and local regulations. They handle payroll tax filing, unemployment claims, and required reporting.

Time savings are significant. Payroll, benefits administration, and HR compliance are time-consuming. By outsourcing these functions to a PEO, business owners and managers can focus on core operations instead of HR administration.

Risk mitigation is valuable. PEOs share employment liability, particularly around payroll taxes, workers' compensation, and compliance. If there's a payroll tax issue or workers' comp claim, the PEO handles it.

Drawbacks and considerations

Cost is the primary drawback. PEOs aren't cheap. For a 10-person company, expect $400-2,000/month in PEO fees on top of salaries and benefits. For some businesses, this is worth it for the time savings and better benefits. For others, it's too expensive.

Loss of control is another consideration. While you maintain day-to-day management, the PEO controls HR policies, benefits offerings, and payroll processes. You can't customize as much as you could with an internal HR team.

Switching costs are real. Once you're with a PEO, moving to a different PEO or bringing HR in-house is disruptive. You have to migrate payroll, benefits, and employee records. Employees may lose benefits continuity during the transition.

Not all PEOs are equal. Service quality varies widely. Some PEOs provide excellent support and technology. Others are bureaucratic and slow. Due diligence is critical when selecting a PEO.

When a PEO makes sense

PEOs are best for small to mid-sized businesses (10-500 employees) with W-2 employees who want enterprise-level HR capabilities without building an internal HR department. Common scenarios include:

You're growing fast and need HR infrastructure quickly. You want better benefits to attract and retain talent. You're spending too much time on payroll and compliance. You're concerned about employment law compliance. You want to reduce workers' compensation costs.

PEOs are less useful for very small businesses (under 5 employees) where the cost per employee is too high, or for businesses that primarily work with contractors rather than employees.

PEOs and contractors

PEOs are for W-2 employees, not independent contractors. If you're working with contractors, a PEO doesn't help. Contractors aren't on payroll, don't receive benefits, and aren't covered by workers' compensation.

For contractor management, you need different tools. Contractor management software helps you organize contracts, track milestones, manage invoices, and coordinate payments. It's designed for independent contractor relationships, not employment.

Many businesses use both: a PEO for their W-2 employees and contractor management software for their independent contractors. The models serve different workforce types.

Common questions

Do I lose control of my employees with a PEO? No. You maintain control over hiring, firing, compensation, job duties, and day-to-day management. The PEO handles HR administration, not business operations.

Can I use a PEO if I have contractors? PEOs are for W-2 employees, not contractors. If you have both employees and contractors, you can use a PEO for employees and contractor management software for contractors.

How long does PEO setup take? Typically 2-4 weeks. The PEO needs to onboard your employees, migrate payroll, and set up benefits. The timeline depends on company size and complexity.

Can I switch PEOs? Yes, but it's disruptive. You'll need to migrate payroll, benefits, and employee records. Employees may experience benefits gaps during the transition. Plan carefully and communicate clearly with employees.

The bottom line

PEOs are valuable for small to mid-sized businesses with W-2 employees who want enterprise-level HR capabilities without building an internal HR team. They provide better benefits, compliance support, and time savings in exchange for monthly fees and some loss of control.

PEOs are not for contractors. If you're working with independent contractors, you need contractor management software, not a PEO. The models serve different workforce types.

Evaluate your needs. If you have employees and want to outsource HR, a PEO might make sense. If you're working with contractors, focus on contractor management tools. Know your workforce type and choose the right solution.