What are the benefits of working with a PEO when compared to a payroll service?

One of the most exhausting parts of running a business is payroll. It consumes so much of your of time and resources, taking the focus off of more important revenue generating activities. If you are tired of giving up your nights and weekends to managing your payroll, it might be time to try something different. When looking for alternatives to DIY payroll, you have options, including outsourced payroll providers and Professional Employer Organizations (PEOs). Payroll providers and PEOs focus on taking payroll “off of your plate, but they engage with your company on different levels.

Here, we explain the differences between PEOs and outsourced payroll providers to help you choose a suitable option for your business. But first, let’s start with some basics.

What is a PEO?

A PEO is a third-party firm that provides all kinds of HR-related services for small and mid-sized businesses. These include, but are not limited to, payroll and payroll tax management, worker’s compensation management, employee benefits administration, risk management, and human resources.

When a business partners with a PEO for payroll, they enter into a co-employment agreement. The PEO becomes the employer of record and shares some of the responsibilities and liabilities with the owner. The PEO will manage the client’s payroll administration and remit all employee taxes under its tax identification number (EIN), instead of the client’s. When a business hires a PEO for payroll, it relies on the PEO to ensure compliance with all related laws and regulations and accurately process payroll.

What is an Outsourced Payroll Provider?

Also known as a payroll service provider (PSP), an outsourced payroll provider is only concerned with payroll solutions. When you hire an outsourced payroll provider to manage your payroll, it pays your employees according to the pay schedule you set and handles deductions, such as taxes, benefits premiums, and garnishments.

A PSP can also prepare, file, and pay your tax returns under your employer tax identification number. With an outsourced payroll provider, you keep all liability for your employees regarding on-time payment and taxes. Also, the liability of HR rests with your business.

PEO VS Payroll Provider: 5 Major Differences

While outsourced payroll providers and PEOs both take care of your payroll, they work differently. When comparing PEO payroll services and standard payroll services, here are the major differences to you should consider:

Services Provided

With a PEO, you’ll get more than just payroll and tax management. The full-service human resources approach of PEOs free you from hiring several providers or having to take care of additional employee management tasks, such as workers’ comp, employee benefits, background checks, talent management, employee handbook development, regulatory compliance assistance, employee retention, and risk management. By putting everything together in one package, a PEO takes the heavy lifting out of administrative duties and frees you up to concentrate on your business.

Conversely, an outsourced payroll provider focuses only on processing your payroll and ensuring they met your payroll tax responsibilities. Typically, standard PSPs do not handle other administrative HR tasks. Piecemealing services together or taking on the other administrative tasks yourself may end up costing you more than a PEO in labor and fees. It can also take your focus away from running and growing your business and reducing labor costs.

Employer of Record

Under the co-employment agreement, a PEO acts as your employer of record (EOR). This means that you allow the PEO to share certain employee-related responsibilities and liabilities. For the period of the co-employment agreement, the PEO will handle payroll administration and related tax filing, provide access to benefits, and handle HR administrative tasks.

They will remit and report taxes to applicable federal and state agencies under the PEO’s EIN instead of yours. This can lower your state unemployment tax (SUTA) and federal unemployment tax (FUTA) burdens.

In a co-employment agreement, you still run the company. You maintain the responsibility for hiring, firing, and managing employees and for handling day-to-day business operations, such as customer service, sales, marketing, employee tasks, and assignments.

An outsourced payroll provider, on the other hand, is neither your co-employer nor employer of record. They generally offer restricted payroll and tax management.

This means that outsourcing to a PSP only changes the way you process payroll. All taxes are filed and remitted under your employer identification number. What’s more, it’s your responsibility to ensure taxes are filed correctly to federal and state entities.

Risk and Compliance

Like many third-party firms you hire for certain outsourced services, a payroll service provider does not share legal liability for compliance errors that it may make. If the payroll provider makes payroll errors or messes up your payroll taxes, you solely bear the legal burden. Working with an outsourced payroll provider doesn’t do much to ease compliance concerns and minimize business risks.

PEOs are quite the opposite. As your co-employer, a PEO share legal responsibility with you. They have an incentive to manage risk and ensure compliance. They will also handle your workers’ compensation administration, as well as claims investigation and representation.

They also manage other business risks and compliance concerns, such as workplace safety, employee handbooks, background checks, and drug testing. Leading PEOs are well-versed in state, federal, and industry-specific legal risks and compliance obligations.

Contractual Obligations

With PEO payroll services, you’ll need to sign a contract for a year or longer. While having a contract in place gives you some predictability and stability, there may be some hurdles if you choose to end your contract. Also, the large-employer rules that apply to the PEO will also apply to your company. You’ll have to comply with additional Affordable Care Act (ACA), Americans with Disabilities Act (ADA), and employee handbook formalities.

If you work with an outsourced payroll provider, you’ll face few contract-based changes. Also, a legal contract is generally not needed when you hire a PSP.

You’ll have to sign an agreement that outlines your and the PSP’s responsibilities. Most PSPs provide their services based on the pay period without requiring lengthy contracts. You can opt-out whenever you want.


If you base your PEO vs. payroll comparison on the dollar number, the PEO will be the more expensive option. But you might want to give the PEO a second look if you want value and return on investment. While an outsourced payroll provider’s duties begin and end with the administration of payroll, a PEO touches on every aspect of human resources.

If you have a compliance issue or need to train employees, your PEO will be there to help. Because of a PEO’s economies of scale and higher purchasing power, you get access to superior workers’ compensation insurance and employee benefits which can cost you less than what you might obtain on your own.

In Conclusion

A payroll company is a services provider, whereas a PEO is a partner. The decision to choose a PEO vs payroll provider depends on the size of your business, the presence of an in-house HR team, or the need for additional services. If you’re a startup with two employees or so, an outsourced payroll provider makes a lot of sense. If you have three employees or more, you’re better off partnering with a PEO.

PEO Vs Payroll Outsourcing: Consider vested HR as Your PEO for Payroll and HR Outsourcing

If you think a PEO may be the right choice for you and are ready to realize the benefits of working with one, Vested HR is the name you can trust. We use an innovative and exception approach to payroll and HR outsourcing, allowing the growth of your business to be your top priority. Contact us today to learn about our PEO solutions.