What is a PEO (Definition): Top 10 FAQs Business Owners Have About PEOs

By Dan Doherty

You may have heard of a Professional Employer Organization, but may be wondering “What is a PEO?” and how can a PEO help you grow your business. This article can help you understand the PEO definition and explain the benefits of outsourcing HR through a PEO and how this help your business grow.

As a business owner, you know how important employees are your company. It’s your responsibility to ensure that your employees are paid on time, stay safe throughout the workday, and have access to benefits like workers’ compensation, health insurance, and 401k.

PEO definition: a human resources outsourcing company that provides HR services like payroll and benefits to small and mid-sized business clients

But spending hours handling HR administration typically isn’t the best use of your time. Some aspects of managing HR such as payroll, benefits, or ensuring compliance with labor laws may take valuable time better spent on other aspects of your company — such as growing revenue.

So, how is HR done in your business?

There are 4 common ways that small or midsize businesses handle HR and other employee-related tasks:

  1. HR tasks are handled by the business owner
  2. In-house staff is hired to assist with HR
  3. HR is outsourced to experts through a PEO or other HR service provider
  4. A combination of the above options

Using a PEO to outsource HR lets you focus on your mission and operations to deliver the best products and services to your clients. In this blog, we’ll help you understand what a PEO is and we’ll discuss the top 10 questions business owners have about professional employer organizations (PEOs).

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  1. What is a PEO?
  2. How does the PEO model work?
  3. What services do PEOs offer?
  4. Can I use a PEO for payroll?
  5. Can I use a PEO for benefits?
  6. What else can PEOs provide beyond payroll and benefits?
  7. Why should I use a PEO?
  8. Do I need an in-house HR person when using a PEO?
  9. How much does a PEO cost?
  10. How do I choose the best PEO for my business?

1. What is a PEO – definition

PEO definition: a human resources outsourcing company that provides HR services like payroll and benefits to small and mid-sized business clients.

PEOs (Professional Employment Organizations) have a partnership agreement to be the employer of record for these businesses in order to effectively streamline tax filing, reduce benefits costs, enforce compliance, and provide an overall comprehensive HR outsourcing solution to business owners.

A PEO is an ideal option for small and mid-sized business owners looking to minimize administrative burden, gain HR expertise, increase operational efficiency, reduce risk, and improve employee experience. Using a PEO will help you save time so you can spend more time growing their businesses.

2. How does the PEO model work?

The PEO model is one of co-employment. A co-employment model means that:

  • Your worksite employees are jointly employed by the PEO at the state and federal level. While PEOs can provide HR and compliance guidance, you still maintain responsibilities over day-to-day operations and are in control of hiring, firing, hours, and wages.
  • The PEO is the employer of record, responsible for paying your employee wages, taxes, and withholdings under its PEO tax ID numbers.
  • The PEO files your Form W-2s under its Employer Identification Number.
  • PEOs pool together worksite employees when receiving rates from insurance companies. This means you can access big benefits at affordable prices using the PEO model, letting you better compete with large companies in terms of recruiting and retention.

3. What services do PEOs offer?

PEO services vary by organization which typically function by region. Most PEOs will administer:

  • Payroll processing
  • Tax filing
  • Benefits administration, including workers’ compensation
  • Compliance and risk mitigation
  • Time and labor
  • Applicant tracking and hiring
  • Onboarding
  • Benefits enrollment
  • Performance management
  • HR consulting

PEO services are designed to remove the burden of managing HR from your business so you can focus on activities that lead to revenue growth.

4. Can I use a PEO for payroll?

Yes, a PEO can handle payroll for you, processing wages, taxes, and withholdings under its own PEO tax ID numbers. Instead of having a team member dedicate time to printing and stuffing paychecks, you can simply review and approve timesheets before the PEO executes the rest. PEO payroll processing can:

  • Use payroll data integrated with your HR software
  • Set automatic limits and check amounts
  • Identify errors against state and federal regulations
  • Deliver customized reports

PEO payroll services are a great option even if your business is already using a payroll provider.

Want to learn more about how partnering with a PEO can help your business?

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5. Can I use a PEO for benefits?

Benefits most frequently added by PEO clients
Employee benefits most frequently added by new PEO clients from The ROI of Using a PEO (2019) by NAPEO

A PEO uses buying power from the co-employment model so that you can get access to a range of employee benefits insurance companies would be unlikely to offer your business on its own. PEO benefits can include:

  • Health insurance, including medical, dental, vision, and prescription coverage
  • FSA, HSA, and HRA
  • Short-term and long-term disability insurance
  • Life and accident insurance
  • Workers’ compensation
  • Unemployment
  • 401k retirement plans
  • Employee wellness programs
  • Discount programs

PEO benefits programs allow small and mid-size businesses to pool together employees so that they can get a wider range of benefit plans at more affordable rates.

6. What else can PEOs provide beyond payroll and benefits?

What services does a PEO provide?
Percentage of business owners with concerns about employee-related challenges from The ROI of Using a PEO (2019) by NAPEO

PEOs are staffed with experts on a wide range of HR functions. Instead of relying on a few people on your team to manage your entire workforce, a PEO can be a significant resource in handling HR administration duties — without increasing your headcount. PEOs can support:

  • Candidate sourcing, job descriptions, job postings, screenings and background checks, communication with applicants, offer letters, and new hire documentation
  • New hire onboarding, forms, and verification
  • Benefits enrollment
  • Employee handbooks, policies, procedures, and best practices
  • Safety and accident prevention, and OSHA assistance
  • 24/7 employee portal with payroll, benefits, and W-2 information accessible from any device
  • Employee and manager training, eLearning, team building, and coaching
  • Performance management, appraisals, and review programs
  • Discipline, conflict resolution, and termination

Our nationwide network of PEO partners can help you find the HR services your business needs.

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7. Why should I use a PEO?

There can be many advantages to using a PEO. Small and mid-sized business owners use PEOs to:

  • Reduce administrative burden: By outsourcing payroll, benefits, and HR tasks, you and your team can focus on what you’re good at⁠— serving your clients and growing your business.
  • Gain HR expertise while keeping overhead low: Small business owners estimate they would need at least 3-4 in-house employees just to handle HR. PEOs are staffed with teams of HR experts who can help you stay on top of trends, offer advice, and resolve issues quickly.
  • Access competitive benefits: The buying power of PEOs allows small business owners to offer affordable employee benefits like health insurance, workers’ compensation, and 401k that they couldn’t otherwise obtain on their own.
  • Streamline operations: When using a PEO, you gain access to one HR technology platform that can serve all of your HR needs. From inputting timesheets to pulling reports, this can increase your efficiency and productivity while minimizing the time spent on these activities.
  • Mitigate risk and stay in compliance: It can be time-consuming to keep track of local, state, and federal laws and regulations, especially for businesses that operate in multiple locations. PEOs assume employer liabilities and proactively mitigate risk. View our compliance checklist to identify areas of risk for your business and better understand the labor laws that affect you.
  • Consolidate HR vendors: PEOs can be your one-stop shop for payroll, benefits, and HR so you don’t need to scramble over communicating with different vendors. With one partner, pricing and financial forecasting is simple.
  • Improve employee experience: Small to mid-sized businesses who use PEOs experience lower employee turnover and higher employee satisfaction. PEOs help to optimize the employee lifecycle, from attracting talent, to onboarding, to retention. Learn more about how to improve employee experience.

8. Do I need an in-house HR person when using a PEO?

This depends on the needs of you and your business. Depending on the range of services you use, the number of employees you have, and the relationship you want with your PEO, in-house support for the PEO may be needed.

When you use a PEO, you still maintain responsibilities like day-to-day operations and are in control of hiring, firing, hours, wages, and other agreed-upon HR obligations. Because of this customized service, it would be necessary for there to be at least one contact person with the PEO for the purpose of approvals, reviews, and discussions on proactive suggestions and advice from the PEO, as well as any issue resolution and additional expertise that you request.

However, the employee in contact with your PEO does not necessarily have to be a person in the HR field with 100% of an HR role. In fact, many small business owners themselves take on this responsibility among running their operations and overseeing their workforce. In-house HR resources can be minimal in partnership with your PEO, but it comes down to the amount of involvement and control in HR you prefer.

9. How much does a PEO cost?

Compared to the cost of hiring full-time in-house HR staff, a PEO can lower your employment costs while offering more reliable service (without taking PTO, sick days, or potentially leaving your business on a whim). Your PEO costs vary depending on the range of services you use, the level of customer service you want, and the number of employees you have. Additionally, the liability your business faces may affect insurance premiums offered by the PEO. PEO pricing is structured in two ways:

  • Per-employee, per-month (PEPM) or per-employee, per-year (PEPY) flat rate
  • Percentage of total payroll

10. How do I find the best PEO for my business?

There are over 900 PEOs serving small to mid-sized businesses today in every state in the United States. If you are considering the switch to a PEO, it’s important to assess:

  • Your HR and employee needs, including operating locations of your business
  • What level of service and/or control you prefer
  • The risks and liabilities involved with your business

To find the best PEO for your needs, you’ll want to address:

  • The services and expertise that a PEO offers
  • References and case studies from other businesses that use that PEO
  • PEO partnerships and associations
  • PEO pricing
  • Your service agreement

If you’re searching for terms like “what is a PEO” or “PEO definition” it’s likely you find this process a bit confusing at first. How do you select the best PEO to improve how you run your business? That’s where we can help.

PrismHR works with the largest network of HR service providers in the U.S. The PEOs in our network deliver payroll, benefits, and HR to more than 80,000 small businesses nationwide across all industries and locations. We can help evaluate your business’s needs and match you to a PEO that is the best fit for your business.

Want help finding the best PEO for your business from our nationwide network of PEOs?

Find a PEO partner now