Professional employer organizations (PEO) and Payroll management services are two ways you can keep your business profitable while also growing. PEO and payroll management services are suitable not only for established organizations but also for startups who are looking to cut costs while keeping their operations effective. Business owners may choose to manage the payrolls of their employees on their own. However, those business owners who outsource such services through PEO and payroll management service providers always have a competitive advantage over the former ones.
Both PEO and payroll management services cater to the unique demands of different types of companies. That being said, it is crucial for business owners to remember that professional employer organizations or PEO and payroll management services are not the same. While many of their functions are similar to one another, businesses need to make a wise decision before choosing one over the other.
What is a Professional Employer Organization (PEO)?
Professional Employer Organization or PEO refers to a firm that specializes in providing human resources services to either small or medium firms. For organizations who are looking for affordable solutions to fill their day-to-day operational gaps, PEO can be the perfect alternative to hiring an in-house employee.
PEOs help smaller organizations better their operations while focusing on higher revenue in the long run. Some important functions carried out by PEO include processing payrolls, withholding and paying payroll taxes, managing and implementing employee benefits, covering workers’ compensatory needs, and providing proper guidance on any human resources-related aspects to both the employer and the employees in a client organization.
Some businesses or organizations that can majorly benefit from PEOs are IT services and technology, real estate, securities dealers and brokers, engineering services, legal services, health services, management consulting services, accounting and bookkeeping services, audit firms, small businesses, manufacturing services, insurance service providers, and nonprofit organizations.
What are the Benefits of a Professional Employer Organization (PEO)?
The following are some of the major benefits of PEOs:
Liability mitigation: As an employer, there is always a liability for legal compliance. With the support of PEOs, you can lessen this burden from your shoulders to a great extent.
Budget-friendly: PEOs are designed for the benefit of smaller businesses. Hence, the services are almost always pocket-friendly.
Payroll and tax filing: PEOs integrate time and attendance with payrolls, which reduces double entry and errors in data recording princess. Likewise, payrolls and taxes are also filed by these firms.
Hiring and talent management: Many PEO firms provide an end-to-end hiring and talent management service, meaning business owners don’t have to carry the burden of hiring and onboarding processes.
Safety assurance: Besides the primary human resources duties, PEOs also remain compliant with safety laws by providing safety audits and training to the employees.
What is a Payroll Management Service?
A firm that covers all the payroll management functions, including tax deductions and calculations, payroll processing, direct deposits, and legal compliances, is known as a payroll management service. Payroll management service providers employ professionals and the best experts to carry out payroll management duties, which helps in cutting off risks while increasing efficiency in operation.
These firms tend to take off a great administrative burden off the head of a company owner. Moreover, instead of directly going to the business owners or their company’s employers, employees go to payroll management service providers when they have any queries or complaints. These firms work as per the necessity and schedule set by their clients. And, there is great transparency in their work as they consult with their clients before and while allocating payments and managing payrolls.
Some organizations or businesses that benefit from a payroll management service are manufacturing companies, restaurants and hospitality companies, IT service providers, financial service providers, construction companies, healthcare and pharmaceutical service providers, and retailers.
What are the Benefits of Payroll Management Services?
The following are some of the major benefits of payroll management services:
Legally compliant payroll management: Handling payrolls internally may lead to several compliance issues. Payroll management services provide an overall legally compliant payroll solution to companies.
Accuracy: Payroll management service providers hire professionals with years of training and expertise, which guarantees accuracy in the operations they carry.
Time saving: Business owners can save time and focus on other important tasks when they outsource payroll management.
Budget-friendly: Outsourcing payroll management is always cheaper than hiring an in-house employee to do the same tasks.
Data security: Certified payroll management service providers are trustworthy and don’t misuse your company’s data.
Differences Between Professional Employer Organizations (PEO) and Payroll Management Services
Though they seem similar to one another, the major nuances between PEOs and payroll management services are:
| Differentiating points | PEO | Payroll Management Services |
| Employer of Record (EOR) | PEOs become a co-employer when hired by a client company, meaning they play the role of employer of record. These firms handle the day-to-day management roles of different businesses or companies. | A business remains the employer of record even though a payroll management service provider is handling the payroll processing. These firms don’t always carry out the day-to-day management role of their client companies. |
| Employee compensation | Employee compensation coverage is usually included in the human resources service package provided by PEOs. | Payroll management services do not include employee compensation coverage in their service packages. They majorly focus on payroll management only. |
| Administrative duties | PEOs handle almost all types of HR duties, including selecting candidates for a job position, hiring them, onboarding them, training them, working as a mediator for communication between employers and employees, managing retirement plans, health insurance, legal compliance plans, etc. | Payroll management service does not include HR duties besides managing payrolls. |
| Legal responsibility | Since PEOs also become Employer of record, they either partially or fully become liable for the legal responsibilities of their client company. | Unlike PEOs, payroll management service excludes legal responsibility towards employee compensation coverage or claims. |
| Costs | PEOs may seem costly considering all the benefits it provides but outsourcing these firms is cheaper in the long run. | Though payroll management service providers are cheaper in the short run, you may have to pay additional costs for HR consulting from other firms, which is going to be expensive in the long run. |
| Worker benefit packages | Companies can enjoy customizable worker benefit packages when they outsource a PEO. | Payroll management services do not provide any worker benefit packages. |
| Insurance | PEOs are responsible for offering insurance benefits to the employees of a client company after they sign a contract. | Company owners or businesses are responsible for providing insurance benefits to their employees, as payroll management services don’t include this in their service package. |
| Flexibility | There is less flexibility in working with PEOs because companies have to sign a contract in order to work with them. | Companies don’t have to sign any types of contract in order to work with payroll management service providers. |
How to choose between Professional Employer Organizations (PEO) and Payroll Management Services?
It can be confusing for business owners to choose between PEOs and payroll management services. The following are the few factors you need to consider before making the decision:
EOR decision: If you want to remain the sole employer of record for your firm, then you should not opt for PEO services. But if you are comfortable with temporarily outsourcing employer duties, then you can choose PEOs over payroll management services.
Liability: Business owners who are willing to pass the liability towards their employees to a third party can choose PEO services over payroll management services. Similarly, those who are not willing to do so can choose payroll management services.
Employee benefits: Businesses seeking competitive employee benefits should opt for PEOs. If your business or company does not have such requirements, payroll management services might be a better choice for you.
Cost: Paying for a PEO service can be higher than paying for a payroll management service in the initial phase. Therefore, if you want to cut costs of additional human resources duties, then you can stick with payroll management services and vice versa.
Employee compensation: Companies that are comfortable letting a third party handle their employee’s compensation can opt for PEO. On the other hand, those organizations that don’t want to outsource such crucial duties should choose payroll management services instead.
Conclusion
Different companies grow differently and have their own set of necessities. In general, there is no such thing as a better choice between PEOs and payroll management services for companies. There are pros and cons to both PEOs and payroll management services, depending on what type of business they are catering to.
Making the ultimate choice also relies on how much accountability you want to pass to a third party. Therefore, it becomes necessary for business owners to analyze the nature and needs of their own companies before coming up with the end decision.
