What is a PEO Company?

A professional employer organization (PEO) is an organization that helps small businesses by taking over some of the human resource (HR) responsibilities such as administrative tasks, workforce compliance regulations, employee benefits, workers’ compensation, and payroll.  A PEO enters into a joint-employment relationship with you, the small business owner, by leasing employees to you and allowing the PEO to manage many employee-related responsibilities and liabilities.

A PEO is different than a staffing agency, in that you are outsourcing your tasks instead of hiring people.  You still maintain the hiring duties when it comes to who works for you, doing said tasks, while the tasks themselves are outsourced and maintained by the PEO.


How does a PEO company work for payroll?

I tried to perform the payroll duties myself when we first opened the company.  Within a month, I hired a PEO company after realizing this is one area that I was not an expert in and needed help.   The company I worked for previously outsourced their payroll and I recognized the benefits as an employee and then as the employer, as well.  We choose to pay weekly, so here is how our payroll week went:

  • Hours were emailed to PEO company on Monday
  • Payroll funds were electronically withdrawn from our bank account on Wednesday (with proof provided)
  • Friday morning my employees woke up with their funds in their bank accounts.


What are benefits to using a PEO company?

Most small business owners struggle with balance in the day-to-day operations of their business.  You must be a Salesperson, Human Resources Manager and Accountant/Bookkeeper.  Outsourcing your payroll allows you to leave that function to an expert:

1 – Reduce Costs / Time Savings / Productivity: No, they are not free to hire, but they do reduce your costs.  Let us do the math:

  • Figure out how many labor hours you or your employees are devoting to payroll-related activities
    • Calculating payroll each time period
    • Printing, signing, and distributing paychecks or pay stubs
    • Computer software and program maintenance
    • Training, and support for each program
    • Tax and employment law changes – keeping up with them and implementing the changes in real time.
    • Payroll taxes and returns to government agencies
    • W-2’s
    • Wage garnishments
    • New hire reporting
    • Generating reports for in-house and accountant use


That is a lot of time, energy and effort!  You will be surprised how much you can save by outsourcing your payroll.  It is worth a phone call.


2 – Team of Experts: A small business owner needs mentors and experts at their side to help their business succeed.  A PEO company will provide resources to Human Resource Managers who understand the ins and outs of HR procedures and processes.  They have attorneys on staff that you can speak with regarding any employment legal issues.   They offer experts in OSHA.  We were able to decrease our workers compensation premium by having our PEO’s OSHA expert come in and evaluate our work environment and provide safe guidelines suggestions.  We experienced an employee who filed unemployment claims against us, and we were able to lean on their experts when we fought the claim.


3 – Avoid IRS (Internal Revenue Service) penalties: Yes, the IRS will charge you penalties if you do not report your payroll taxes on a timely basis. And they will charge you for your mistakes as well.  Penalties and mistakes can lead to IRS audits.  As a small business owner your time is best spent growing your business by working on your business, not in the business.  A reputable outsourced payroll provider has a staff dedicated to keeping up to date on all the changes that could affect your payroll, ensuring that you stay in compliance.  Yes, you can purchase payroll software, but who will oversee making sure it is up to date with all the changes?


4 – Enhanced Security:  How secure is your payroll information on your server?  Even with long time trusted employees, there is always a risk of identity theft, embezzlement of funds, or tampering with company files for personal gain. You can also incur penalties or even be sued if you fail to safeguard your employees’ sensitive information.


5 – Employees leave who have your payroll expertise: Unfortunately, even small businesses deal with employee turnover.  Yes, your right-hand assistant may decide to take time off, utilize FMLA leave, ask for an extended vacation, or maybe they just quit.  There goes your payroll expert!  Can you step in and keep payroll going and maintain compliance as you go?


6 – How does your employee access their payroll information?  Do you have software that allows your employees to login and review pertinent payroll information?  PEO companies will utilize HR software that allows the employees to see previous check stubs, tracking PTO, updating pertinent information and obtain payroll documents.  This software will provide the owner with time saving reports for end of year taxes, storage for confidential documents and generate reports for analyzing your expenses.


7 – Small Business Owner Peace of Mind: Owners have a lot on their plates and outsourcing payroll provides one less aspect of the business they must worry about. Having the experts that come with hiring a PEO company will allow you to sleep a little better at night.


How do I find a good PEO Company?

You’ve decided it’s a great idea to have a PEO Company, so how do you find one that meets your needs? It’s simple! Remember those networking activities we talked about in earlier blogs? Use those opportunities to ask other small businesses who they use. Google, Yelp and other online resources are also great. (Don’t forget to check their reviews and do your homework.) Talk to your accountant, or to your competition; and of course, reach out to us at Collin SBDC!


For additional resources and information on PEO Companies, and on how and when to hire one, to help you in your small business, please contact us at the Small Business Development Center – SBDC – serving Collin and Rockwall Counties, Texas.   


Blog post by: Karen Raymond