What Is The Difference Between PEO and Payroll Services
January 25, 2021
As a business owner, you have many responsibilities to handle. One of the most draining elements is handling all aspects relating to payroll. It can be a daunting task. You have to determine how to pay employment taxes, ensure your employees get paid in a timely manner, and more. Thankfully, there are some services available to owners of small to medium-sized business owners that make the process of handling payroll easier. There are two main choices when it comes to payroll services. They include PEO or Professional Employer Organizations like Consolidated Personnel Services, then there is a PSP or Payroll Service Provider. Read on to learn the difference between PEO and Payroll services to determine which is the better fit for your business:
Before delving deeper into the differences between these two services, it's important to define what they do.
What is a PEO?
A Professional Employer Organization provides all sorts of human resource-related services to small and medium-sized businesses. This can include, but is not limited to worker compensation rates and claims, risk management plans, employer taxes, FICA taxes, recruiting employees, federal taxes, administration for employees, and government compliance. In order to serve in this capacity, a PEO will enter into what's called a co-employer status with you, allowing them to shoulder the legal liability of paying an employee. The following is a shortlist of the duties a PEO handles for your business:
- Alternate Dispute Resolution.
- Human Resources Management.
- Risk Management Workers Compensation
- Tax Services and Payroll
- Welfare and Health Benefits
- Other Employee Benefits
What is a PSP?
A Payroll Service Provider handles the functions related to paying your employees and federal payroll taxes. However, you retain all liability for your employees in regard to taxes and the like with a PSP.
How to Know Which Service is Right For Your Needs
The service type that would best fit your needs depends greatly on the size of your business. For example, if you only have a handful of employees, you might not need the full-service range of benefits a PEO offers. However, if your business is growing and you find yourself having to handle the many elements of human resources administration, you might benefit greatly from PEO services.
Which Benefits You Greater Financially?
In general, a PEO will provide you greater savings when compared with a PSP. Much of this is due to the fact that you will benefit from their reduced insurance premiums for employee health and even worker's compensation coverage.
Main Differences Between PEOs and PSPs
Perhaps the best way to determine which service is more beneficial for your business is to consider the primary differences between the two services. Read below to learn more:
- Employer of Record: As mentioned above, when you join a PEO service, you will enter into a co-employment relationship. This means you are outsourcing some of the risk associated with hiring and maintaining employees, such as worker's compensation and tax issues. The PEO then becomes an employer of record. With a PSP, you remain the employer of record and maintain ownership of all liability relating to your business.
- Workers Compensation: Another big difference between the two services is the way workers' compensation is handled. When you go with a PEO, your company is provided with worker's compensation through the PEO service. With a PSP, you as the employer will remain responsible for your employees' workers' compensation. PSPs might offer you options for Workers Comp through various partnerships with insurance agents; however, you will be responsible for worker's compensation as a whole.
- Cost: Bottom line is, money talks. As a business owner, you know this to be true. Unfortunately, due to the various factors form business to business, it's difficult to ascertain the cost of a PSP when compared with a PEO. However, with a PSP, you don't have to sign a contract for their services. A PEO service, on the other hand, requires a contract, lasting a predetermined amount of time. Therefore, you can cut off your service at any time with a PSP, but to cease working with a PEO often means paying a termination fee of some sort. However, the savings you can garner from a PEO can outweigh this factor.
A Partnership Versus a Service
Even though in actuality a PEO is a service, due to the co-employment aspect and the shared liability, when you choose to go with a PEO, it is almost as if you are entering into a partnership of sorts. Your business will be tied to your PEO and their State Unemployment Tax (SUTA) rate could benefit you if yours is more because you will be paying your rates based on their reputation and numbers. On the other hand, a PSP allows you to be much more flexible. You can come and go, back and forth. Unfortunately, you will also maintain the entirety of the liability associated with your business, tax-wise. You also won't benefit from the PSP's reputation or tax rates as you are considered a completely different company. Therefore, in one way you could consider a PEO a partnership and a PSP a service that you pay for. When you consider it that way, it's easy to understand the benefits a PEO offers.
Both Services Are Valuable
Admittedly, both options have benefits. For an extremely small business, employing only two people or so, payroll services make a lot of sense. After all, you just don't need the partnership element of a PEO. However, for anyone with a small to a medium-sized business employing three people or more, a PEO like Consolidated Personnel Services is an ideal way to manage the human resource aspect of your business.
Hear From Our Customers
Read what our clients say about our Payroll and Human Resource services.
We have been using CPS for the last 16 years and have had zero problems with them. They are very professional and a total pleasure to work with! I highly recommend them to anyone whom is considering using a payroll company.
Believe me if you are not using CPS you are making a big mistake!