Payroll Providers and PEOs

Choosing a payroll provider and PEOs

As your business grows, it will become harder for you to manage payroll, withholdings, and HR yourself so a lot of companies use payroll providers or professional employer organizations (PEOs) to:

Payroll providers:

  • Manage employee salaries
  • Ensure that taxes are paid on time and correctly

PRO:   They are very cheap and there are some solid online options

CON: Limited services

PEOs also help with:

  • All payroll provider services
  • Benefits
  • Calculating the real cost of employees: Social security, medicare, unemployment, workers comp, taxes
  • Additional HR support (helping with hiring, firing, etc)–helpful when employees work in more than one state
  • Access to their HR lawyers

PRO: Help you grow quickly since you can leverage their HR infrastructure

CON: More expensive

How PEOs work: For tax (including social security) and insurance purposes “your” employees are actually employed by the PEO and area leased back to you. While this may seem like a trivial difference, using a PEO can have some downsides

Hiring and firing: The PEO will fire employees instead of you because they are technically not your employees, however if you improperly fire someone, you are still liable.

Qualifying for set-asides: If the owners of a company are actually employees of the PEO you may not qualify as a minority owned business since the minority member is not actually an employee of the company. Same with your “employees” if you are applying for HUBZone

51% work share: As the prime you have to do 51% of the work, but if the PEO employs your people then the government may view the PEO as a sub to you that is doing the majority of the work potentially creating a violation

Clearance: Since the people are not technically your employees, there can be issues obtaining clearance.

Cost:  This will depend on the what services you decide to utilize. Some providers utilize a flat fee while some charge per employee. So, as a small business one service may work best initially and then as you grow you might need to switch to another provider.

Evaluating Providers: The most important thing to do is to consider how responsible the provider is. All providers generally offer the same services but their quality varies significantly. When negotiating get everything in writing and make sure the contract outlines who is liable in the following situations:

  • Fines if a tax deposit is not submitted on time
  • If there are mistakes in the garnishment etc and you need to get money back from an employee.
  • Taxes on new accounts with local authorities

As always talk to people you trust and that work in the industry.


Fewer than 10 employees:

1) ADP Run (less than 30 FTE)

2) Excel HR

More than 10 employees: