Updated: Dec 8, 2021
If you are a small business owner who’s considering partnering with a professional employer organization, one of the questions you’ll likely have on your mind is “How much does a PEO cost? or “How much does it cost to use a PEO?”.
Ideally, you’d want to know if your investments in working with a PEO are worth the value you’ll be getting in return compared to the cost of handling the job internally within your company. Working with a PEO means that you understand the benefits that a PEO offers. You’re probably overwhelmed by the volume, cost, and complexity of HR-related tasks you’re faced with. Perhaps, your in-house HR team does not have the expertise to manage these functions, or they are already becoming too time-consuming for them.
In this situation, hiring a PEO is a smart move, but the cost of using a PEO service generally depends on a host of factors, such as your service needs, the PEO's location, the level of support it provides, and other important factors.
Calculating the Cost of PEO Services
To better understand how much it will cost you to hire a PEO, you need to understand how PEOs charge for their services. Most PEOs will charge for their services in any of two ways; depending on how you pay your employees, a PEO will either charge you a flat fee per employee or charge you based on a percentage of all the wages earned by employees at your company in a year.
An employee-based fee is typically charged monthly and is a good choice if your employees’ pay is at least partly dependent on variables, such as commission. This means that the PEO will calculate the fees for their services based on the number of employees working in your company.
The payroll-based fee is charged between 2 and 12 percent of your total payroll and varies, depending on the size of your organization. This approach is more profitable for you if you have a consistent or stable payroll that is not dependent on mobile variables. Using this method to calculate your charges allows the PEO to easily determine the annual costs of their services.
Note that when it comes to budgeting, the employee-based or flat fee option is better. Some employees will also offer you both options, which gives you the liberty to choose the option that suits your business best.
What are the Fees Included in a PEO Services Bill?
The cost of hiring a PEO depends on a variety of factors, including the size and scope of the PEO you want to partner with. But it mostly depends on the services you want from the PEO. Sometimes, the services covered vary, and the charges also vary across several states. However, here are some standard charges that every PEO will likely for, regardless of the PEO you decide to hire:
Federal Unemployment Tax Act (FUTA)
State Unemployment Tax Act (SUTA)
Federal Insurance Contributions Act (FICA)
One thing to note about these costs is that they are general, and they apply to every business, whether you hire a PEO or not. However, when you hire a PEO, the PEO service provider can take the burden of remitting these payments off your shoulders, so that you can focus on other important aspects of your business. The PEO will assume the responsibility of filing your tax returns to your state government and the federal government.
When calculating the cost of a PEO, you want to also remember that the cheapest isn’t always the best. Ideally, you will be expecting quality service from your PEO, and the same goes for the PEO in terms of the charges involved. But generally, partnering with a PEO is a proven way to save money on HR and administrative functions. On average, hiring a PEO will cost a small business anywhere from 2-11% of all employees’ wages, or $500-$1500 per employee annually. The actual cost, as already mentioned, depends on the factors we’ve highlighted.
Other services that impact how much the PEO will charge you include:
Group health insurance plans
Employee benefits administration
Time and attendance management
Verification of employment
EEOC claims management
The PEO may also request additional payments if your business needs special administrative services. Be sure to ask the PEO representative or sales team to break down the costs into fine details that you can understand before signing a service contract with a PEO. If the cost is beyond your budget, there are a number of good PEO choices that you can explore.
Do You Really Need a PEO?
There are some pointers that can help you decide if a PEO is right for your business. If you are beginning to find it hard to keep up with managing your HR issues and administrative tasks, it could be a strong reason to consider hiring a PEO. A PEO can help you manage compliance issues, especially your payroll taxes, and also help you navigate labor and employment laws in your state.
Other critical areas that a PEO can help you with include finding the right talent for your business, providing you a team of HR professionals specialized in your industry so you can access HR support that fits your industry needs, offering you a comprehensive employee benefits package, and competitive health insurance policies.
Ready to Hire a PEO?
Not all PEO services are exactly reliable. You want to be sure that the company is a certified professional employer organization (CPEO). The National Association of Professional Employer Organizations (NAPEO) is another accreditation organization that you can check with. Working with a certified PEO company shields you from errors and liabilities that may arise due to the negligence, actions, or inactions of the PEO. Besides that, you’ll have access to a fuller range of benefits.
At Mission HR, we do not only offer your business the services and solutions you need to scale quickly and efficiently. We also bring our years of experience and rich insight to the table, providing your business with answers to all your bugging HR and outsourcing needs. Don't hesitate to contact us, if you have further questions about PEO or hiring employees in other locations.