What is the difference between PEO and payroll?

Explore the pros and cons of both a PEO and a payroll service provider to determine which is right for your business


Any entrepreneur can tell you that owning a business comes with a ton of responsibilities. If you can find a faster and more efficient way to handle almost any task, it is a worthwhile investment. 


In an effort to increase efficiency, many business owners are choosing to use either a PEO or payroll service provider to run their payroll with over 173,000 small and mid-sized businesses using PEO services in the U.S.


If you have decided that outsourcing payroll management is right for your business, you are likely left with the choice between partnering with a PEO or using a payroll service provider. Join us to explore the fundamental differences between these two options and determine which is right for your unique business needs.



What is a PEO? 

A professional employer organization (PEO) is a co-employer and functions like an off-site human resources (HR) department to provide cost-effective HR and payroll services to businesses.


The PEO co-employs its client’s personnel, creating a three-way relationship among the PEO, the client company, and the client company’s employees. In doing so, the PEO provides small and medium-size businesses access to an integrated HR department that delivers a vast array of services and benefits while mitigating employer-related liabilities.



What are the advantages of a PEO?

PEOs can offer many benefits to your business, including: 

  • Protecting you from legal risks and liability. With a PEO, your team is co-employed, meaning that your business’s employees are under the PEO’s tax ID and your business is protected from employment tax liabilities. Many PEOs are also certified with the IRS giving you peace of mind.
  • Saving your business time and money. The average return on investment based on cost-savings alone for PEO clients is 27.3%. [2] Working with a PEO also means that your business will not need to hire an HR department and other employees to handle tasks like payroll processing. 
  • Providing lower benefit rates for your employees. A PEO manages multiple businesses, so they have a larger amount of employees and benefit options than one business looking for benefits on its own. 
  • Payroll management services. It can become very time-consuming to keep track of payroll and taxes after your company expands beyond a few employees. When a PEO takes over this responsibility, you have more time to focus on efforts that contribute to the success of your business. 
  • Improving your employees’ experience and satisfaction. Since a PEO handles many of the responsibilities of an HR department, you can focus on enhancing your company culture and employee management. PEOs may also allow your business to receive benefits it would not have been able to afford otherwise, leading to greater employee satisfaction. 



What are the disadvantages of a PEO?

Many PEOs will not work with companies that have less than five employees because it is not worth the time and resources for them as the PEO or you as the potential client. 


Read more: 

Top eight reasons to partner with a PEO for payroll services (and more!)



What is a payroll provider? 

A payroll service provider (PSP) handles your business’s payroll management and tax compliance. A PSP pays your employees based on the pay schedule that you set, and many offer additional limited services to minimize administrative tasks, such as tax filing and withholdings. 



What are the advantages of a payroll provider?

Payroll service providers can provide your business with advantages, such as:

  • Remaining fully liable. When your company hires a PSP, it is different from hiring a PEO because you will continue to be completely liable for your business and employees. If you are not ready to enter into a co-employment relationship, a PSP may be a better fit for your business. 
  • Lowering costs. PSPs usually cost less than hiring a PEO since they are only providing a payroll service. However, it is important to note that PSP services are usually priced per employee, so your cost for the service will increase as your business grows. 
  • Saving time. Just like a PEO, a PSP can save your business a lot of time when it comes to processing payroll. By removing this responsibility from your team, they will be able to focus on more critical tasks and complete their routine duties faster. 



What are the disadvantages of a payroll provider?

PSPs typically only provide payroll services, so if your business is looking for other services as well, a PSP is likely not the right choice. Some PSPs may offer tax compliance services as an add-on, but they do not serve as an outsourced HR department like a PEO. 


Hiring a PSP does not minimize any business risks or compliance concerns. They do not share any legal responsibilities or liability regarding tax compliance. If your payroll provider does not pay taxes on time or accurately, your business is fully accountable, whereas with a PEO, both companies share liabilities. 



Is it best for my business to use a PEO or a payroll provider? 

When your business has decided to outsource its payroll management or HR department, there are many aspects to consider. There are benefits that both PSPs and PEOs can bring to your business, but if you want any other service apart from payroll management, a PEO is the right choice.


Whereas hiring a PSP is simply rendering a service, hiring a PEO entails entering into a true business partnership. The co-employment aspect of a PEO creates a unique relationship with your company because they share some legal responsibility to help your business reduce risks. 



Looking for a PEO in the Orlando area?

PER has provided outsourced HR services to small and mid-sized businesses across Central Florida for over 25 years. Our comprehensive services include payroll management, benefits administration, and more.


With PER, our clients find value in our compliance and advising services that go far beyond simply running payroll. We are your integrated, off-site HR department that fully supports you with a vast array of quality services that mitigate your employer-related liabilities.


We pride ourselves on providing personalized assistance to create a true partnership by acting as an extension of your current HR department. When we partner with your business, we reduce your HR burden to allow you more time to manage the HR aspects you still maintain complete control of such as employee performance, grievance issues, and recruiting efforts .


Unlike the automated, conglomerate PEOs, our PEO professionals are always available to answer your questions or respond to your concerns as a genuine part of your HR team. 



Ready to get started? 

Contact us today to learn more!



1: NAPEO | Industry Statistics  

2: NAPEO | NAPEO White Papers

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