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Payroll & Taxes

PEO vs. Payroll Services: What’s Better for Your Business?

by FrankCrum on May 3, 2024

Choosing the right payroll solution is crucial for any business looking to optimize its operations. Professional Employer Organizations (PEOs) and payroll service providers are two popular options, each offering distinct benefits.

Understanding the difference between them can help you make an informed decision on what's best for your business.

What is a PEO?

A PEO is a company that businesses hire to handle employee tasks such as payroll, benefits, and following laws. When a company partners with a PEO, they enter into a co-employment arrangement.

This means the PEO shares responsibilities with the company for managing the workforce. For instance, while the original company still directs the day-to-day tasks of its employees, the PEO takes over administrative duties such as handling payroll and making sure that tax filings are done correctly.

Using a PEO can make managing employees easier. This is especially helpful for small businesses with limited HR resources. PEOs can manage things like health benefits, retirement plans, and tax withholdings, which can be challenging and time-consuming.

This allows business owners to focus more on growing their business instead of getting bogged down by administrative duties. Moreover, because PEOs work with multiple companies, they often have better leverage to secure more favorable conditions for things like health insurance and workers' compensation, which can be a great advantage for smaller businesses.

What is a Payroll Service Provider?

A payroll service provider is a company that helps other businesses handle their payroll. This means they take care of calculating how much money each employee should get paid every pay period, taking out the right amount for taxes, and making sure everyone gets their paycheck on time. They handle paperwork and reports for taxes and social security deductions to prove they are done right.

Using a payroll service provider can be helpful for small business owners who might find managing payroll confusing. It can also help owners who are too busy running their business to handle it themselves.

These services ensure that business owners follow all the complicated tax rules, helping them avoid costly mistakes or fines. Plus, it's convenient for businesses, as most payroll services offer online systems where employees can view their pay stubs and information whenever they need.

How do payroll services work at a PEO?

At a PEO, payroll services work a bit differently compared to regular payroll companies. When a business partners with a PEO, they share some responsibilities for managing employees. The PEO manages payroll tasks. These include calculating employee pay, handling tax deductions, and making sure paychecks are delivered on time.

PEOs use their expertise and technology to make sure everything runs smoothly. They keep track of employee hours, benefits, and any changes in tax laws that might affect payroll.

Small businesses without HR departments can benefit greatly from this tool, as it simplifies payroll and reduces errors. These tasks are all integrated for easier tracking of employee management.

What are the differences between standard payroll services and PEO payroll services?

Here is a chart that shows the different services offered by PEOs compared to regular payroll services. This outlines why PEOs are a better choice for businesses that need complete HR solutions. 



Payroll Service Provider

Payroll Processing

✅ Provides comprehensive payroll processing including taxes, deductions, and filings.

✅ Specializes in payroll processing and tax compliance.

Tax Filing and Compliance

✅ Manages all payroll-related tax filing and ensures compliance with current laws.

✅ Handles payroll tax calculations and filings but limited to payroll-related taxes.

Benefits Administration

✅ Offers complete management of employee benefits like health insurance, retirement plans, etc.

❌ Typically does not offer benefits management.

HR Management

✅ Provides full HR services including recruitment, employee relations, training, and support.

❌ No HR management services; focused only on payroll.

Legal Compliance

✅ Ensures compliance with a broad range of employment laws at federal, state, and local levels.

❌ Limited to compliance related to payroll processing.

Workers’ Compensation

✅ Manages workers' compensation insurance and claims.

❌ Does not handle workers' compensation insurance or claims.

Risk Management

✅ Implements risk management strategies and safety programs to reduce workplace hazards.

❌ No risk management or safety program services.

Cost Structure

⚖️ Fee based on per-employee or percentage of payroll; reflects broader service scope.

⚖️ Typically charges a flat fee or per-payroll transaction fee.

Employee Support

✅ Provides a help desk for all employee inquiries regarding HR, benefits, and payroll.

❌ Limited support, usually focused on payroll inquiries only.

Strategic HR Consulting

✅ Offers strategic advice on HR practices to improve efficiency and employee satisfaction.

❌ No consulting services related to broader HR strategy.

This chart shows that PEO services offer more than just payroll management compared to payroll service providers. PEOs provide a wider range of services that can benefit a company in various ways. Important services like HR management, legal compliance, and employee benefits are essential for keeping employees happy, productive, and reducing administrative tasks.

For businesses looking for an integrated solution that covers multiple aspects of HR and payroll under one umbrella, a PEO is clearly the superior choice. Integrating systems can improve risk management, compliance, and efficiency in managing human resources. These are all items that are crucial for business growth and stability.

What do you need to run payroll through a PEO?

When a business decides to work with a PEO to handle its payroll, there are a few important things they need to provide to make sure everything runs smoothly. Here’s a simple breakdown of what’s needed:

  • Employer Identification Number (EIN) and State Tax ID: These numbers are like special codes that the government uses to identify your business. Just like every person needs a Social Security number, every business needs these numbers for tax purposes. The EIN is used for federal taxes, while the State Tax ID is for state taxes. These numbers help the PEO properly report and pay the taxes that are taken out of employees’ paychecks.
  • Employee Information: The PEO will need detailed information about each employee. This includes their full name, address, Social Security number, salary or hourly wage, and any other details related to their payment. It’s important that this information is accurate so that paychecks are calculated correctly, and everyone gets paid the right amount.
  • Payroll Scheduling: The business also needs to tell the PEO how often employees should be paid. Some businesses pay their employees every week, others every two weeks, or some even once a month. This schedule helps the PEO know when to process each paycheck and ensure everyone gets paid on time.
  • Employee Wages and Salary Details: The PEO needs detailed information on how much each employee earns, including any commission or bonus structures that may affect payroll calculations.
  • Benefit Deductions: If your company offers benefits like health insurance or retirement plans, the PEO will need details about the contributions from both the employer and employees. This information is essential for accurate paycheck deductions.
  • Time and Attendance Data: For businesses with hourly workers, providing up-to-date time and attendance data is crucial. This helps the PEO calculate the exact hours worked and any overtime to be compensated.
  • Previous Payroll Records: If you are switching to a PEO from another system, providing previous payroll records can help ensure a seamless transition. These records help the PEO understand your payroll history and maintain consistency in your payroll processes.

Giving all necessary information allows the PEO to handle your payroll accurately and follow tax laws. This gives you more time to focus on important business tasks. This partnership not only simplifies administrative tasks but also enhances the accuracy and reliability of your payroll system.

What are the benefits of using a PEO for payroll services and beyond?

Partnering with a Professional Employer Organization (PEO) can bring a lot of benefits to a business, not just in handling payroll, but in many other important areas too. Here’s how a PEO can help:

1. Payroll and Tax Filing: A PEO makes sure that employees are paid correctly and on time. They take care of complex tasks like calculating how much tax needs to be taken out of paychecks and making sure that the tax filing is done correctly. This helps a business avoid mistakes and fines related to payroll taxes, which can be tricky to handle.

2. Benefits Administration: PEOs can also manage employee benefits, like health insurance and retirement plans. They often can get better deals on these benefits than a small business could on its own because they work with many employees across different companies. This means better benefits for employees, which can make them happier and more likely to stay with the company.

3. Compliance: Laws about how employees should be treated at work can change often and can be hard to keep up with. PEOs are experts in these laws and can help make sure that a business is following them properly. This means less worry about legal problems related to employees.

4. Risk and Safety: Keeping the workplace safe is important and sometimes complicated. PEOs help by creating safety programs and making sure the business is following laws that keep the workplace safe. This not only helps prevent accidents but can also lower insurance costs.

5. Human Resources Support: PEOs provide lots of help with human resources tasks. This includes hiring new people, managing employee issues, and even training employees. This support can take a lot of pressure off business owners, allowing them to focus more on growing their business.

6. Workers’ Compensation: Handling workers' compensation, which is insurance for employees who get hurt at work, is another area where PEOs can help. They manage the claims process and ensure efficient handling, reducing stress and confusion.

7. Improved Productivity: With a PEO handling many of the time-consuming administrative tasks, business owners and their teams can focus more on what they do best—running their business. This can lead to better productivity and growth.

8. Expert Advice and Support: PEOs bring a wealth of knowledge and experience in HR that many small businesses can’t afford to have in-house. This means access to expert advice whenever needed, which can help in making better business decisions.

Whether it's managing payroll, ensuring compliance, or supporting human resources, a PEO provides valuable services that can significantly benefit any business.

How much does a PEO cost?

Business owners see using a PEO as an investment in their company's efficiency and compliance. While the direct costs are the fees paid to the PEO (either as a percentage of payroll or per-employee per month), there are indirect cost savings to consider. These include potentially lower rates for employee benefits due to the PEO’s bargaining power, reduced risk of compliance penalties, and savings from not having to employ an in-house HR team.

Additionally, the PEO handles complexities associated with payroll taxes, workers' compensation claims, and employment law, which are often substantial hidden costs of running a business. By managing these effectively, a PEO can reduce a company's overall risk and administrative overheads, which might offset the fees paid to the PEO.

In short, the PEO earns money by charging fees for handling HR tasks. Businesses should take into account both direct and indirect costs when deciding to use a PEO. It's an investment that involves paying fees but it is one that can lead to significant savings and risk mitigation throughout your business operations in its entirety.

What do PEOs NOT do?

While PEOs offer a lot of helpful services like managing payroll, handling taxes, and taking care of employee benefits, there are several things they do not do. Understanding these limitations is important so business owners know exactly what to expect when partnering with a PEO.

  • Make Decisions Regarding Your Business: A PEO does not get involved in making business decisions. This means they won't tell you how to run your company, what products to sell, or how to manage your daily operations. They do not participate in strategic decision-making that guides your company's direction.
  • Help with Marketing, Sales, or Product Distribution: PEOs focus on human resources and do not assist with marketing, sales strategies, or the distribution of your products. They are experts in managing people and compliance issues, not in promoting products or boosting sales. If you need help in these areas, you would typically consult with marketing or sales professionals, not a PEO.
  • Dictate Pay Rates, Hours, or Schedules: Although PEOs handle the processing of your payroll, they do not have the authority to set salaries, determine working hours, or schedule your employees. These decisions remain under the control of the business owner. The PEO simply ensures that once these pay rates and schedules are set by you, they are implemented correctly in terms of payroll and compliance with labor laws.
  • Directly Manage Employees: PEOs do not manage your employees on a day-to-day basis. They do not oversee your employees, deal with daily employee issues, or talk directly to your team about their duties. Instead, they provide the tools and support your management team needs to do this effectively.
  • Replace Your HR Completely: While PEOs significantly reduce the burden of HR tasks, they do not completely replace an internal HR department. In larger companies, an internal HR team may still be necessary to address on-site issues and directly interact with employees.

Understanding these boundaries is crucial for any business considering a PEO. Knowing what a PEO does not do can help you use their services effectively in your business. This can lead to a successful partnership that maximizes the strengths of both parties.

Why FrankCrum?

Looking for a PEO to handle your payroll and other business functions? FrankCrum is well-known for our industry experience, offering expert assistance with compliance, risk reduction, and enhancing benefits. Our packages are often better than what small or medium-sized businesses could get on their own. Partnering with FrankCrum allows business owners to focus on core activities, boosting productivity and growth while FrankCrum handles employee administration efficiently.

At FrankCrum, our mission is to help businesses become the best they can be. To learn more about our comprehensive services, contact us today.


FrankCrum is a professional employer organization (PEO), founded in 1981 dedicated to helping business owners boost HR capabilities and broaden convenient services and benefits to employees. The origin of FrankCrum dates back to 1981, when Frank W. Crum, Jr. and his father, Frank Crum, Sr., founded the Great American Temporary Service. With a passion for helping small business owners succeed, the company has evolved and grown over several decades.