How Much Should a PEO Cost?

By Tessa Bahoosh|Jul 31, 2024|8:28 pm CDT

Key Takeaways

• Professional Employer Organizations (PEOs) provide outsourced HR services and can be a cost-effective solution for many businesses. Your PEO costs will include any fees associated with these services.
• Your PEO costs will depend on the number of employees at your organization, the level of required services, any business risks, state unemployment taxes, and the PEO’s pricing model.
• PEOs usually follow two pricing models: a flat fee per employee and a percentage of total payroll. Other costs include setup fees, HR function fees, and payroll management fees.
• Outsourcing HR to a PEO results in savings of 27.3% on average.
• The cost per employee of PEO services may be higher for smaller businesses compared to larger ones due to economies of scale. Nevertheless, the comprehensive solutions offered by PEOs, including HR expertise, compliance assistance, and improved morale, can make this investment worthwhile for businesses of any size.

Understanding PEO Costs

Several factors can affect PEO costs, making the pricing vary from one organization to another — and from one PEO to another. Here’s a closer look at these factors.

1. Number of Employees: PEO costs often correlate directly with your company size. More employees mean more HR tasks and potentially higher prices.
2. Level of Services: The exact services that you require from the PEO, like payroll administration or risk management, can significantly impact the cost.
3. Business Risks: Companies in high-risk industries may attract higher workers’ compensation premiums, which translates to higher PEO fees.
4. State Unemployment Taxes (SUTA): SUTA rates differ from state to state. This variation could affect your PEO cost.
5. Pricing Models: Different PEOs adopt different pricing models. The specifics of this model will influence the final PEO cost.

Deciphering PEO Cost Structure

Understanding the cost structure of a PEO helps business owners make informed decisions that are right for their specific needs. Get the full picture of PEO costs, including setup fees, HR costs, and payroll management costs.

Setup Fees and Pricing Models

PEOs typically charge setup fees for onboarding new businesses. Generally, they follow two pricing models: flat fee per employee or a percentage of the total payroll. The flat fee model is a set amount each month based on the number of full-time employees. Conversely, the percentage model ties your PEO cost directly to your total payroll, providing flexibility as your business expands or contracts.

Human Resources Costs

PEO fees for Human Resources services can vary widely, depending largely on your HR needs. Some of the HR tasks that are commonly outsourced to PEOs include benefits administration, workers’ compensation insurance management, and risk management. While you’ll incur initial costs from setting up a PEO, those costs may be smaller than the costs of managing those functions in-house — ultimately saving you an estimated 27.3%.

Payroll Management Costs

Most PEOs offer payroll processing as a part of their services. They handle all aspects of payroll administration, including calculating pay, distributing checks, and managing payroll taxes.

These services do come with costs, however. Payroll management costs, often included in your overall PEO fees, depend on your number of employees and the complexity of your payroll. The more employees and intricate the payroll, the higher the cost. Despite the costs, hiring a PEO for payroll services usually comes with a savings in time and resources compared to an in-house HR team managing it. The initial set-up may take some capital, but most businesses save significantly by partnering with a PEO in the long-run.

To choose the right PEO for your company, spend some time considering your specific business needs. It’s not just about the savings from better negotiated benefits, but also the time and resources you’ll spend on in-house administrative tasks.

PEO Costs Versus Benefits

How do you know a PEO partnership is worth it? By weighing the costs against the benefits. Let’s go through some of scenarios to consider.

Comparing PEO Costs to Traditional HR Expenses

Partnering with a PEO comes with costs, but so does maintaining an in-house HR department. It’s important to compare the costs and services you might expects from a PEO against traditional HR expenses.

While PEO pricing includes the costs of outsourcing HR services such as payroll processing and benefits administration, managing these same services in-house include the salaries of full-time HR experts, costs of HR software, time spent on administrative tasks, and even risk management. These factors make up a significant portion of the traditional HR costs, which can often exceed PEO fees. Which avenue makes sense for you will be depend on your business’s individual needs, resources, and budget.

Evaluating Tangible and Intangible Benefits

PEOs offer more than just HR solutions. They also bring tangible and intangible benefits that may transcend the PEO cost.

In terms of tangible benefits, PEOs help with time savings, as they manage HR tasks and allow you to focus on other activities associated with growth. They also offer cost savings by providing economies of scale for services such as health insurance and workers’ compensation.

Intangible advantages, although harder to quantify, are equally important. These include having access to HR experts for advice, ensuring compliance with ever-changing labor laws, and improving employee morale through excellent employee benefits.

The right PEO can be a cost-effective solution for small business owners, providing an efficient HR administration while also offering value-added benefits. Your choice of PEO should be driven not simply by PEO cost, but by the complete package of services and benefits they bring to your plate.

Effect of Company Size on PEO Cost

The size of your business has a direct affect on PEO costs. PEOs often cover services like payroll processing, benefits administration, workers’ compensation, risk management, and HR management, all of which are influenced by company size.

Impacts of Workforce Size on PEO Pricing

Workforce size strongly impacts PEO cost, with pricing models typically reflecting this. PEOs may use a flat fee per employee or calculate fees as a percentage of total payroll. Operational costs such as payroll processing and workers’ compensation insurance are both dependent on the number of employees, making larger workforces more costly to manage. This doesn’t necessarily mean the per-employee cost is higher for large companies, however, as economies of scale allow PEOs to reduce per-employee charges for larger companies.

Selecting the Right PEO for Cost Efficiency

Choosing the right PEO involves an analyzing not just the upfront costs, but also the long-term benefits and potential return on investment. A low-cost PEO might not cater to all your HR needs, which could result in unexpected additional costs. It’s entirely possible that a PEO with a higher upfront price could be cost-effective overall. It all depends on if the PEO is covering the services you need.

Begin by determining your enterprise’s HR needs. HR services range from payroll administration and benefits administration to compliance and risk management. Once you identify these needs, compare the potential PEO partners that can accommodate them.

Be sure, as well, to assess the quality of experts working with the PEO. A PEO with an experienced success team is likely to save you from future pitfalls and help manage HR costs better.

Conclusion

When you start with the right expectations and a keen understanding of your business needs, a PEO partner can help you save significantly in the long-run. Businesses both large and small can reduce HR costs significantly by choosing the right PEO. The key is to find the PEO that aligns with your business needs. It’s not just about the cost — it’s also about the value and efficiency that a PEO brings to your business operations.

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