Successful partnerships are based on trust. Companies need to accurately compare their in-house HR costs against what it will cost to partner with a Professional Employer Organization (PEO). That’s why it’s so important for businesses considering a PEO to understand the costs upfront. If services are bundled together, ask for an itemized list so you know exactly what is included. Dig deep so you can be sure you’re partnering with the right PEO for your team.
Pricing Models for PEOs
There are two common methods used for calculating PEO admin services:
- Percentage of payroll – The percentage applies to the gross wages paid to the employees.
- Flat fee per paycheck or employee – PEO cost does not fluctuate even if employee compensation increases or commissions/bonuses paid
The actual percentage amount or fee charged depends on the number and type of employees and will vary by PEO. To determine which method works best for your company goals, calculate gross wages against each method described above. Compare this to what you feel your costs are to perform this currently.
Pass Through Costs – Employer Taxes
These are statutory expenses that businesses already withhold or pay. When partnering with a PEO these expenses will now be calculated and collected by the PEO and remitted to the appropriate governing body.
- Federal Insurance Contributions Act (FICA)
- Federal Unemployment Taxes (FUTA)
Depending on the PEO and their service model, clients may be reported under their own state unemployment account for taxes (SUTA) or that of the PEO. This is decided by the state in which you do business and the PEO’s service model. If the PEO is using the client’s SUTA account, year-to-date wages will be recorded so there is no double payment of taxes. If the PEO is reporting the company under the PEO’s SUTA account, this may require a repayment of taxes and loss of control of the rate that PEO may charge. It is important to ask what billing model is being used and the financial impact if you will be reported under the PEO account.
Workers’ Compensation Premium
Most states require employers to have workers’ comp coverage. On your PEO quote it will be listed as a percentage of payroll. Your percentage depends on the risk classification for each employee. For example, clerical employee cost is significantly lower than the cost of a roofer.
PEOs usually base workers’ comp insurance charges on “dollar per hundred.” A $5.00 workers’ comp charge means $5.00 will be charged for every $100 of payroll in that classification. You will see workers’ comp charges for each type of work submitted by your company.
Other Potential Charges
Whether your company is running a legacy system or using cloud applications, HR software integration will be needed. Is there an extra charge for this? What does it cost if your team needs help hiring new staff, interviewing and training? Is there a charge for timekeeping software? Partnering with a PEO is a big commitment, so be sure to ask questions so you know upfront all the costs involved.
Typical administrative fees charged by a PEO range from 2% to 4% of gross payroll, based on services provided and employee wages. Generally speaking, businesses spend that or more to perform these functions in-house. However, time savings and peace-of-mind are the key drivers for continued use of PEO services.*
Unfortunately, there are some sales teams that will do anything to sign up a new client, but that’s not the way we do business at MidwestHR. With over 20 years partnering with companies, we analyze your company’s needs and provide a detailed proposal on services to be performed. There are many services that we include for our clients even when other PEOs charge for them.
We believe complete billing transparency helps you make the most informed decision about taking care of your employees – today and every day in the future. Have questions? We are here with answers! Give us a call at 630-836-3000.
*PEO Market Research conducted by Provado – April 2018