Professional employer organizations (PEOs) administer human resources (HR) and compliance tasks for startups and small to midsize businesses (SMBs). The best PEO providers help companies offer better health insurance benefits, comply with wage and payroll laws, and save time on administrative work.
Knowing what questions to ask and services to look for can help you choose the right PEO company for your small business. Our guide breaks down pricing structures, costs, must-have features, and onboarding processes. Use these best practices and tips when comparing options from our list of PEO vendors.
Guide to professional employer organization providers
A professional employer organization acts as your co-employer. You manage daily responsibilities while sharing specific employment responsibilities with the PEO provider. According to the National Association of Professional Employer Organizations (NAPEO), 500 PEO providers assist over 200,000 SMBs and their 4.5 million team members with payroll, benefits, and HR.
Indeed, entering into a PEO arrangement can help future-proof your business. The NAPEO-commissioned research by McBassi & Company found that companies that use a PEO are more resilient during challenging economic times. Working with a PEO cuts your risk of going out of business in half and drives a growth rate more than double that of comparable SMBs.
To fully benefit, it’s crucial to understand what you get for your money and how that differs between vendors. Our buyer’s guide walks you through how pricing works, what questions to ask, and everything in between.
What to look for in a PEO provider
Choose the right PEO service provider by taking inventory of your current challenges and any upcoming changes. Create a checklist or use a spreadsheet to compare PEO companies under these categories: accreditations, service offerings, technology integration, customer support, and contract terms. Learn more about these factors below.
How to choose the right PEO for your business size and needs
The largest PEO companies and even best-rated providers aren’t a fit for every small business. A fast-growing startup might want premium, multistate onboarding tools, while a local SMB focuses on affordable, high-quality benefits. And the best PEOs for a company with 10 employees might not be the same ones for firms with 50 or more.
Consider the following scenarios when building your list:
- Solo founder or startup with a few employees: Look for PEOs offering month-to-month or yearly contracts for affordable services, including health benefits, user-friendly software, and compliance support for first-time employers.
- Cost-sensitive small business owners: Explore solutions that offer transparent, per-employee, per-month pricing and that disclose invoice and billing information before contract signing. Look for itemized invoices, a la carte services, and straightforward exit terms.
- Fast-scaling multistate employer or SMB with remote workforce: Prioritize providers offering multi-jurisdiction payroll and excellent employee self-onboarding tools. Check for customizable service bundles and scalable plans with federal and state regulation compliance alerts.
- Health care, finance, and legal firms: Consider PEO firms that provide industry-specific compliance support, ideally through experienced HR representatives. Focus on risk management and safety training tools, regulations support, and policy documentation.
- Companies expanding globally: Narrow your shortlist to vendors offering global PEO services or employer of record (EOR) options. Choose providers that can assist with international tax and labor law compliance and cross-border payroll and benefits. Prioritize software that centralizes management of full-time employees and contractors.
Must-have features PEOs should offer
No matter what stage or industry your company is in, the best PEO providers should offer features that directly support your small business growth.
When comparing vendors, look for these PEO services and features:
- Multistate payroll with compliance support: PEO payroll services automate wage filings, tax withholding, and compliance updates with options for one or multiple jurisdictions. Make sure the provider alerts you when payroll or labor laws could affect payments.
- Employee lifecycle: As co-employers, most PEOs make it easy to onboard new hires and can help assess your termination policies, manage employee disputes, and handle unemployment claims.
- Insurance benefits and administration: PEO insurance options include group benefits for health, dental, vision, life insurance, and 401(k). You can request cost breakdowns to ensure that you’re paying carrier rates, not administrative markups.
- Certified HR experts: Top PEOs have advisors that are certified by the Society for Human Resource Management (SHRM) or the HR Certification Institute (HRCI), or have similar credentials. Access to top-tier support could cost extra.
- HR guidance and compliance: In addition to expert assistance, PEOs should offer HR knowledge bases and real-time support when your team has questions about standard HR tasks like updating employee handbooks and recordkeeping.
- Workers’ compensation and risk management tools: With a PEO as your co-employer, you don’t need third-party insurers for workers’ compensation. Your provider manages claims processing and might offer personalized safety or training programs for high-risk sectors like construction or health care.
- HR management tools and integrations: An easy-to-use human resource information system (HRIS) and payroll processing software centralize HR functions like benefits administration and integrate with accounting systems like QuickBooks or Xero.
- Employee self-service portals: Make sure PEO service providers offer mobile access to benefits information, pay stubs, tax documents, and paid time off. Portals or apps reduce calls to HR while ensuring employees have the information and resources they need.
Besides these services and tools, many PEO companies offer specialized resources, add-ons, and advanced features. For example, some include employee training and development programs with PEO packages or as a software module add-on. Other popular options include performance management tools with support for evaluating employees and recruiting systems for attracting and retaining a skilled workforce.
When these solutions are built into your HRIS and integrate with business technologies, you can save time and access more data from one spot. But adding more modules isn’t always better. For each additional service, cross-check its functionality, features, and cost vs. value with well-known standalone platforms. The top PEO companies should stand out for more than their software.
Questions to ask before choosing a PEO company
Get the facts about PEO providers and services by asking questions related to your specific needs and budget. If sales representatives can’t answer your questions or provide resources to share with your business partners, consider it a red flag. Give them a chance to follow up with a clear response after they consult with upper management. But be prepared to move to the next PEO company if not.
Use these questions as a starting point:
- Are you a Certified Professional Employer Organization (CPEO)? The IRS certifies PEO firms that meet requirements for financial stability, bonding, and employment tax compliance in its voluntary program.
- What’s the average size company that you work with? PEOs for small businesses often offer flexible service models for teams of 10, 50, or under 100 employees. Make sure your advisors can relate to and provide solutions targeted to your business size.
- Do you specialize in serving certain industries? If so, how? Industry-specific PEO firms should explain how they help your company comply with regulations, such as trained experts assigned to your account.
- What HR technology platforms and integrations do you offer? Have a list of your current (or near-future) software platforms and ask if these specific tools integrate with their systems. See if they will assist with setup and if you can demo the HR tools and apps.
- Can I see a sample invoice and service agreement? Reputable providers who want to partner with your small business will share billing examples, explain fee structures and benefit premium costs, and walk you through their contract and service level agreement without pressure tactics.
- What’s your average client retention rate, and can you share a current reference? Low client turnover and references from businesses like yours could mean that the PEO has a strong performance, especially when other factors like customer reviews and cost transparency line up.
Top PEOs have advisors that are certified by the Society for Human Resource Management (SHRM) or the HR Certification Institute (HRCI), or have similar credentials.
How much does a PEO provider cost a small business?
While PEO pricing varies by provider and company needs, industry research suggests small businesses pay around $40 to $150 per employee monthly or between $500 and $1,800 per employee annually. Outliers also exist, with premium service tiers over $200 per employee per month.
Many PEOs use a per-employee, per-month pricing structure, which is similar to a subscription service plan where you pay for the people enrolled. When your workforce size remains stable, this model offers predictable pricing. Alternatively, vendors may charge a percentage of your total payroll. According to PEO provider Rippling, percentage-based costs range from 2% to 12%. This PEO pricing structure could better fit companies with seasonal staffing.
At the lower end, the more affordable PEO companies typically include essential HR services like payroll processing and benefits administration. Midrange and premium packages add specialized support for risk management and compliance along with advanced tools for employee development, training, or acquisition.
To understand your total costs and compare PEO pricing between vendors, see how the following services could affect your costs:
- Insurance premiums: SMBs can save money through a PEO vs. insurance broker; however, benefit pricing differs by industry, plan options, and group size. Depending on the pricing structure, these fees may be bundled into your rate or a separate cost.
- Workers’ compensation insurance: The best PEOs for small businesses bundle workers’ compensation into service plans and may offer lower rates than you can get on your own. Certain industries and companies with histories of workers’ comp claims may pay higher fees.
- Dedicated support: If you require legal compliance assistance or industry-specific HR services, these factors can impact your PEO cost comparison. Some providers include advisory support whereas others charge hourly fees or require add-on packages.
Additional fees to watch out for
Finding affordable PEO services for small businesses can be tricky when most vendors don’t publish pricing or share fee lists online. Beyond base costs, some PEOs charge extra fees for HR services or simply don’t disclose when fees may apply to certain circumstances.
Here are a few common fees PEO vendors could add to your bill:
- Setup fees: One-time setup or onboarding fees cover software and system implementation, employee paperwork and onboarding, and HR staff training.
- Benefits administration markups: Some PEOs tack on an administration fee to the negotiated group insurance plans and may not disclose it clearly on invoices.
- Early termination penalties: Ending a PEO contract may result in substantial fees. Always review the terms and ask for clarification on anything you don’t understand.
- Technology access fees: Occasionally, PEO firms will charge fees for additional users to access software.
- State unemployment insurance (SUI) markups: PEO providers cover employees under their SUI accounts, which generally have lower rates. Some charge you at your old rates and pocket the difference.
To avoid hidden costs of PEO services, request unbundled quotes that itemize costs. Ask about anything that seems unclear. For example, you can ask the PEO company to provide a breakdown of payroll tax charges or to see their current SUI rate certificate. The same goes for health insurance markups. Request the actual carrier rate so you can compare that to your invoice.
How to onboard with a new PEO provider
The best PEO companies want you to succeed from Day One and provide the resources to help you. You can expect to spend at least a week or two setting up your contract, benefits, and service package. After signing your co-employment agreement and formalizing the deal, it can take another two to eight weeks, depending on the complexity of your operations and included services.
Proposal stage and choosing PEO benefits
Besides ensuring the contract terms and pricing align with your needs, the pre-onboarding stage is when you choose from a list of benefit plans. Higher-priced health insurance options could increase your PEO cost per employee. But, you also want to ensure the employer and employee contribution requirements, plan tiers, and eligibility rules work for you and your staff. Once you’re pleased with the terms, it’s time to onboard.
PEO onboarding steps: post-contract
Generally, the more organized you are, the quicker the PEO onboarding process goes. If you operate across state lines or have a complex setup, it could take longer. The configuration steps involve data entry and system setup, which the PEO usually handles. You are responsible for supplying correct information.
The standard onboarding timeline includes:
- Collect and send information: You must submit payroll history, tax IDs, and an employee census, which lists names, job roles, pay rates, and benefits eligibility.
- Set up and test systems: The PEO provider typically configures HR and payroll software. They will upload historical data, run tests, and check that tax and classification information is correct.
- Onboard employees: Staff will receive log-in information for their HR and benefits portal. They must sign new W-4s, I-9s, direct deposit forms, and policy documents.
- Handle benefits and deductions: Eligible employees can enroll in benefits through the PEO system. The provider manages this process and may verify payroll deductions before the first run.
- Launch payroll and HR systems: When it’s time to go live, the PEO company processes payroll and begins filing taxes under its employer identification number.
- Review and adjust: Many PEO vendors assign an advisor to assist with ongoing setup issues for at least the first 90 days. They can help you adjust permission levels and integrate business tools.
FAQs about PEO providers
What’s the difference between a PEO and an HR outsourcing company?
The PEO provider becomes a co-employer to the employees of its small business partner. An HR outsourcing (HRO) company does not. Both PEOs and HROs manage payroll taxes and benefits administration, but only PEOs share legal, employer-related responsibilities.
How do I know if a PEO is IRS-certified?
The IRS publishes a list of CPEOs and separate documents for suspended and revoked CPEOs. You can view the updated lists of certified professional employer organizations on the IRS.gov CPEO public listings.
Is a PEO different from an employee leasing company?
PEOs administer benefits and provide HR services to your company’s existing employees, whereas an employee leasing company is like a staffing agency or temp service that supplies your business with worksite labor. According to NAPEO, some states still use the term “employee leasing” in older statutes, which causes confusion about how modern PEOs work.
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