PEOs vs. Payroll Services: What is the Difference?

As a business owner, you have many responsibilities to handle. One of the most time-consuming tasks is handling aspects relating to Human Resources & payroll.

Payroll management is one of the most challenging tasks of any organization because it must be done with maximum accuracy & efficiency. The administration burden at times can become quite difficult & quite challenging & you might want to look to outsource the payroll processing & HR activities of the organisation.

There are two factors that will influence your decision are whether you want additional HR services beyond payroll processing and that depends on what type of in-house HR team you have in place if any.

While there are various options available to outsourcing payroll, two of the most common approaches to it are:

• A Payroll Service Provider (PSP)
• A Professional Employer Organization (PEO)

PEOs & payroll services both streamline the activity of payroll processing, but they do so in vastly different methods. Before we deep dive into the differences, let’s get to know what Payroll, Payroll Processing Services & PEO Mean.

A payroll is a list of employees of your organisation that are entitled to receive payments as well as other work benefits & the amounts that each should receive are based on the salary & Incentives / time worked / tasks performed. Payroll could also refer to a company’s records of payments that were previously made to the employee which include salaries & wages, bonuses, and taxes, or the company’s department that deals with compensation.

A Payroll service provider is a third-party company hired to process a company’s payroll to the employee’s accounts. Payroll service providers provide direct deposit or payroll checks; they also (in most cases) forward the tax payments to your organisation & to the Local / State government tax authorities. Payroll service providers may track the benefits to be disbursed to employees which would include incentives, Attendance & Leave Management (time off, sick time, or vacation time). A payroll service provider (PSP) handles your payroll administration & statutory compliance without any shared legal burden.

Professional Employer Organization (PEO): This involves getting your organisation into a legal contract with the PEO that acts as a co-employer so they can take up the legal responsibility of paying the client & overall payroll management of the business. PEO is a company the provides payroll administration & compliance support with additional HR services. With a Professional Employer Organization (PEO), it is easy to outsource many of your HR functions which includes sharing employment liability and help provide benefits package to your employees. A PEO acts as an integral extension of your business & engages with your management team to address complex employee-related functions & Activities. Most PEO’s have an HRMS platform that help you track, monitor, and manage the HR activities.

Given below are the top 5 comparisons between Professional Employer Organisations & Payroll Service Providers.

1. Type of Services provided

The type of services provided by PSP’s and PEO’s are different. Payroll Processing services generally do not handle administrative responsibilities while PEOs provide complete HR services which include managing employee onboarding & training, health insurance & life insurances, administration, regulatory compliance and the most important aspect of all, Recruitment. 

2. Cost Factors
The cost might be cheaper with a PSP, but you may be required to hire additional HR consultants for other services as they do not provide administrative services. 

This could potentially be costly in the long run. But PEO on the other can be a cost-effective solution as it comes as a packaged service with additional HR Services. In addition, depending on your needs, you may pay a customised price for the services that you use. PEO’s also control the costs of a business in the long run by providing service infrastructure, the latest technology solutions, and the HRMS platform for delivering the contracted services with compliance. PEO’s enable cost-savings by managing the routine & redundant tasks of Payroll & HR.

3. Contractual obligations

When you choose a PSP, you would need to sign a payroll agreement that outlines the responsibilities of both parties (You & the PSP) & you would not need lengthy contracts and if you’re not happy with your provider, it’s easy to switch. But with a PEO, you’ll need to sign an annual contract. The contract gives you some stability on people and process in place.

Even though in actuality a PEO is a service, due to the co-employment aspect and the shared liability, when you choose to go with a PEO, it is almost as if you are entering into a partnership of sorts. If you choose a PSP, you will have to face & manage a few regulatory & contract-based changes, since your PSP is not your co-employer. It is important to note that with neither a PSP nor a PEO, do you lose control over your employees. You’ll still control the day-to-day operations such as employee tasks, Performance, assignments and required business goals.

4. Risk and compliance Involved

Like any third-party service provider that you hire for services, a PSP does not share legal responsibility for compliance errors that it may make. 

Hiring a PSP wouldn’t do all that much to minimize your business risks or reduce any compliance concerns. PEOs on the other hand are an excellent choice for managing your risk & compliance. As your co-employer, they share legal responsibility with you. They can help obtain top talent to your organisation, plan a competitive Compensation & Benefit plans for your company. PEOs take co-ownership of several additional small business risks & compliance concerns such as BGV, hiring & firing, Infrastructure & workplace security, and a lot more.

5. Serving as an Employer of Record

A PSP is neither your EOR nor your co-employer but a Service Provider. Hiring a PSP only changes how you process your payroll. You remain the employer of record for the employees, and all taxes are filed and remitted under your organization.

On the other hand, a PEO acts as your employer of record (EOR), which means it sets the rules around the benefits you would choose for your employees. Although this arrangement changes little about your day-to-day affairs, it would help your employees with a wider range of benefits. The advantage of a PEO serving as your EOR generally outweigh the cons. As the EOR, your PEO has access to benefits with higher quality & lower premiums than you would likely find on your own. Your EOR arrangement also delegates compliance & reduces tax burdens such as ESI, PF and Gratuity.

Given below is a table which compares PSP’s to PEO’s

So, which one should your organisation choose?

There can be significant advantages by choosing a PEO, especially if you are a small or mid-size employer that may not have the time & resources available to focus on many of the transactional HR functions. Or have in house HR expertise or systems for functions such as payroll & HRIS / HRMS.

In short, your decision to choose either a PSP or PEO depends on your business requirements and goals. As a business owner, you would know what’s best for your company’s growth & future. Indeed, both options have benefits.

For a new founded startup that employs only two people or less payroll services may make a lot of sense. However, for businesses that employ more people, a PEO can be a better option.

Expand Your Business with Our PEO Services

InsourceIndia PEO/EOR service in India is committed to assist the employer from any country to successfully set up their business in India. InsourceIndia takes care of services for HR, payroll, insurance, benefits, and risk management. InsourceIndia goes one additional step further than what generally PEO agencies offer, we provide extended services like leave management, recruiting, office infrastructure Service & HR management.