10 Most FAQs about PEO Companies (+ Top Tips for Hiring the Right PEO)

Professional Employer Organizations (PEOs) play critical roles in helping organizations sustain operational efficiency and scaling their businesses beyond international borders. PEOs can be a game-changer for small to medium-sized businesses. However, the concept can be confusing for those new to it.

In case you’re considering hiring a PEO or just hearing the term for the first time, this post provides answers to top 10 PEO FAQs, as well as top practical tips to help you choose the right PEO for your business.

Okay. Let’s dig in!

1. What is a PEO or Professional Employer Organization?

A professional employer organization (PEO) is an outsourcing firm that provides HR services to small and medium-sized businesses (SMBs), and in some cases, larger corporations. PEO services typically include HR consulting, regulatory compliance management, payroll processing, employer payroll tax filing, risk mitigation services, workers' compensation insurance, health benefits, employers' practice and liability insurance (EPLI), retirement and pension (401(k)), employee management technology, training, etc.

The PEO acts as the employer of record or legal employer, while the client company provides the work environment and defines the duties of the employees. PEOs are typically ideal for small and mid-sized businesses that cannot afford a full HR apparatus on their own. Download the Ultimate Guide to PEO to learn more.

2. Is a PEO Partnership the Same as Co-Employment?

Yes. When your company partners with a PEO, it enters into a contractual co-employment relationship with the PEO. In a co-employment agreement, the PEO becomes the employer of record (EoR) for tax purposes. Hence, it files employee payroll taxes on behalf of your company under its own tax identification numbers. The PEO is also responsible for properly withholding and filing employee and employer taxes, paying unemployment insurance taxes, and providing workers’ compensation coverage (as agreed between you and the PEO).

3. How Many Companies Can a PEO Partner With?

PEOs can take on as many employers as their bandwidth allows. Most PEOs manage HR solutions for hundreds of companies, while effectively managing all employees working for their clients. Top PEOs manage thousands of employees' benefits and compensations, while still providing client companies with comprehensive support services.

4. What Small Businesses Can Hire a PEO?

PEOs can work with any kind of business. Typically, most PEO companies work with organizations with at least 5 employees. However, to fully enjoy the benefits of partnering with a PEO, you may need to have up to 50 or more employees. This is not to say that companies with less than 5 employees cannot benefit from partnering with PEO companies.

5. What are the Best PEO Companies Available?

There are several PEO companies on the market, many of which provide top-notch HR services to their clients. However, choosing the right PEO also depends on some in-house peculiarities. I am talking about the unique needs of your business. So you want to look out for the PEO companies that can offer you tailored business solutions.

If you’re not sure, here’s our take on the best 10 PEO companies in the U.S. Feel free to use any of them. Although some nice PEO companies did not make our list. It doesn't mean they aren't quality providers; it's simply that they fell a little short in our evaluation, based on factors like technology, services, underwriting, cost, customer service, and healthcare benefits.

6. What is a Certified PEO?

A certified professional employer organization (CPEO) is simply a PEO that has applied and is approved to be certified as a CPEO by the Internal Revenue Service (IRS), after meeting some rigorous qualifying requirements. In other words, all PEOs are not equal. Some are better than others. Find out more about CPEOs here.

So what’s the difference between a PEO and a CPEO?

If a PEO is certified, your business is fully protected from sanctions and compliance lapses, including issues related to payroll taxes, as recognized by the IRS certification program. So if anything goes wrong, the CPEO is held liable. With an ordinary PEO, you are not guaranteed this protection. In fact, if taxes are filed wrongly or late, the IRS will hold you, the primary employer, responsible. See the IRS's current list of certified PEOs in the United States.

7. What is the Cost of Hiring a PEO?

This is one of the most asked PEO FAQs. Typically, the cost of hiring a PEO depends on several factors, including the size of the PEO and the scope of your project. But it mostly depends on the services you want from the PEO. Sometimes, the services they provide vary, and so does the cost across several states. Generally, most PEO companies will likely charge you for the Federal Unemployment Tax Act (FUTA), State Unemployment Tax Act (SUTA), Federal Insurance Contributions Act (FICA), and Workers Compensation deductions.

8. How Do I Know if Using a PEO is Right for My Business?

It’s simple. The moment you realize that managing your HR responsibilities in-house is becoming overwhelming or you’re unable to provide industry-standard benefits and insurance coverage to your workers, then it’s time to consider a PEO co-employment partnership. Here’s a thorough guide to help you understand when a PEO company is right for your business.

9. If I Hire a PEO, Will They Control My Workers?

A PEO company mostly provides HR support services and is officially the employer of record for your workers. However, when it comes to staff welfare, employee management, workspace management and maintenance, health insurance, pension management, administrative support, and so on, your company is responsible for that. That is how the co-employement partnership is structured.

The PEO company ensures you have adequate staffing solutions, HR technology and services, and compliance protection. How you run your day-to-day activities is totally up to you. You’re still in charge of setting job responsibilities, salaries, performance standards, working hours, and compliance with employment rules among others.

10. Is it Cheaper to Hire a PEO?

Absolutely! There are several ways a PEO can save your company money. Starting with workers’ compensation insurance to employee benefits, 401(K), health insurance, employment practices liability insurance (EPLI), and employer’s liability insurance, most startups and SMBs rely on PEOs to cut down HR administrative costs and provide the best benefits and insurance coverage to their employees.

Generally, most employers that partner with PEO companies are able to provide a broader range of better employee benefits to staff than many companies that prefer not to hire PEOs.

Top Tips For Hiring a PEO

Before choosing a PEO, here are some important considerations to check off your list.

1. Verify the experience level and expertise of the PEO Company, and ensure that they’re capable of handling your business needs.

2. Ask questions about workers’ compensation insurance, employment practices liability, insurance, health insurance, and others. A PEO company with access to multiple insurance carriers is more likely to be able to accommodate the needs of your staff and support the growth of your company.

3. Hire a PEO company that has the financial capacity to cater to its clients' needs, even in emergencies.

4. While the cost of hiring a PEO depends on various factors, you want to make sure that it is affordable for your company.

5. Choose a PEO that’s experienced in handling compliance issues. Also note that compliance regulations do change from time to time as federal, state, and local authorities release new legislation and mandates.

6. Confirm that the PEO company’s technology solutions are standard and fit for your business.

7. The PEO should have reliable client support services. Your PEO partner company should be available to help you navigate any HR issues you’re having.

8. Find out if the PEO can offer customized solutions to your company, or whether they use a one-size-fits-all approach for all clients. When discussing with the PEO, be sure to clarify the unique needs of your business, if any, and understand the cost implications before choosing the PEO company.

9. Speak with other businesses that have worked with the PEO.

Have More Questions about PEOs or Looking for the Right PEO for Your Business?

Choosing a PEO can be really exhausting, but it doesn’t have to be. Once you have defined your business goals, growth trajectory, and budget, the burden becomes considerably lighter. In the end, it’s all about the vision you have for your company - that’s what determines the PEO company you partner with.

For further assistance, you can reach out to us at the Mission. We are here to help you overcome the challenges of finding the best HR and PEO solutions. You can learn more about PEOs by downloading our ebook, The Ultimate Guide to PEO.