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Payroll vs. PEO - How Do They Compare?



When a business hires employees, they have to manage their payroll, taxes, and benefits. There are two ways they can do this:

  1. Do payroll In-house: In-house payroll means that a business manages its payroll process internally, without outsourcing to a third-party service provider. When a business does payroll in-house, they are responsible for calculating the pay each employee has earned, subtracting taxes and other deductions, and issuing paychecks. They also have to keep track of each employee's information and make sure that all tax laws and regulations are followed. It can be time-consuming and complicated.

  2. Hire a payroll company: A payroll company will manage the business's payroll and taxes. This means that they will calculate how much each employee should be paid, withhold the appropriate amount of taxes, and file tax forms with the government.

  3. Hire a PEO/Employee Leasing company: A PEO/Employee Leasing company (which stands for Professional Employer Organization) will do everything a payroll company does, but they also offer additional HR services. This means that they can help with things like employee benefits, workers' compensation insurance, and compliance with employment laws.

The pro's of using a PEO/Employee Leasing company include:

  1. Cost savings: PEO/Employee Leasing can often negotiate better rates on employee benefits like health insurance and retirement plans because they are pooling together many small businesses. This can save businesses money on their overall benefits costs.

  2. Risk reduction: PEO/Employee Leasing can help businesses stay compliant with employment laws and regulations. They can also provide guidance on issues like workplace safety and harassment prevention, which can reduce the risk of lawsuits and fines.

  3. Time savings: By outsourcing HR tasks to a PEO/Employee Leasing company, businesses can save time and focus on other aspects of their business. They don't have to worry about managing payroll, benefits, and compliance on their own.

When a business hires a PEO/Employee Leasing company, the PEO becomes the employer of record for the employees. This means that the PEO/Employee Leasing company is responsible for filing all payroll taxes, including federal, state, and local taxes, and assumes ALL tax liability associated with these taxes.


On the other hand, when a business hires a payroll company, the business remains the employer of record and is responsible for paying and filing all payroll taxes. While the payroll company may provide software to help with these tasks, the business is ultimately responsible for ensuring that all taxes are paid on time and accurately.


One of the benefits of using a payroll company is that it can be a more cost-effective solution than hiring an in-house HR staff. Payroll companies typically charge a fee based on the number of employees or the complexity of the payroll tasks, but this fee is usually lower than the cost of hiring a dedicated HR staff member. Additionally, payroll companies typically provide software that makes it easier to manage payroll tasks, such as generating paychecks, keeping track of employee hours, and calculating taxes.


However, there are also some downsides to using a payroll company. For example, the business remains responsible for ensuring that all taxes are paid on time and accurately. If the payroll company makes an error in tax calculations or filing, the business is ultimately responsible for correcting the mistake and any associated penalties or fines. Additionally, payroll companies may not offer additional HR services beyond payroll management, such as employee benefits or compliance with employment laws.


While payroll software can help streamline the payroll process, there is still the risk of human error in entering data or making mistakes in tax calculations. If a mistake is made, the business is ultimately responsible for correcting the error and any associated penalties or fines.


With a PEO/Employee Leasing company, businesses don't have to worry about these risks and liabilities, as the PEO/Employee Leasing takes on the responsibility of ensuring compliance with payroll taxes and employment laws. This can provide peace of mind and reduce the administrative burden on the business.


It's important to note that while a PEO/Employee Leasing company may take on some of these responsibilities, the business is still responsible for providing accurate employee data and ensuring that the PEO/Employee Leasing has the information needed to correctly calculate and pay taxes.


However, it's important to note that using a PEO/Employee Leasing company can be more expensive than using a payroll company because of the additional services they offer. Businesses should weigh the benefits against the costs to determine if it makes sense for them to use a PEO/Employee Leasing company.

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