PEO vs Payroll Service: When Is a PEO Worth It?
A payroll service runs payroll and files employment taxes for you while you remain the sole employer. A PEO co-employs your staff and adds benefits, workers' compensation and compliance support. Below roughly five worksite employees most PEOs will not quote, and a payroll service is the right answer.
What each one actually does
A payroll service calculates pay, makes deposits, files employment tax returns and produces year-end forms. You remain the sole employer. You buy your own benefits, hold your own workers' compensation policy, and own your own compliance.
A PEO does all of the above inside a co-employment arrangement, and adds benefits through its plans, workers' compensation usually under a master policy, and HR and compliance support.
Side by side
| Payroll service | PEO | |
|---|---|---|
| Employer status | You, alone | Co-employment |
| Runs payroll and files taxes | Yes | Yes |
| Benefits | You buy your own | Through the provider's plans |
| Workers' compensation | Your own policy | Usually a master policy |
| HR support | Little to none | Included |
| Multi-state registrations | Mostly your problem | Largely handled |
| Typical minimum headcount | One | Around five |
| Fee shape | Per payroll or PEPM | PEPM or a percentage of payroll |
| Switching cost later | Low | Meaningful |
Stay with a payroll service when
- You have fewer than about five employees. Most PEOs will not quote you, and
those that will tend to price the administrative fee where the benefits advantage no longer covers it.
- Everyone works in one state and the compliance load is small.
- You do not offer health benefits, or you buy them through a broker you are
happy with.
- You expect a funding round, an acquisition or a restructure inside a year —
entering and exiting a PEO around a corporate event is avoidable work.
Move to a PEO when
- Benefits are the constraint: you are losing candidates or staff over a health
plan you cannot improve at your size.
- You have crossed into two or three states and the registration and filing work
has become somebody's part-time job.
- Workers' compensation is expensive or hard to place in your class codes.
- Compliance risk has outgrown the person currently absorbing it — usually a
founder, an office manager or a controller doing it on evenings.
The honest middle ground
Between "payroll service" and "PEO" sits the option most buyers never price: keep the payroll service, add a decent broker, and buy the two or three compliance services you actually need. It is unglamorous, nobody markets it to you, and for a single-state employer of eight people it is frequently the cheapest correct answer.
We say so even though we are paid when you talk to a PEO and not when you do this. That is the test of whether an independence claim means anything.
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Frequently asked
At what headcount should I look at a PEO?
Most providers start quoting around five worksite employees, and the arrangement tends to make more sense from ten upward, especially across multiple states. Below that, a payroll service plus a broker usually costs less and constrains you less.
Can I keep my payroll provider and add a PEO?
Generally no. The PEO runs payroll as part of the arrangement, which is one of the switching costs people underestimate.
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