Should a startup use a PEO for payroll and benefits?

A professional employer organization (PEO) helps businesses, typically small and mid-sized companies, manage human resources, payroll, employee benefits, and more.

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Kruze Consulting - PEO for Payroll and Benefits

Kruze Consulting - PEO for Payroll and Benefits

Startups benefit from PEOs because they reduce administrative workloads, and they can help early-stage companies reduce expenses. As more small businesses employ remote workers, navigating the constantly shifting state and local employment regulations become increasingly difficult and time-consuming. A PEO helps your startup avoid potential issues.

PEOs offer large company benefits to small businesses

PEOs provide full-service human resource outsourcing to startup companies. Often called a co-employer, a PEO can take on most of your HR functions and typically adds all of your employees to the PEO’s payroll. That allows economies of scale that are an asset in providing benefits. Most insurance companies view PEOs as large companies, giving PEOs access to better and often less expensive insurance plans. 

Co-employment arrangements preserve the employer status of client companies. However, the PEO also becomes the employer of record to the client company’s employees, and is legally able to perform tasks associated with employment, and handle sensitive payroll and benefits information. For example, employees will receive annual wage and tax statements (IRS Form W-2) from the PEO, not the client company. 

What do PEOs do?

PEOs perform various employee administration tasks, but there are differences between providers, so founders should research each PEO they’re considering and compare their services. In general, PEOs offer assistance with:

  • Payroll services. PEOs process payroll and in some cases can pay local, state or federal employment taxes. 
  • Benefits. Through a co-employment agreement, PEOs can provide access to high-quality and more affordable health, dental, and vision insurance that would typically only be available to large employers, helping your startup compete for the best talent. The PEO will usually handle employee enrollment and claim processing. They can also provide short- and long-term disability insurance, life insurance, and retirement plans such as 401(k)s.
  • Compliance. PEO have compliance specialists who help protect your business by assisting you with various HR regulations in different locations, unemployment insurance, reporting requirements, workers’ compensation, and other laws and requirements. In addition, PEOs may offer training programs for employees to help you avoid HR issues and limit claims.

A comprehensive HR solution

As a small company grows, supporting your employees becomes increasingly important. A PEO provides your company with high-quality HR services and benefits, while improving costs and streamlining processes. You’re free to focus on developing your business, with the flip side being possibly slightly higher overall cost and less flexibility on the particular benefits you offer. This is often a great tradeoff for high-growth startups that are adding a ton of employees across state lines. Our current favorite PEO providers are Trinet and JustWorks, which we review in more detail on our startup payroll provider page

If you have questions about PEOs or how they can work with your startup, please contact us.

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