What is a PEO?

A professional employer organization (PEO) provides human resource services for small to medium businesses—paying wages and payroll taxes, assisting with the compliance of state and federal rules and regulations, providing access to and administration of a 401(k) plan, health, dental, vision, disability and life insurance and other benefits not typically provided by small businesses. 

Why would a business use a PEO?

Most owners of small to medium-size businesses do not have the necessary knowledge or experience to handle the “employment” part of their business, including regulatory compliance, human resource issues, payroll & tax management, insurance and benefit administration, and workers’ comp / risk management. Business owners would profit more by spending their time and energy focusing on their core business. PEOs can provide a single-source service model and can also give small-group markets access to many benefits and employment amenities they would not otherwise have.

How does a PEO arrangement work?

Once a client company contracts with a PEO, the PEO will then co-employ the client's worksite employees. In the arrangement among a PEO, a worksite employee and a client company, there exists a co-employment relationship, which involves a contractual allocation and sharing of employer responsibilities between the PEO and the client pursuant to a client service agreement (CSA). The PEO typically remits wages and withholdings of the worksite employees and reports, collects and deposits employment taxes with local, state and federal authorities.  The PEO also issues the Form W-2 for the compensation paid by it under its EIN.  The client company retains responsibility for and manages product development and production, business operations, marketing, sales, and service. The PEO and the client will share certain responsibilities, as determined in the CSA.  As a co-employer, the PEO will often provide a complete human resource and benefit package for worksite employees.

How do employees benefit from a PEO arrangement?

Through a PEO, the employees of small businesses gain access to big-business employee benefits such as: 401(k) plans; health, dental, life, and other insurance; dependent care; and other benefits they might not typically receive as employees of a small company. And, when a company works with a PEO, job security is improved as the PEO implements efficiencies to lower employment costs. Job satisfaction and productivity increase when employees are provided with professional human resource services, enhanced benefits, training, employee manuals, safety services and improved communications.