PEO or Payroll Company- What's the
Difference?
There is a very significant difference between working with a
PEO versus a payroll company even if it feels similar. The
most important has to do with who is the employer of record
according to the IRS. When an employer hires a payroll
company to process their payroll it is a 3rd party relationship.
The payroll company is simply providing a service on behalf of
the employer. When an employer hires a PEO they are
entering into a co-employment relationship and transferring
certain rights and responsibilities b contract.
Payroll companies process payroll, file taxes, and distribute
W-2's under the employers federal and state tax identification
numbers. The customer or client does not transfer rights
or responsibilities from themselves to the payroll provider.
They are still ultimately liable as the employer even though
most payroll companies offer some sort of accuracy guarantees.
Conversely, PEO relationship require the employee transfer in
order to make the relationship work. In order for a PEO to
offer certain solutions like their master policy workers
compensation and health insurance they must have the employer of
record status. While the IRS does consider the PEO to be
the employer of record it does not necessarily protect the
employer from liability. In fact, other government
entities such as the Department of Labor and most state
employment security divisions consider both the PEO and the
client as co-employers.
Related:
Why
outsource payroll?
What Does This Mean for My
Business?
In simple terms, a good PEO may be able to offer lower cost
efficiencies in some areas and ultimately help save money,
improve cash flow, and improve the employer/employee experience.
When executed properly, most employers don't notice any real
difference in the day to day process.
As the co-employer you will still decide who to hire, what to
pay employees, and how to run you business. The difference
is that you will be doing it all under the PEOs umbrella so to
speak. Like any business relationship, there is an
inter-dependence on both parties doing a good job and living up
to their responsibilities in the relationship. As long as
the PEO remains healthy and provides a high quality service and
low cost factors for insurance and other employee services there
should not be any problems.
The trade off is your employer status will eventually
disappear after a period of time because you technically no
longer have employees. When employers partner with stable
and healthy PEOs this is seldom a problem. However,
exiting a PEO relationship and the industry can be a challenge
if you ever decide to exit the PEO arrangement.
Related:
Should I use a PEO or payroll company?
Related
When is a PEO a better fit?
What if I Decide to Leave
My PEO?
If you ever decide to leave your PEO arrangement and put
payroll back in house or outsource to a payroll vendor you will
need to make sure your employer status is back in place.
Here is a list of the things to do:
- Ensure you have an active FEIN established with the IRS
- Re-establish state withholding accounts and
identification
- Re-establish federal and state unemployment accounts and
identification numbers
- Purchase workers compensation insurance
- Replace any employee benefits deemed necessary
- Prepare to manage and retain employee paperwork such as
I-9's and tax forms
- Assume necessary HR functions and programs
* Most payroll providers,
business attorneys, and accounting professionals can easily
assist with most of these tasks.
It is important to remember that even though you have been
with a PEO, your prior workers compensation loss history,
unemployment claims, and health utilization will likely play a
substantial role in your ability to replace your insurance
coverage with another carrier. If you plan to exit your
PEO relationship you will need to request copies of your
currently valued work comp loss runs from your PEO in order to
solicit replacement coverage quotes from other carriers.
If you have had minimal losses and claims finding replacement
coverage should not be a difficult task. However, if your
losses have been significant most carriers will likely decline
to quote your work comp and you may end up in the
state fund.
The best advise is to have coverage lined up prior to giving
termination notice to a PEO. Remember to review your
agreement in order to provide proper notice of termination.
Our agency is available to assist employers seeking to exit a
PEO relationship.
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