The ABC's Of PEOs - ABC's of Small Business

The ABC’S Of PEOs

Lately, a lot of people have been asking about Professional Employment Organizations (PEOs). What is a PEO and what do they do? I will try to give you a basic overview, but due to space limitations and the complexity of the topic, I can’t give you an exhaustive explanation.

Here are the basics of how a PEO works:

Instead of putting you and your people on YOUR payroll, you put yourself and your staff on the payroll of your PEOs. The PEO writes the paychecks, makes the payroll tax deposit and filings. The PEO administers the insurance and other benefit programs. It handles workers compensation, unemployment claims, wage garnishment and a whole host of other payroll and employee related issues. You, as the employer, have to write them a monthly check to cover the costs of payroll, taxes, insurance, and other benefits and, of course, their profit.

How do you benefit by using a PEO? The PEO people will tell you that you can get big company benefits and freedom from those awful payroll chores. They, in essence, become your human resources department. You choose who to hire and fire, who to give raises to and handle the day-to-day operations of your business. The PEO takes care of the rest. Because they employ a huge number of people, they can offer group health insurance, dental and vision insurance, workers compensation insurance, employee assistance and discount programs, 401(k) plans, and a host of other benefits that small companies usually can’t afford. Many of the PEOs also help you with the hiring and new hire reporting process and with reducing risks in the workplace. If someone gets hurt on the job, or a government agency decides to audit your payroll records, they take care of it for you. They take care of payroll records, personnel files, unemployment claims, child support and garnishment issues, COBRA administration and many other functions that usually fall to the business owner to do.

One of my clients told me she really likes being in a PEO. Previously the owners were a bit sloppy sometimes about paying in the 401(k) payments and paying payroll taxes. W-2s were sometimes late and not always accurate. With a PEO, my client knows all of that is handled and the business owner can’t goof it up.

So are you ready to sign up with a PEO right now? Well, hang on. The picture isn’t complete until we look at the downside to PEOs. If a PEO is willing to do all that work for you and take on all that risk, they don’t do it out of the goodness of their hearts. Like any other business, you have to pay them to do it. Now, they will say they can save you money by getting insurance and other benefits cheaper than you can. Sometimes that’s true. However, another client of mine (with about 50 employees) found out that switching to a PEO would give them less coverage from their health insurance premiums and it would cost them more. The point here is it will probably cost more to have them run things for you than if you did it yourself. That’ s business. You pay more for a CPA to do your taxes (you do have a CPA do your taxes, don’t you?) than if you did them yourself. The reason you pay the CPA is because it takes time and expertise to do them correctly yourself. The same thing applies to PEOs. You hire them for their expertise.

What are your employees going to think about the PEO concept? It depends on how you sell it to them. When you sign up with a PEO, you have to terminate all of your employees and then the PEO hires them. They will probably like the new benefits and amenities that the PEO has to offer, but they may be uncomfortable with the changeover. If you convince them they will get better benefits at no cost to them and that are just as secure in their jobs as they were before, they will handle it fine. Maybe. But if they have worked for the same company for years, and now their check comes from a different employer, it may be a difficult adjustment. You can remind them that for all intents and purposes, they still work for your company just as before. Remember that when the employee goes to apply for a loan or fill out other legal documents, they legally do not work for you. They are employed by the PEO and will get their W-2s etc. from the PEO.

Another downside to the PEO option is that because you and your employees work for a large company, you are now subject to laws such as the Family Medical Leave Act, that affect only large employers. For a small employer, being subject to these laws could be expensive. Generally you and your employees are stuck with the choice of insurance, worker’s compensation carrier, and other providers that the PEO makes. One PEO representative tells me that if you have a preferred insurance carrier, he can work it out so that you can retain that carrier.

How do you decide if a PEO is right for you? If I knew that, I would be on “Who Wants to Be a Millionaire?” instead of writing this article. Each company has to look at the benefits and costs associated with this choice. My advice to you is to shop around. Talk to a few different companies. Talk to people that use PEOs currently and ask what they think. Talk to people who use the PEOs that you are considering using. Don’t forget to ask your CPA what he or she thinks.

Of course, if you don’t have a CPA, you can hire me for a reasonable price.

- Mark Edgar, CPA

Mark Edgar is a certified public accountant practicing in Denver, Colorado, with Krause & Company CPA. He’s been practicing long enough that he’s actually gotten it right. Need his help?