PEO vs PSP: Which One Is Better for the Long Run?

Updated: Jun 1

October 19, 2021

For business owners looking to save on payroll, benefits, and HR services, PEOs provide a unique model for outsourcing traditional HR practices.

Becoming a PEO client gives you access to a variety of resources, however, the most important thing it provides is a sense of security.

According to NAPEO’s White Papers, PEO Clients in the COVID-19 Pandemic: Follow-Up Analysis, small businesses that are PEO clients were 58% less likely to have permanently closed during the pandemic.

However, not every business is seeking that blanked of security. If your business has a dedicated HR department but does not want to pay for additional services outside of the payment cycle, a Payroll Service Provider (PSP) may look like your most affordable option.

When taking a deeper dive into Payroll providers, thanks to this blog from Max Freedman of Business News Daily, Freedman shows that future costs and regulations could ultimately end up costing you more in the long run when opting for a PSP over a PEO.

“PEOs are often more expensive than PSPs, but in looking at the bigger picture and longer term, PEOs may cost less. For starters, the superior health insurance plans available to you through PEOs can cost you less than the insurance plans you might obtain through an insurance broker.

Additionally, your PEO won't charge you more as you add services.

PEOs typically charge you up to 15% of your gross wages per pay period or a flat but high per-employee fee each month. You may also pay a setup fee that can cost thousands of dollars.

By comparison, a PSP will likely cost no more than $200 per employee per year, but these fees come with none of the cost-saving HR services for which PEOs are known.”

According to Freedman, here are the main differences to consider when deciding between the two types of service providers:

PEO

· More services offered

· Higher initial fees but can potentially save big in future

· Co-employer arrangement may subject you to new ADA, ACA, and employee handbook needs

· Risk and safety management

· Shared legal burden

· Employer of record

PSP

· Only payroll, could include benefits as well

· Lower initial feed but potential higher costs in future

· No significant changes to contracts

· No shared legal burden

· Contracted provider

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