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Updated Mar 07, 2024

PEO Software: How to Choose the Best One for Your Business

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Joshua Stowers, Staff Writer

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From handling payroll and employee recruiting to managing paid time off and benefits, taking care of your company’s human resources responsibilities can be daunting and time-consuming for small business owners. As a result, many are turning to professional employer organizations (PEOs) for help.

Businesses that partner with PEOs can outsource payroll and other human resources (HR) tasks to specialists. But if you plan to outsource such critical responsibilities, it’s essential to find a PEO partner that can handle all your needs. 

Editor’s note: Looking for the right PEO for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs. 

We’ll explain how to choose the right PEO for your business and share insights into the advantages and risks of working with PEOs.  

Did You Know?Did you know

PEO software is different from HR management software. Some PEOs offer HR software online, while some HR software providers market their product as a PEO.

What is a PEO?

A PEO is a company that provides third-party HR, benefits administration and payroll support to small businesses. PEOs are a low-cost alternative to hiring an entire internal HR department. They can run payroll, find benefits options, process W-2s or 1099s, and ensure you adhere to HR compliance laws. PEO software doesn’t take sick days or ask for vacation time, and your business isn’t liable for its work. You can tailor a PEO’s services to match your business needs.

PEOs work under a co-employment model where they become an employer of your employees. 

“As a co-employer, [the PEO] takes over certain responsibilities from you,” explained Brian Cairns, CEO of ProStrategix Consulting. “It varies depending on the agreement, but the most important distinction is that they pay your employees under their employer identification number.”

This co-employer arrangement saves your company money on benefits. Because it represents many companies, the PEO can negotiate better rates and benefits for insurance and retirement plans than your business could offer on its own. The National Association of Professional Employer Organizations found that businesses in a PEO arrangement grow 7 to 9 percent faster, have more than 10 percent lower turnover, and are 50 percent less likely to go out of business. 

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TipBottom line

If you’re interested in partnering with a PEO, read our comprehensive reviews of the best professional employer organizations to better understand their features and pricing.

How to choose a PEO

PEOs cater to various business needs, so finding the right one for your organization can be challenging. You’ll need to investigate any potential partner’s PEO services and features to choose the best option. 

These five tips can guide your decision-making process:

  1. Consider the PEO’s technology. Does the PEO offer online services? Which software packages does it use? How do its software choices integrate with your existing systems? You’ll need to decide if a PEO’s technology makes more sense than your current solutions for payroll, accounting and more.
  2. Explore the PEO’s benefits. The PEO should handle or partially automate business-critical tasks, including payroll, HR and risk management. Evaluate how well any PEO you’re considering handles these functions and determine if it will be worth the investment.
  3. Decide if the PEO’s benefits suit your employees’ needs. Many PEOs offer employee benefits like insurance packages. If the PEO will handle your employees’ insurance plans, ensure its options meet your staff’s expectations and your own. Some PEOs also offer corporate wellness programs, retirement plans and similar employee perks to make your business more appealing to top talent.
  4. Analyze the PEO’s prices. Weigh any potential PEO’s prices against the benefits you’ll receive. Estimating your ROI is the best way to remove uncertainty from the decision-making process. Which services are critical, and how much do they cost? Are they in your budget? What services would you sacrifice for a less expensive PEO?
  5. Check any PEO’s references. Online reviews are helpful, but true conversational references are worth more. Talk to business managers — especially those in your industry or a similar field — who have worked with the PEO you’re considering.

What to consider when choosing PEO software

Consider how any potential PEO handles the following essential HR services: 


Your PEO’s software should include payroll services or integrate with your existing payroll platform. When a business uses a PEO payroll service, the company becomes a co-employer and assumes the responsibility of managing your business’s payroll administration. A co-employment model can help time-crunched small business owners pay wages, deposit employment taxes and issue employee W-2s.

Employee benefits packages

Employee benefits packages can help your business attract and retain top talent. The most popular employee benefits include health insurance coverage, paid time off and flexible sick leave. One of the primary reasons many small business owners use PEO software is to provide high-quality benefits to their employees at a lower cost. Your PEO benefit options will vary depending on your business’s size and goals. 

FYIDid you know

PEOs can help provide the best benefits for your employees. These companies can access benefits and perks a small business likely couldn’t affordably provide on its own.


A low-cost PEO generally charges a per-employee fee or a percentage of your total payroll. In many cases, there isn’t a free trial where you can evaluate the service. A PEO’s contract length depends on your business’s size and needs. Some PEOs offer long-term contracts; others don’t require one.

Usually, 30 to 60 days’ notice is required before canceling the service. Some companies let you leave anytime and for any reason, while others charge you a fee for leaving. Search for a PEO with a money-back guarantee, especially if you’re a small business owner new to PEOs.

How can a PEO help your business?

Operating a small business is challenging, and it’s easy to get bogged down in administrative work. Outsourcing various HR tasks to a PEO can free up time for building your business. 

A PEO can streamline the following functions and take them off your plate: 

  • Recruitment
  • HR services
  • Onboarding and offboarding
  • Health and welfare management
  • Payroll processing
  • Benefits administration
  • Legal compliance
  • Workplace safety compliance
  • Employee training and development programs

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What are some of the top PEOs?

The following three companies are excellent PEOs for small businesses to consider. 

1. ADP 

ADP provides exemplary customer service to small businesses of all types and sizes. This IRS-certified PEO includes the following offerings:

  • HR administration
  • Talent management
  • Employee benefits
  • Payroll and regulatory compliance
  • Comprehensive 401(k) plans
  • Employee wellness programs

Read our review of ADP TotalSource for more information.

2. Insperity 

Insperity is an excellent PEO for small businesses. It operates on a per-employee pricing structure and can provide the following features:

  • Onboarding resources
  • Recruitment tools
  • Benefits packages
  • Time and attendance tracking
  • Payroll processing
  • Employee training
  • Risk management services

Read our review of Insperity for more information.

3. Paychex

Paychex is a great PEO partner for larger businesses that need more extensive resources. It can provide the following:

  • Extensive HR support
  • Onboarding and recruiting resources
  • Handbook and HR policy development
  • Termination and dispute assistance
  • Employee screening and training
  • Health, retirement, vision and dental packages
  • Customizable service bundles

Read our Paychex review for more information.      

Did You Know?Did you know

PEOs are similar to ASOs (administrative services organizations). However, ASOs help arrange services like benefits and payroll processing without directly providing them.

What are the pros and cons of PEO software?

PEO software solutions and services aren’t suitable for every business. Before you decide if working with a PEO is the right move, consider the pros and cons of PEOs.

PEO pros

  • Cost-effectiveness: If you can’t afford to hire an HR professional, a PEO can be a cost-effective way to outsource HR duties. If you have an HR specialist or a small HR staff that needs additional support or resources, a PEO can provide what they need.
  • Fewer headaches: A PEO can take on your HR and administrative tasks. There’s little room for human error in HR, and the service assumes liability for any complications or issues that may arise.
  • Time savings: Implementing a PEO service’s software allows you to dedicate your time to other areas of your business needing your attention to ensure growth and success.

PEO cons

  • Lack of personal interaction: While using PEO software, your business risks losing the interpersonal aspect of managing employees. There’s nothing more important than face-to-face interaction and communication. Software can’t pick up on anything beyond logic and data.
  • Security concerns: Your PEO software solution hosts all your employee data in one centralized location, making it a gold mine of data for hackers. If the PEO’s network is hacked, your business could face severe consequences.
TipBottom line

Vet the PEO thoroughly to ensure it’s an accredited, legitimate company that operates ethically and complies with HR regulations. Check with the Better Business Bureau to see if it has received any complaints.

Risks of working with a PEO

Beyond the general “cons” outlined above, businesses should thoroughly understand the unique risks of working with a PEO:

1. There’s potential for workers’ comp fraud and misuse with PEOs.

PEOs have been used to reduce workers’ compensation fees for business clients, costing legitimate employers, employees and healthcare providers millions annually. Some cases of PEO fraud have involved filing taxes improperly, exaggerating workplace injuries and incorrectly classifying employees.

One example of a PEO misusing services to commit tax fraud was the case of Larry W. Kimes, former manager of AccounTex Financial Services LLC, and Charles Pircher, a manager of multiple PEOs based in San Antonio, Texas. Kimes and Pircher were each sentenced to more than 10 years in federal prison and ordered to pay $132 million in restitution for stealing client money instead of using it to pay payroll taxes and insurance premiums.

2. You could be subjected to a misclassification audit.

As the PEO’s co-employment partner, you share responsibility for ensuring your business operates within the laws of its state. One common error is worker misclassification. Here are three steps you can take to avoid this error:

  • Verify each employee’s classification. To avoid being audited for employee misclassification, understand the legal distinction between employees and contractors. This includes reviewing all federal, state and local classification laws.
  • Provide appropriate treatment. Don’t treat contractors like employees, even when you work with them regularly. The services of an independent contractor can be great. Still, it’s recommended you establish an independent contractor engagement program.
  • Enforce employer tax obligations. Tax evasion may occur when workers are misclassified. Employers pay taxes on employees, not independent contractors. If a worker is an independent contractor, they are responsible for paying their self-employment and income taxes.
TipBottom line

Conduct a payroll audit to ensure you’re properly classifying all employees and contractors.

3. Your company may be vulnerable to security breaches.

The most significant risk of using a PEO is that you are entrusting your employees’ private information to another company, according to Will Ellis, IT security consultant and founder of Privacy Australia. Before choosing a PEO, ask the company how it protects its clients’ data.

“Ensuring that a private network is used rather than a public network and inquiring about encryption are two important things to consider so that you can further increase security and privacy for your employees,” Ellis advised. “Security of your data and employees’ information should always be a priority.”

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PEO software FAQs

Still unsure how to choose the best PEO software? Here are some frequently asked questions about a PEO’s processes and operations to help you.

The best services PEOs offer for startups include risk and compliance management; health, vision and dental benefits; comprehensive HR software tools; time and attendance tracking; and payroll support.

A small business should look for HR help immediately. If your business already has an HR specialist on staff, additional HR support could be beneficial. Alternatively, if your business has no HR team, a PEO’s software could be the definitive factor in your business’s growth.

You’ll want to work with an accredited PEO because accreditation indicates the company is financially stable, is ethical and meets regulatory requirements. This is crucial because it ensures sensitive HR processes are handled correctly so you don’t run afoul of the U.S. Department of Labor or the IRS.

An HR outsourcing (HRO) service is one alternative to using a PEO. The best HROs function similarly to a PEO but don’t use a co-employment model. Another option is to hire your own in-house team to manage HR support and benefits. If you go this route, you will likely want to use HR software to manage your processes.

Only PEOs use a co-employment model. PEO services tend to be bundled HR solutions catering to smaller companies with features like payroll, administrative HR services, benefits administration, compliance assistance and HR support.

HROs provide many of these services but on an a la carte basis, meaning you can customize an HR solution based on your specific HR needs. HROs tend to be a better fit for larger organizations with existing HR personnel who only need help with a few specific HR functions.

Some vendors offer both PEO and HRO offerings, allowing you to switch between the two as your business scales.

Hiring a PEO may not be the right solution for some businesses. Here are three reasons why some businesses opt not to use PEO software:

  1. Some business owners prefer not to give up control. A small business owner may find it challenging to hand over significant responsibilities and tasks to an outside company. PEOs also have strict policies regarding hiring, training and disciplining that you must follow to protect yourself from liability.
  2. PEO fees can be too expensive for small businesses. PEO software is ideal for startups and small businesses because it’s less expensive than hiring HR staff. The average cost of a PEO is $1,000 per employee annually, but this may still be too expensive for small businesses with tight budgets. Also, as your business grows, the cost of maintaining employees can decrease while PEO fees remain constant.
  3. It’s not the right fit for your business. If a PEO does not understand and address the needs of your business, then your company might not function the way you want. There must be a direct line of communication with the PEO and a precise understanding of where you want your business to be within the next several years. This concern can be removed by choosing PEO software that allows for customization.

Co-employment agreements can reduce HR and administrative issues. However, the insurance, payroll processing and HR packages PEOs offer come with additional fees for administrative services. In many cases, PEOs separate HR and administrative services and may price each differently according to the size of your business. Be sure to review your legal liabilities and understand your business’s requirements within the co-employer agreement.

There are a few different ways PEOs can bill you. One option is to charge a fee per employee on a monthly or annual basis. This is the most common form of billing. Another way of billing is to calculate its costs, add an administrative fee and profit margin, and then tally that as a percentage of your PEO payroll software costs. Once your time sheets are completed and submitted, the PEO will notify you of the required wire transaction so it can begin processing payroll. The administrative fee is a percentage of the actual cost. It’s essential to note that employee benefits are an additional fee on top of a PEO’s standard cost.

Skye Schooley and Matt D’Angelo contributed to this article. Source interviews were conducted for a previous version of this article.

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Joshua Stowers, Staff Writer
Joshua Stowers is a and Business News Daily writer who knows firsthand the ups and downs of running a small business. An entrepreneur himself, Joshua founded the fashion and art publication Elusive Magazine. He writes about the strategic operations entrepreneurs need to launch and grow their small businesses. Joshua writes about choosing the choosing and building business legal structures, implementing human-resources services, and recruiting and managing talent.
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