A PEO (Professional Employer Organization) is a co-employer: it serves as the employer of record for administrative purposes, such as sponsoring health plans and remitting payroll taxes, while the business continues to direct daily work. A payroll company processes payroll and files taxes on the business’s behalf, but the business remains the sole employer. The two are not interchangeable, and the right choice depends on how much HR responsibility a business wants to transfer.
Key Differences
Employment relationship. With a PEO, employees are co-employed, and the PEO generally files payroll taxes under its own employer identification number (EIN). With a payroll company, taxes are filed under the business’s own EIN, and liability for those taxes stays with the business even though the provider prepares the forms.
Services included. PEOs typically bundle payroll, employment taxes, workers’ compensation, benefits administration, and ongoing labor-law compliance support. Payroll companies focus on payroll processing and tax filing, with some adding new-hire reporting, onboarding tools, or benefits administration. See HR solutions for the HR support Capital Payroll Partners offers beyond core payroll.
Cost structure. The U.S. Chamber of Commerce reports that PEO fees are usually a percentage of payroll, ranging from 2% to 15%, because they include unemployment insurance, workers’ compensation, and health benefits. Payroll-only services generally carry lower monthly costs, typically a base fee plus a per-employee fee. See Capital Payroll Partners’ pricing for payroll service rates.
Control and liability. A PEO shares certain employer responsibilities and liabilities. With a payroll company, the business keeps full control of hiring, firing, and HR decisions, and remains responsible as the sole employer. The IRS maintains a program for certified professional employer organizations (CPEOs), which take on specified federal employment tax obligations for their customers; a business using a PEO should confirm whether the PEO holds this certification.
Which Fits Richmond, VA Businesses Best?
Businesses that want to outsource HR liability and benefits administration, and do not need direct control over employment decisions, may prefer a PEO. Businesses that want to remain the employer of record while outsourcing payroll processing and tax filing typically choose a payroll company.
Richmond-area employers must meet the same Virginia requirements under either model, including state income tax withholding and quarterly Virginia Employment Commission (VEC) unemployment reports. Capital Payroll Partners provides payroll processing, tax compliance, and optional HR support, including 401(k) retirement plan management, for businesses that want outsourced payroll without co-employment. See payroll company in Richmond, VA for local service details.
Frequently Asked Questions
What is the difference between a PEO and payroll?
A PEO co-employs a business’s staff and bundles payroll with benefits, workers’ compensation, and HR compliance. A payroll company processes payroll and files taxes while the business remains the sole employer.
Is a PEO cheaper than a payroll company?
Not typically. PEO fees are usually a percentage of payroll (2% to 15% according to the U.S. Chamber of Commerce) because they bundle more services. Payroll-only services generally carry lower monthly costs.
Do I need a PEO or just a payroll company?
A business that mainly needs payroll processing and tax filing, and wants to remain the employer of record, usually needs only a payroll company. A PEO fits businesses that want to outsource HR and benefits administration as well.
Who is responsible for payroll taxes with each option?
With a payroll company, taxes are filed under the business’s EIN and the business remains liable. With a PEO, the PEO generally files under its own EIN and shares employer liability.
To compare options for a specific business, request a free payroll quote from Capital Payroll Partners in Richmond, VA.