PEOHas your startup or small business ever considered using a professional employer organization—a PEO? PEOs specialize in providing benefits and human resources help for many different clients. Because they serve multiple companies, they can leverage their clients’ numbers for better healthcare and retirement savings options.

If you’re a small business owner or a new entrepreneur, your finances may be precarious. As you fine-tune your product, you might be spending more money than you intended on research or outsourcing. Employee benefits, then, may seem out of the question. How can you provide 401(k) options for your small team when you’re one hundred percent focused on scaling your business?

Employee benefits are a key part of worker morale, though. Even if your employees are passionate and experienced, and have joined you because they believe in what you’re making together, they deserve benefits like health insurance, paid vacation time, and retirement savings options.

What’s more, a competitive benefits package will net you the talent you need. AFLAC’s annual employee findings survey showed that 60 percent of employees would take a job with lower pay but better benefits.

Both current employees and job seekers care about the benefits they receive, which is no surprise, given that the median cost of an emergency room visit for someone without insurance is over $1,200.

So how do you take the first step in providing benefits? One solution is to partner with a professional employer organization, or PEO.

How does working with a PEO work?

If you enter into an agreement with a PEO, you’ll use a co-employment structure. Co-employment means that your employees are also the PEO’s employees. This may sound intimidating, and it is important to realize that any PEO you choose will have authority over your tax and health care responsibilities. In most cases, though, the PEO itself is responsible if it makes a mistake when, say, filing your taxes.

In a co-employment framework, you still run your company, but you allow the PEO to do what it does best: payroll and benefits administration.

Still, it is imperative to do your research and read through contracts fully when seriously considering PEOs. This prevents regret and bad blood on either side.

Why use a PEO?

PEOs offer small businesses the chance to administer competitive benefits without the sky-high cost that corporations can afford to pay.

Here are some of the reasons you might want to use a PEO for your benefits and HR needs.

PEOs bring down benefit costs

PEOs give you the chance to save money on major expenses like healthcare since they provide more options than a small business would normally have available.

The average cost of an employer’s healthcare plan contribution per employee was $6,401 in 2017, says a United Benefits Advisors study, and contributions from both employers and employees have trended upwards since 2012. Cutting that $6,000+ number is key.

A PEO can shave up to $2,400 off that cost, although the amount varies due to both state-specific laws and the PEO in question. If your business employs 15 people, and you’re trying to offer them health insurance, a PEO could save you $36,000.

If your business employs more than 50 people, you must provide health insurance, as per the Affordable Care Act (ACA). Scaling fast and not sure how to get benefits for that many people? PEOs can save you bundles there, too.

Once your company grows to 100 people or more, though, a PEO might not be the best choice for you. Consider bringing your HR needs in-house.

PEOs handle taxes and payroll

Unless you’re an accountant, you probably don’t know the ins and outs of tax law. You could always hire your own accountant to do taxes for you—and that’s better than nothing—but PEOs can provide an advantage here, too.

Not only do PEOs handle your yearly, but they provide payroll services and deduct the correct taxes from each employee’s wages each pay period.

Your PEO account manager will know how to manage state and federal taxes and will provide W2 forms for each of your employees come January. In addition, most PEOs provide online platforms for you to check your tax information at any time.

PEOs can provide retirement savings

A retirement savings plan, such as a 401(k), is one of the most common benefits—it allows employees to put away money for when they no longer work. But choosing a plan, just like choosing health insurance, is a complex, detail-heavy process.

If you’re a PEO client, you’ll receive guidance on which options to offer, but you’ll also have many more options to choose from.

PEOs find new employees

When you’re looking to add new talent to your team, identifying and reaching the best candidates can be a headache. Posting to the right job boards and sorting through resumes takes days, and the process can cost thousands of dollars: according to the Society for Human Resource Management, finding a new employee costs $4,129 and takes at least 42 days.

PEOs can often help their clients assemble a pipeline of qualified candidates since they have access to all kinds of recruitment networks. What’s more, once they’ve placed a notice about your company’s position, they’re experienced enough to help screen applicants to save time when you just need to see which candidates meet the guidelines you set.

You’ll be free to focus on interviewing the top candidates and making the best hiring decision for your team. Do keep in mind, though, the more you remove yourself from the hiring process, the less control you have over the candidates whose resumes land on your desk. If you use a PEO for recruitment, find a healthy balance between outsourcing recruitment tasks and handling them yourself.

PEOs manage workers’ compensation and unemployment

Since you’re registered as a business, you have to pay compensation and unemployment costs, and likely have to have workers’ compensation insurance.

Specific workers’ compensation and unemployment costs for businesses differ by state, and they can get quite complicated. If you don’t pay or pay incorrectly, you’re likely to get slapped with fines.

PEOs are responsible for knowing your state’s compensation laws and can help verify that you’re paying the proper amount.

PEOs know how to track employee performance

All businesses, but especially small ones, only function well if managers and their reports communicate openly about performance.

If you don’t have significant managerial experience, you may struggle to talk about your employees’ performance in a useful way. That’s no surprise: it’s difficult to give job feedback that doesn’t come across as aggressive or insulting and can be difficult to calculate how your employees are performing their jobs.

Most PEOs provide employee performance tracking software, complete with forms for both you and your workers to fill out on a schedule you set. In other words, the PEO provides a performance reporting structure; you use it as you wish to make sure you and your team are on the same page about each employee’s goals and areas for improvement.

Your PEO may even provide supervisor coaching so that you and your managers learn how to talk effectively about performance.

The downsides of PEOs

PEOs can perform many services, but they’re no magic pill, and they won’t fix every problem your small business has. In some cases, they create more problems.

Cameron Ken, a tax expert, wrote about a client’s PEO nightmare for Forbes. Horizon Health Center wanted to employ a PEO and chose Insperity, one of the largest PEOs currently operating. However, Insperity waited until the day before the co-employment period was supposed to begin to tell Horizon that they would have to prepay by two weeks.

This was a major financial hindrance to Horizon, especially since Insperity refused to communicate by phone and would only talk by email. Horizon was so dissatisfied with the experience that they went back to an in-house payroll and HR system.

The Insperity story is evidence as to why you should look for a severance clause in any contract you sign. If an experience with a PEO goes poorly, you want to be able to pull the plug as early as possible.

The best PEOs are detail-oriented to a fault, so look for this quality when selecting one. The organization you choose will be responsible for critically important, highly sensitive information, such as tax data and health insurance plans.

Paycor suggests that, because PEO employees don’t work on-site with you, they may not have the same drive to take care of crucial matters (like health insurance and payroll) as someone who is physically in your office. This will vary between PEOs, but try to get a sense of how dedicated PEOs are to each client. If you get an assembly-line feel, look elsewhere.

Put the same amount of effort into a PEO search as you would into employee recruitment. Remember, co-employment means that your PEO will be part of your team.

Professional employer organizations save time and money

Using a PEO is a way to outsource the tasks you don’t have the time or expertise to handle. Ideally, people who really are experts in health insurance, retirement savings, and human resources best practices will then manage those tasks for you.

Consider the PEO question carefully, though. Only choose an HR management partner that you trust with sensitive information. If you’re a small business, you already know that time and money are scarce. Consider using PEOs to reclaim hours and dollars so that you can tackle the problems your business is meant to solve.

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Elizabeth Ballou
Elizabeth Ballou

Elizabeth Ballou is a writer and marketer at Clutch, a B2B ratings and reviews company. She focuses on business process outsourcing, but has also written about user experience and app development.