What Is a PEO and How Does it Work? (Ultimate Guide)


  • PEOs are strategic allies for businesses that need to increase efficiency and reduce the time spent on HR admin tasks.
  • They assume full responsibility for HR functions like payroll processing, compliance, benefits administration, and more.
  • At Solid Business Solutions, we support Texas business owners with PEO and HR outsourcing services, so they can focus on growth. Contact us to learn more!

Administrative HR tasks are complex and time-consuming. But they don’t have to be. Professional Employer Organizations (PEOs) can handle the heavy workload for you, while your business stays in charge of more strategic tasks. So, what is a PEO and why should you consider partnering with one?

This article goes through the ins and outs of PEOs, how they work, and the advantages they can bring to small businesses.

Not sure if PEO services are the right move for your business? Read on to find out!

What Is a PEO? – PEO Definition

As we’ve mentioned earlier, PEO stands for Professional Employer Organization.

A PEO is a third-party outsourcing company that helps small and medium-sized businesses (SMBs) manage administrative aspects of HR, such as employee benefits, payroll and taxes, and compliance.

Companies usually invest many hours and resources in these tasks. By outsourcing them to a PEO, you ensure your processes run smoothly and compliantly while having more time to focus on higher-impact activities.

Companies in a partnership with a PEO grow 7-9 % faster, have employee turnover that is 10-14 % lower, and have a higher survival rate than businesses that don’t use PEOs

—  McBassi and Company

Even though most PEOs offer similar services, their lineup of services and expertise can differ from one another. For instance, not all of them provide HR support in areas like HR strategy, policies and handbooks, and employee onboarding.

How Does a PEO Work?

PEOs work under a co-employment relationship. They assume risks and legal responsibilities while leaving business owners the task of running their company.

In other words, when a company partners with a PEO, the PEO becomes the Employer of Record for tax and insurance purposes. This means that the PEO takes on payroll processing, Workers’ Compensation, employee benefits administration, and other HR-related tasks. So, what’s left on your side? Your company retains control over its day-to-day operations, including hiring, firing, and managing employees’ job responsibilities.

Since PEOs serve multiple clients, they can negotiate more competitive rates for benefits and insurance.

This allows smaller businesses to access resources and expertise that might be challenging to manage independently.

Find Out All the Benefits that PEOs can Offer to your Business

Why Do Companies Use a PEO?

Companies of all sizes, but especially small and medium-sized businesses, can find numerous benefits in partnering with a PEO.

According to a NAPEO study:

Businesses with 20 to 49 employees use PEOs the most (37%), followed by companies with 10 to 19 employees (28%)

But even larger companies, with hundreds of employees and existing human resources teams can benefit from PEOs. 

Let’s go through the main benefits that companies (and their employees) can enjoy from a PEO partnership:

Access to HR Expertise

SMBs may not have dedicated HR departments or specialists. A PEO provides access to experienced HR professionals who can handle tasks such as:

  • Payroll processing
  • Benefits administration
  • Compliance management

Better Employee Benefits at a Lower Cost

For small businesses, providing competitive benefits is expensive — and yet it’s crucial to attract and retain top talent.

PEOs often have economies of scale, so they can negotiate better rates for employee benefits, insurance, and other services. This helps companies provide better benefits while saving money, which can have a very positive impact on employee satisfaction and retention.

Ensure Compliance (and Avoid Legal Issues!)

Staying compliant with ever-changing employment laws can be challenging.

PEOs assist with risk management and compliance, helping companies navigate complex employment laws and regulations. This reduces the risk of legal issues and penalties related to HR matters.

More Time to Focus on Core Business

Administrative tasks such as calculating payroll or tracking time and attendance can add significant time to your team’s workload.

By outsourcing HR functions to a PEO, companies can free up time and resources to focus on their core business activities. This can be particularly valuable for entrepreneurs and small business owners.

Increase Payroll Accuracy

PEOs handle payroll processing, including tax withholding and reporting. This ensures accuracy and compliance with tax regulations, relieving companies of the administrative burden associated with payroll.

It also reduces the risk of payroll errors, which are not only frustrating for employees but can also lead to financial losses, legal disputes, and reputational damage.

Access to Top-Notch Technology

PEOs often provide advanced HR technology platforms that streamline processes such as time and attendance tracking, benefits enrollment, and employee self-service.

This helps companies boost efficiency and accuracy in HR-related tasks, improves employee satisfaction, and eliminates the cost of having to invest in their software.

Meet Solid: HR Experts & Your Business Allies

PEOs can be your allies, allowing you to focus on business growth while a team of specialists handle all the routine, time-consuming tasks.

For SMB owners, partnering with a PEO can make all the difference, from cutting down the time spent on administrative tasks to getting access to the latest technology and being able to offer better benefits to all your employees.

At Solid Business Solutions, we provide PEO and HR outsourcing services for Texas-based businesses, helping them build and grow their business on solid ground.

Contact us to learn how we can support your HR-related tasks and set your business on a path to success!

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