What does a Payroll service provider or PSP do?
Typically, A Payroll Service Provider (PSP) is responsible for handling all tasks related to paying employees and federal payroll taxes. However, it is pertinent to mention that employers retain liability for their employees at all times.
Additionally, many PSPs provide a more robust set of services, but under the title of Administrative Services Organization (ASO). The responsibilities include providing supportive services such as safety training or administrative services related to Human Resources.
What services can a PEO offer?
While PSP merely provides payroll services, Professional Employer Organizations (PEOs) offer much more. A PEO specializes in providing assistance in matters related to Human Resources. Considering that they serve multiple clients at once, they can leverage the number of clients to collectively procure group-pricing on benefits such as healthcare and retirement savings options.
As mentioned earlier, other than handling payroll and tax administration, PEOs offer services that may be comprised of the recruiting process, benefits administration, as well as government compliance. Not only this, but they can also handle other tasks like onboarding, employment verifications and the creation and maintenance of a compliant Employee Handbook. However, PEO goes a much longer way than simply providing a set of services.
A relationship with a PEO involves “co-employment”, which means that the PEO and client partner company share the total employee headcount for different reasons. The client company shares liability for the employees with the PEO, but retains complete control of the staff and continues to supervise their daily activities. Moreover, the PEO may also provide proprietary offerings like healthcare and 401k offerings that only their client partners will have access to.
Additionally, PEOs have the ability to provide both workers’ compensation and healthcare benefits at much lower costs as compared to what an individual employer could obtain on their own, because the PEO is a collective of employees that continues to grow as more and more companies form partnerships with them. That’s what makes the PEO offering unique and very different from a standard payroll provider. This is especially relevant to small and midsized businesses, considering that they have such a large number of employees.
Now that we know what responsibilities each of them bears let’s talk about whether your business will benefit from a PEO or PSP.
In case you are a start-up or an emerging business, your total workforce may only initially consist of one to three employees. Therefore, such a business might not require the extensive services offered by a PEO. Businesses of such a scale can consider outsourcing their payroll processes in addition to other minor aspects of your human resources.
On the other hand, a small to medium–sized business will enjoy substantial benefits from the services a PEO provides. As your business works towards growth, it can become time-consuming to handle administrative and HR-related issues. As a result, a good deal of time could get consumed by non-revenue generating tasks. Another value-add is that PEOs also provide professional consultation and make sure that you are in full compliance with federal and state laws, mitigating employment-related liability, which can also be very costly.
Because of the many service offerings provided by a PEO, through a single source, there is a potential of saving money through consolidation of vendors, where as a PSP, only one key service, payroll, is handled. The host business can use the remaining funds for expansion and growth.
Each business circumstance will need to be evaluated to determine whether a PEO option is viable and adds value, or if initially a PSP should be utilized for the sole purpose of providing an automated payroll service. There are differences in cost when compared, but when considering the multitude of other areas PEO can administrate and serve the cost difference is justified.