Forty percent of small business owners say that payroll and bookkeeping are the worst part of their jobs. 54% admit there's room for improvement in their current payroll process, and 40% incur IRS penalties due to payroll errors. To top things off, 54% of the American workforce deals with payroll issues due to these struggles, and half of them start looking for a new job after just two errors.
So, it's not surprising that businesses across the globe outsource their payroll services. Payroll is usually the first place business owners look when they outsource HR functions.
But who should handle that payroll?
You have options. There are Professional Employer Organizations (PEOs) who handle payroll, HR administration, benefits, workers' compensation, and a plethora of other HR-related tasks. There are also payroll processors — whose sole job is to tackle payroll headaches.
But which one gives you a better "bang for your buck"?
It's a tough question to answer. Payroll processors have a highly variable ROI. It depends on the number of employees you have, your current payroll processes, and their charge structure. With PEOs, you automatically capture payroll savings, but you also load up on savings across your HR pipeline.
Let's explore the ROI differences between PEOs and payroll processors.
Calculating Payroll Processor Savings
Unsurprisingly, payroll processors' area of savings is payroll. They handle payroll. If you're a business owner struggling with payroll accuracy and manual entry costs, the ROI of a payroll processor may be positive. But if you already have payroll automation software, your only tangible cost savings are going to come in the form of:
- Freeing up HR time
- Increasing compliance related to payroll
If your HR rarely makes compliance mistakes (related explicitly to payroll), using a payroll processor may even net you a negative ROI.
There are benefits to having a payroll processor. But payroll processors only handle payroll. And given the massive number of roles involved in HR, that's a small drop in the bucket.
Your internal HR team will still have to handle tax remittance, benefits, workers' comp claims, and other HR administration responsibilities.
To calculate the ROI of a payroll processor, you can simply subtract their costs from the amount of time you spend on payroll. Again, if you automate already, you're probably going to hit a negative ROI.
Calculating PEO Savings
PEOs also handle payroll functions. So you already natively capture any positive ROI savings provided by payroll processors. But, that's only a small fraction of a PEOs overall job.
Even when it comes to payroll, PEOs give you more reach. A reputable PEO will also provide payroll tax remittance and access to best-in-class HR software that combines hiring, onboarding, reporting, benefits enrollment, and time-keeping.
PEOs provide self-service portals for employees and back-end portals for business owners, allowing both to change enrollment information, print paystubs, and do all of the other things that are necessary to create a fluid, transparent, and holistic payroll ecosystem.
When it comes to compliance, PEOs provide end-to-end compliance across your HR framework. This includes:
- OSHA (penalties for non-compliance go up to $134,937 per violation)
- Workers' comp claims (the average cost of a workers' comp claim is over $40,000)
- Fair Labor Standards Act (penalties for non-compliance go up to $118,826 per violation)
- Plenty of unique local, state, and federal needs (the average small business spends over $83,000 complying to these laws)
But, so far, we've only talked about payroll. PEOs also offer:
- Benefits and benefits administration (including access to better benefits at lower costs via economies-of-scale)
- Lower SUTA rates
- Pay-as-you-go workers' compensation premiums (with no upfront deposit!)
- Employee handbooks and posting notices
- Workers' compensation procurement, management, audits, return-to-work systems
It's easiest to think of PEOs as end-to-end HR administration partners rather than simply payroll processors. They cover a much broader scope of responsibilities and offer far more assistance across your HR pipeline. So, by nature, they provide better ROI.
Cost of Payroll Processor vs. PEO
This gets a little tricky. There's not a one-size-fits-all PEO. To help, let's cover the two primary "types" of PEOs.
There are massive, multi-office PEOs that serves clients across states. These PEOs often have fancy marketing campaigns, an extremely high overhead, and a swarm of employees. And, while national PEOs will undoubtedly help you tackle your HR administration responsibilities, you're likely overpaying for them. You'll find yourself surrounded by hidden fees (e.g., delivery fees, processing fees, etc.) and a higher overall pay scale. And you won't be getting any "extra" capabilities — outside of a fancy name, logo, and commercials.
These are small, locally-driven PEOs that operate in a single (or a few) offices in a localized area. They have a deep understanding of local laws and ordinances, and they offer the same benefits as a national PEO without all of the hidden fees. Since local PEOs don't have to pay for hundreds of offices, thousands of employees, and overblown marketing campaigns, they can pass those savings onto you.
PEOs vs. Payroll Processors
Payroll processors almost always charge a fixed price-per-employee-per-check fee plus basic account fees. Usually, the cost difference between a payroll processor and a local PEO is negligible. They're practically the same. But, that doesn't mean the ROI is the same.
Remember, PEOs offer far more than payroll, and each of those HR buckets results in a higher ROI for your business. The average ROI of a PEO is 27%. Much of these savings come from not needing to hire more HR representatives. Payroll processors do not handle enough work to lead to savings on that level.
National PEOs offer the same value as local PEOs, but they cost more than both payroll processors and local PEOs. You'll still get a better ROI working with a national PEO than a payroll processor. But local PEOs will offer a better ROI (simply due to lower costs and localization) than both payroll processors and national PEOs.
Are You Ready to Work With a Local, ROI-friendly PEO?
Here's the secret: PEOs offer better ROI than payroll processors. Even national PEOs (with their bloated budgets and high overhead) will outpace a payroll processor based on services alone. So, for most business owners, payroll processors are a low-cost, low-benefit solution. They have their place. But ROI-hungry business should look elsewhere.
Local PEOs offer the same services as national PEOs with the added benefits of lower costs and a better understanding of local compliance needs. Since local PEOs cost around the same as a payroll processor, you're essentially getting benefits, SUTA, workers' comp, and all the other HR administration needs free. It's a more ROI-friendly HR model.