What Exactly Is a PEO and How Can It Benefit Your Small Business?


It has probably only been recently that you have come across something called a PEO, and you may be wondering just what they are and how they can benefit your small business. The term stands for Professional Employer Organization which can be a strangely elusive phrase until you have a better understanding of the concept. Let’s take a brief look at what a PEO is and how it can benefit your business.

PEO Loosely Defined

While you might start thinking of a PEO as an outsourced service such as HR or Finance, that isn’t exactly what a Professional Employer Organization is. When you enter into a contract with a PEO, they become the employer and you are their client. Your employees, then, become their employees for the administration of such things as all those time-consuming HR duties, accounting, and so much more. You still maintain managerial control of your employees but all tax liabilities, for example, would then revert to the PEO. 

Think of them as an umbrella under which your small business can be protected from certain liabilities and responsibilities. They are legal in all states but in some states, they must be licensed such as in the State of Texas. Therefore, you might be operating under a PEO San Antonio umbrella of benefits. Some states require PEOs to be certified and others have no licensing or certification guidelines at all.

Main Benefits of a PEO

As we stated above, a PEO is an organization that has received a federal tax ID, and state tax IDs as well. From the time you contract their services, anything and everything that relates to state or federal tax falls under their umbrella. This means that your employees would be filling out their W-2 and W-4 forms under the PEO and not your company. Any tax issues would be dealt with between the government and the PEO. That’s an amazing benefit which anyone who has ever had to deal with all the legalese at tax time can tell you. It takes hours, days and even weeks away from other tasks they can be doing in the operation of their business.

In fact, when it comes to HR, just think about all these time-consuming tasks they will take over for you. These would include duties such as:

  • Recruitment
  • Administration of benefits
  • Administration of unemployment
  • Payroll
  • Workers’ compensation
  • Drug testing if required
  • Local, state, federal, and industry compliance
  • Administration of the Family and Medical Leave Act

And these are just some of the benefits but enough to tell you that this might be a path you want to pursue.

The Difference Between Outsourcing and a PEO

Once again, the main benefit of contracting a PEO is that they are taking on much of the responsibility and liability you would still maintain if you simply outsourced HR operations, for example. They are the ones with the state and federal tax IDs, and subsequently, they are the ones who bear the ultimate responsibility if there is an issue with compliance. When you outsource HR, you are still responsible for all those liabilities and responsibilities that are beyond time consuming. If you’ve ever had to fill out all the paperwork for a 401k, you’d understand what all that legal jargon can do to your almost nonexistent time.

So, although the PEO becomes the employer and your employees become their employees, you will not lose control of the day-to-day operations of your business or your managerial rights. It’s an interesting relationship you just may wish to explore.

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