PEO Cost per Employee: How to Compare Quotes

A professional employer organization becomes your co-employer for certain purposes: it runs payroll, files payroll taxes, offers benefits through its group plans and often handles workers' compensation and HR support. Quotes generally come in one of two shapes:

• A flat fee per employee per month, which is easy to budget and doesn't grow when salaries rise.
• A percentage of gross payroll, which grows as pay grows and can make high-salary teams cost more.

Then ask what sits outside the fee: benefits premiums, workers' compensation, state unemployment tax handling, setup or onboarding charges, minimum monthly charges and termination terms. Two quotes with the same flat fee can differ by thousands of dollars a year once these are counted, which is why you need a worksheet.

Use one sheet with one column per provider, including your current setup as a baseline. Fill in the following rows for the same headcount and the same benefits level:

1. Administrative fee, converted to an annual figure.
2. Benefits premiums for the plan you'd actually offer, employer share only.
3. Workers' compensation cost as quoted for your job classes.
4. Payroll tax handling and any pass-through or service charges.
5. One-time setup, implementation and any exit fees.
6. Minimums, such as a minimum monthly bill or minimum headcount.
7. Total annual cost, and that total divided by headcount.

Divide by headcount at the end to get an all-in cost per employee. That's the number to compare. Ask each provider to confirm in writing what's included, since a verbal summary won't hold up when you're billed.

Use made-up numbers to see how the structure works. Say you have 25 employees and a provider quotes a flat $150 per employee per month. In this example that comes to $3,750 a month, or $45,000 a year, for the administrative fee alone. Suppose a second provider quotes 3 percent of a $2,000,000 annual payroll: the fee is $60,000, but the quote may include workers' compensation that the first quote leaves out.

The lesson is that neither is cheaper until benefits, insurance and taxes are on the same footing. Say the first quote adds $12,000 a year for a separate workers' compensation policy: the comparison then tightens. These figures are illustrations only. Replace every number with quotes for your own headcount, states and job classes, and ask an accountant or benefits broker to check the totals.

Ask questions that surface cost and control, not just features:

• Which of the quoted charges are fixed for the contract term, and which can change at renewal?
• What happens to our benefit plans, and our employees' deductible progress, if we leave?
• Who is the employer of record for which purposes, and what stays our legal responsibility?
• What are the notice period and fees for canceling?
• Which states do you handle payroll registration for, and how do you deal with multi-state employees?
• Who answers when payroll is wrong, and what's the escalation path?

Also ask for references from companies of a similar size and industry, and confirm the contract terms with an attorney if the commitment is significant.

A PEO earns its cost when the bundle replaces things you'd otherwise buy separately, such as benefits access, workers' compensation, compliance support and HR help, and when you don't have anyone to manage those. Payroll software suits companies that want to keep their own benefits arrangements and have someone in-house to handle compliance.

The PEO vs payroll software guide explains the switching points, and this payroll and PEO provider comparison puts specific products side by side. For total hiring cost across channels, use the cost per hire calculator, and for overseas hires see EOR cost by country. To judge whether headcount costs are reasonable for your revenue, review operations headcount ratio and revenue per employee.