Contact Customer Support  (888) 818-0707
EmpowerHR white logo
Table of Contents
A happy woman in the middle of a telephone call

What Is The Difference Between PEO And Payroll?

Share This:

As a smart business owner, you are constantly looking for ways to find efficiencies within your business operations to ensure you are mindful of costs and processes. In your research, you probably came across outsourcing as an option along with Professional Employer Organizations (PEOs) and Payroll Service Providers (PSPs) and think they are the same, but surprisingly that is not the case.

PEOs and PSPs are the most standard options used by different businesses out there but can interact with your business differently depending on your needs. In outsourcing options, one size does not fit all, so it’s critical to understand your needs first and align them to the right solutions provider.

Here are some of their differences in more detail to help you understand the nuances of the partnerships and identity which solution is best for your business:


With a PEO, you enter into a co-employment agreement. What is a co-employment agreement? It allows you to share some of the responsibilities and liabilities of being an employer by controlling some of the daily decisions while the weight of the liabilities are taken on by the PEO.

At the same time, your PEO provider will handle many of the duties that an internal HR team would, along with managing any risks. The difference with a PSP is that they will only handle the functions responsible for timekeeping, tax remittance, and paying workers for that period.

Question to ask: Based on the growth over the next 12-24 months, does utilizing a PEO help or hinder my business operations?


If you compare PEOs to a PSP, the PEO will likely be the more expensive choice depending on other services you have with your provider. The difference being that the PEO is multifaceted and very much involved in every part of your business.
Whether it’s compliance or training, a PEO is sure to hit the ground running when you reach out. With a PSP, you may need to hire other HR consultants to support the department as their duties start and stop with the administration of everything payroll. Depending on your arrangement, there could be additional cost savings in other areas of your operations as an offset to any additional costs

Question to ask: Do the costs create an advantage that I can use for my business size and model for today or is this better used in the future?

Compensation Insurance

One key difference between PEOs and PSPs is how workers’ compensation insurance is handled. PEOs provide workers’ compensation insurance when you enter an agreement with them. If you choose a PSP, you will be responsible for managing that liability. Now PSPs may be able to provide options based on the relationships they have with insurance agents; however, you will be responsible for managing the worker’s compensation as a whole.

Question to ask: Based on your workforce’s makeup, what is a better situation to navigate these areas and costs?

Contract and Termination

It’s common practice for PSPs not to require contracts to use their payroll services, whereas PEOs would generally require a contract for a specific period. On the other hand, a PSP is more flexible and would typically allow you to opt-out of your agreement at any time because the service is from pay period to pay period.

Another element to consider is paying state unemployment tax. If a PEO is responsible for maintaining and settling your state unemployment tax, depending on the state you reside in, you have to pay at their rate since they are the employer of record. Making a switch mid-contract may cause inconsistencies which may result in paying a more considerable amount.

Question to ask: Can your business benefit from a payroll provider’s flexibility, or does it create too much risk?

You are in the best position to know which option sounds right for your business from weighing the differences. Obtaining the facts relating to the employer of record, worker’s compensation, regulation, contracts, how the costs between a PEO and PSP can help make an informed decision.

Quotes serve as a straightforward way to help you compare financial costs quickly, and by looking at the pros and cons, you will also be aware of the implications of using any of them. As your business grows and evolves, so will your needs, so ensuring you evaluate your external partners every year will be key to having the best operational framework for your operations and employees.