Key Takeaways
- The average business saves 20 to 25 percent on health insurance and up to 25 percent on workers' comp through PEO pooling.
- Payroll tax reduction strategies available through a PEO save approximately $1,100 per employee per year.
- A 20-employee company typically saves $66,000 to $74,000 per year, against a PEO fee of $24,000 to $40,000.
- The savings are largest for companies that offer health insurance and operate in industries with meaningful workers' comp costs.
Where the Savings Come From
A PEO saves money in three main areas. The first and largest is health insurance. By pooling your employees with thousands of others, the PEO negotiates large-group rates that small businesses cannot access on their own. The typical savings is 20 to 25 percent on health insurance premiums. If you spend $8,000 per employee per year, that is $1,600 to $2,000 per employee in annual savings.
The second area is workers' comp. PEOs pool workers' comp risk across many companies, which lowers your effective rate. High-risk industries like construction and roofing see the biggest savings, up to 25 percent. If you spend $3,000 per employee per year on workers' comp, a 20 percent savings is $600 per employee.
The third area is payroll taxes. PEOs can use tax credits and strategies that reduce payroll tax liability, saving approximately $1,100 per employee per year. This includes the FICA tip credit for restaurants, research and development credits, and work opportunity tax credits that most small businesses never claim because they do not know they qualify.
The Numbers for a 20-Employee Company
Let us look at a real example. A 20-employee company with an average salary of $50,000, spending $8,000 per employee on health insurance and $3,000 per employee on workers' comp, would see the following annual savings. Health insurance savings at 20 percent: $32,000. Workers' comp savings at 20 percent: $12,000. Payroll tax savings at $1,100 per employee: $22,000. Total savings: $66,000 per year.
Against that, the PEO fee for 20 employees ranges from $24,000 to $40,000 per year, depending on the pricing model. The net savings is $26,000 to $42,000 per year. That is money that goes directly to the bottom line, every year, for as long as you use the PEO.
Which Companies Save the Most
The savings are not equal across all companies. You save the most if you offer health insurance, because the insurance pooling benefit is the largest component. You also save more if you are in a high-risk industry with high workers' comp costs, like construction, roofing, staffing, or transportation. And you save more if you have not been claiming available tax credits, which is common for small businesses without a dedicated HR or finance team.
You save less if you do not offer health insurance, have very low workers' comp costs, or already have an efficient in-house HR operation. In those cases, the PEO fee may be close to or exceed the savings. This is why a cost-benefit analysis is essential before signing.
Savings Beyond the Dollar Numbers
Beyond the quantifiable savings, a PEO reduces costs that are harder to measure but just as real. The owner or office manager who currently handles HR tasks gets that time back to focus on revenue generating activities. The shared compliance liability reduces the risk of costly audits, fines, and lawsuits. Better benefits reduce turnover, and replacing an employee costs 20 to 30 percent of their salary.
Access to an HRIS platform eliminates the need for separate payroll, benefits, and HR software subscriptions. And the PEO handles annual compliance updates, poster requirements, and legal changes that would otherwise require an outside consultant or attorney. These intangible savings often exceed the quantifiable ones, especially for growing businesses.
Get Your Exact Savings Number
The only way to know exactly how much a PEO will save your company is to run the numbers with your actual costs. We do this for free as an independent PEO broker. You provide your employee count, payroll, health insurance costs, and workers' comp costs. We compare those against multiple PEO options and show you the net savings in dollars.
The analysis takes about 15 minutes to request and gives you the data you need to make the decision. If the numbers work, we help you choose and implement the right PEO. If they do not, we tell you straight, so you do not waste time or money on a solution that does not fit.
Frequently Asked Questions
How much can a PEO save on health insurance?
The average small business saves 20 to 25 percent on health insurance premiums through PEO pooling. For a company spending $8,000 per employee per year, that is $1,600 to $2,000 per employee in annual savings.
How much can a PEO save on workers' comp?
Savings vary by industry and risk level. High-risk industries like construction and roofing can save up to 25 percent. Lower-risk industries save less. The savings come from pooled risk and safety program credits.
Is there a way to know the savings before signing?
Yes. A free cost-benefit analysis compares your current costs against what multiple PEOs would charge and save. The analysis shows the net savings in dollars so you know exactly what to expect before making a decision.