Key Takeaways
- A PEO is worth it when the savings on health insurance, workers' comp, and payroll taxes exceed the PEO fee, which is the case for most businesses with 5 to 200 employees.
- 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.
- The intangible benefits, including shared compliance liability and HR support, often exceed the quantifiable savings.
Understanding the Cost
PEO fees are typically structured as either a percentage of total payroll (2 to 6 percent) or a flat per-employee-per-month fee ($40 to $160). The fee covers payroll processing, benefits administration, HR support, compliance management, and workers' comp. Some PEOs bundle workers' comp into the fee, while others itemize it separately.
For a 20-employee business with an average salary of $50,000, a PEO charging 4 percent of payroll would cost $40,000 per year, or $167 per employee per month. A PEO charging a flat $100 per employee per month would cost $24,000 per year. The fee structure matters, and you should compare both models to see which is more cost-effective for your payroll level.
Quantifying the Savings
The savings come from three main sources. First, health insurance savings from pooling: typically 20 to 25 percent for small businesses. If you spend $8,000 per employee per year on health insurance, that is $1,600 to $2,000 per employee in annual savings. For 20 employees, that is $32,000 to $40,000 per year.
Second, workers' comp savings from pooling: up to 25 percent for high-risk industries. If you spend $3,000 per employee per year on workers' comp, a 20 percent savings is $600 per employee, or $12,000 per year for 20 employees. Third, payroll tax reduction strategies: approximately $1,100 per employee per year, or $22,000 per year for 20 employees. Total quantifiable savings: $66,000 to $74,000 per year for a 20-employee business.
Calculating the Net ROI
Using the example above, a 20-employee business paying $24,000 to $40,000 per year for a PEO and saving $66,000 to $74,000 per year has a net savings of $26,000 to $50,000 per year. The ROI is clearly positive. This is the typical result for businesses with 10 to 200 employees that offer health insurance and operate in industries with meaningful workers' comp costs.
The ROI is less compelling for very small businesses (under 5 employees) that do not offer health insurance, because the insurance savings are the largest component. It is also less compelling for very large businesses (over 500 employees) that can negotiate good insurance rates independently. The sweet spot is small and mid-sized businesses that are large enough to feel the cost of benefits but too small to negotiate large-group rates.
The Intangible Benefits
Beyond the quantifiable savings, a PEO provides benefits that are harder to put a number on but are often more valuable. Shared compliance liability means the PEO is on the hook for employment compliance, reducing your direct exposure to audits and claims. HR support means you have professional guidance for hiring, termination, and employee relations decisions without hiring a full-time HR person.
Access to Fortune 500-level benefits helps you attract and retain talent in a competitive labor market. The PEO's HRIS platform provides self-service tools for employees that reduce administrative burden. And the PEO handles annual compliance updates, poster requirements, and legal changes that would otherwise require an outside consultant or attorney. These benefits compound as your business grows.
How to Evaluate for Your Business
The best way to evaluate whether a PEO is worth it is to get a free cost-benefit analysis. Provide your current employee count, payroll, health insurance costs, and workers' comp costs, and compare them against what a PEO would charge and save. The analysis should show the net cost or savings, not just the gross fee.
If the analysis shows net savings, the PEO is worth it on financial grounds alone. If the analysis shows a small net cost, consider the intangible benefits: shared liability, HR support, and talent retention. For most businesses with 10 to 200 employees that offer health insurance, the analysis shows clear net savings, making the decision straightforward.
Frequently Asked Questions
At what size does a PEO start making sense?
A PEO typically starts making financial sense at 5 to 10 employees, especially if you offer or want to offer health insurance. The health insurance savings from pooling are the largest component, so businesses that do not offer insurance see less benefit. The sweet spot is 10 to 200 employees.
What if the PEO costs more than I save?
For most businesses with 10 to 200 employees that offer health insurance, the savings exceed the fee. If the analysis shows a small net cost, consider the intangible benefits: shared compliance liability, HR support, better benefits for talent retention, and reduced administrative burden. These often justify a small net cost, especially for growing businesses.
How do I get a cost-benefit analysis?
A free cost-benefit analysis is available through our PEO brokerage service. We compare your current costs against multiple PEO options and show you the net savings or cost. The analysis takes about 15 minutes to request and provides the numbers you need to make an informed decision.