3 Differences Between Payroll Service Providers and Professional Employer Organizations


So you decided to outsource your payroll, now what? A common decision business owners have is choosing a type of payroll outsourcing.  Two common types of providers are Payroll Service Providers and Professional Employer Organizations. Here is a brief breakdown of each:

Payroll Service Provider (PSP):  Provides payroll processing for the business and the business remains the employer of record.

Professional Employer Organization (PEO): Provides payroll processing with the PEO as the employer of record, also known as co-employment.  This is not to be confused with Employee Leasing. With a PEO the business is responsible for recruiting, hiring, and training even though the PEO is the employer of record.

1. Employer of Record

A professional employer organization is known for co-employment meaning that you, the employer, can outsource certain managerial tasks. The tasks include but are not limited to administration of employee benefits, workers’ compensation insurance, and payroll. One key thing here is that whatever the PEO uses for benefits and insurance, you must use too if you enter into a contract with a PEO. A Payroll Service Provider may have options for employee benefits and workers’ compensation insurance either in house or through strategic partnerships.  Last, when using a PEO you use their State Unemployment Tax Rate, which may be higher or lower than your rate as the employer of record.

2. Worker’s Compensation

Choosing to outsource your payroll with a Professional Employer Organization also means they will provide you with workers compensation insurance.

If you choose a Payroll Service Provider you will be responsible, as an employer, to be insured for Worker’s Compensation if your business meets the criteria of your state’s laws that would require you to have Workers’ Comp Insurance. PSP’s have options of their own for Worker’s Comp from partnerships to local insurance agents.

So what’s the difference between getting coverage between the two?  A PSP has more to offer when it comes to payment options and carriers. The first way is traditional Workers’ Comp which is putting a down payment on the coverage and making monthly payments. The second way is a pay-as-you-go program which allows you to pay it each pay period based off your actual payroll, the same way as a PEO charges.

3. Cost

Costs are a big deal to every business owner, so let’s get down to it. The cost of a PSP versus a PEO is hard to compare because there are so many pricing models for each type of provider. What can be said is that most PSP’s require no contract to use their payroll services, where as a PEO normally require a contract for a certain period of time. So let’s say you’re not happy with the PEO’s service, you’re going to face an early termination fee. A PSP is more flexible. Most PSP’s allow you to opt out at any time because the service is from pay period to pay period.   

One very important thing to keep in mind, cost-wise, is State Unemployment Tax (SUTA). When you have a PEO maintaining and paying your state unemployment tax you have to pay at their rate, since they are the employer of record. If you use a PSP and remain the employer of record, you can lower your SUTA rate significantly over time by controlling employee turnover using good hiring practices. So, you get control of your unemployment rate.


Choosing how to outsource your payroll is about making the right choice for your business. Knowing the facts pertaining to employer of record, worker’s compensation, and cost between a professional employer organization and a payroll service provider can help make that decision. There are so many different payroll situations out there that getting quotes from both can help you compare actual costs and benefits for each type.