The Payroll Percentage PEO Model for Small and Medium Businesses

Running a small to medium-sized business (SMB) is tough. As an owner, you have to think about growing your company while trying to manage day-to-day operations. One area that takes substantial time yet often gets overlooked is human resources (HR). Handling payroll, benefits, compliance, and other HR tasks pulls your attention away from revenue-generating activities.

A Professional Employer Organization (PEO) provides HR services so you can get back to taking your business to the next level. When you work with a PEO, you typically have payment options to choose from. In this article, we’ll explain the PEO percentage of payroll fee structure.

PEOs Charge a Percentage of Payroll for Bundled HR Services

PEOs offer a wide array of HR services, taking over the burden of HR management for small and mid-sized companies like yours. This includes:

  • Payroll administration
  • Health and retirement benefits
  • Compliance with labor regulations
  • Recruiting and hiring
  • Training and development
  • Workplace safety programs

Rather than nickel-and-dime clients by charging per service, PEOs can charge a single bundled fee. This fee is a percentage of the client’s total payroll. It covers all the HR services the PEO provides.

The payroll percentage fee generally ranges around 3-15%. The exact figure depends on:

  • Size of the company
  • Number of employees
  • Industry
  • Types of benefits offered
  • Level of risk and regulation

Larger companies with more employees tend to pay a lower percentage. High-risk industries like construction tend to pay a higher percentage due to increased workers’ compensation premiums.

The Percentage Fee Structure Simplifies HR Costs

Charging a single percentage of payroll to encompass all HR services provides multiple benefits:

1. It’s Simple

Business owners easily understand how this pricing model works. They already know the size of their payroll. A 3-15% fee applied to that total gives them a straightforward estimate of the PEO cost. There’s no mystery trying to decipher complex pricing schemes — it’s a simple percentage of a known quantity.

2. It’s Stable

Payroll is relatively stable and predictable for most companies. Therefore, the PEO fee also remains relatively fixed month to month. Sudden large fluctuations in the PEO price are unlikely, letting businesses confidently budget. The percentage may be adjusted at renewal based on changes in payroll or risk profile, but there are no surprise fees.

3. It Bundles Costs

Charging a single fee bundles all PEO services together into a convenient package and simplifies decision making. You don’t have to pick and choose HR options. The fee covers everything required for comprehensive HR support, making it easy to determine if the full package creates value compared to costs.

4. It Aligns Incentives

When PEOs charge a percentage of payroll, their incentives stay in step with their clients’ incentives. Both parties want to manage payroll and staff costs wisely. If the payroll costs rise dramatically, it hurts both the client and the PEO.

And similarly, the PEO’s revenue rises when client payroll rises, so PEOs have a vested interest in helping their clients succeed and grow. This shared motivation drives efficiency.

Percentage Fees Give Access to Quality Benefits

A major advantage of PEOs is access to high-quality employee benefits. PEOs can offer robust benefit plans at affordable rates due to their scale. Being part of a larger benefits pool of thousands of employees provides leverage for negotiating better deals with insurance carriers. Plus, PEOs get lower prices due to their HR expertise in benefit plan design.

These savings get passed on to clients through the bundled percentage fee. The fee allows smaller businesses to offer Fortune 500 benefits at an affordable cost by being part of the PEO’s benefits consortium.

PEO Fees Are Tax Deductible

PEO fees are tax-deductible business expenses, which helps make the services more affordable for owners. Contributing to employee benefits is already deductible, so rolling in expenses for HR services like payroll and hiring assistance is a big advantage.

Bundling all these services together into a single PEO fee designated as a business expense preserves the deductibility and allows tax savings that offset the overall PEO costs.

Partnering with a PEO Brings Peace of Mind

While every business differs, partnering with a PEO to outsource HR tasks to dedicated experts is an appealing option for many. And though the bundled percentage fee model might seem unusual at first, the simplicity and stability of the pricing are reassuring.

Perhaps most importantly, it frees owners like you from HR management so you can get back to why you started your company in the first place: focusing your talent and passion on running your business.

You can continue your research by learning about the other models PEOs use to charge for their services:

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