This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.
When you decided to start a business, it probably wasn’t the fun of keeping up with the latest employment regulations, tax issues, and OSHA requirements that lit your fire. Nevertheless, if you have even a single employee, you’re stuck with all that and more. You’re not alone and fortunately, where there is opportunity there are generally entrepreneurs with a solution. Enter the world of professional employer organizations (PEOs). For the folks who run these companies, HR is their passion.
In a nutshell, a PEO acts as a co-employer and assumes many of the HR administrative functions that frustrate small business owners. These can include:
My first-hand experience with PEOs came 15 years ago when I was running a vintage airplane ride business in San Diego. The business was, er, taking off, but the payroll and other compliance issues were dragging it – or at least, me down. Just figuring out which posters I was supposed to have on what walls was enough to bring on migraine. A company called Employers-Resource was my salvation.
As a co-employer, the PEO becomes the employer of record for tax purposes. They do all the payroll administration and reporting under their own tax identification numbers. Their fees run between 3% and 15% of payroll.
For some businesses, particularly new ones, an experienced PEO can offer big savings in Workers Compensation by virtue of their group rates. Group health insurance rates can be lower too, but it pays to check around. Some PEOs, due to their particular client base, may actually experience higher insurance rates.
But efore you wash your hands of all that annoying HR administrative stuff, it’s important to note that using a PEO doesn’t mean you’re entirely off the hook. If the PEO fails to pay the taxes for your employees, you’re still liable. Similarly, they are no get-out-of-jail-free cards for any violation of employee rights, wage, or similar disputes.
According to the National Association of Professional Employer Organizations, while the industry is relatively young – less than 30 years old – there are more than 700 PEOs across the U.S. So how do you pick a good one? Here are some questions to get you started on your search:
Naturally, you’ll also want to check a prospective PEO’s references with particular attention aimed at clients of a similar size and in similar industries.
The big players in the field include companies such as ADP Total Source, Administaff Inc., TriNet Group Inc., and Paychex. While they may offer the most comprehensive services, if you don’t need all of them, you may be paying for the extra overhead. Lots of smaller PEOs stand ready to take the HR burden off your shoulders, too.
You can start your search for a PEO on the Employer Services Assurance Corporation’s website.
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