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Edited by: Kimberlee Leonard
 and Reviewed: Kimberlee Leonard

What Is A PEO or Professional Employer Organization?

Author: | Nov 6, 2023

Editorial Note: We earn a commission from partner links on Go Sifter Advisor. Commissions do not affect our editors’ opinions or evaluations.

What is a PEO company, otherwise known as a “Professional Employer Organization?” If you are a small business owner who is doing everything for your company, including human resource tasks, then it could be the answer you are looking for. 

That’s because a PEO is full service outsourcing for HR services and contracts under the  co-employment status model with your business. One benefit of a PEO is that they handle human resource responsibilities like payroll so you have time and energy to lead your company.

What Is Co-Employment?

The model of co-employment is a relationship between a company and PEO that hold the same responsibilities for employment. The owner and leadership team oversee the main day-to-day workflows and managerial responsibilities. The company’s employees stay under the PEO as the employer of record, which uses its employer identification number (EIN) to file payroll and taxes. 

When looking to define PEO in a co-employment model the main focus is supporting employees with human resources related issues. The PEO works for the company’s staff as a co-employer for HR administrative duties. The business owner continues to have final say over employment and company-wide decisions while not in the minutiae of human resource tasks.

How Does PEO Work?

The benefits of a PEO is that it takes HR-related responsibilities off the plate of the business owner. Usually a company will approach a PEO to enter a co-employment contract. The PEO takes on employer-related duties such as benefits, payroll, and taxes. Collaborating with a PEO means having access to compliance experts that know the laws, compliance, and regulations related to human resources. This frees up leadership to drive their company’s future in the right direction and not have to wear all the hats of an in-house HR department.

What Does A PEO Provide?

What is a PEO company bringing to the table? A PEO takes on employer-related duties that can include training, compliance, payroll, and other human resource responsibilities. Beyond HR management, the benefits of a PEO are having experts on hand who are familiar with insurance plans, retirement plans, workers compensation, and many other services.

HR Management

A PEO is like having a human resources department just outside of your actual company. The professional employment organization addresses all the issues related to staff and employee HR needs. Typically a PEO will file taxes, process payroll, and take on other tasks the business owners and leadership do not have the time or knowhow to accomplish.

PEO Benefits Administration

Companies try to attract and retain talent by offering an employee benefits package while keeping plans affordable. The streamlined process that creates and manages an organization’s employee benefits is the benefits administration. A PEO brings not just personnel but software dedicated solely to benefits for your company.

Insurance Plans

One of the benefits employers like to offer to staff are insurance plans. Very few business owners know how to implement or oversee medical, dental, vision, and other insurance plans. Instead the professional employment organization manages all the details.

Section 125 Plans

Another name for this is the “Cafeteria Plan.” It is part of IRS code enabling employees to convert taxable benefits into nontaxable ones, like a cash salary. PEOs provide understanding for what benefits need to be deducted prior to taxes on an employee’s paycheck.

Payroll Administration And Processing

Paying your staff on time and correctly is essential. Having a PEO means that you can outsource the payroll duties and schedule to another organization to make sure every cent is accounted for on time. They sync calendars, delivery methods, and accounts. Employees receive their on time down to the penny.

State Unemployment Insurance

While federally mandated, unemployment insurance requirements regarding payment amounts and eligibility come down to what the state decides. For the majority of states, a PEO can work with a company to either fund unemployment benefits via taxes companies pay on their employee’s behalf. In other states, PEOs will be aware and arrange for the tax to be paid directly by the employees.

401(k) Retirement Plans

A PEO can work with a company’s employees on an individual basis to set up a 401(k) retirement plan. Employees contribute a portion of their wages to personal accounts in order to allocate money for retirement. The PEO ensures the funds are deducted from their paycheck and deposited directly into their 401(k) account. 


Employee’s have extended health coverage known as COBRA. This is even if they suddenly found ineligible for the plan provided by their employer. Professional employment organizations work with employers, insurance carries, or a combination to provide employees with COBRA coverage information upon initial enrollment.

Workers’ Compensation

Employees can get hurt or sick while on the job. PEO’s collaborate with their co-employer to provide insurance plans and coverage if someone on staff is injured or becomes ill. Having a professional employment organization manage workers’ compensation benefits also reduces the chances of the company facing a lawsuit brought against them by one of their employees.

Safety Programs (OSHA Compliance)

The Occupational Safety and Health Administration–otherwise known as OSHA–requires that employers maintain a level of safety and compliance at their place of business. A PEO will be able to keep up on the laws, regulations, and rules that are continuously being updated. The professional employment organization ensures the company is following up-to-date standards set by OSHA.

PEO Training and Development

Bringing on new employees can be time consuming for business owners to train. Partnering with a PEO allows the organization to train new employees and provide development opportunities to grow at your company. Lesson plans, professional development, and training schedules can all be overseen by the PEO.

PEO Recruiting And Outplacement Support 

Hiring new employees can be a long, arduous process. Letting the professional employment organizations take the reins helps when it comes to finding the right people for the open job. Outplacement support or career transition services, is a benefit provided to recently laid off staff that PEO can manage as well.

Government Compliance

All companies must follow the letter of the law. However, different industries have varying rules and regulations as set forth on both state and federal levels. Professional employment organizations are aware of the laws, as well as changes and updates that occur in real time, to keep their co-employers within legal limits of operation.

Tax Compliance

A PEO that manages a company’s payroll will usually take care of taxes as well. Staying compliant and up-to-date with tax compliance is crucial for a business to operate. Professional employment organizations can inform business owners of anything new related to taxes and their company in order to stay compliant.

How Could A PEO Benefit Your Business?

If you are a small business owner, chances are you do not have access to all the bells and whistles of a big corporation’s in-house HR department. Bringing on a PEO means that there are HR experts working for you at a rate you can afford. Payroll, compliance, and other human resource duties move from your to-do list. Companies with a PEO tend to retain employees at a higher rate and attract a better caliber of talent to their workforce.


What is a PEO company if not a partnering in time-management, human resources, and co-employment. Payroll, compliance, benefits taxes, and other HR responsibilities are handled by professional experts. That means you as the business owner still have control over where the company goes and what it does while not having to worry about the details of human resources.


Are there any downsides to working with a PEO?

Some of the potential PEO risks are tax issues, liability, delayed responses, and the possibilitiy of impersonal human resource services.

How do I choose the right PEO for my business?
Is a PEO right for my business?
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