What Is a PEO? An Employer Guide to What They Can & Can't Do

What Is a PEO? An Employer Guide to What They Can & Can’t Do

Operating a startup is complex. Founders and leadership teams juggle competing priorities, from seeking funding to managing the team to attending to an array of human resources, accounting, and administrative tasks.

Operating a business that employs workers in multiple states is even more complicated: If your business is incorporated in Delaware and you want to hire remote employees in Maine, Nevada, and Arizona, the HR, accounting, and admin tasks quadruple. You’ll need to register with relevant agencies in each state and fulfill state-specific payroll and insurance requirements.

Head spinning yet? If so, you might consider a professional employer organization (PEO). PEOs market themselves as a silver bullet for multi-state employers, making it easy for businesses to employ out-of-state workers and taking some of the human resources and accounting responsibilities off the founder’s plate.

Partnering with a PEO company, however, isn’t always the right answer. While a reliable PEO partner can provide these (and other) benefits, retaining a PEO can be expensive, negatively impact employee experience, and leave your business liable for the provider’s mistakes.

What’s more, depending on your state’s laws, PEOs may not be able to streamline administrative overhead as much as you’d like them to. Finding the right PEO for your needs—or determining if you should use one at all—depends on your business size, internal capacity, and specific needs.

What is a Professional Employer Organization? How Does a PEO Work?

A professional employer organization (PEO) is a company that provides accounting, compliance management, and human resources support to businesses. The PEO model creates economies of scale that are especially beneficial to small and medium-sized businesses.

PEOs partner with companies under a “co-employment agreement.” In this model, the PEO becomes the employer of record for its client company’s workforce, while the client company retains control of its workers’ core responsibilities, schedules, and salaries. This co-employment model creates a unique arrangement where responsibilities are shared between your business and the PEO.

This arrangement is sometimes referred to as employee leasing, though modern PEOs offer far more comprehensive services than traditional leasing companies.

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Essentially, it works like this:

Your PEO employs your workers. As an employer of record, your PEO employs your workers for you. Your PEO’s name will appear on your employee’s paychecks, and your PEO will assume responsibility for collecting W2s, running payroll, and administering benefits.
You manage your employees. Your company leases your workers from your PEO. While your PEO technically employs your workforce, you retain responsibility for day-to-day management and business decisions. While your staff are legally employed by the PEO, they remain worksite employees under your day-to-day management.

This employment arrangement allows businesses to focus on core operations while the PEO handles administration. Still, while modern PEO solutions have certainly evolved to address many common business challenges, it’s important to understand what they can and can’t do for your business.

Advantages and Benefits of a PEO for Your Company

PEO services support critical HR functions (like employee benefits administration and talent management) and accounting functions (like running payroll and withholding employment tax). Here’s a breakdown of what PEOs can do:

Employ workers on your behalf. Because PEOs employ workers on behalf of your business, partnering with a PEO can make it easier to hire out-of-state employees—you won’t need to worry about registering your business in every state where you have staff. Some PEOs also allow businesses to hire international workers.
Administer employee benefits. PEOs can provide and manage employee benefits and employee programs, including health insurance, unemployment insurance, workers’ compensation insurance, retirement plans, and Family Medical Leave Act provisions. PEOs can provide access to benefits that attract and retain top talent but might otherwise be too costly, including health insurance, retirement plans, and other employee perks.
Support recruiting and hiring processes. A PEO can handle the administrative aspects of hiring and onboarding new employees, and some also support recruitment efforts.
Process payroll. Payroll administration. A PEO can manage your company’s entire payroll process.
Withholding tax and unemployment insurance reporting. PEOs withhold social security and income taxes during the payroll process. In some states, withholding taxes and unemployment insurance can be filed under the PEO’s employer identification number (EIN).
Provide human resources support. A PEO can give you access to a human resources business partner (HRBP), who you can call with questions. An HRBP can advise on workplace issues and support compliance with health and safety standards and employment law.
Strategic HR Expertise. PEOs provide access to HR professionals who can advise on workforce planning, employee engagement strategies, HR administration, and compliance with complex labor laws—helping businesses scale efficiently.
Employee training resources. Some PEOs offer employee training programs and compliance education to help your workforce develop.

What a PEO Can’t Do for Businesses

A PEO’s scope of work is limited to specific accounting, human resources, and compliance responsibilities. Even within that defined scope, there are administrative tasks related to taxes and insurance that they can’t do. While they handle specific business functions and many employer responsibilities such as payroll, strategic decisions remain with you.

Therefore, a PEO cannot manage your employees. Your PEO’s name might be on your employee’s paycheck, but you’re still the boss. Promotion and termination decisions remain with you, as does the responsibility to allocate work and coach and inspire your team. While PEOs take on many administrative functions, certain employer responsibilities always remain with your business.

State-Specific PEO Challenges for Human Resources and Payroll

The most frequent and severe PEO challenges for both HR and payroll tend to come from state-specific limitations and requirements. For instance, in some states, a PEO can file payroll tax and employment tax for your business, but they can’t file sales tax or an owner’s personal income taxes.

Put differently, PEO limitations usually depend on the state you’re in because state laws vary on everything from insurance requirements to taxes to corporate regulations. Of course, that makes life immeasurably more difficult for companies operating in multiple states. Other examples of state-specific areas that organizations must address include:

Client-Reporting States. In states like California and New York, businesses must use their own EIN for taxes and unemployment insurance instead of relying on the PEO’s EIN.
Monopolistic States*. In North Dakota, Ohio, Wyoming, and Washington, businesses must purchase workers’ compensation insurance directly from the state rather than through a PEO.
Secretary of State Compliance. Businesses remain responsible for corporate compliance, such as Secretary of State filings and requirements, even when using a PEO.

Given these state-by-state limitations, a PEO can actually add rather than subtract complexity for multi-state employers.

*As of 2025, the four monopolistic states in the US are: North Dakota, Ohio, Wyoming, and Washington.

Who Can Use PEO Services? Who Can’t?

Technically, any company can use a PEO. Although individual PEOs may specialize in particular industries or business sizes, no rule prevents anything from very large-sized companies to small businesses from working with a PEO.

Why Small Business Owners Consider PEOs

That said, PEO services are generally considered valuable to small businesses with less than 50 employees, especially those with employees in multiple states. These organizations are large enough to have significant human resources and accounting obligations but may be too small to employ specialists in the relevant areas.

As we discuss in the following section, small businesses hit that sweet spot for PEOs, where the financial and opportunity costs of keeping everything in-house—tackled by either the founder/leaders or dedicated HR staff—typically don’t make sense. You’re either taking valuable time from decision-makers that are better used steering the organizational ship, or adding to fixed (labor) costs that small businesses usually can’t afford.

In short, small businesses often can’t justify the cost of a full-time HR department, making PEOs an attractive alternative.

How Much Does a PEO Cost?

PEOs typically use one of two pricing models:

Flat fee. Flat fee PEOs charge a fixed price per employee. Rates typically run between $900 and $1500 per employee per year. For instance, if you have 20 employees, and your PEO charges $1,200 per employee annually, your total cost—flat fee—would be $24,000 per year.
Percentage of overall payroll. PEOs that use this model often charge 3-10% of a company’s total annual payroll. As an example of this method, if your annual payroll is $500,000 and your PEO charges 5%, your total cost would be $25,000 per year.

In this light, it’s much easier to see which method is most cost-efficient for an organization and, just as importantly, identify when it’s time to start looking for alternative solutions.

Pros and Cons of Outsourcing to a PEO

PEOs are attractive to business owners because they can handle complex payroll functions and decrease administrative work related to employment—but they still have limitations and drawbacks. Here’s an overview of the pros and cons of working with a PEO.

Pros of PEOs for Employees and Employers

Employee benefits for a lower cost. Because PEOs serve as employers of record for their client companies’ workforces, they technically have many employees across multiple client organizations. A PEO can leverage a large organization’s buying power to secure better, more comprehensive benefits packages at a somewhat lower rate than those that a small business can secure. However, discounts are usually no more than 20%.
Access to support. Working with a PEO gives you access to a support system for human resources and payroll issues—and having a team of experienced HR and accounting professionals in your corner can increase your peace of mind.
Time and cost savings. PEO services can save you hours on human resources and administrative tasks every week. They can also allow you to quickly hire out-of-state workers, eliminating the need to apply for registration in another state, wait for approval, and obtain a registered agent. A PEO’s finance and outsourced HR services can also be cost-effective for some businesses—depending on your team size and specific needs, it might cost more to handle these tasks internally than to contract with a PEO.

Cons of PEOs

Decreased control. Working with a PEO requires businesses to adapt to the PEO’s established HR processes and benefits providers. You’ll have to work with the PEO’s benefits provider and may have less flexibility in the plans you can offer your staff. The PEO will also hold payroll and human resources information, making it more difficult for businesses to access critical data. Ultimately, administrative aspects such as benefits management are transferred to the PEO, which can be both an advantage and limitation.
Reactive, rather than proactive support. PEOs tout access to HRBPs whom you can call to ask questions or seek advice. But a PEO’s HRBP isn’t likely to give you a call to proactively let you know what you need to be thinking about. If you don’t know what questions to ask, compliance tasks can fall through the cracks—and you (not your PEO) will face the penalties.
Can be expensive—and you’ll likely outgrow it. The cost-benefit analysis for working with a PEO depends on your company’s size and growth stage. In-house approaches are usually cheaper, and larger companies can also save money by handling PEO responsibilities internally. If you do opt for a PEO when you’re small, you’ll likely outgrow it over time, and migrating off a PEO can cause you administrative expense and effort in the future.
Limited capabilities in certain states. A PEO’s capability to handle administrative tasks related to state taxes and mandatory insurance is not guaranteed—it’s dependent on the laws in your state. Client-reporting and monopolistic states limit a PEO’s ability to file taxes on your behalf and provide lower rates on mandatory insurance.
Potential Impact on Employee Experience. If employees’ paychecks list the PEO as their employer instead of your business name, they may feel disconnected from their employer. If not managed properly, this can affect morale or company culture. This can also complicate the employment relationship and confuse new hires about who they actually work for.
Compliance Risks with Non-Certified PEOs Partnering with non-certified or inexperienced PEOs can lead to errors in tax filings or failure to comply with state-specific regulations, which can leave your business liable for penalties.
You remain liable. PEOs can make mistakes, and your company remains liable for any compliance violations. The IRS can also hold your company accountable for your PEO’s tax filing errors. To reduce this risk, consult the National Professional Employer Organization (NAPEO) for a list of IRS-certified PEOs (or CPEOs). Working with a CPEO protects you from the CPEO’s filing mistakes.

What Are Certified PEOs?

Zeroing in on that last bullet point, understanding the differences between PEO types is crucial for making an informed decision. Since the most significant distinction is between certified and non-certified providers, it warrants a closer look and additional insights.

Some PEOs are certified by the IRS as Certified Professional Employer Organizations (CPEOs).
CPEOs assume sole liability for federal employment taxes, protecting your business from mistakes in tax filings.
Partnering with a CPEO reduces compliance risks and ensures adherence to federal regulations.
Organizations like the Employer Services Assurance Corporation provide accreditation for PEOs that meet high professional standards.
To find a CPEO, consult the National Association of Professional Employer Organizations (NAPEO).

Alternatives to a PEO Beyond HR Software

You don’t need to partner with a PEO or strictly rely on complex HR software to efficiently manage compliance, payroll, human resources, and employment obligations. Consider the following alternatives:

Keep it in-house. There’s no rule against going it alone. Handling your own employer obligations keeps you deeply involved in every aspect of your business. It also doesn’t come with an out-of-pocket expense—though you will spend time on it. Employment and tax laws are complicated, and mistakes can be costly. At the very least, you’ll probably want to engage a CPA to file your taxes, use payroll software, and consider paying for HR advice.
Use Mosey. Mosey is a one-of-a-kind compliance platform that automates manual compliance tasks, providing the time-saving and risk-reduction benefits of retaining a PEO for a fraction of the cost—all while keeping your data safely in-house. Our complete system for state compliance helps you stay on top of employment and tax requirements in all 50 states + DC and creates a single source of truth for all compliance-related account info.
Hire a consultant or retain fractional services. HR and legal consultants can help you navigate specific compliance challenges, bookkeepers can help with finances and payroll, and a fractional Chief People Officer can provide more hands-on HR support as you grow.
Staff up. As your business grows, compare the cost of accounting, compliance, and HR outsourcing to the cost of hiring experts to perform these functions in-house. When the cost of outsourcing exceeds the cost of hiring, it might be time to add to your team.

PEOs don’t cover all areas of compliance that can arise from employing someone in a particular state—so even if you do opt for a PEO, you may end up engaging some of these alternatives to complement the PEO’s services.

Master Multistate Compliance with Mosey

Mosey is a platform for employment and tax compliance. We automate the setup, provide tools to identify and manage ongoing compliance, alert you when requirements change, and provide a unified source of truth.

Moreover, Mosey is agnostic to the payroll provider or tax vendors you use, making it a good fit for scaling startups operating in many locations at once or planning to move from a PEO. Want to learn more? Schedule a demo and see what a difference Mosey can make for your business.

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