The pricing model your PEO uses can swing your annual bill by thousands of dollars. Two businesses with the same headcount and the same PEO provider can pay very different amounts depending on whether they chose a flat per-employee fee or a percentage-of-payroll model.
Most PEO providers (Professional Employer Organizations) use one of these two pricing models. A few offer both. Understanding the difference puts you in a better position to compare quotes and spot the deal that actually costs less for your team. You can also estimate your costs upfront with our PEO cost calculator.
Two Models, One Key Question
Every PEO charges an administrative fee for handling your HR, payroll, and compliance. That fee covers the service itself. Health insurance premiums, workers' compensation, and payroll taxes are billed separately on top.
The admin fee is where the two models diverge:
- Flat per-employee fee. You pay a fixed dollar amount for each employee, every month. If an employee gets a raise, your PEO fee stays the same.
- Percentage of payroll. You pay a percentage of your total gross payroll each pay period. When payroll goes up (raises, overtime, bonuses), so does the PEO fee.
That single structural difference changes your math. Which model costs less depends on what your team looks like.
How Flat Per‑Employee Fees Work
With a flat fee, the PEO charges a set dollar amount per person per month. The typical range runs from $40 to $160 per employee per month, with most full-service PEOs falling between $100 and $150 (NAPEO/McBassi, 2019).
Your bill is simple to predict. Multiply the per-employee fee by your headcount. That number stays steady month to month, even when an employee earns overtime or receives a year-end bonus.
Example: A dental practice with 22 employees pays $130 per person per month. That is $2,860 per month in admin fees, or $34,320 per year. If the practice gives everyone a 5% raise in January, the PEO fee does not change.
This model rewards businesses that pay higher salaries, because the fee is the same whether an employee earns $35,000 or $120,000.
How Percentage‑of‑Payroll Pricing Works
With percentage pricing, the PEO charges a percentage of your total gross payroll each pay period. The typical range is 2% to 6%, with most PEOs quoting 3% to 5%.
Your bill moves with your payroll. Raises, overtime, commissions, and bonuses all push it higher. That means your costs are less predictable, especially during busy seasons or bonus periods.
Example: A home cleaning company with 30 employees and an average salary of $32,000 runs $960,000 in annual gross payroll. At 4%, the admin fee is $38,400 per year. But if overtime pushes payroll to $1.1 million during the summer, the annualized admin fee rises to $44,000.
This model tends to cost less for businesses with lower-paid hourly workforces, because the percentage is applied to a smaller payroll base.
Flat Fee vs. Percentage of Payroll: Key Differences
| Feature | Flat Per-Employee Fee | Percentage of Payroll |
|---|---|---|
| How it is calculated | Fixed dollar amount per employee per month | Percentage of total gross payroll per pay period |
| Typical range | $40 to $160 per employee per month | 2% to 6% of gross payroll |
| Cost predictability | High: same bill every month | Lower: fluctuates with payroll changes |
| Effect of raises and bonuses | No change to admin fee | Admin fee increases |
| Best fit | Teams with higher salaries or stable payroll | Teams with lower wages or seasonal staffing |
| Transparency | Easy to compare across providers | Harder to compare (depends on payroll assumptions) |
This table covers the admin fee only. Health insurance, workers' compensation, and payroll taxes are always separate regardless of which pricing model the PEO uses.
For a breakdown of what is included in the admin fee versus what is billed on top, see our guide to how PEOs actually work.
When Flat‑Fee Pricing Saves You More
Flat fees work in your favor when your average employee salary is higher. The math is straightforward: a flat fee of $130 per employee per month costs the same whether your team earns $40,000 or $100,000 per person.
Higher salaries, bigger gap. A 20-person tech consultancy paying an average of $95,000 per year runs $1.9 million in total payroll. Under a flat fee of $130 per employee per month, admin fees total $31,200 per year. Under a 4% percentage model, the same company would pay $76,000. That is a $44,800 difference.
Flat fees also help businesses where payroll fluctuates seasonally. Because the fee is fixed, a spike in overtime or commissions does not change what you owe the PEO.
If your team is mostly salaried professionals, ask PEO providers about flat-fee options. You can calculate your potential savings to see the difference for your specific case.
When Percentage Pricing Costs Less
Percentage pricing tends to favor businesses with lower average wages. When salaries are modest, 2% to 6% of payroll produces a smaller number than a flat $100 to $150 per person.
Lower wages, lower fees. A retail store with 25 employees earning an average of $28,000 runs $700,000 in annual payroll. At 4%, admin fees total $28,000 per year. A flat fee of $130 per employee per month would cost $39,000. That is $11,000 more.
Percentage pricing also works for businesses with high turnover. If employees come and go frequently, you pay based on actual payroll rather than a fixed per-head count.
One caution: if your payroll includes commission-heavy roles or regular overtime, percentage pricing amplifies those costs. Ask any provider for a breakdown of how bonuses and overtime factor into the quote.
Which PEO Pricing Model Fits Your Business?
The right model depends on your payroll profile. Here is a quick way to think through it:
The $55,000 threshold is not a hard cutoff. It is a rough midpoint where the two models tend to converge for most PEO providers. Below that, percentage pricing often produces a lower admin fee. Above it, flat fees usually win.
The real answer comes from comparing actual quotes. A PEO broker can pull proposals from multiple providers and run the numbers for your specific payroll. You can request a free consultation to see how both models play out for your team.
Watch for Bundled vs. Itemized Quotes
Not every PEO quote is structured the same way, which makes apples-to-apples comparisons harder than they should be.
Some PEOs bundle workers' comp and state unemployment taxes (SUTA) into their percentage quote. Others list them as separate line items. A quote that reads "8% of payroll" with workers' comp included may actually cost less than a "4% of payroll" quote with workers' comp billed separately at 2.8%.
Before you compare any two proposals, ask each provider for a line-by-line breakdown. You need to know exactly which costs are inside the admin fee and which ones sit on top.
Things to ask for:
- The admin fee (flat or percentage) by itself
- Workers' comp rate and how it is quoted
- Health insurance premium (group rate vs. pass-through)
- Setup and onboarding fees
- Any per-transaction charges (off-cycle payroll runs, garnishments, new-hire processing)
Businesses that work with a broker typically receive quotes 8% to 15% below what they would get negotiating directly (NAPEO, 2024). A broker also handles the breakdown comparison for you. You can browse PEO providers in our directory to start exploring your options.
The Bottom Line
Two pricing models dominate the PEO market: flat per-employee fees and percentage of payroll. Flat fees offer predictability and tend to save money for businesses with higher salaries. Percentage pricing can cost less for lower-wage teams but fluctuates with payroll changes.
The only way to know which model costs less for your business is to compare real quotes. Our brokerage team will pull proposals from multiple PEO providers and walk you through the numbers.
Request a Free Consultation
The process takes several business days and is completely free to you. PEO providers compensate our brokerage team directly, so there is no cost on your end. You can also estimate your time savings or calculate your PEO ROI before you start.
Sources
- NAPEO/McBassi & Company, "The ROI of Using a PEO," White Paper #7 (2019)
- NAPEO/McBassi & Company, "PEO Clients: Faster Growing, More Resilient Businesses" (2024)
- NAPEO, "PEO Clients: A Comprehensive Analysis" (October 2025)
- NAPEO, "New NAPEO Survey Shows Small and Mid-Sized Businesses Remain Optimistic" (2026)
- IRS, "Certified Professional Employer Organizations"
