Your payroll company deposits paychecks on time and files your quarterly taxes. But last month an employee asked about health insurance options, another one filed a workers’ comp claim, and you got a letter from the state about a new employment law you’ve never heard of. Your payroll provider can’t help with any of that.
That is the core PEO vs payroll company difference: a payroll company handles your pay runs, while a PEO (Professional Employer Organization) handles your entire HR function. This guide walks through what each one does, what each one costs, and how to know when you’ve outgrown payroll-only service.
What a Payroll Company Does
A payroll company (sometimes called a payroll service or payroll processor) does one job well: it makes sure your employees get paid correctly and your payroll taxes get filed on time.
What a typical payroll company handles:
- Calculating gross-to-net pay each pay period
- Withholding federal, state, and local income taxes
- Filing quarterly and annual payroll tax returns (Forms 941, 940, W-2s)
- Direct deposit processing
- New hire reporting to the state
- Basic employee self-service (viewing pay stubs online)
That is where the service stops. A payroll company does not provide health insurance, does not manage workers’ compensation claims, does not help you follow employment laws, and does not step in when an employee files a complaint. Those tasks land back on you.
Payroll companies typically charge $5 to $17 per employee per month plus a base fee of $20 to $150 per pay run. For a 15-person company running biweekly payroll, that works out to roughly $150 to $400 per month.
What a PEO Adds Beyond Payroll
A PEO does everything a payroll company does, plus a full range of HR services. For a complete list, see our breakdown of PEO services. Here is what a PEO adds on top of payroll:
- Health insurance, dental, vision, and 401(k) plans through pooled group rates (the PEO combines employees from many small businesses to negotiate rates you could not get on your own)
- Workers’ compensation insurance and claims management (coverage that pays if an employee gets hurt on the job)
- HR compliance support (help following federal, state, and local employment laws so you do not get fined)
- Benefits administration (enrolling employees in plans, handling changes, managing open enrollment)
- Unemployment claims management
- Employee handbook creation and policy guidance
- Hiring and termination support
The key difference is not just the service list. It is the co-employment model. When you work with a PEO, the PEO becomes the employer of record for tax and benefits purposes. You still manage your team day-to-day. The PEO handles the administrative and compliance side. For a detailed look at this relationship, see our guide to how a PEO works.
A PEO typically costs $40 to $160 per employee per month, or 2% to 12% of gross payroll. That is more than a payroll company, but you are getting significantly more services. For a breakdown of how PEOs charge, see our PEO pricing models guide.
PEO vs Payroll Company: Side‑by‑Side
| Feature | Payroll Company | PEO |
|---|---|---|
| Payroll processing | Yes | Yes |
| Tax filing (941, 940, W-2) | Yes | Yes |
| Health insurance access | No | Yes, pooled group rates |
| Workers' comp management | No | Yes, included |
| HR compliance support | No | Yes, ongoing monitoring |
| Benefits administration | No | Yes, enrollment and changes |
| Co-employment model | No | Yes, shared employer relationship |
| Typical cost (PEPM) | $5 to $17 plus base fee | $40 to $160 all-in |
A PEO covers all payroll company services plus additional HR, benefits, and compliance support.
Five Signs You’ve Outgrown Your Payroll Company
Most businesses start with a payroll company because payroll is the first HR task that gets too complicated to do by hand. But as your team grows, other HR needs pile up. Here are five signs it is time to consider a PEO.
1. You are spending hours on HR tasks that are not payroll. Tracking PTO, answering benefits questions, reviewing job postings, handling employee complaints. If HR admin takes more than 5 hours a week and you do not have a dedicated HR person, you are absorbing the cost in your own time. See how many HR hours you could reclaim with our time savings calculator.
2. You cannot offer competitive benefits. Small businesses pay 8% to 18% more for health insurance than large employers because insurers price small groups at higher risk (Kaiser Family Foundation, 2024). A PEO pools your employees with thousands of others to access large-group rates. If your best candidates are turning down offers because of weak benefits, a PEO closes that gap.
3. You are worried about compliance. Employment law changes constantly. The DOL, EEOC, OSHA, and IRS each issue rules that affect how you hire, pay, and manage employees. About 33% of employers make payroll errors each year, and penalties add up fast (IRS, 2024). A PEO monitors these rules for you and flags what you need to do. For a deeper look at who handles what, read our guide to PEO responsibilities vs employer responsibilities.
4. Workers’ comp is getting expensive or complicated. If you are in construction, manufacturing, or another higher-risk industry, managing workers’ comp on your own means dealing with experience ratings, audits, and premium surprises. PEOs handle all of that and often get better rates through their pooled risk.
5. You are growing beyond 10 employees. NAPEO data shows that 230,000 businesses use a PEO, covering 4.5 million worksite employees. The typical PEO client has 5 to 150 employees. Once you cross 10 employees, compliance requirements (ACA reporting, FMLA eligibility, state-specific rules) multiply. A PEO absorbs that complexity.
If two or more of these apply to you, it is worth comparing your options. Use our PEO cost calculator to estimate what a PEO would cost for your team, and compare that to what you are paying now for payroll plus the HR gaps you are filling yourself.
What It Costs: Payroll Company vs PEO
The sticker price of a PEO is higher than a payroll company. But a straight cost comparison misses the point because you are not buying the same thing.
A payroll company for a 15-person team costs roughly $150 to $400 per month ($10 to $27 per employee). A PEO for the same team costs roughly $600 to $2,400 per month ($40 to $160 per employee).
But that PEO fee includes health insurance administration, workers’ comp, HR compliance, benefits enrollment, and more. If you priced those services individually, you would pay separately for:
- A standalone health insurance broker (commissions built into premiums)
- Workers’ comp insurance ($0.20 to $15 per $100 of payroll depending on industry)
- An HR consultant ($100 to $300 per hour for ad hoc help)
- Benefits administration software ($5 to $15 per employee per month)
- Employment law compliance monitoring (varies widely)
When you add it up, the PEO often costs less than buying each service separately. Businesses using a PEO see an average ROI of 27.2% (NAPEO/McBassi, 2019). You can model your own numbers with our PEO savings calculator.
For a full breakdown of PEO pricing, see our guide to how much a PEO costs.
When a Payroll Company Is Enough
A payroll company is the right fit when payroll is truly your only administrative need. That usually means:
- You have fewer than 5 to 10 employees
- Your team is W-2, same state, straightforward job classifications
- You already handle benefits through a separate broker or do not offer them yet
- You do not have significant workers’ comp exposure
- Your industry has minimal compliance requirements
If that describes your business, a payroll company gets the job done at a lower cost. But revisit the decision as you grow. Most businesses hit the ‘I need more than payroll’ moment somewhere between 10 and 25 employees.
The Bottom Line
A payroll company handles one thing: making sure your people get paid and your tax filings are correct. A PEO handles payroll plus benefits, workers’ comp, HR compliance, and more under a co-employment model.
If your biggest HR challenge is payroll accuracy, a payroll company is enough. If you are juggling benefits, compliance, workers’ comp, and employee management issues on top of payroll, a PEO gives you one partner to handle all of it. You can browse providers in our PEO directory to see which ones serve businesses like yours.
Request a free consultation through our brokerage team. They compare PEO providers for your specific situation. The process takes several business days and costs you nothing. PEO providers compensate our brokerage team directly.
