of total payroll is the typical PEO cost — often offset by savings on benefits and compliance
lower employee turnover rate at businesses using a PEO vs those managing HR in-house
average annual salary for an in-house HR coordinator — the baseline cost PEOs replace
HR outsourcing for small businesses takes two forms. The first is a Human Resources Outsourcing arrangement (HRO), where specific HR functions — payroll, benefits administration, recruiting — are handled by a third-party vendor. The second is a Professional Employer Organization (PEO), where the vendor becomes a co-employer of the business’s workforce, taking on HR administration, compliance, and benefits purchasing on the business’s behalf. Most small businesses considering HR outsourcing should evaluate the PEO model first, because the cost and administrative benefits are substantially greater.
PEO vs HRO vs in-house HR: cost and coverage comparison
Annual HR cost estimate for a 15-person business at $55K average salary. PEO figure reflects 8% of payroll. In-house reflects part-time HR coordinator. HRO reflects payroll + benefits admin vendor costs.
The most underestimated PEO benefit is group health insurance purchasing power. A PEO pools hundreds of small businesses into a large group, accessing the same insurance rates as a 500-person company. Small businesses that purchase health insurance independently pay 20 to 30% more for equivalent coverage. For a 15-person business spending $120,000 per year on health premiums, a PEO can reduce that to $85,000 — a savings that often exceeds the PEO fee entirely.
What a PEO does and does not handle
| Function | PEO handles | Business retains | Notes |
|---|---|---|---|
| Payroll processing | ✓ | — | PEO files taxes under co-employer EIN |
| Benefits administration | ✓ | — | Group rates, not small-group rates |
| HR compliance / employment law | ✓ | — | Shared liability in most states |
| Workers’ comp insurance | ✓ | — | Pooled rates, lower for most SMBs |
| Hiring decisions | — | ✓ | Business controls all hiring/firing |
| Day-to-day management | — | ✓ | PEO does not manage employees |
| Business strategy | — | ✓ | PEO is an HR vendor, not an advisor |
Calculate your PEO cost
15
$55K
8%
PEO fee / yr
per employee / yr
per month
The leading PEOs for small business: what to compare
The PEO market has a handful of dominant players and dozens of regional providers. For small businesses, three platforms account for the majority of decisions: Justworks (transparent pricing, strong for knowledge-work businesses under 50 employees), Insperity (broader coverage, better for service and field-work businesses), and TriNet (strongest benefits offerings, best for businesses competing for talent in expensive markets).
Comparing PEOs on monthly fee alone misses the most important variable: the health insurance rates available through that PEO’s carrier network. A PEO with a slightly higher admin fee that saves $30,000 per year on health premiums is the better financial decision. Ask each PEO vendor for a sample benefits quote at the current employee count before making a cost comparison.
Most PEO contracts run 12 months with auto-renewal. Exit provisions matter: some PEOs charge a termination fee equal to 3 months of service fees. Verify that employee data (payroll history, benefit elections, I-9s) is fully portable on exit in a standard format before signing. Data portability is non-negotiable.
A fractional HR director can assess whether HR outsourcing, a PEO, or in-house HR makes the most sense for your employee count, state requirements, and growth trajectory.
