Most small business owners don’t have the time or expertise to manage all aspects of human resources (HR). If you’re one of them, a professional employer organization (PEO) can add tremendous value. PEOs can help with routine administrative HR tasks and compliance requirements so you can focus on the strategic, revenue-building aspects of your business.

Benefits of a PEO for small business

Why should your small business use a PEO?

By sharing certain responsibilities with a PEO, you may be able to reduce some of the expenses and liabilities associated with being an employer.

Lower benefit costs

Because PEOs manage hundreds to thousands of employees, they can often offer access to high-quality benefits at competitive prices. Many PEO-sponsored plans rival those of Fortune 500® companies.

Workers’ compensation assistance

PEOs typically provide workers’ compensation coverage and may handle claims administration on your behalf. They can also advise you on how to implement industry-specific workplace safety measures that could lower your risk.

HR support and peace of mind

You can’t expect to be an expert on everything, but with a PEO’s dedicated team of HR experts in your corner, you’ll be better prepared for whatever comes your way. From compliance to employee relations to a pandemic, a PEO can help you make important and difficult employment-related decisions.

PEO services for small businesses

Although many employers first hear of a PEO as a solution for benefits and workers’ compensation coverage, they offer much more. Some of the integrated HR services that come with a co-employment arrangement today include:


PEOs assume the responsibility for processing payroll and those that are certified by the IRS may also report and remit payroll taxes on your behalf. If you don’t work with a certified PEO, you could be responsible for any unpaid taxes, late penalties or interest.

Employee handbooks

An employee handbook that clearly defines company policies and procedures can help improve your business operations and may prevent conflict. As part of their services, PEOs typically will produce and maintain the document for you.

Employee Investigations

If an employee files an internal complaint, PEOs are usually well-suited to handle the internal investigation. Their objectivity and expertise may help ensure that any inquiry conducted is both appropriate and lawful.

Benefits administration

In addition to providing Fortune 500-caliber benefits packages, PEOs typically handle plan enrollment, claims and employee questions. They also may help with Affordable Care Act paperwork, including annual health care information returns (IRS Forms 1094-C and 1095-C), Marketplace/Exchange notices and appeals, and the Form W-2 value of health coverage.


With a PEO, you may have access to risk and compliance experts who keep up with ongoing changes to employment regulations. They can help you develop strategies to address a full range of requirements impacting employers, including tax reporting requirements, unemployment insurance, workers’ compensation, the Affordable Care Act (ACA), leave and disability laws, and more.

Employee onboarding and training

PEOs that provide new hire training programs can help you make a good first impression with employees. Compliance and skill-based training programs, also typically offered by PEOs, serve to further employee development as they grow with your business.

Organizational philosophy

Workplace demographics are changing. PEOs with premium consulting services, such as ADP TotalSource®, can help you establish a mission, vision and culture that may meet employee expectations.

How a PEO can help small businesses grow

Because PEOs help reduce liability and increase efficiency, you may have more time to focus on the core competencies of your business and could be better poised for expansion. In fact, businesses that work with PEOs grow nearly 10% faster than their competitors and have as much as 14% less turnover, according to the National Association of Professional Employer Organizations (NAPEO).

Employee benefits at affordable costs

In many cases, a PEO can give you access to benefits packages that normally would be unaffordable for small businesses. PEO-sponsored plans may include:

  • Health insurance
  • Life insurance
  • Dental care
  • Vision care
  • Long- and short-term disability coverage
  • Retirement savings plans
  • Commuter benefits
  • Exclusive group discounts on products and services

Compliance support that may reduce risk

An employee claim or regulatory violation can strain resources, damage reputations and take focus away from activities that drive profits. But by partnering with a PEO, you can get help navigating complex employment issues and rest easier knowing that compliance experts are looking out for the health of your business.

Improved engagement and reduced turnover

Most PEO services begin after employees are hired, but some, like ADP TotalSource®, offer recruitment services and talent management. This type of support can help you make long-term plans for adapting to changes in workforce demographics. PEOs typically will also recommend customized benefits and services designed to attract and retain employees.

Choosing the right PEO for your small business

Not all PEOs provide the same level of service. To find the right one for your business:

  1. Look at PEOs with a strong financial, compliance and client retention record.
  2. Assess how well a PEO’s capabilities can meet the unique needs of your business and the preferences of your employees.
  3. Examine the depth and quality of the services offered by the PEO.
  4. Ask for references and talk to a PEO’s existing clients, particularly those who are in your industry.
  5. Check whether the PEO is IRS-certified and accredited by the Employer Services Assurance Corporation (ESAC) to ensure it meets the highest standards of excellence.

PEO for small business FAQs

See what other small business owners are asking about PEOs:

Is a PEO right for my company?

When evaluating PEOs, align your needs with the capabilities of a potential partner. Do your due diligence and ask plenty of questions and compare pricing and value just as you would for any other strategic business need.

What are the pros and cons of a PEO?

Each business is different, but the benefits of PEOs usually outweigh any negatives. Pros include access to competitive benefit packages, mitigation of certain employment-related risk, scalable technology and infrastructure, and employee-related cost stability. As for cons, PEOs sometimes confuse employees when they see their paychecks and benefits issued by another company. You, therefore, need to ensure that the PEO will help you explain the co-employment relationship.

Who should use a PEO?

Businesses that use PEOs span a wide range of industries from manufacturers and accounting firms to physicians and non-profit organizations, as well as people in various trades, such as plumbers, carpenters and mechanics. These organizations typically employ 10 to 1,000 employees, but some larger businesses also choose to work with a PEO. In either case, the owners and chief executive officers, chief operating officers, chief financial officers, office managers or HR directors (for those who have internal HR) tend to play an important role in the decision. Ultimately, whether a business partners with a PEO depends on what’s right for each organization.

What does PEO stand for?

PEO stands for professional employer organization. It’s also commonly known as a co-employment arrangement.

This article provides practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.

Kristen J. Appleman, Senior Vice President and General Manager, ADP TotalSource®

Kristen J. Appleman Senior Vice President and General Manager, ADP TotalSource® Kristen J. Appleman focuses on driving strategic growth and operational excellence for ADP TotalSource®.