Is your startup evaluating a PEO vs payroll service?
In a startup, things move quickly. Today, you may have a dozen or so employees and a few contractors. By next quarter, it could be double or triple your current team.
Managing payroll, taxes, insurance and other elements of HR (hiring, training, etc.) make for a big task. Early on, many companies look for solutions and partnerships (outside of the company) to alleviate some of these tasks.
Two primary answers include:
- Professional Employer Organization (PEO)
- Payroll Services (or Payroll Administration)
PEO vs Payroll: Before You Choose? (4 Criteria to Consider)
As with many things in the business world, the answer depends on a number of factors. A few of the things to understand and consider include:
1. Trajectory and speed
Startups have multiple ways to grow. A sudden injection of funding usually means engineering must ramp up immediately. Pursuing growth marketing means building up the marketing/sales team to handle incoming leads and running experiments to continue growth. High sales volume may mean increased support burden, leading to more service reps.
Example: A SaaS company is close to their goals on the development roadmap (as caught up as you can be in the software world). But the company is experiencing high numbers of incoming leads, due to word of mouth product marketing.
Assessment: The company likely needs additional sales reps.
Potential solutions:
- A PEO handles the recruitment process as well as initial paperwork and payroll setup. Then, the employee(s) then report to the sales manager for training.
- You task a member of your team (either HR, operations person, or sales manager) to open up the new position. When you hire someone, for any department, alert your payroll admin provider to get everything in order.
2. Model
How you develop your products is important (for instance, a team that uses Agile). The leadership structure is important (would it be better for your management to hire directly or indirectly?) Will one department grow quickly while others stay the same?
As mentioned in the sales example, sometimes your team will need direct involvement in the hiring process. Good developers, for instance, are at a premium. If your head engineer doesn’t have input, it could lead to frustration in the workplace.
3. Urgency of need
Understanding the need and timeline are very important when choosing between PEO vs a payroll service. If you can’t keep up with the onslaught of new hire paperwork and regulation obligations, that makes a big difference.
4. Internal structure
What’s the current makeup of your team? How is that working for you? In the end, you’re building a company both internally and externally. You’ll want to feel comfortable with both.
Culture is a big part of the growth puzzle to many startups. A close-knit team is open and productive. Maybe having a slew of new employees that don’t technically work for you isn’t going to feel right.
What’s the Difference Between PEOs and Payroll Service Providers?
PEOs offer what’s called a “co-employment” arrangement, virtually outsourcing part or all of your labor force. Your employees technically work for the PEO and are then assigned to roles/tasks within your organization.
Payroll services, on the other hand, is where a business outsources the administration of payroll tasks with the staff officially working for your company.
Both of these solutions effectively take payroll “off of your plate,” so to speak. But there are a few distinct differences.
PEOs
PEOs take a step further into offloading some of the legal liabilities associated with human resource management.
With PEO:
- You set pay, hours, schedule, roles and responsibilities
- Typically, employees managed through the PEO work for said PEO, not your company (reducing liability)
- May handle recruitment, in addition to hiring
- Will not involve themselves with other financial aspects of the business
- Typically charge a percentage of total compensation (for the employees)
The big drawback: Your employees may experience a lack of pride in their work, since they aren’t technically employed at your company. While they’re not “temps” it still could cause issues.
Examples of PEO Services:
- Justworks: This is an example of both a payroll tool and a PEO service. Only the tool for those who want to keep employee’s “in-house” and a fully outsourced service is also available.
- Rippling: Rippling is a highly-rated PEO for fast growth startups, especially those wanting to offer health benefits to their team.
Payroll Service Partners
In a nutshell, they’re your employees and a payroll partner handles most or all of the paperwork.
Of course, not all providers offer the same services, but a few of the things you should look for include:
- Timely payroll with direct deposit or checks
- Online access for employee pay stubs, pay history and other information
- Track employees’ vacation, sick days and personal days
- Administer medical insurance, HSA, FSA, IRA, 401(k), and other pre-tax benefits
- Set up workers’ compensation plans
- Electronic filing of your State and Federal payroll tax documents including W-2 forms
- Tax reporting
- Filing new hire reports
- 1099 forms, for contractors
- Other payroll and bank reports
Examples of Payroll Services:
Gusto: Gusto is one of the most popular payroll tools for startups, small businesses and tech companies. It makes it easy to handle your own payroll and many accounting firms know how to use it, as well.
ADP: ADP offers the standard payroll functionality, but extends it a bit further into it’s “Talent” platform. A tool that helps manage recruitment and team performance once they’re onboard.
Biggest benefit of a Payroll Service
Many payroll compliance partners also provide additional financial services. For example, here at Pasquesi Partners, we offer a full range of accounting and advisory services—specifically for fast growing companies.In addition to clean payroll, we provide clean books, budgets, forecasts and even virtual CFO services for early stage startups. Tie in your payroll, sales, operations and accounting together to see a clear snapshot of your business. Take a look at our payroll services, or talk with one of our experts, to see how we can help.