Accounting technology / Glossary / PEO (professional employer organization)

What is a PEO (professional employer organization)?

Definition

A PEO, or professional employer organization, is a US company that co-employs another business's staff. The PEO takes on payroll, payroll tax filing, benefits and parts of HR compliance under its own employer identification, while the client business keeps control of hiring, pay decisions and day-to-day work. Pooling many small employers often gives access to larger-group health plans.

Also calledprofessional employer organisationco-employmentCPEO

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Model: Co-employment
Region: United States
Main draw: Pooled benefits and payroll tax

How a PEO works

The client signs a co-employment agreement that divides employer responsibilities. The PEO typically reports wages and pays payroll taxes under its own federal employer identification number, sponsors health, dental and retirement plans for all its client companies together, and handles workers' compensation and some compliance work. The client remains responsible for the business and directs the employees. The PEO bills the client for gross wages, taxes and benefits plus a fee, either per employee or as a percentage of payroll, and the client books it as payroll cost. The IRS certifies PEOs that meet its requirements as Certified Professional Employer Organizations. Rippling offers a PEO as an optional layer on its payroll platform, and Deel runs a US PEO for companies that also hire abroad.

Common questions

What is the difference between a PEO and an employer of record?+

A PEO co-employs staff of a US company that has its own entity and shares employer duties with it. An employer of record is the sole legal employer, often in a country where the client has no entity.

What does a PEO cost?+

PEOs charge either a fee per employee per month or a percentage of total payroll, on top of the wages, taxes and benefit premiums they pass through.

Can a company leave a PEO?+

Yes. It then takes payroll, tax filing and benefits back under its own registrations, which needs planning around benefit plan renewals and payroll tax accounts.