PEOs vs. PSPs: What are the Differences?

December 5, 2022
minute read

Both PEOs and PSPs are responsible for streamlining payroll processing, however, each follow their own unique formula.  

Once upon a time, payroll was calculated by hand, especially for smaller businesses. In the modern era, most companies utilize a digital method. Small business owners have the option to rely on a PSP, also known as a  payroll service provider, to get the job done.

PSP primarily focuses on a company’s payroll needs. or they could use a PEO, also known as a professional employer organization, to take over their payroll duties or services in regard to human resources.  

You want the best service for your business – choosing the right option is dependent on various factors, including:

  • Whether your company has an in-house HR team
  • If you’re in need of other services alongside payroll processing  
  • The size of your company  

With that said, don’t choose the type of service you would like to work with before understanding what either player can offer your business in the long run.


A Closer Look at a PEO

A professional employer organization provides payroll administration and compliance. With the help of a PEO, you’ll have access to health insurance, workers’ compensation, and similar business insurance plans.  

A PEO is considered to be a sizeable employer; it’s not quite as risky. Furthermore, this outsourcing firm is a less expensive option for insurers. When working alongside a PEO, technically speaking, they become the employer for your company.  

Keep in mind that you’re still in control of the hiring process, however, PEOs are responsible for paying your employees and supplying them with benefits.  

How it Works  

If you decide to hire a PEO, you will be signing a co-employment agreement, which grants the PEO control over the HR tasks you assigned them. Since they are a co-employer for your business, they file and repeal taxes under its EIN (employer identification number).  

Because you’re filing all taxes under your PEO’s EIN rather than your own, you’ll likely save SUTA (state unemployment) tax costs.  

Get to Know a PSP

A payroll service provider handles your business’ payroll processing, administrative needs, and tax agreements. A PSP pays employees in accordance with the schedule that you create. This payment plan includes the accurate deductions for your employee’s paychecks.  

Not only this, but PSPs can also pay, file, and even prepare your FUTA (federal unemployment) tax returns along with quarterly business tax returns. This is done so under your EIN. Additionally, they can file and furnish your W-2 and W-3 forms.  

A PSP can resolve any tax issues by directly communication with the IRS in place of your company.  

How a PSP Works

Upon hiring a payroll service provider, you will sign an agreement that states how much you’ll be paying the PSP every month and the services they’ll be providing you.  

Your PSP will have a representative who will serve as the primary source of support for any concerns involving payroll. If you use a PSP to pay your employees, they should contact you directly. After the fact, you will get in touch with your PSP on their behalf.  

A Final Breakdown

While PEOs and PSPs both manage your company’s payroll, they each take a different approach. Let’s break them down further.  


A PSP is concentrated on successfully processing your company’s payroll while ensuring your payroll tax responsibilities are met. A PEO can sponsor your business’ health insurance plans and provide large-employer plans.

In most cases, PSPs offer health insurance, however, PEOs tend to have better plans to work with.  

Contractual Obligations

Because a PEO oversees most of your HR needs, their rules also apply to you. These rules can save you a lot of valuable time, thanks to a PEOs slew of responsibilities.  

A PSP, on the other hand, has contractual changes that frequently take place. This is because a PSP is not your co-employer, unlike a PEO.  

Overall Cost  

Generally speaking, PEOs are more expensive than PSPs. PEOs can save you money if you utilize all of their services.  

Superior health insurance plans supplied by PEOs may cost you less than plans obtained by an insurance broker.

Every year, a PSP will most likely remain under the $200 mark annually per employee. That said, the fees do not come with cost-effective insurance plans, unlike PEOs.


The Risks  

There always seems to be a catch, right? If a PSP makes a compliance error, they are not legally responsible for them. In other words, if the PSP makes a mistake, they will fix it, however, you are the one who will have to deal with the repercussions, not the PSP.  

They serve as an additional layer of protection, but they aren’t entirely shielding you. Overall, a PSP can alleviate any compliance risks or concerns. As for PEOs, they’re well equipped to manage any risk factors and compliance.  

Considering they’re your co-employer; they’re also legally responsible for any errors that may occur. PEOs can address a wide range of issues because of their professional motivations – they are required to minimize the risks involved with your company, like a workers’ comp claim.  

They’re highly dependable and efficient.  

Which Payroll Service is the Best Option for You?  

Managing your payroll and other HR operations requires a strong force that can maintain its momentum long-term. PEOs allow you to incorporate different types of HR services into your contract, ultimately saving you time and money.  

Employee tasks and additional assignments will remain under your control.  If you plan on hiring a PEO, it’s recommended that you choose one that has been certified by the IRS or ESAC (Employer Services Assurance Corporation).  

On a side note, you’re not risking a loss of control over your company’s employees with either choice. PSPs may be the better option if you’re responsible for handling the majority of HR services. They can also provide you with payroll assistance.  

The final choice you make solely depends on your company’s individual needs.

Friday Helps Small Business Manage and Pay Their Team  

When it comes to managing, tracking, and paying your employees, additional help goes a long way. Friday is the simplest software created to help small businesses and freelancers track their team’s hours without any paperwork involved.  

Friday is an easy to use, yet powerful payroll and team management solution.  



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