What’s the Difference Between PEO vs Payroll Services?

When it comes to managing HR and payroll, navigating the options can feel overwhelming—especially for businesses looking to scale efficiently while staying compliant.

Should you choose a PEO that offers end-to-end HR solutions, or stick with a payroll service provider focused solely on payroll processing?

The stakes are high: selecting the wrong partner could lead to inefficiencies, compliance risks, or missed opportunities to optimize your back-office operations.

Fortunately, Deel brings global expertise to this decision, offering insights into the differences between PEOs vs payroll services, and when each approach makes sense for your business.

In this blog, we’ll break down these two popular options, explore their unique value propositions, and guide you toward solutions tailored to your growth needs. By the end, you’ll understand which partnership can help you streamline processes, reduce compliance headaches, and drive your business forward confidently.

What is a PEO?

A professional employer organization (PEO) is a company that helps businesses with human resources (HR) tasks. They enter into a co-employment relationship with an employer to provide essential services like payroll, employee benefits, risk management, and compliance support. By working with a PEO, companies can handle HR tasks more easily without needing to manage everything in-house.

What is a payroll service provider?

A payroll service provider (PSP) is a company that assists businesses with payroll and tax-related tasks. They usually don’t offer other HR services but can suggest additional providers for benefits and insurance if needed.

Employee relationships with a PEO vs PSP

Employee relationship with a PEO

In a co-employment situation with a PEO, there are three parties involved: the company, its employees, and the PEO. Here’s how it works:

• The client company keeps control of its main operations, products, and services. They hire and manage their employees, set their roles, and oversee daily activities.
• The employees work for the client company. They report to the company’s management and follow its rules
• The PEO offers HR support to the client company. For HR, payroll, and legal matters, the PEO is also considered an employer, sharing certain responsibilities

Employee relationships with a PSP

With a payroll service provider, there is no co-employment relationship—your company directly employs the workers. The PSP exclusively handles payroll-related tasks, including managing local, state, and federal tax filings, tax compliance documentation, wage calculations, deductions, and employee and employer tax payments.

Overall, engaging a payroll provider positively impacts the employee-company relationship through efficient and accurate payroll processing, compliance with tax laws, and enhanced data security. By providing reliable and transparent payroll services, companies can foster trust in the workplace and promote open communication to improve job satisfaction.

See also: Employee Misclassification Guide: Independent Contractor or Employee?

HR management and expertise with a PEO vs PSP

PEO HR management

As a co-employer, the PEO plays an important role in your organization by managing various HR responsibilities throughout the employee lifecycle, including but not limited to:

• Federal, state, and local benefits compliance
• Locally compliant employee training
• HR policy development
• Employee handbooks creation
• Employee onboarding and offboarding
• PTO management
• COBRA administration
• ACA compliance

It’s important for your PEO to have a team of HR specialists who are well-versed in the employment laws and regulations of your particular region. With this localized expertise, you can get the latest guidance to ensure your HR practices comply with the relevant labor laws and workplace regulations.

HR management with a PSP

With a payroll service provider, you retain full responsibility for handling HR-related tasks, such as employee onboarding, training, performance management, and compliance with labor laws. While most providers don’t directly offer employee benefits, some may provide support with benefits enrollment and deductions from employees’ paychecks.

Payroll and taxes with a PEO vs PSP

Payroll and taxes with a PEO

When you partner with a PEO, they take on the responsibility of processing payroll for your employees. PEO payroll management typically includes:

• Calculating employee wages and payroll taxes for each state
• Issuing paychecks and payslips
• Generating payroll reports
• Tax filing and preparation as per federal, state, and local requirements
• Ensuring workers’ compensation coverage

As co-employers, PEOs are responsible for your company’s payroll compliance.

A crucial part of their role involves staying up to date with ever-changing tax regulations and ensuring your employees are paid accurately and on time every pay period.

Working with a PEO can also provide your employees with more diverse payment options, such as getting paid in crypto or getting paid on demand.

Payroll and taxes with a PSP

A payroll service provider offers a specialized service focused solely on processing payroll for the client company.

Each client company has a separate payroll system and is responsible for providing the necessary information to the payroll provider.

A payroll service provider calculates payroll taxes based on the information provided by the client company and generates payroll tax reports. Some payroll service providers, like Deel US Payroll, also help you file federal, state, and local payroll taxes.

The provider focuses primarily on payroll compliance and may not offer the same comprehensive HR compliance support as PEOs.

Employee benefits with a PEO vs PSP

Employee benefits through a PEO

When you partner with a PEO, they handle benefits administration and associated compliance and administrative duties on your behalf.

The PEO will ensure the benefits package provided to your workforce complies with local statutory requirements, such as providing health insurance, dental and vision coverage, or retirement plans. They should also work with you to identify competitive benefits in the US and perks that can help attract and retain talent.

PEOs typically manage employee benefits enrollment, negotiate with insurance carriers, and provide legal notices whenever there are changes to the benefits plan. Additionally, PEOs can assist employees in understanding their benefits, support them during the enrollment process, and address frequently asked questions for you.

A PEO provider can often offer group benefits packages, pooling together employees from multiple client companies. This can lead to potential cost savings and access to benefits that smaller companies might not be able to secure on their own.

Employee benefits through a PSP

Payroll service providers primarily focus on payroll processing tasks and typically do not offer a comprehensive suite of employee benefits. In most cases. the payroll company can refer you to benefits provider partners to help set up and manage your benefits program. Alternatively, you should be able to integrate your own benefits providers with the payroll services.

With Deel, you can easily add localized benefits administration to your payroll service. The Deel platform has built-in benefits administration and HRIS features.

Entity registration requirements with a PEO vs PSP

Entity registration with a PSP

Before you can work with a PEO, you must register your business in every state where you employ workers. In the US, registration requirements vary from state to state based on the business entity type, location, and the nature of the business.

While these variations often complicate the registration process for business owners, a PEO can guide you through the following steps to ensure compliance:

• Establish and register your legal entity with the appropriate state authorities, following all necessary procedures and obtaining the required licenses and permits
• Obtain an employer identification number (EIN) from the IRS to facilitate tax filings and payroll processing
• Ensure compliance with all relevant federal, state, and local laws and regulations governing employment, taxation, and reporting
• Review local insurance requirements, as the PEO may provide certain insurance coverage, such as workers' compensation, as part of the co-employment arrangement

Entity registration with a PSP

A payroll service provider is there to help you manage your payroll, but they don’t handle the process of setting up or registering your company.

Instead, it’s your company’s responsibility to handle the registration with each state where you intend to run payroll, and ensure compliance with all relevant employment laws, tax regulations, and reporting requirements that apply to your industry and location.

Some companies, like Deel, offer employer of record (EOR) services that enable companies to hire employees without setting up legal entities themselves.

Employee claims with a PEO vs PSP

Employee claims with aPEO

PEOs typically offer assistance with employee claims management. They have HR professionals who can handle various types of claims, such as those related to workplace disputes, workers’ compensation, harassment, discrimination, or employee grievances.

They often mediate between the employer and employees to resolve claims in a fair and impartial manner, working towards a mutually satisfactory resolution. PEOs also handle all paperwork and maintain communication with employees and insurance companies.

Employee claims with a PSP

Unlike a PEO, a payroll service provider does not share liability for HR-related issues or employee claims. The client company retains full responsibility for handling and resolving employee issues, while payroll service providers focus primarily on payroll processing tasks. If any claims arise, your company will need to manage all paperwork and handle claims directly with the insurance provider and affected employees.

Workers’ compensation with a PEO vs PSP

Workers’ compensation with a PEO

A PEO can help you navigate workers’ compensation by providing coverage and handling risk management on your behalf, including compliance issues, paperwork, partnerships, and program certification requirements.

Some PEOs—specifically those that specialize in physical labor industries—have a designated workers’ comp team. If your business is in an industry with high rates of workers’ compensation incidents, seek a PEO with specialization.

Workers’ compensation with a PSP

Most payroll service providers don’t directly cover workers’ compensation. Instead, the responsibility falls on the client company, though many payroll service providers can refer you to workers’ compensation insurance partners or brokers to obtain suitable workers’ compensation coverage.

PEOs vs. other HR service providers

Some PEO responsibilities overlap with other HR service providers, complicating the decision-making process. Here’s a quick overview of how they compare.

Employee leasing companies

The main difference between a PEO and an employee leasing company (ELC) is their relationship with the employees.

Employee leasing companies provide a company with new workers, usually for temporary projects. After the leased employees complete the work for the company, they return to the ELC to find another short-term job.

A client company hires a PEO to handle HR tasks. Once a PEO and client company terminate their relationship, the employees stay with the client company, and their ties with the PEO cease. PEOs do not provide the company with a supply of new employees.

Temporary staffing services

Like an ELC, temporary staffing services provide client companies with additional staff. These organizations recruit workers for companies experiencing seasonal shortages, temporary skill shortages, or employee absenteeism.

Administrative services outsourcing (ASO)

Under an ASO arrangement, the client company retains full employer status and must report payroll taxes using its own employer identification number. Companies can also maintain their existing benefits and workers’ compensation providers with an ASO.

Human resources outsourcing (HRO)

With an HRO, the client company retains full administrative employer status. However, unlike PEOs and ASOs, HROs provide specific HR team tasks based on their experience and specialty. HROs are popular with larger companies that have developed internal departments and only require specific HR expertise.

Employer of record (EOR)

Like a PEO, an employer of record takes care of a company’s human resources while the company manages the employee’s day-to-day activities, schedules, and workloads. However, an EOR is the legal employer of your workforce, which means they assume complete responsibility for your full-time employees.

Explore Deel’s US payroll and PEO options

Every business needs payroll and HR experts to ensure their organization runs smoothly and compliantly. However, not all companies have the funds, expertise, or resources to employ a full-time, in-house team.

As an all-in-one payroll and HR solution for global teams, Deel simplifies employee management by bringing everything into one platform. From Deel PEO and international payroll to immigration support and performance management, Deel has everything you need to manage your workers in the US and beyond.

Book a 30-minute demo to see the platform in action.