PEO vs. Payroll Software: Which Do You Actually Need?
Payroll software runs payroll. A PEO becomes your co-employer and takes over payroll, benefits, workers' comp, and HR compliance as a package. The right answer is mostly a function of headcount, states, and whether you offer health benefits.
The core difference
| Payroll software | PEO | |
|---|---|---|
| Cost | $40–$150/mo base + $6–$15 per employee | $40–$160 per employee/mo admin fee |
| Health benefits | You shop small-group market yourself | Pooled large-group rates, often 10–25% lower |
| Compliance liability | Yours | Shared — PEO carries payroll tax & much HR risk |
| Workers' comp | You buy your own policy, annual audit | Under PEO's master policy, pay-as-you-go |
| HR support | Knowledge base / add-on | Dedicated HR specialists included |
When payroll software is the right call
- Under ~8 employees and not offering health benefits yet
- Single state, low-risk industry, simple W-2 payroll
- You genuinely enjoy handling HR admin (someone out there does)
When the math flips to a PEO
- You offer (or need to offer) health insurance. This is the big one. Benefits pooling is where PEO savings usually exceed the entire admin fee.
- You hire in a second state. Registration, SUTA accounts, local leave laws — multi-state compliance costs either consultant fees or fines.
- You're 10+ employees and losing candidates over benefits. A PEO puts Fortune-500-grade plans on your offer letters.
- Workers' comp is expensive in your industry. PEO master policies often beat standalone rates and kill the year-end audit surprise.
The tipping point
Rule of thumb: at 10–15 employees with health benefits, or any headcount across 2+ states, get PEO quotes and run the total-cost comparison. Below that, stay on software. The comparison costs nothing and takes days, not weeks.
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