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June 2021

How to Exit a PEO

A professional employer organization (PEO) does exactly what the name implies. It’s a third-party organization whose role varies depending on the agreement. A company can hire a PEO to handle employee benefits, employment listings, hiring, exit interviews, payroll, and other aspects of HR. With another group managing those time-consuming tasks, management is free to focus on managing and critical business operations.

Why PEOs Are Appealing?

When you hire a PEO, it’s like leasing a portion of your business out. You have your business and your employees, but the third-party handles the benefits in exchange for a fee. The fee may be a certain amount of money per employee (PEPM) or a percentage of the total monthly payroll.

With the PEO taking over most of your benefits and payroll, payroll taxes are not your responsibility. They’re paid under the PEO’s tax ID. It’s up to that third-party PEO to pay them on time and make sure they’ve paid the right amount. If there are discrepancies, it’s not your problem if you’ve hired an IRS certified PEO.

Employee benefits are another reason a PEO is so appealing. Insurance costs keep rising, but a PEO can pool groups of employees under their service to get lower rates. That reduces your monthly costs and make your employees happy. These group rates are also possible with things like life insurance and short-term disability. Your employees are happy with the different protections offered to them.

The Downside to Using a PEO

While a PEO is appealing, you may find there are negatives. One of the biggest is that you’re often working with multiple people. It’s usual to get one dedicated representative. If you have two questions to ask, you’ll have to be transferred to one person for one of the questions and to someone else for the other.

When you’re paying based on your monthly payroll, there are often administrative fees added to the percentage of payroll, workers’ comp, and payroll taxes. You want to know exactly how much you’re paying, but the answer may change from month to month. Things like raises and extra paydays in longer months can increase the total payment.

Steps to Take if You Want to Exit Your PEO

First things first, timing is everything. There are two ways to go. One benefits your employees, and the other benefits you.

To benefit your employees, exit your PEO at the start of the tax year or at the beginning of a new quarter. January 1st is ideal for your employees. If you switch mid-year, your employees will get W-2s and other tax forms from both you and the PEO. It’s more of a hassle for them.

If you’d rather make it easier for your new accounting team, remember that you’ll be taking over paying quarterly employment taxes. It may be better for you to quit your PEO to match the quarterly tax deadlines. Quarterly taxes are due in April, June, September, and January. They’re always due on the 15th or the closest day after the 15th if there’s a holiday or weekend falling on the 15th.

Remember that the PEO has been paying all of the employment taxes under its tax ID. You need to start filing your own payroll taxes with your own Federal Employer Identification Number. You also need a State Tax ID number to start paying state taxes.

Make Sure You’re Following Your Contracted Terms

When you entered into an agreement with a PEO, you signed a contract. Make sure you’re meeting the terms of that agreement when you exit the PEO. You do not want the PEO to abruptly cut off your employees without notice and leave them without important benefits like dental or health insurance.

Once you’ve left your PEO, you’re free to find a better solution for your benefits package and payroll. Ask a third-party HR company to handle just one or two tasks for you. Human Resources Outsourcing allows you to maintain control and have your own HR department, but you can hire a third-party to take over just one or two tasks. You might want to have someone else getting group rates for insurance benefits, but you want to do your own payroll. That’s fine.

At Emphas!sHR, we have a number of ASO and HRO solutions. Let us show you how we can help you find the right services for your needs. Email us today to schedule a demo.