PEO Billing Guide - employersresource.com · PEO companies allow entrepreneurs to focus on growing their business by removing the administrative burdens of having employees, while

T h e I n t e r n a l W o r k i n g s o f P r o f e s s i o n a l E m p l o y e r O r g a n i z a t i o n s ’ B i l l i n g a n d P r o p o s a l s

THE ANATOMY OF A PEO INVOICE

EMPLOYERSRESOURCE.COM

Welcome

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Hi there! Thanks for checking out this guide. If you’re a CEO, CFO, controller, general manager,

owner, or any other business leader considering a partnership with a PEO, it’s important that you

understand what the numbers on that proposal and invoice represent. This guide will help you

make sense of the costs, and make informed decisions when selecting a PEO.

Who doesn’t like to know how something's made? It’s fascinating to get a behind the curtain look at

a process, learn about the inner workings. Well, today that’s what you’re going to get. We’re going

to give you an inside look at the inner workings of the PEO invoicing world.

Our National Manager of Underwriting, Bob Henbest, has been in the PEO industry for 19+ years,

and in underwriting specifically for the past 16 years. It is safe to say that only a handful of people

around the country know PEO billing as well as this guy. You are lucky to have him as your tour

guide on this journey you are about to take. We have worked closely with him and others from our

organization and the industry to put together this resource.

What the parts of a PEO invoice are and what they mean.

Different billing approaches PEO companies take.

Costs on the PEO invoice that you’re already paying for.

How PEO companies calculate their admin fees.

Additional costs to be aware of on PEO invoices and proposals.

Learning to compare PEO invoices in different formats.

Tips on comparing PEO services.

And many other insider tips.

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Our hope is that this guide will give you the tools necessary to make a better decision for your

business as it relates to selecting a PEO partner.

This is your backstage pass. Now, go take a look!

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What is a PEO?

Here’s a crash course. PEO companies allow entrepreneurs to focus on growing their business

by removing the administrative burdens of having employees, while reducing their employer-

related liability by ensuring the business is compliant with the many labor, employment,

compensation, safety, and tax laws. This typically looks like relief of business costs,

administrative burdens, and compliance risk in these four main areas:

Before we go any further, if you don’t know what a PEO is and what they do, you’re reading the wrong eBook!

Get the right one HERE.

HR and compliance.

Payroll and tax.

Employee benefits.

Workers’ comp and safety.

Some PEOs provide detailed invoices that break out costs related to all areas, rates, and exact

numbers that create the final invoice for their services. Some do not.


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The Anatomy of a PEO Invoice

PEO services vary from company to company.

It is not a surprise, then, that the way they

charge for their services vary, as well.

Do they offer a PDP program for workers'

comp? EPLI or ADR? Are all HR services

included? What about software? There are a

lot of variables...

In order for us to breakdown how PEOs bill

for their services, we will examine them from

three different viewpoints:

1. What are the various parts of an invoice? 2. What is being calculated and how? 3. What are you actually being charged for?



What’s in a PEO Invoice?

Let’s break this down. It’s important to understand that there are items included in a PEO invoice

or proposal that you are already (or should already) be paying. PEOs include these items because

they play a role in the total amounts of funds that pass-through the PEO while you are using

their services.

Did you catch that? It’s important. There are funds that pass-through your PEO that will be

included in your invoice that are “costs” related to having employees that you are already paying.

Got it? Okay, our first element is what those “pass-through costs typically consist of.

Shopping for the right PEO for your business? Learn the 10 essential questions you should ask during the process here.


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These pre-existing statutory expenses are often referred to as “pass-through” costs in a PEO invoice. Here are some common examples of these pass-through costs.

Statutory and "Pass-Through" Costs

Federal Insurance Contributions Act (FICA)

Employers are required to both withhold social security taxes from their employees, and

pay a matching percentage contribution. This matching amount is an obligation as an

employer known as FICA. This amount is 6.2% of the employee’s wages, up to a wage cap of

$117,000 per employee.

You have two things you must do related to FICA:

1) Withhold and send the amounts for your employees to the government.

2) Pay your matching share as the employer.

It is important to know that your PEO invoice or proposal will only show the amount for

your portion of FICA. This is the “pass-through” amount related to FICA.

The PEO will calculate and withhold the employee’s portion automatically as they process

your payroll.

Medicare

Medicare is another statutory burden on employers that you are already required to

withhold from your employee’s wages and pay as an employer. Medicare is 1.45% from

your employee and 1.45% from you. Your portion of the Medicare tax obligation will be

shown on the PEO quote or proposal as a “pass-through” amount collected for you by the

PEO and remitted to the government.



Federal Unemployment Taxes (FUTA)

PEO invoices will also include a pass-

through charge for Federal

Unemployment Taxes (FUTA). Amounts

shown for FUTA will reflect a rate that

is federally set. For example, currently

FUTA rates are at .6%. The PEO is

responsible for depositing the FUTA

payments and filing the Form 940 as

your PEO partner.


State Unemployment Taxes (SUTA)

State unemployment taxes vary by state.

The PEO invoice or proposal will show a

charge for SUTA.

Check out our SUTA map tool to see the SUTA rate for your state.

A Note About PEO SUTA Rates

Since PEOs have a co-employment arrangement with their clients, SUTA may be calculated and paid

by the PEO since they can be considered the employers of record in a given state. This relieves you

from the tedious and complex task of calculating and reporting SUTA. This is extremely valuable for

companies with employees in multiple states.

The history of unemployment claims on an employer will impact something called their “experience

tax rate.” This rate refers to a method for determining the contribution rates of individual employers

according to the factors specified in their state. Some states allow these taxes to be paid using the

experience rate of the PEO in lieu of the employer’s. This varies by state and PEO. There are also

circumstances where your PEO might handle the calculations and reporting but you maintain your

own experience rating.

Unemployment law varies by state, so always ask your PEO how they specifically handle SUTA for

their clients in your state.


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Workers’ Compensation Premium

Workers’ comp is administered by the state.

Most states require employers to have

workers’ comp coverage. Workers' comp is

billed as a percentage of payroll. The

percentage will vary depending on the type

of industry and the type of work a given

employee on your payroll is performing.

National Council on Compensation Insurance

(NCCI) is a national organization that

determines which classification codes apply

to employers and each state determines the

rates for each of these classifications.

For example: a clerical employee

may cost $0.25 per $100 while a

plumber might cost $10.35 per

$100 in your state. These codes

basically represent the risk

involved in providing coverage for

them and the likelihood of

experiencing a claim for that

employee.

For example: a $5.00

workers' comp charge

will be charged at the

rate of $5.00 for each

$100 of payroll in the

particular workers' comp

classification.

As you might expect, the more employees working

in a particular risk classification, the higher the

workers' comp insurance charges. When using a

PEO, employee time (hours worked) is reported to

the PEO for each workers' comp risk classification,

and is used as the payroll (remuneration) basis for

billing you for workers' comp premium.

Each unbundled PEO quote you receive will

identify the charges for workers’ compensation

insurance. Workers' comp charges are usually

based on a “dollar per hundred” charge.



You should expect to see workers' comp charges identified for each type of work you

identified on the proposal you receive from the PEO. Unlike many traditional workers’

compensation insurance plans, there are no up-front deposits required to secure

coverage. When using a PEO, workers' comp coverage is part of the program.

For “white collar” companies without significant workers' comp exposure, these costs

are usually a minor component of the overall price being quoted. However, for

companies with higher-risk jobs, workers' comp costs and/or savings are a significant

component of the overall quote.

Participating Discount Programs (PDP)

Some PEOs offer a PDP program that allows the client to access lower

monthly premium rates in exchange for sharing more in the cost of claims

and risk. This can look many different ways, but most commonly you’ll see

an out-of-pocket cost that the employer will agree to pay for claims up to a

certain point. Sometimes it specifies a certain flat fee per work comp

medical only claims. For example, $50 per incident only claim. Sometimes

you will see a flat fee per claim related to indemnity/death. For example,

$5,000 per indemnity/death claim. These programs are used by PEOs to

allow employers to put some “skin in the game” in exchange for lower

monthly premiums.


Workers’ Compensation Premium Continued...


Employer-Paid Benefits

Examples of employer related benefits costs you might see:

401k matching contributions.

Medical insurance premium contributions.

Dental insurance.

Tuition reimbursement.


Employer-paid benefits costs on the invoice are expressed as dollars per pay period, per enrolled plan subscriber. These are costs that are not deducted from your employees’ paychecks. They are costs paid for by the employer.

These will vary from employer to employer. But, if you have

any benefits that you do pay for for your employees, they will

be listed on the PEO invoice under this section.


Admin Fees for Professional Employer Services

Payroll processing.

Unemployment claims handling.

Worker’s compensation claims administration.

Employee handbook creation.

HR consulting.

And many other services.

1. A percentage of payroll. 2. A flat dollar amount per paycheck or employee. 3. A flat minimum amount per pay period.


Finally, these are the fees directly related to the services your PEO provides. These fees typically appear in one of three ways on your invoice:

Some PEOs will even show you your rate in a couple different formats from the list above. For

example, we provide proposals to prospects showing our costs in both per-check and percentage

format. These rates are set within the client service agreement between you and the PEO. We will

discuss a few different approaches to how these fees are shown on your invoice more in depth in

the next section.

PEO services include things like:

If you offer benefits that your employees are paying pre-tax, it’s important to ask whether your

PEO is billing their admin percentage against gross or adjusted wages. The difference can add up to

very big numbers over the course of year.

*See additional costs in The Fine Print section later in this guide to learn about other services that

may be charged by your PEO in addition to regular admin fees.


Types of Invoices

Now that we’ve looked at the

various parts of a PEO invoice, let’s

look at a couple different ways these

costs might be displayed on an

invoice, as well as some other

approaches that might make one

invoice different from the next.

In our experience, we have run into

two different approaches to how an

invoice is laid out. These two

different approaches fall into what is

commonly referred to as “bundled”

or “unbundled” billing.

Let’s take a look at how these two

approaches differ.



In a bundled invoice you will typically see just one or two lines that represent all the various pieces of

the PEO services. Bundled pricing usually takes the form of providing a single percentage value that

represents the total percentage of each paycheck going to the PEO to cover:

Bundled Pricing

Workers’ comp

FICA

FUTA

It is common to see this percentage rate as a before cut-off rate. This means that the rate will be

reduced by the respective percentages once applicable cut-off limits are reached for FICA, FUTA,

and SUTA.

Here’s an example of what a bundled invoice or proposal might look like...

As you can see from this example, the PEO in this situation does not break out the costs that make up

the percentage fee (pass-throughs, work comp, benefits, admin, etc.). You don’t know the percentage

that you are paying for their administrative services, or what actually makes up this percentage. All

you know is the total amounts that you will have to pay the PEO on a monthly basis for your given

payroll.

While this does appear to be a both simpler and easier to understand method, you need to be careful.

Over-simplifying in this manner can be used to hide service rates that should be lower, benefits

rates, or high admin rates. Only 2% of that $8,349.04 from that example may be going to the PEO for

their services, but you won’t know unless it’s broken out (disclosed).

SUTA

Employer-paid benefits

Admin fees



Unbundled pricing is where all of the costs are unbundled, or broken-out, so you can see exactly what

you are paying for in each area. You can see all the individual components making up that total

percentage cost or per-check rates.

Below is an example of unbundled pricing using a percentage billing method:

Unbundled Pricing

You can see the the cost and rates are the same on both examples, but it is much easier to see exactly what you are paying for in this unbundled format.



This is when a PEO applies an administrative service charge in the form of a percentage amount that

will be paid to the PEO from each payroll check they process. It’s important to note that this is

payment for the PEO services, and not the other pass-through costs, as described earlier in this

guide.

Percentage vs. Per-Check (flat rate)

The way a PEO charges for their services will be calculated in two common ways: the percentage method, and the per-check method.


The Percentage Method

/

Notes about this method: This method is not advantageous when you have a large amount of

commissions and bonuses paid out to your employees.

Example:

5 employees paid biweekly

$5769 gross wages per biweekly pay cycle.

PEO is charging 2% per payroll cycle for their services.

This means you would be paying approximately $115.38 biweekly for their services.


This is a fixed fee per-employee, per-paycheck processed.

Percentage vs. Per-Check (Flat Rate)


The Per-Check Method

Notes about this method: This method can be less favorable when you have lots of part-time

employees, unless your PEO gives you a different rate for part-time employees. You may end

up paying more using this method compared to the percentage method in some situations.

This method can be advantageous when you have a large fluctuation in payouts related to

commissions and bonuses from pay cycle to pay cycle.

Using the same examples from above, let’s say the next pay cycle your gross pay went up from

$5769 to $6345:

Example:

5 employees paid biweekly

$5769 gross wages per biweekly pay cycle.

PEO is charging $24.00 per-check per payroll cycle for their services.

This means you would be paying $120.00 biweekly for their services.

Using the percentage method of 2%, you would pay $126.90 for the same five employees.

Using the per-check method with a flat rate of $24 per-check, you would still pay $120.00

for the same five employees.

The advantages and disadvantages of each method will vary from company to company. Look at your annual gross wages. Calculate an average gross pay per pay cycle, then use this to test which model works best for your company, and which way you see the most savings (or, receive the greatest value).

/


The Annual Admin Per Employee Quote


It’s worth noting that, while you’re shopping for PEO companies, you will most often see quotes that are in “annual admin per employee, per year pricing models.”

For example, a sales consultant may quote you $850/ee/yr* for their services.

To convert to flat fee per payroll cycle, just divide this number by the number of your payroll

cycles to get your per payroll cycle costs. Example: $850/26 (for biweekly pay) = $32.69 cost per

employee, per pay cycle.

To convert this to percentage per pay cycle, take $850 and divide that by the number of payroll

cycles you have in a year. Then use that number to calculate the percentage that number

represents of your average pay per employee, per pay cycle.

Example: $850/26 (for biweekly pay) = $32.69 cost per employee, per pay cycle.

$32.69/$1153.8 (pay per employee, per pay cycle) = 2.83%.

*per employee, per year


The Fine Print

Lastly, let’s discuss a few small details to pay attention to that could have a big

impact on the amount you pay your PEO in a given year. You should always pay

attention to the fine print, but we’ll make it a little easier for you by telling you

what to watch out for.

1. What are the various parts of an invoice? 2. What is being calculated and how? 3. What are you actually being charged for?



Ask the sales representative what your setup fees will look like. Setup fees vary greatly from PEO to

PEO. Setup fees can be a large check you have to cut right after signing up. It’s important to know the

per employee setup fees you will be paying the PEO and factor it in while choosing between PEO

companies. Some sales teams are given complete freedom to set these fees at whatever they can get

away with and pocket the extra! It’s also a common trick to use setup fees to recoup dollars lost

because of low admin fees that were set as a first year rate to lock the client in and then raise their

rate each year.

Additional Costs


Setup Fees

Background Checks.

EPLI (for example: $0.75 per employee,

per week).

Pre-employment testing.

Additional cost per-claim, and flat fees for

claims over a certain dollar amount.

Recruiting.

Resume screening.

Interviewing.

Customized employee handbooks.

Performance appraisals.

Rewards and recognition programs.

Position descriptions.

Wellness programs and tools.

Drug-free workplace.

It’s very important to consider what will cost you extra in a given billing cycle with your PEO. Some PEOs will include the following services in their standard admin fees. Others will charge you extra using an à la carte service model, and you’ll pay for it when you need those extra services.

Training (employee and managerial).

W2 reprints.

Bank wires.

Unemployment claims processing.

1099 year-end processing.

Specialty reporting for job costing or certified

payroll.

Other specialty reporting.

Online access to payment information or reports.

HR software like HRIS.

Timekeeping software and hardware.

Software integrations and custom

imports/exports of data.

Payroll delivery (multiple check delivery

locations will usually incur a Fedex charge).

Possible Extra Cost Items:


Does the PEO Paying out caps vs. not paying out caps? Do they honor wage limits or caps? It has

finally become very rare. But, there are still some PEOs that do not recognize wage caps.

When negotiating with a PEO company, make sure you ask this question: “Do you honor wage

limits?” Some PEOs don’t and they simply won’t bring it up. We at Employers Resource do honor

wage limits that affect these key areas:

Caps vs. No Caps (Wage Limits)


SUI Refunds

Tax limitations.

Executive wage caps (Work comp premiums).

Some states’ disability insurance benefits.

Sometimes, a PEO will collect more SUI funds than are needed on behalf of the client. The state will

issue a refund to the PEO for what was overpaid. Most PEOs refund this money to the client, but not

all of them. Check the fine print here. It can be a significant amount of money at the end of a given

year.

Client Service Agreement

Make sure you take a close look at the Client

Service Agreement. This is what the PEO is

actually agreeing to do at the rate they have

quoted you. Make sure you understand the

terms. Look for any fees that might surface if you

choose to end the relationship, as well as any

other hidden fees or charges. Look for clear and

simple language.

Is it saturated with legal jargon and attempt to

confuse their clients? This can be a warning sign.


You get what you pay for, right? We know we should view pricing from the perspective of

total value. In reality, though, that’s not what

we always do, and sometimes we really pay for

it in the end.

Sometimes, two products or services might look the same, but they don’t cost the same.

One appears cheaper than the other, so you go

for the cheaper deal, right? We’ve all been

there. Well, we’ve also all experienced those

situations where that cheaper decision comes

back to haunt us later, costing far more in time

and money when everything's said and done.

Don’t be Penny Wise and Pound Foolish


Pennies Now

Value Later

Never make a purchase based on price alone— for anything.

That’s why it is so important to dive deeper

and gather all the facts before you make

commitments or sign any contracts.


We hope this guide has answered the questions you

had about PEO billing, and what exactly makes up a

PEO invoice. Now, you will be able to compare

invoices that are in different formats and actually

understand the numbers you’re looking at in order

to make better comparisons, and ultimately, better

decisions.

You will still run into some unique ways that PEOs

do their pricing. However, in general this guide will

help you understand the main concepts across the

board.

As you can see, there are also varying levels of

billing transparency. Make sure you know what

you’re actually paying for, and be careful to always

pay attention to the fine print!

Good luck! We truly hope you find a PEO that fits

your organization perfectly. They can be a

tremendous partner in helping your company grow,

make your life easier, and radically reduce the

complexity of running your business.

Closing Thoughts



Employers Resource is a PEO and we’d be more than happy to tell you how our invoices look.

Oh, In Case You’re Wondering...


Our invoice can be broken up into these sections:

Interested in receiving a custom proposal? You can request a quote right here.

Employment Taxes (pass-throughs).

Workers Compensation.

Employment Benefits.

Professional employer services. And we often show our clients the rate in

per-check and total percentage formats on the same proposal/invoice.

We also list out any additional costs outside of these four main areas in

clear bullet point format.

We believe that the dreams of American business leaders are our country’s most valuable resource. We exist so that you have more freedom to build these dreams and do more of what you love to do. We strive to have a deep understanding of your business and the unique challenges it faces related to having employees. Then, we make life easier for you and your employees by providing personalized and custom solutions to remove them. Our mission is to protect and set free the spirit of entrepreneurship - one dream, one business, and one paycheck at a time.


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PEO Billing Guide - employersresource.com · PEO companies allow entrepreneurs to focus on growing their business by removing the administrative burdens of having employees, while