The Hidden Costs of PEOs: 5 Financial Signs It’s Time to Unbundle
When you first signed up with your Professional Employer Organization (PEO), the value proposition was simple: “We handle the headaches; you run the business.” For a startup with three employees, that convenience is worth almost any price.
But as your business grows, the definition of “value” changes.
Many business owners assume that PEOs always offer cheaper health insurance and streamlined costs due to their “buying power.” However, our analysis at AccuPay often reveals a different reality. Once you cross the 10-20 employee threshold, the PEO model can shift from a cost-saver to a significant profit leak.
Is your “convenient” solution actually costing you thousands in unnecessary fees? Here are the 5 financial signs it’s time to audit your PEO relationship.
1. The “Pay Raise” Penalty (Percentage vs. Flat Fees)
This is the most common hidden cost in the PEO industry. Most PEOs charge an “Administrative Fee” calculated as a percentage of your total gross payroll (often between 2% and 12%).
The Problem: When you give your employees a raise, or when you hire high-salary talent, your PEO administrative fee goes up automatically.
Ask yourself: Did the administrative work of processing that paycheck actually increase because the employee got a raise? No. It takes the same effort to process a paycheck for $50,000 as it does for $150,000. Yet, under the percentage model, you are penalized for growth.
The AccuPay Difference: We believe in Pricing with Integrity. We typically charge on a “Per Employee Per Month” (PEPM) or per-check basis. If you give your team a raise, we don’t take a cut. Your administrative costs should reflect the work done, not the wages paid.
2. The SUTA Tax “Shell Game”
State Unemployment Tax (SUTA) is typically paid on the first several thousand dollars of wages (the “wage base”). In a PEO relationship, you report your wages under the PEO’s federal and state tax IDs.
The Problem: PEOs often charge clients a flat, blended SUTA rate that may be higher than what a stable business would pay independently. Because you’re pooled with thousands of other companies some with high turnover and frequent claims you might be subsidizing their unemployment costs.
If your business has low turnover, you’re likely overpaying. By establishing your own SUTA tax ID, you can earn your own experience rating, which often drops your rate significantly over time.
3. The “Buying Power” Myth on Health Insurance
The biggest fear keeping companies in PEOs is the belief that “we can’t get these insurance rates on our own.”
The Reality: While PEOs do have large pools, those pools are often rated on a “community” basis. This means your healthy workforce may be sharing the risk with companies that have higher claims data.
If your group is relatively healthy, the open market (small group or mid-market ACA plans) can be competitively priced. A skilled benefits broker can tailor a plan to your specific demographics rather than placing you in a one-size-fits-all master policy. We’ve seen clients save 15-20% on premiums simply by unbundling and shopping the market with their own risk profile.
4. Cash Flow Constraints (The Pre-Funding Trap)
Many PEOs require you to “pre-fund” your payroll. They’ll debit your bank account for the entire gross payroll, taxes, and fees days before employees are actually paid, holding that cash float to protect themselves.
The Problem: This hurts your working capital. You’re effectively giving the PEO an interest-free loan every pay period.
The Alternative: With modern HCM solutions like isolved, you maintain control of your cash flow. Tax impounds and direct deposits are timed closer to the actual check date, keeping your money in your operating account longer.
5. The “Opaque Invoice” (Lack of Data Transparency)
Can you look at your PEO invoice right now and tell exactly how much you paid for:
- Workers’ Comp premiums?
- State unemployment taxes?
- Administrative processing?
- Technology fees?
If the answer is “No, it’s just one big line item,” you have a visibility problem. Bundled pricing makes cost control difficult. Without granular data, you cannot audit your costs or shop for better rates. You’re flying blind.
Transitioning to an independent model provides clarity on these costs. You’ll see every dollar allocated to taxes, insurance, and administration, allowing you to make more informed financial decisions.
Conclusion: Do the Math
If you’re paying a percentage of payroll for administration, pre-funding your payroll, and have no visibility into your SUTA rates, you may be overpaying for “convenience.”
Unbundling doesn’t mean losing capabilities. With platforms like isolved People Cloud and partners like AccuPay, you can access the technology and support of a PEO without the inflated costs.
Is it time to see the real numbers? Don’t guess at the savings. Contact AccuPay today for a complimentary PEO Cost Analysis. We’ll review your current invoice, calculate your potential SUTA savings, and show you exactly what your bottom line looks like unbundled.