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Administrative Services Outsourcing (ASO) vs. Professional Employer Organization (PEO) Cost Comparison

One significant disadvantage with the Professional Employer Organization (PEO) arrangement (see also PEO Disadvantages) is understanding your costs. Typically, a PEO will present their pricing in one of two formats, a bundled rate including employer portion of payroll taxes (SUTA, FUTA and FICA), workers' compensation, and admininistrative fees, or a flat fee per employee for administrative fees plus a bundled rate including the employer portion of payroll taxes and workers' compensation.

Most businesses in a PEO relationship today admit they do not have a clear understanding of the costs charged by their PEO. Typically, this is due to the rate being bundled and although the customer may know the total overall cost charged by the PEO, they do not know what they are paying for payroll taxes, workers' compensation, or in most cases administrative fees specifically.

Professional Employer Organization (PEO) Administrative Fees

In the PEO arrangement, administrative fees can range from to 2% to 6% of gross wages and the rate may vary based on the number of services you use and what industry you are in; industries with lower wage employees may pay a higher percentage of gross wages. PEO's also have to factor in their workers' compensation costs that can range from 1% to 15% of gross wages for each employee based on their individual workers' compensation classification; office/clerical employees are typically at the low end with manufacturing or construction classifications being much higher. Typically, administrative fees charged by PEO's range from $1500 to $2500 per employee per year on average.

Administrative Services Organization (ASO) Administrative Fees

In the ASO arrangement, fees are typically charged as a per transaction or per employee flat rate and you pay only for services purchased. Unlike the PEO arrangement where the bundled rate includes the employer portion of payroll taxes the ASO arrangement allows you to retain your own SUTA rate and although the ASO may manage these payments for you, you know what your exact costs are at all times. Similarly, workers' compensation is retained by you and although the ASO may manage these costs for you, you know what your exact costs are at all times. Typically, administrative fees charged by ASO's range from $600 to $1200 per employee per year on average.

ASO vs. PEO - "Apples to Apples" Cost Comparison

Although the ASO and PEO are similar in services offered, the cost difference can be substantial. Typically, the ASO can cost as much as 50% less than the PEO for identical services. One advantage the PEO arrangement presents and probably the reason for the significant price difference is the claimed "transfer of liability" created in the PEO arrangement. When comparing the ASO to PEO, each business will need to decide whether the "transfer of liability" is real and beneficial based on their individual circumstances.

If you are currently in a Professional Employer Organization (PEO) relationship and would like to learn more about the Advantage Smart ASO solution provided by Solid Business Solutions, please contact us here.

If you are interested in learning more about Professional Employer Organizations (PEOs) and the PEO Broker Services provided by Solid Business Solutions, please contact us here.