Cost Of PEO Services: A Complete Guide

PEOs allow organizations to outsource complex HR tasks—like payroll, benefits, and compliance—by acting as a co-employer, reducing administrative burden and sharing legal responsibilities.

Of course, these services come at cost.

The average cost of a PEO service is about $100–$120 per employee per month or ~3%–6% of total gross payroll.

In this guide, I’ll break down the costs and pricing of PEO services, compare them to in-house HR costs, and provide tips for selecting and negotiating with PEOs.

How PEO Pricing Works

PEOs use various pricing models to charge for their services:

• Flat fees: A fixed monthly fee per employee for the PEO services. This model emphasizes transparency and clarity, helping clients understand exactly what they are paying for without any hidden costs.
• Percentage of payroll: Charging a percentage of the total payroll, typically ranging from 2% to 12%.
• Per-employee fees: A set fee per employee per month, which can range from $50 to $150 per employee.

Example: A company with a $1,000,000 annual payroll might pay $20,000 to $120,000 annually under a percentage of payroll model. 

Alternatively, if they have 50 employees, they might pay $2,500 to $7,500 per month with a per-employee fee model.

What fees are you paying when outsourcing HR to a PEO?

The total cost of PEO services covers a number of different fees.

1. Administrative fee

This covers core services like payroll, HR support, tax filing, and compliance. It's usually charged as a percentage of payroll (2–12%) or a flat rate per employee per month ($40–$160).

2. Benefits administration fee

PEOs manage employee benefits like health insurance, dental, and retirement plans. This may be bundled into the admin fee or charged separately, depending on the provider.

3. Workers’ compensation insurance

PEOs secure and manage your workers’ comp coverage, often at lower group rates. Costs vary by your industry and risk profile.

4. Unemployment insurance and employer taxes

You reimburse the PEO for state and federal unemployment taxes and other employer tax obligations. They handle the filings and compliance on your behalf.

5. Onboarding or setup fee

Some PEOs charge a one-time fee (often $500–$2,000) to cover initial implementation and account setup. Others may waive this depending on contract length or team size.

6. Optional add-ons

These include services like background checks, learning management systems, or custom HR consulting. Add-ons are typically priced separately and can vary widely.

Potential hidden fees

Whenever contracting any service as a business it’s important to be fully aware of all the potential costs involved.

Some “hidden” or extract costs to be aware of when contracting an PEO include:

• Setup or termination fees: Some PEOs charge a one-time onboarding fee ($500–$2,000) or early termination fees if you leave the contract early.
• Benefits markups: The PEO may bundle benefit costs in a way that hides markups on health plans or insurance premiums.
• Workers’ comp premium audits: If your payroll estimates are off, you might owe more at year-end during audits—especially in higher-risk industries.
• Add-on services: Things like background checks, employee training, recruiting support, or HR software features might not be included in your base fee.
• Annual increases: Admin fees or benefits costs can rise each year—check your contract to see if there are caps or notification periods.
• Minimum charges: Some PEOs charge a minimum monthly fee even if your headcount is small, which can be pricey if you have part-time or seasonal staff.

Factors Influencing PEO Costs

Several factors can influence the cost of a PEO:

• Company size: Larger companies may receive volume discounts, reducing per-employee costs.
• Industry: Industries with higher regulatory requirements might incur higher costs due to the need for specialized compliance services.
• Location: Local labor laws and market conditions can impact pricing.
• Specific services required: Customized service packages or additional services beyond the standard offerings can increase costs.
• Payroll taxes: PEO costs often include handling payroll taxes, which can relieve businesses from these responsibilities and potential additional costs.

Do PEOs Save You Money?

Using a PEO can save you money, but it depends on your current setup and growth plans.

Here’s how a PEO might save you money:

• Better benefits at lower rates: PEOs can group together to access big-company health plans, often at reduced premiums.
• Fewer compliance mistakes: Avoid costly fines or legal issues from misclassified employees or tax errors.
• Reduced HR headcount: Instead of hiring in-house HR staff early on, the PEO handles it for a fraction of the cost.
• Lower workers’ comp rates: PEOs often negotiate group discounts based on their pooled clients.
• Time = money: You and your team spend less time on admin and more time growing the business.

But it might not save money if:

• You already have good rates or internal HR support
• You don’t fully use the services included
• You’re paying for add-ons you don’t need.

Pro Tip

Generally speaking, it’s advantageous to use a PEO for up to 20 employees. Above that, the buying power of the company could be close enough to that of the PEO to make the high PEO fees disadvantageous.—Alice Ferretti, Founder, HumansR

Comparing the Cost of PEO Services to In-House HR

Whether a PEO or internal HR team is a more cost effective option really depends on your unique circumstances and is quite hard to quantify. 

However, here’s what to consider when evaluating whether a PEO is the best value option for you or not: 

Pro Tip

In general, PEO services are a good option for smaller organizations, with no little or no in-house HR, who need better benefits or multi-state hiring. They might not be so cost effective for larger organizations with complex, custom HR needs who want tight control over all HR processes and already have an HR team and infrastructure.—Alice Ferretti, Founder, HumansR

Maximizing Value from PEO Services

Lastly, some tips for getting the best value from your PEO service.

• Be clear on what’s included: Understand exactly what services are bundled (e.g., payroll, compliance, benefits) and what costs extra. Ask for an itemized breakdown.
• Leverage their buying power: Use the PEO’s access to large-group benefit rates to offer more competitive packages to your employees—this can be a game-changer for hiring and retention.
• Use them as a compliance safety net: Rely on the PEO for help with employment law, tax filings, and risk management—especially if you operate in multiple states.
• Streamline admin workflows: Use their HRIS and tools for onboarding, time tracking, and employee documentation to cut manual work and avoid errors.
• Tap into HR expertise: Don’t just use the PEO for admin—get their advice on policies, employee relations, terminations, or performance management when needed.
• Review your contract annually: Audit your fees, services, and headcount yearly to ensure you're not overpaying or paying for things you no longer need.
• Educate your team: Make sure your managers and employees know how to use the PEO’s tools and services—it boosts satisfaction and reduces HR workload.
• Negotiate when you renew: If your needs change or you’ve grown, renegotiate terms or shop around—you may qualify for better rates or upgraded services.

Pro Tip

I recommend doing thorough research on the PEO service model and culture to make sure it aligns with the needs and culture of your organization and you can work well with them. One thing to keep in mind is that, even when companies work with a PEO, they need at least one HR person on staff, or someone to liaise between the PEO and the staff. — Alice Ferretti, Founder, HumansR

Subscribe To The People Managing People Newsletter

For more advice on using PEOs and outsourcing HR, subscribe to our weekly newsletter for HR and business leaders. You’ll receive all our latest content to help you grow in your career and make greater impact in your organization.