In the debate between ASO vs PEO, small and mid-sized businesses (SMBs) have crucial decisions to make regarding administrative task outsourcing. An administrative service organization (ASO) serves as a viable option for SMBs needing to outsource singular tasks such as payroll to specialized firms. This approach can be beneficial when an SMB is struggling with a specific function.
On the flip side, for more extensive and all-encompassing human resources support, professional employer organizations (PEOs) emerge as the go-to solution for many business owners. It’s essential for SMB owners to understand the differences between these service providers before getting further into the research process and making an informed hiring decision. Let’s dive deep into the ASO vs PEO comparison.
The National Association of Professional Employer Organizations (NAPEO) defines a PEO as a separate entity from an SMB that offers comprehensive HR solutions. The most common reasons businesses hire a PEO include:
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One thing that makes a PEO especially unique when compared to an ASO is that the PEO acts as a co-employer to the client. The PEO, not the client company, becomes the employer of record with the Internal Revenue Service (IRS). In practice, this means the PEO files taxes for its clients under its own employer identification number (EID), shares certain HR compliance risks and takes on certain federal and state compliance tasks, such as tax withholding, payroll administration and more.
Since PEO companies represent numerous SMBs, they have the power of numbers to negotiate more affordable and robust employee benefits. With the PEO as a co-employer, smaller businesses overcome the challenge of not being able to compete with larger businesses for talent in the benefits arena. Affordability and quality of benefits make all the difference for people in the position of considering multiple job offers.
Companies with fewer than 150 employees benefit from a partnership with a PEO when they do not have the resources to support a fully-staffed internal HR department. PEOs can also work in partnership with existing HR departments to provide greater expertise in certain areas.
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Working with a PEO relieves SMBs of time-consuming HR tasks and frees up more time to focus on core competencies. When weighing the decision to partner with an ASO vs PEO, it’s important to figure in the full ROI potential. According to NAPEO, SMBs that hire a PEO grow up to 9% faster, have up to 14% less turnover and are half as likely to fail. They also enjoy an annual return on investment (ROI) of approximately 27%.
ASOs offer many of the same services as PEOs, but they do not serve as an employer of record. In an ASO partnership, the client company retains full risk liabilities and compliance responsibilities.
ASOs typically do not provide workers’ compensation claims management or employee benefits administration. While they may be able to assist clients in locating these services, ASOs do not negotiate for the best rates on behalf of their clients. ASOs also don’t negotiate for health benefits on their clients’ behalf, meaning client-companies miss out on the “economy of scale” savings generated by the PEO’s strength in numbers. Under an ASO plan, the client-company takes on full responsibilities for paying covered claims.
With an ASO, payroll looks a bit different than it would with a PEO. ASOs do not process, remit or report payroll taxes under their own employer identification number (EIN). When deciding between an ASO vs PEO, ease of payroll administration is criticial to busy SMB finance and HR teams.
Another major difference between a PEO vs ASO is that an ASO operates on an à la carte basis. SMBs choose individual services which may feel more like administrative and back-office support. A PEO operates on an all-inclusive basis making a variety of services, including group health insurance, employee benefits administration, workers’ comp insurance, risk management, recruiting and a full-suite of HR services available to all clients.
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Here is a quick summary of how PEOs and ASOs differ by service offering:
Clients may qualify for large group benefits through a PEO master plan or use their own policy. ASOs, on the other hand, may assist in obtaining benefits and administration, but ASO plans likely won’t offer the same cost-savings to the employer, nor do they offer their own plans.
A PEO is the employer of record at the federal level and with most state governments. Some states require SMBs to generate and submit their own reports, but the PEO can act as Power of Attorney. When working with an ASO, SMBs remain the employer of record and file taxes and reports under their own EIN.
Both PEOs and ASOs provide support and guidance for HR responsibilities, although clients may find that they have to know the “right questions to ask” when working with an ASO for HR support. With either a full-support PEO or a selective-support ASO partnership, the client-employer retains control over hiring, firing, and promotional decisions, organizational structure and more.
PEOs assume responsibility for federal, and in some cases, state taxes. With an ASO partnership, the SMB is fully responsible for its own taxes (and liable for corresponding risks).
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When looking at an ASO vs PEO, both are capable of informing their clients of their regulatory compliance responsibilities. But with a PEO partnership, clients often find that fuller support in ensuring that responsibilities are met affords them greater time to focus on their core business.
PEOs implement and monitor safety programs, claims and compliance. Experienced and certified PEOs take a whole-business approach to safety, keeping your unique industry requirements in mind.
They also provide workers’ compensation claims management in case anything does go wrong, with the goal of making your business and its employees whole again. ASOs do not provide claims management, but some ASOs can support client safety programs in other ways if requested.
The PEO uses its own state unemployment tax rate (SUTA) unless prohibited by state regulations. Clients of ASOs use their own SUTA rate for tax reporting.
PEOs are able to handle unemployment claims for clients, offering extensive knowledge of support throughout the entire claim process. An ASO can help with unemployment claim management, or the client may choose to handle claims themselves.
PEOs can provide coverage under their own master policy or a coordinated master policy. ASOs do not offer workers’ compensation coverage - the SMB needs to obtain its own policy.
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As we’ve discussed, there are so many factors to weigh when making a decision to partner with an ASO vs PEO. SMBs that choose to work with an ASO often find that they end up outsourcing additional tasks to other service providers while keeping some in-house. This arrangement can be stressful and difficult to track.
By choosing a PEO vs ASO, SMBs receive a comprehensive outsourced HR department. They reduce their risk, lower employee benefit costs, and in some cases, can eliminate the need to have an in-house HR department altogether. Choosing a PEO is ideal for growth-oriented SMBs that want to focus on revenue-generating activities.
RELATED: Is a Professional Employer Organization Right for My Business? >>
Axcet HR Solutions has fulfilled the HR needs of small businesses in Kansas and Missouri for more than 30 years. As Jerry Diddle, our founder, says, "Worry and sleepless nights do not need to be a natural outgrowth of running a small business." Diddle launched Axcet HR Solutions in 1988 to provide friends and neighbors with valuable peace of mind.
We invite small and mid-sized business owners on both sides of the Kansas-Missouri state line to request a consultation with Axcet HR Solutions. The consultation is an opportunity to learn about our HR, benefit, payroll and risk management services, and how they can eliminate burdens for your business. We hope to hear from you soon!
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