Many businesses needs business expansion and they relay on EOR or PEO Services to simplify the business expansion, but many are often confused with EOR and PEO providers. But, before we understand more about EOR let’s see what PEO is and understand how it helps businesses and later we will see about EOR Providers even though they offer similar services, they’re different in more ways than one.
The major difference between a PEO and an EOR is that the latter employs workers on behalf of their clients in any country. Another difference is that PEO works with organizations registered in the country where their employees exist. However, EORs allow companies to move to different states or countries without setting up a legal entity.
Read on to understand the differences between the two and why you need to work with certified providers in detail.
What Is a PEO?
A professional employer organization (PEO) is an organization that provides HR services to businesses. They manage payroll, regulatory compliance, tax filing, recruitment, training & development and offer comprehensive benefits to employees.
PEOs also keep themselves updated with any changes in the local, state, and national regulations. They also research the potential impact of the changes on your business and help you make necessary adjustments.
When you work with a PEO, you enter into a co-employment model where you share the risks and liabilities of being an employer.
What Is a Certified PEO?
A certified PEO (CPEO) is a PEO provider that has been certified by the IRS for meeting the requirements and guidelines set by the United States government.
In order to get certified, a PEO must:
Have a positive history of financial stability, organizational integrity, and tax compliance (federal, state, and local).
Agree to verify to the IRS that it continues to meet the certification requirements regularly.
Be managed by professionals who have in-depth knowledge or experience in federal and state tax compliance.
Here are some additional requirements to gain certification:
- Bond: The PEO must submit proof of a $50,000 bond or a bond of 5% of the company’s federal employment tax liabilities for the previous year (whichever is greater). It should be done within 30 days of applying for certification.
- Quarterly CPA Attestations: The PEO must provide the IRS with quarterly proof of payment for all employment taxes. These statements must be attested by a CPA.
- Annual Fee: PEO providers must pay a yearly fee of $1000 to obtain and maintain certification status.
Once a PEO provider is certified, they must maintain specific records and provide the IRS with ongoing independent financial reports. If not, the PEO risks having their certification revoked or suspended.
Why Should You Work With a Certified PEO?
The only and most significant difference between a CPEO and a non-certified PEO provider is that the former minimizes the financial liability of the clients.
When you work with a non-certified PEO, the IRS considers both the PEO and your company accountable for the payment of payroll taxes. Therefore, if the PEO fails to pay the payroll taxes for you, the IRS can go after you (even if you have remitted the taxes to the PEO).
However, when you work with a CPEO, you won’t have to worry about the IRS coming behind you. The CPEO is solely responsible for federal employment tax payments.
What Is an EOR?
Employer of Record (EOR) is an organization that takes complete responsibility for all formal tasks on behalf of another company. They offer similar services to that of a PEO.
However, the major difference between an EOR provider and a PEO is that you don’t enter into a co-employment agreement with the former. Instead, they act as the official employer. This allows you to legally engage with overseas workers in a new country or state without setting up a local entity.
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Difference Between PEO and EOR
As mentioned above, the major difference between a PEO and an EOR is the employment contract. With a PEO, you work in a co-employment model, whereas an EOR is the official employer of record.
Let’s understand this with an example. Suppose you want to expand your business into India.
When you work with a PEO, you must incorporate your company in India. Your PEO will help you find the right talent for your business and manage all the HR-related activities (including payroll). However, you will control the day-to-day tasks of the employees.
On the other hand, when you work with an EOR, you won’t need to create a legal entity for your business in India. Your EOR provider will help you hire Indian employees legally and without any risk of fines or penalties. They will pay the employees and manage all the HR-related activities.
PEO vs. EOR: Pros and Cons
Understanding the advantages and disadvantages of working with certified PEO providers and EOR providers is essential to making a more informed decision.
Certified PEO Provider Pros
Lower HR Costs
The primary advantage of a PEO provider is that they help reduce HR costs. The fee you agree to pay (as per your contract) covers all the necessary HR services for seamless employee management. As a result, it makes scaling up locally very cost-effective.
Since CPEOs are solely responsible for paying taxes for employment, you don’t have to worry about legal issues or penalties. They also usually help you create employment contracts, meet the local employment requirements (e.g., number of paid and sick leaves per state and federal laws), decide on the salary, and avoid permanent establishment risk.
Better Employee Management
CPEOs have experts who have in-depth knowledge of local labor laws, which ensure your employees get the benefits they’re legally entitled to. This includes healthcare and retirement plans. You can also offer additional benefits, such as remote work allowances
Certified PEO Provider Cons
Need to Set Up a Legal Entity
Even though CPEOs manage your employees, you will have to set up your legal entity, which can be challenging. However, a reputed global PEO can employ on your behalf by setting up a legal entity of their own in the countries your employees are based.
Communication Gap With Employees
As you work in a co-employment model, you’ll have to contact your PEO provider if any issues arise, which can be inefficient and time-consuming.
EOR Provider Pros
Facilitate Hiring Overseas Employees
EORs can hire employees on your behalf from different states and countries. This makes it easier for you to expand into global markets without setting up a legal entity in the country your employees reside. This works well for companies that want to test new markets before making a full-fledged investment.
Finding, recruiting, and onboarding employees is time-consuming. However, EOR service providers make the entire process smooth, helping you get into new markets quickly. This, in turn, enables you to focus on growing your business and other critical operations.
Immigration policies are complicated and ever-changing, making it challenging for companies to get work permits and visas for their employees.
However, an EOR service provider can help you with work permit and visa requirements, avoiding any complications or scrutiny from immigration authorities.
Top Reasons To Focus On PEO And EOR In India
EOR Provider Cons
Not Beneficial In the Long Run
EORs are a way to enter into new markets and hire local employees quickly. However, once you’ve established your business in a country, you’d want better control over your employees. This could be challenging with EORs as they’re the official employer.
Might Not Be Always Aligned With Your Company Culture
When organizations hire employees, they ensure that the recruit is a good fit for the company culture. However, when you work with an EOR provider, they’ll do the recruiting process, making it difficult to ensure that new employees are aligned with your culture.
PEO vs. EOR: Which Is Better For Your Business?
The benefits, challenges, and drawbacks of CPEOs and EORs can be subjective. What seems like the best move for a company might be counterproductive for others.
However, it is worth noting that CPEOs offer more control over your employees while mitigating legal risks. On the other hand, EORs are good if you don’t want to create an entity of your company in a new country.