The Real Cost of a PEO: What You’re Actually Paying For

One of the most common questions I get is some version of “how much does a PEO actually cost?” The honest answer is that it depends — but not in the vague, hand-wavy way most consultants mean when they say that. PEO pricing has real structure to it, and once you understand the components, you can read a proposal the way it’s meant to be read: critically.

I started my career in bookkeeping, so I’ve spent more time than most people staring at the line items that make up a PEO invoice. Here’s what you’re actually paying for.

The Two Pricing Models

Most PEOs price in one of two ways: a percentage of payroll or a flat per-employee-per-month (PEPM) fee. Each has its implications.

Percentage of payroll means the PEO takes a cut of your total gross payroll — typically between 2% and 12%, depending on what’s bundled. The upside is simplicity. The downside is that your costs go up automatically every time you give someone a raise, even if the PEO’s cost of serving you hasn’t changed.

Per-employee-per-month charges a flat fee for each employee on your roster — anywhere from $40 to $200+ per month depending on the services included. This model is more transparent and predictable, but you need to watch what’s included versus what’s billed separately.

What’s Bundled (and What Isn’t)

A standard PEO arrangement typically bundles payroll processing, tax filings, workers’ compensation, health insurance access, basic HR support, and compliance monitoring. Some providers also include EPLI coverage, 401(k) administration, and employee assistance programs at no additional charge.

What often isn’t bundled — and where the hidden costs live — includes things like benefits administration fees, COBRA management charges, custom reporting, and certain compliance services. The hidden fees in PEO proposals can add 15-30% to what you thought you were paying if you don’t know where to look.

The Workers’ Comp Component

For many businesses — especially in construction, manufacturing, and staffing — workers’ compensation is the single largest line item in the PEO arrangement. Under a PEO’s master policy, your company’s claims history gets blended into a much larger risk pool, which typically means lower rates than you’d get on your own. But the savings vary dramatically by provider, and not every PEO’s master policy is priced competitively for your specific industry and risk class.

This is one of the areas where having an independent consultant makes the biggest financial difference. I know how each PEO prices workers’ comp for different industries, and I can show you where the real savings are — not just the admin fee discount.

How to Read a PEO Proposal

When you get a PEO proposal, the first thing to do is separate the admin fee from the pass-through costs. Pass-throughs are things like health insurance premiums, workers’ comp premiums, and payroll taxes — costs that exist whether you use a PEO or not. The admin fee is what you’re paying for the PEO’s service itself. That’s the number you should be comparing across providers, and it’s the number that many proposals try to obscure.

If you want a clearer picture of what PEOs charge and why, I’ve written a deeper breakdown on the pricing page. And if you’d rather just hand someone the proposals and get a straight answer, that’s exactly what I do.

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Confused by a PEO proposal you’ve received?

Send it over. I’ll break down what you’re really paying and whether you can do better.