Understanding total PEO costs requires looking beyond quoted administrative fees. Benefits costs, workers’ compensation, additional services, and hidden fees all affect your actual investment. Here’s a complete breakdown of what you’ll actually pay.
The Three Main Cost Components
1. PEO Administrative Fees
This is the base service charge covering:
- Payroll processing
- HR support and guidance
- Benefits administration
- Compliance assistance
- Technology platform access
- Account management
Typical Range: $80-$300 per employee per month
What Affects This Cost:
- Company size (larger = lower PEPM rates)
- Industry risk level
- Services included
- Provider brand and scale
- Geographic complexity
2. Employee Benefits
Actual insurance premiums for:
- Health insurance
- Dental and vision
- Life and disability insurance
- 401(k) recordkeeping
- FSA/commuter benefit administration
Typical Range: $400-$900 per employee per month (varies dramatically by coverage levels)
What Affects This Cost:
- Plan selections (PPO vs HDHP, deductible levels)
- Employee demographics (age, location)
- Employer vs employee contribution split
- Number of employees enrolling
- Geographic location
3. Workers’ Compensation
Coverage cost based on:
- Employee job classifications
- Payroll amounts
- Industry risk level
- Claims history
Typical Range: 0.5% – 15%+ of payroll depending on industry
What Affects This Cost:
- Industry (construction = high, office = low)
- Specific job classifications
- Safety record and claims history
- State requirements
Total Cost Example: 25-Employee Service Company
Company Profile:
- 25 employees
- $1.2M annual payroll
- Professional services (low risk)
- Texas location
PEO Administrative Fees:
- $140 PEPM × 25 employees × 12 months = $42,000/year
Benefits Costs:
- Average $600/employee/month (employer portion)
- $600 × 25 × 12 = $180,000/year
Workers’ Compensation:
- 1.5% of payroll for professional services
- $1,200,000 × 0.015 = $18,000/year
Total Annual PEO Cost: $240,000
Breakdown:
- Administrative: $42,000 (17.5%)
- Benefits: $180,000 (75%)
- Workers’ Comp: $18,000 (7.5%)
What’s Included in Administrative Fees?
Typically Included:
- Payroll processing (all frequencies)
- Payroll tax filing and payments
- New hire reporting
- W-2 and 1099 preparation
- Basic HR support and guidance
- Employee handbook templates
- Benefits enrollment administration
- Workers’ comp claims management
- Basic compliance updates
- HRIS platform access
- Employee self-service portal
- Basic reporting
Sometimes Included:
- Time and attendance system
- Applicant tracking system
- Performance management tools
- Learning management system
- Advanced analytics
- On-site HR support
Usually Extra:
- Implementation/setup fees
- Specialized consulting
- Legal services
- Recruiting services
- Background checks
- Drug testing
Hidden Costs to Watch For
Implementation/Setup Fees:
- One-time charge: $500-$5,000
- Some PEOs waive this
- Always ask upfront
Benefits Markup:
- Some PEOs add margin above actual insurance costs
- Ask: “Do you mark up benefits beyond carrier premiums?”
- Request transparency about actual costs
Per-Transaction Fees:
- $1-$3 per paycheck
- $25-$50 per employee change
- $25-$100 per custom report
- These nickel-and-dime charges add up
State Expansion Fees:
- $100-$500 per new state
- Should be included but verify
Technology Fees:
- Some PEOs charge separately for platform access
- Should be included in base rate
- Question any “technology surcharge”
Annual Increase Surprises:
- Rates increasing 15-25% at renewal
- Ask about typical annual increases upfront
- Negotiate multi-year rate guarantees if possible
Exit Fees:
- Penalties for terminating early
- $1,000-$10,000 or more
- Review contract carefully
Comparing Proposals Accurately
Don’t just compare administrative fee quotes.
Create total cost comparison:
| Cost Component | PEO A | PEO B | PEO C |
| Admin Fees (annual) | $42,000 | $48,000 | $38,000 |
| Setup Fee | $2,000 | Waived | $1,500 |
| Benefits (annual) | $180,000 | $165,000 | $195,000 |
| Workers’ Comp (annual) | $18,000 | $16,000 | $22,000 |
| Year 1 Total | $242,000 | $229,000 | $256,500 |
| Ongoing Annual | $240,000 | $229,000 | $255,000 |
In this example, PEO B costs least despite having higher administrative fees due to better benefits pricing.
Cost vs Value
Cheapest isn’t always best value.
Consider:
- Service quality and responsiveness
- Technology platform capabilities
- Benefits plan quality (not just cost)
- Account manager expertise
- Provider financial stability
- Implementation support
- Ongoing assistance
Paying 10% more for significantly better service often proves worthwhile.
ROI Calculation
Total PEO Investment vs Alternative:
25-Employee Company PEO Scenario:
- Total PEO cost: $240,000/year
Alternative (Self-Management):
- HR Manager salary + benefits: $75,000
- Payroll service: $3,000
- Benefits (purchased independently): $225,000
- Workers’ comp (independent): $24,000
- Compliance consultant: $5,000
- HRIS software: $4,000
- Total: $336,000
Annual Savings with PEO: $96,000 (28.5%)
Plus intangible benefits:
- Reduced compliance risk
- Better employee benefits
- Founder time saved
- Professional HR support
Cost Ranges by Company Size
5-10 Employees:
- Administrative: $150-$250 PEPM
- Benefits: $400-$800 per employee/month
- Workers’ comp: Varies by industry
- Typical total: $6,000-$12,000/month
11-25 Employees:
- Administrative: $125-$200 PEPM
- Benefits: $400-$750 per employee/month
- Workers’ comp: Varies by industry
- Typical total: $6,500-$25,000/month
26-50 Employees:
- Administrative: $100-$175 PEPM
- Benefits: $400-$700 per employee/month
- Workers’ comp: Varies by industry
- Typical total: $13,000-$45,000/month
51-100 Employees:
- Administrative: $90-$150 PEPM
- Benefits: $400-$650 per employee/month
- Workers’ comp: Varies by industry
- Typical total: $25,000-$75,000/month
Industry Cost Variations
Low-Risk Industries (Professional Services, Tech):
- Lower workers’ comp costs
- Lower overall PEO costs
- Administrative fees similar across industries
High-Risk Industries (Construction, Manufacturing):
- Significantly higher workers’ comp costs
- Overall PEO costs 30-50% higher
- Administrative fees often slightly higher
- PEO workers’ comp savings most dramatic here
Geographic Cost Variations
High-Cost States (CA, NY, MA, HI):
- Benefits costs 25-50% higher
- Workers’ comp costs often higher
- Administrative fees typically similar
Lower-Cost States (TX, FL, TN, GA):
- Benefits costs 20-40% lower
- Workers’ comp varies by industry
- Administrative fees similar
Multi-State Operations:
- May pay slightly higher admin fees
- Benefits costs average across locations
- Complexity premium: $10-$30 PEPM additional
Negotiating PEO Costs
What’s Negotiable:
Administrative Fees:
- Can often reduce by 10-25%
- Larger companies have more leverage
- Competitive proposals create negotiating power
- Multi-year commitments may reduce rates
Setup Fees:
- Often waivable
- Negotiate based on company size
- Use competition as leverage
Benefits:
- Plan selections affect costs
- Carrier choices matter
- Employer contribution levels flexible
- Actual premiums usually not negotiable
Workers’ Comp:
- Rates somewhat negotiable based on safety programs
- E-mod affects pricing
- Claims history matters
- Shopping multiple PEOs compares rates
What’s NOT Negotiable:
- Core platform features
- Fundamental service model
- Insurance carrier premiums (set by carriers)
- Most compliance requirements
Questions to Ask About Costs
- What’s your all-in cost for my company?
- What’s included in the administrative fee?
- Are there setup or implementation fees?
- What costs extra beyond the base rate?
- Do you mark up benefits above actual premiums?
- What are typical annual rate increases?
- Can you guarantee rates for multiple years?
- What are your workers’ comp rates for my classifications?
- Are there fees for adding employees mid-year?
- What are the contract termination provisions?
- Do you charge for state expansion?
- What transaction or per-check fees exist?
Red Flags in PEO Pricing
- Unwilling to provide complete cost breakdown
- Vague about what’s included
- Significantly cheaper than all competitors (hidden fees likely)
- Complex, confusing fee structures
- Won’t put pricing in writing
- Different prices quoted at different times
- Reluctant to explain benefits markup
- No clear contract terms
Budget Planning
When budgeting for PEO:
Year 1:
- Administrative fees × 12 months
- Setup/implementation fee (one-time)
- Benefits costs (estimated based on proposals)
- Workers’ comp costs (based on quotes)
- Buffer for unexpected costs (5-10%)
Ongoing Years:
- Administrative fees (factor in 5-8% annual increase)
- Benefits costs (factor in 8-12% annual increase)
- Workers’ comp (varies based on claims experience)
Cash Flow:
- Most PEOs bill monthly
- Benefits deducted from payroll
- Workers’ comp may be monthly or pay-as-you-go
- Budget for first and last month initially
The Bottom Line on PEO Costs
Total PEO costs include:
- Administrative fees (typically 15-25% of total)
- Benefits costs (typically 65-75% of total)
- Workers’ comp (typically 5-15% of total)
Most businesses find:
- PEOs cost less than self-managing HR with comparable benefits
- Benefits savings alone often exceed administrative fees
- Total value includes services, support, and risk reduction
- Proper comparison requires looking at all costs, not just admin fees
The “expensive” PEO with better benefits may cost less overall than the “cheap” PEO with poor insurance options.
Want accurate cost comparisons for your specific situation? Contact PEO Consulting Partners for a free analysis. We’ll obtain complete proposals showing all costs, create accurate comparisons, and negotiate the best possible pricing—at no cost to you.