As your business grows, you face an important decision: Should you build an internal HR department or outsource these functions to a PEO? Both approaches have merits, and the right choice depends on your specific circumstances, growth trajectory, and strategic priorities.
The In-House HR Approach
Building an internal HR function means hiring HR staff to manage payroll, benefits, compliance, recruiting, training, and employee relations. This gives you complete control and dedicated resources focused solely on your company.
Advantages of In-House HR:
Complete Control: You design every policy, process, and program exactly as you want. There’s no need to work within a PEO’s frameworks or compromise on your preferences.
Company Culture Focus: Internal HR professionals become deeply embedded in your culture, understanding your unique values, challenges, and dynamics in ways an external provider can’t match.
Immediate Availability: Your HR team is on-site (or directly accessible), providing instant support for employee issues, management questions, or urgent situations.
Long-Term Loyalty: HR staff are your employees, invested in your company’s success and aligned with your long-term goals rather than serving multiple clients.
Customization: You can build specialized programs, unique benefits structures, or innovative approaches that might not fit within standard PEO offerings.
Disadvantages of In-House HR:
High Costs: A complete HR department is expensive. An HR Generalist costs $55,000-$70,000 annually, a Benefits Specialist $60,000-$75,000, a Payroll Manager $60,000-$80,000, and an HR Director $90,000-$120,000—all plus benefits, taxes, and overhead. You’re easily spending $200,000-$400,000 per year for a small HR team.
Limited Expertise Breadth: Even experienced HR professionals can’t match the collective expertise of a PEO with specialists in benefits, compliance, payroll, workers’ comp, employment law, and more.
Compliance Risk: Employment law complexity is overwhelming. One person or small team can’t stay current on federal regulations, 50 states’ employment laws, industry-specific requirements, and constant changes. Mistakes are costly.
Benefits Purchasing Power: Small companies can’t negotiate competitive benefits rates. You’ll pay significantly more for inferior coverage compared to PEO-pooled options.
Vacation and Turnover Challenges: When your HR person goes on vacation or leaves the company, you’re suddenly scrambling to cover critical functions.
Technology Investment: Modern HR requires sophisticated HRIS platforms, payroll systems, applicant tracking, and benefits administration tools. These systems cost tens of thousands annually to license and maintain.
The PEO Approach
Partnering with a PEO means outsourcing most HR functions to experts who manage these responsibilities for multiple clients, giving you access to enterprise-level resources at a fraction of the cost.
Advantages of PEO Partnership:
Cost Efficiency: Most businesses save 30-40% compared to building internal HR departments when accounting for salaries, benefits, technology, and benefits purchasing power.
Expertise Depth: Access to specialists in every HR domain: benefits design, multi-state compliance, payroll tax, workers’ comp, employment law, HR best practices, and more.
Better Benefits: Fortune 500-quality health insurance, 401(k) plans, and supplemental benefits at rates small businesses can’t obtain independently. This dramatically improves recruitment and retention.
Risk Reduction: PEOs share employment-related liabilities, handle complex compliance, and implement risk management programs that reduce your exposure to lawsuits, penalties, and claims.
Scalability: PEOs easily scale up or down as your business grows or contracts, without hiring or laying off internal staff.
Technology Included: Modern HRIS platforms, employee self-service portals, mobile apps, and reporting tools included in your PEO fees.
Disadvantages of PEO Partnership:
Less Control: You must work within the PEO’s frameworks, policies, and systems. Custom programs or unique approaches may not be possible.
Shared Attention: Your account manager serves multiple clients, so you’re not getting exclusive focus.
Co-Employment Concerns: Some business owners are uncomfortable with the co-employment relationship, even though they retain operational control.
Contract Commitments: Most PEOs require annual contracts, limiting flexibility to make changes mid-term.
Potential Service Variability: Service quality depends on your specific account manager and PEO. If you get a poor rep, your experience suffers.
Cost Comparison: Real Numbers
Small Business Example (25 employees):
In-House Option:
- HR Generalist salary: $60,000
- Payroll taxes & benefits: $15,000
- HRIS software: $12,000
- Benefits (purchased independently): $180,000
- Workers’ comp: $25,000
- Total: $292,000 annually
PEO Option:
- PEO fees (25 employees × $150 PEPM): $45,000
- Benefits (PEO rates): $125,000
- Workers’ comp (included)
- Total: $170,000 annually
- Savings: $122,000 (42%)
Mid-Sized Business Example (75 employees):
In-House Option:
- HR Manager: $75,000
- Benefits Specialist: $65,000
- Payroll Coordinator: $50,000
- Taxes & benefits for HR staff: $50,000
- HRIS/Payroll software: $30,000
- Benefits (purchased independently): $600,000
- Workers’ comp: $85,000
- Total: $955,000 annually
PEO Option:
- PEO fees (75 employees × $125 PEPM): $112,500
- Benefits (PEO rates): $420,000
- Workers’ comp (included)
- Total: $532,500 annually
- Savings: $422,500 (44%)
These examples illustrate why PEOs often make financial sense, particularly for companies under 100 employees.
The Hybrid Approach
Some businesses use a hybrid model: maintaining a lean internal HR presence (1-2 people) while outsourcing specific functions like payroll, benefits administration, or compliance through an ASO or unbundled PEO services.
This approach provides some internal expertise while leveraging external specialists for complex or administrative tasks. However, it’s often more expensive than a full PEO relationship and creates coordination challenges.
Making Your Decision
Choose In-House HR if:
- You have 200+ employees and can justify the investment
- You need highly customized policies and programs
- You operate in a single state with straightforward compliance needs
- You have the budget for competitive benefits independently
- You want complete control over every HR decision
Choose a PEO if:
- You have 5-200 employees
- You want to reduce costs while improving benefits
- You’re expanding into multiple states
- You don’t have time to manage HR complexity
- You want to minimize compliance risk
- You need to scale quickly without adding overhead
The Bottom Line
For most small to mid-sized businesses, PEOs offer superior cost-effectiveness, better benefits, reduced risk, and more comprehensive expertise than building internal HR departments. The savings from benefits purchasing power alone often exceeds the entire PEO fee.
However, every business is unique. The right choice depends on your specific circumstances, priorities, and growth plans.
Unsure which approach is right for your business? Contact PEO Consulting Partners for an objective analysis. We’ll evaluate your situation and recommend whether a PEO, ASO, or in-house approach makes the most sense—with no obligation or cost to you.