The two pricing models, honestly.
Every PEO bills you one of two ways: a percentage of your payroll, or a fixed dollar amount per employee per month. The difference between them is not really about the headline number — it's about how the model behaves as your business changes.
Percentage of Payroll
Typically 2–12% of gross payroll. Your PEO cost rises and falls in lockstep with what you pay your team.
- Familiar to most buyers
- Automatically scales with growth
- Cost compounds as wages rise
- Annual raises become PEO raises
Looks aligned. Behaves compounding.
Per Employee Per Month (PEPM)
A fixed dollar amount per active employee per month. Predictable, easier to forecast, unbundled from wage growth.
- Stable and predictable
- Not tied to wage inflation
- Can feel high at small scale
- Cleaner for forecasting
Separates growth from cost.
Neither model is universally better. For a 12-person professional services firm with 8% annual wage growth, PEPM saves you money in year three. For a 60-person construction crew where headcount fluctuates project-to-project, percentage-of-payroll matches your operational reality more cleanly. The PEOs that quietly out-earn their peers are usually the ones that lock buyers into the model that benefits the PEO, not the model that fits the business.
The five cost layers no one quotes you on.
The quote you receive is the visible layer. The decisions that matter — for total cost over three years — live underneath. There are five of them, and the gap between a PEO that handles each cleanly and one that doesn't is typically 10–25% of total spend.
01 · Workers' Compensation
The largest single cost lever in most PEO bills, especially in trades, hospitality, and construction. Class codes, experience modifiers, and exposure logic interact in ways most buyers don't model. A PEO that actively manages your class structure can take 15–30% out of your WC line. A PEO that just processes your existing structure leaves that money on the table.
02 · Health Benefits Margin
PEOs source health benefits two ways: a single master plan that all clients go onto, or open-market shopping per engagement. Master plans deliver administrative simplicity and bulk negotiating power — though the bulk-negotiating advantage has narrowed substantially since 2020 as major carriers have closed the gap. Open-market sourcing produces better plan-fit for individual workforces but requires more active renewal-time work. Either way, the PEO's margin on benefits is the most often-overlooked line in the comparison.
03 · State Unemployment Insurance (SUI)
Some PEOs include SUI in their base pricing. Others rate-shop your SUI through a co-employment arrangement and capture the savings as margin. Still others charge you the state's actual rate and pass it through. Three structurally different economics, all called "SUI handling" on a quote sheet.
04 · 401(k) Administration
Multiple Employer Plans (MEPs) compress 401(k) admin cost and unlock institutional fund pricing for small employers. They also create governance complexity that grows with your headcount. A PEO that's structured to use a MEP well will save your participants money. A PEO that bolts a generic 401(k) onto its offering will be slightly cheaper for you and meaningfully worse for your team.
05 · The Admin Fee
The line item every buyer focuses on. In practice, it's usually the smallest of the five and the easiest to negotiate. The other four lines move more money. Sophisticated buyers anchor their negotiation on the structural lines, not the headline.
The lowest quoted price rarely produces the lowest total cost.
How costs compound silently.
The most expensive mistake in PEO selection is not picking the wrong provider — it's picking the wrong pricing model for the trajectory of your business. The compounding works two ways.
Wage inflation under percentage-of-payroll. If you give 4% annual raises and you're on a percentage model, your PEO bill grows 4% per year without any change to scope of service. After three years, you're paying 12.5% more for the same thing. After five years, 21.7%. None of that compounding shows up in the original quote.
Headcount changes under PEPM. If you contract from 80 to 50 employees over a downturn, percentage-of-payroll falls with you. PEPM with a minimum doesn't. The PEOs that lock buyers into PEPM-with-minimum during boom periods harvest the difference during contractions.