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What is the Difference Between a PSP and a PEO?

5 min read

As a business owner, you’ll discover options at every corner. Whether it’s as simple as picking paint colors for your brick-and-mortar or as significant as hiring a new employee, running a business involves a constant decision-making cycle. 

Like picking paint colors or hiring staff, outsourcing payroll services involves surveying your options. For business owners seeking streamlined payroll management, a PEO or a PSP can do the trick. But before making any concrete decisions, it’s essential to learn what PEOs and PSPs can individually offer and how they can meet your business’s unique needs. Read below to learn more about the differences between a PEO and a PSP. 

What is a PEO?

A PEO, or professional employer organization, provides foundational HR services to small and medium-sized businesses. Entering what’s known as a co-employment relationship, a PEO and its client company become co-employers and distribute responsibilities based on what is outlined in their PEO service agreement. Generally, a PEO will be responsible for their client company’s administrative tasks, including payroll, employee benefits, tax administrations, worker’s compensation, and regulatory compliance assistance. Meanwhile, the client company will remain in charge of day-to-day business operations, talent management, work schedules, and the scope of work. 

What is a PSP? 

A PSP, or payroll service provider, handles payroll processing, tax compliance, and other administrative needs for small and medium-sized businesses. Following the payment schedule set by the client company, a PSP will manage payroll and allocate payments to employees with appropriate paycheck deductions from taxes and benefit premiums. PSPs can also assist businesses during tax season, as they can file and furnish W-2 and W-3 forms and prepare and pay federal unemployment tax returns and quarterly business tax returns. 

What is the difference between a PSP and a PEO?

While PEOs and PSPs offer payroll management, they differ in several ways. So, before choosing one or the other, it’s important to thoroughly understand the critical differences between the two and how each aligns with your business requirements and goals. Read below for a breakdown of the differences between a PEO and a PSP. 

Offered services

Because a PEO acts as your co-employer, it can oversee more parts of your business than a PSP can. While a PSP solely focuses on payroll processing and tax responsibilities, a PEO can do that and more. From administering workers’ compensation to sponsoring health insurance plans, a PEO offers your business a much more extensive selection of services. 

Employer of record

When entering a co-employer relationship, a PEO acts as an employer of record for your business. As an EOR, your PEO can set rules around your benefit plans and carrier options. However, these limits often will play in your favor. Assuming your PEO is much larger than your business, it will grant you access to higher-quality plans with lower premiums that you would not be eligible for on your own. Noto to mention, a PEO could lessen your tax burdens by tax filing and remitting under its own employee identification number instead of yours. Meanwhile, a PSP will not affect your employee benefits whatsoever. Because it is neither your EOR nor co-employer, a PSP will only have control of your payroll and potentially additional HR services if they offer them. 


The cost difference between a PSP and a PEO can vary depending on how you look at it. While PEOs may cost more upfront due to their expansive selection of services, they may save you more in the long run. For example, hiring additional HR consultants in addition to a PSP may cost you more in the long term than using a PEO to take care of payroll and HR across the board. 

Contractual obligations

Because PEOs are generally large, taking one on as a co-employer will thereby succumb your business to large-employer rules. You will have to abide by the large-employer regulations set by the Americans with Disabilities Act and the Affordable Care Act. However, following these restrictions is often worth the benefit of having a PEO. Meanwhile, you will only face regulatory and contract-based changes if you choose the PSP route.


Liability comes into play when choosing between a PSP and a PEO. While outsourcing a PSP for payroll processing is incredibly beneficial, it also comes with many risks. Because a PSP is not your co-employer, you can be held liable for any mistakes they may make in payroll processing. On the other hand, a PEO shares legal responsibility with you as your co-employer. For this reason, most PEOs prioritize risk and compliance when partnering with a business, obtaining top-tier talent and expertise to minimize risk and give you peace of mind as a business owner. 

Simplify Your Business with 

At, we make it easier to find the perfect PEO provider for your business. With access to some of the largest PEOs in the country, our agents provide high-performing options that will unlock your business’s true potential. If you’re ready to take your business to new heights, connect with our team today to shop PEO quotes and receive competitive pricing within 24-72 hours!

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