Here at Employers Resource, we recently published our newest eBook, The Anatomy of a PEO Invoice. This eBook is an in-depth guide to PEO billing, and covers a variety of topics that many small business owners interested in PEO services have questions about.
We want to give all of you a small preview of what we cover in the eBook, and will be posting sections of it over the coming weeks. This week, we’re bringing you the sections on what’s actually in a PEO invoice, including things you’re already paying for.
Keep an eye out for more sections in the coming weeks for more information on PEO billing and invoices, or just download the full eBook here!
The Anatomy of a PEO Invoice
PEO services vary from company to company. It is not a surprise, then, that the way they charge for their services vary, as well.
Do they offer a PDP program for workers’ comp? EPLI or ADR? Are all HR services included? What about software? There are a lot of variables…
In order for us to breakdown how PEOs bill for their services, we will examine them from three different viewpoints:
- What are the various parts of an invoice?
- What is being calculated and how?
- What are you actually being charged for?
What’s in a PEO invoice?
Let’s break this down. It’s important to understand that there are items included in a PEO invoice or proposal that you are already (or should already) be paying. PEOs include these items because they play a role in the total amounts of funds that pass-through the PEO while you are using their services.
Did you catch that? It’s important. There are funds that pass-through your PEO that will be included in your invoice that are “costs” related to having employees that you are already paying.
Got it? Okay, our first element is what those “pass-through costs typically consist of.
Statutory and “Pass-Through” Costs
These pre-existing statutory expenses are often referred to as “pass-through” costs in a PEO invoice. Here are some common examples of these pass-through costs.
Federal Insurance Contributions Act (FICA)
Employers are required to both withhold social security taxes from their employees, and pay a matching percentage contribution. This matching amount is an obligation as an employer known as FICA. This amount is 6.2% of the employee’s wages, up to a wage cap of $117,000 per employee.
Really you have two things you must do related to FICA:
- Withhold and send the amounts for your employees to the government.
- Pay your matching share as the employer.
It is important to know that your PEO invoice or proposal will only show the amount for your portion of FICA. This is the “pass-through” amount related to FICA.
The PEO will calculate and withhold the employee’s portion automatically as they process your payroll.
Medicare is another statutory burden on employers that you are already required to withhold from your employee’s wages and pay as an employer. Medicare is 1.45% from your employee and 1.45% from you. Your portion of the Medicare tax obligation will be shown on the PEO quote or proposal as a “pass-through” amount collected for you by the PEO and remitted to the government.
Federal Unemployment Taxes (FUTA)
PEO invoices will also include a pass-through charge for Federal Unemployment Taxes (FUTA). Amounts shown for FUTA will reflect a rate that is federally set. For example, currently FUTA rates are at .6%. The PEO is responsible for depositing the FUTA payments and filing the Form 940 as your PEO partner.
State Unemployment Taxes (SUTA)
State unemployment taxes vary by state. The PEO invoice or proposal will show a charge for SUTA.
Check out our SUTA map tool to see the SUTA rate for your state.
A NOTE ABOUT PEO SUTA RATES:
Since PEOs have a co-employment arrangement with their clients, SUTA may be calculated and paid by the PEO since they can be considered the employers of record in a given state. This relieves you from the tedious and complex task of calculating and reporting SUTA. This is extremely valuable for companies with employees in multiple states.
The history of unemployment claims on an employer will impact something called their “experience tax rate.” This rate refers to a method for determining the contribution rates of individual employers according to the factors specified in their state. Some states allow these taxes to be paid using the experience rate of the PEO in lieu of the employer’s. This varies by state and PEO. There are also circumstances where your PEO might handle the calculations and reporting but you maintain your own experience rating.
Unemployment law varies by state, so always ask your PEO how they specifically handle SUTA for their clients in your state.