ASO vs PEO: Taxes, Benefits, Costs and How to Choose

TriNet, which sells both models, puts it plainly: «the biggest difference comes down to co-employment.» A PEO works through a co-employment relationship. An ASO supports HR administration without becoming a co-employer. Paychex describes the same split: with an ASO «there's no co-employment arrangement, and the client company always retains administrative employer status.»

That one choice decides who files payroll taxes, who sponsors benefit plans, who carries workers' compensation and how much HR work stays with your team. The sections below follow each of those threads.

An ASO is an outside provider that runs parts of your HR on your behalf. Common services are payroll processing, payroll tax administration, benefits administration, HR guidance and compliance support. You choose which services to buy, and many ASOs sell them as separate packages.

Payroll taxes stay under your EIN

G&A Partners, which sells an ASO, explains that an ASO «processes your payroll and typically calculates and submits payroll tax deposits and returns using your company’s own tax accounts.» TriNet says the same for its ASO: payroll taxes are filed under the company's EIN.

The IRS rules for this kind of provider are clear. A payroll service provider prepares returns using each client's employer identification number, and a reporting agent authorized on Form 8655 files separate returns for each client under that client's EIN. In the IRS's words, these providers assume no liability for their clients' employment tax duties. The IRS also reminds employers that they are ultimately responsible for the income tax withheld and for both halves of Social Security and Medicare taxes. So with an ASO, a missed deposit is still your problem, and you should be able to check every deposit the provider makes.

You sponsor your own benefits

With an ASO, the benefit plans stay yours. You choose the carriers, the broker and the plan design, and the ASO helps with enrollment, eligibility and compliance work. G&A sums it up: an ASO «administers your existing plans, while a PEO leverages its buying power to provide access to plans at affordable rates.» Paychex adds that an ASO does not offer group policies or plans.

That is a strength if you already have plans you like or a group large enough to buy coverage on good terms. It is a weakness if your main goal is better benefits than your headcount can buy alone.

Workers' comp stays with you

An ASO client keeps its own workers' compensation policy. CO— by the U.S. Chamber of Commerce notes that ASOs typically do not deal with workers' compensation or state unemployment insurance, although some agreements include administrative help.

A PEO enters a co-employment relationship with your business. You keep control of the daily work: hiring, assignments and terminations. The PEO takes on the employer duties set out in the client service agreement, typically payroll, payroll tax reporting, benefits and workers' compensation.

Wages are reported under the PEO's EIN

TriNet explains that a PEO may report wages under the PEO's federal EIN and remit payroll taxes for payroll processed on its platform. For a certified PEO (CPEO), the IRS says the CPEO pays wages to the customer's workers, is responsible for withholding, reporting and paying federal employment taxes on those wages, and files aggregate returns using its own EIN. That is the opposite of the ASO model, where every return carries your EIN.

Large-group benefits

Because a PEO covers employees of many client companies, it can sponsor large-group health and retirement plans. The Department of Labor treats a PEO health plan that covers employees of two or more client employers as a multiple employer welfare arrangement (MEWA), which state insurance law can also regulate. For you, this means plan choice is the PEO's, not yours, but rates and options may be better than you could get alone.

Workers' comp and unemployment tax

A PEO usually provides or arranges workers' compensation coverage. CO— notes that PEOs negotiate workers' comp rates, file state unemployment tax and handle claims processing.

Neither model is better for every business; each gives up something.

What a PEO asks of you. CO— notes that switching to a PEO means giving up some control over HR processes, which can change your company culture and affect your taxes. Paychex adds that PEOs often work with a set group of carriers for benefits and workers' compensation, which can limit your options, and that a PEO usually reviews your finances before it accepts you.

What an ASO leaves with you. An ASO does not provide workers' compensation coverage, and you manage your own insurance vendors, CO— points out. Paychex notes that ASOs usually offer a narrower range of services than PEOs, so some HR work stays in-house, and that you remain responsible for sponsoring your own benefit plans.

TriNet says ASOs usually charge an administrative fee based on the services selected, often per employee per month. PEOs may charge per employee per month or a percentage of payroll, and benefits, workers' compensation, payroll taxes and optional services may be billed separately or bundled.

CO— by the U.S. Chamber of Commerce says PEOs cost more than ASOs, but its point about what the price covers matters more. A PEO price usually includes workers' compensation, state unemployment insurance and health benefit fees. An ASO client pays its own insurance and benefits on top of the ASO fee. Compare total cost, not headline fees. Our PEO cost guide breaks down what PEO fees include.

Start with who handles HR today.

1. The owner or an office manager handles HR alone. CO— suggests a PEO, which takes on more of the work. The same applies if better benefits are the main goal.
2. You have at least one person responsible for HR. CO— suggests considering an ASO once one or more people are responsible for HR functions, to add administrative help while keeping control.
3. You already have a benefits broker and plans you want to keep. Paychex lists businesses with established broker and carrier relationships, and larger companies with large-group status, among those that benefit from an ASO.
4. You want to pick services one by one. An ASO lets you outsource payroll, benefits administration or HR support separately.
5. You want to share employment-related responsibilities. Only a PEO does that, through co-employment.

Several large providers run a PEO and an ASO side by side, under different names:

• ADP: ADP TotalSource is its PEO, under co-employment. With ADP Comprehensive Services, ADP says the business remains the sole employer of record and ADP does not share employment liability.
• TriNet: TriNet PEO uses co-employment; TriNet HR Plus is its ASO. See TriNet.
• Insperity: HR360 and HRScale are PEO plans. Insperity describes HRCore as an HR platform with HR support, independent of the PEO model.
• Paychex: Paychex PEO uses co-employment; its HR packages work without shared employer responsibility.
• G&A Partners and INFINITI HR also sell both.

A provider that sells both can make a later switch simpler. TriNet notes that businesses can move from an ASO to a PEO, or the reverse, subject to the service agreement and payroll tax reporting requirements.

In health insurance, ASO means «administrative services only». Paychex and CO— both point out the difference: in that arrangement an employer self-funds its health benefits and a third party manages the plan. It is a way to fund health coverage, not an HR outsourcing provider. If a search for ASO pricing returns health plan fees, that is the other ASO.

1. Is this quote for your PEO or your ASO, and under whose EIN will our payroll taxes be filed?
2. If you file for us, how can we see each tax deposit and return?
3. Which services are in the base fee, and what does each add-on cost?
4. For an ASO: which of our carriers do you connect to, and who files ACA forms and COBRA notices?
5. For a PEO: which benefit plans are available in our states, and how are renewals priced?
6. Who handles workers' compensation reporting, audits and claims?
7. What is the notice period, and what data do we receive if we leave?
8. If we later want to switch between your PEO and ASO, how is that handled mid-year?

• Decide first whether you want a co-employer. Taxes, benefits, insurance and liability all follow from that choice.
• With an ASO you stay liable for payroll taxes filed under your EIN, so insist on visibility into every deposit.
• A PEO's higher fee usually buys large-group benefits and workers' compensation; an ASO's lower fee leaves those with you.
• Ask any provider that sells both which model a quote is for, and compare full costs on your real headcount.