THE ANATOMY OF A PEO INVOICE

Transcription

1 THE ANATOMY OF A PEO INVOICE The Internal Workings of Professional Employer Organizations Billing and Proposals EMPLOYERSRESOURCE.COM

2 Welcome Hi there! Thanks for checking out this guide. If you re a CEO, CFO, controller, general manager, owner, or any other business leader considering a partnership with a PEO, it s important that you understand what the numbers on that proposal and invoice represent. This guide will help you make sense of the costs, and make informed decisions when selecting a PEO. Who doesn t like to know how something's made? It s fascinating to get a behind the curtain look at a process, learn about the inner workings. Well, today that s what you re going to get. We re going to give you an inside look at the inner workings of the PEO invoicing world. Our National Manager of Underwriting, Bob Henbest, has been in the PEO industry for 19+ years, and in underwriting specifically for the past 16 years. It is safe to say that only a handful of people around the country know PEO billing as well as this guy. You are lucky to have him as your tour guide on this journey you are about to take. We have worked closely with him and others from our organization and the industry to put together this resource. What the parts of a PEO invoice are and what they mean. Different billing approaches PEO companies take. Costs on the PEO invoice that you re already paying for. How PEO companies calculate their admin fees. Additional costs to be aware of on PEO invoices and proposals. Learning to compare PEO invoices in different formats. Tips on comparing PEO services. And many other insider tips. Our hope is that this guide will give you the tools necessary to make a better decision for your business as it relates to selecting a PEO partner. This is your backstage pass. Now, go take a look! 1

3 What is a PEO? Before we go any further, if you don t know what a PEO is and what they do, you re reading the wrong ebook! Get the right one HERE. Here s a crash course. PEO companies allow entrepreneurs to focus on growing their business by removing the administrative burdens of having employees, while reducing their employerrelated liability by ensuring the business is compliant with the many labor, employment, compensation, safety, and tax laws. This typically looks like relief of business costs, administrative burdens, and compliance risk in these four main areas: HR and compliance. Payroll and tax. Employee benefits. Workers comp and safety. Some PEOs provide detailed invoices that break out costs related to all areas, rates, and exact numbers that create the final invoice for their services. Some do not. 2

4 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: 1. What are the various parts of an invoice? 2. What is being calculated and how? 3. What are you actually being charged for? 3

5 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. Shopping for the right PEO for your business? Learn the 10 essential questions you should ask during the process here. 4

6 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. You have two things you must do related to FICA: 1) Withhold and send the amounts for your employees to the government. 2) 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 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. 5

7 Federal Unemployment Taxes (FUTA) PEO invoices will also include a passthrough 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. 6

8 Workers Compensation Premium Workers comp is administered by the state. Most states require employers to have workers comp coverage. Workers' comp is billed as a percentage of payroll. The percentage will vary depending on the type of industry and the type of work a given employee on your payroll is performing. National Council on Compensation Insurance (NCCI) is a national organization that determines which classification codes apply to employers and each state determines the rates for each of these classifications. For example: a clerical employee may cost $0.25 per $100 while a plumber might cost $10.35 per $100 in your state. These codes basically represent the risk involved in providing coverage for them and the likelihood of experiencing a claim for that employee. For example: a $5.00 workers' comp charge will be charged at the rate of $5.00 for each $100 of payroll in the particular workers' comp classification. As you might expect, the more employees working in a particular risk classification, the higher the workers' comp insurance charges. When using a PEO, employee time (hours worked) is reported to the PEO for each workers' comp risk classification, and is used as the payroll (remuneration) basis for billing you for workers' comp premium. Each unbundled PEO quote you receive will identify the charges for workers compensation insurance. Workers' comp charges are usually based on a dollar per hundred charge. 7

9 Workers Compensation Premium Continued... You should expect to see workers' comp charges identified for each type of work you identified on the proposal you receive from the PEO. Unlike many traditional workers compensation insurance plans, there are no up-front deposits required to secure coverage. When using a PEO, workers' comp coverage is part of the program. For white collar companies without significant workers' comp exposure, these costs are usually a minor component of the overall price being quoted. However, for companies with higher-risk jobs, workers' comp costs and/or savings are a significant component of the overall quote. Participating Discount Programs (PDP) Some PEOs offer a PDP program that allows the client to access lower monthly premium rates in exchange for sharing more in the cost of claims and risk. This can look many different ways, but most commonly you ll see an out-of-pocket cost that the employer will agree to pay for claims up to a certain point. Sometimes it specifies a certain flat fee per work comp medical only claims. For example, $50 per incident only claim. Sometimes you will see a flat fee per claim related to indemnity/death. For example, $5,000 per indemnity/death claim. These programs are used by PEOs to allow employers to put some skin in the game in exchange for lower monthly premiums. 8

10 Employer-Paid Benefits Employer-paid benefits costs on the invoice are expressed as dollars per pay period, per enrolled plan subscriber. These are costs that are not deducted from your employees paychecks. They are costs paid for by the employer. Examples of employer related benefits costs you might see: 401k matching contributions. Medical insurance premium contributions. Dental insurance. Tuition reimbursement. These will vary from employer to employer. But, if you have any benefits that you do pay for for your employees, they will be listed on the PEO invoice under this section. 9

11 Admin Fees for Professional Employer Services Finally, these are the fees directly related to the services your PEO provides. These fees typically appear in one of three ways on your invoice: 1. A percentage of payroll. 2. A flat dollar amount per paycheck or employee. 3. A flat minimum amount per pay period. Some PEOs will even show you your rate in a couple different formats from the list above. For example, we provide proposals to prospects showing our costs in both per-check and percentage format. These rates are set within the client service agreement between you and the PEO. We will discuss a few different approaches to how these fees are shown on your invoice more in depth in the next section. PEO services include things like: Payroll processing. Unemployment claims handling. Worker s compensation claims administration. Employee handbook creation. HR consulting. And many other services. If you offer benefits that your employees are paying pre-tax, it s important to ask whether your PEO is billing their admin percentage against gross or adjusted wages. The difference can add up to very big numbers over the course of year. *See additional costs in The Fine Print section later in this guide to learn about other services that may be charged by your PEO in addition to regular admin fees. 10

12 Types of Invoices Now that we ve looked at the various parts of a PEO invoice, let s look at a couple different ways these costs might be displayed on an invoice, as well as some other approaches that might make one invoice different from the next. In our experience, we have run into two different approaches to how an invoice is laid out. These two different approaches fall into what is commonly referred to as bundled or unbundled billing. Let s take a look at how these two approaches differ. 11

13 Bundled Pricing In a bundled invoice you will typically see just one or two lines that represent all the various pieces of the PEO services. Bundled pricing usually takes the form of providing a single percentage value that represents the total percentage of each paycheck going to the PEO to cover: Workers comp FICA FUTA SUTA Employer-paid benefits Admin fees It is common to see this percentage rate as a before cut-off rate. This means that the rate will be reduced by the respective percentages once applicable cut-off limits are reached for FICA, FUTA, and SUTA. Here s an example of what a bundled invoice or proposal might look like... As you can see from this example, the PEO in this situation does not break out the costs that make up the percentage fee (pass-throughs, work comp, benefits, admin, etc.). You don t know the percentage that you are paying for their administrative services, or what actually makes up this percentage. All you know is the total amounts that you will have to pay the PEO on a monthly basis for your given payroll. While this does appear to be a both simpler and easier to understand method, you need to be careful. Over-simplifying in this manner can be used to hide service rates that should be lower, benefits rates, or high admin rates. Only 2% of that $8, from that example may be going to the PEO for their services, but you won t know unless it s broken out (disclosed). 12

14 Unbundled Pricing Unbundled pricing is where all of the costs are unbundled, or broken-out, so you can see exactly what you are paying for in each area. You can see all the individual components making up that total percentage cost or per-check rates. Below is an example of unbundled pricing using a percentage billing method: You can see the the cost and rates are the same on both examples, but it is much easier to see exactly what you are paying for in this unbundled format. 13

15 / Percentage vs. Per-Check (flat rate) The way a PEO charges for their services will be calculated in two common ways: the percentage method, and the per-check method. The Percentage Method This is when a PEO applies an administrative service charge in the form of a percentage amount that will be paid to the PEO from each payroll check they process. It s important to note that this is payment for the PEO services, and not the other pass-through costs, as described earlier in this guide. Example: 5 employees paid biweekly $5769 gross wages per biweekly pay cycle. PEO is charging 2% per payroll cycle for their services. This means you would be paying approximately $ biweekly for their services. Notes about this method: This method is not advantageous when you have a large amount of commissions and bonuses paid out to your employees. 14

16 / Percentage vs. Per-Check (Flat Rate) The Per-Check Method This is a fixed fee per-employee, per-paycheck processed. Example: 5 employees paid biweekly $5769 gross wages per biweekly pay cycle. PEO is charging $24.00 per-check per payroll cycle for their services. This means you would be paying $ biweekly for their services. Notes about this method: This method can be less favorable when you have lots of part-time employees, unless your PEO gives you a different rate for part-time employees. You may end up paying more using this method compared to the percentage method in some situations. This method can be advantageous when you have a large fluctuation in payouts related to commissions and bonuses from pay cycle to pay cycle. Using the same examples from above, let s say the next pay cycle your gross pay went up from $5769 to $6345: Using the percentage method of 2%, you would pay $ for the same five employees. Using the per-check method with a flat rate of $24 per-check, you would still pay $ for the same five employees. The advantages and disadvantages of each method will vary from company to company. Look at your annual gross wages. Calculate an average gross pay per pay cycle, then use this to test which model works best for your company, and which way you see the most savings (or, receive the greatest value). 15

17 The Annual Admin Per Employee Quote It s worth noting that, while you re shopping for PEO companies, you will most often see quotes that are in annual admin per employee, per year pricing models. For example, a sales consultant may quote you $850/ee/yr* for their services. To convert to flat fee per payroll cycle, just divide this number by the number of your payroll cycles to get your per payroll cycle costs. Example: $850/26 (for biweekly pay) = $32.69 cost per employee, per pay cycle. To convert this to percentage per pay cycle, take $850 and divide that by the number of payroll cycles you have in a year. Then use that number to calculate the percentage that number represents of your average pay per employee, per pay cycle. Example: $850/26 (for biweekly pay) = $32.69 cost per employee, per pay cycle. $32.69/$ (pay per employee, per pay cycle) = 2.83%. *per employee, per year 16

18 The Fine Print Lastly, let s discuss a few small details to pay attention to that could have a big impact on the amount you pay your PEO in a given year. You should always pay attention to the fine print, but we ll make it a little easier for you by telling you what to watch out for. 1. What are the various parts of an invoice? 2. What is being calculated and how? 3. What are you actually being charged for? 17

19 Additional Costs It s very important to consider what will cost you extra in a given billing cycle with your PEO. Some PEOs will include the following services in their standard admin fees. Others will charge you extra using an à la carte service model, and you ll pay for it when you need those extra services. Setup Fees Ask the sales representative what your setup fees will look like. Setup fees vary greatly from PEO to PEO. Setup fees can be a large check you have to cut right after signing up. It s important to know the per employee setup fees you will be paying the PEO and factor it in while choosing between PEO companies. Some sales teams are given complete freedom to set these fees at whatever they can get away with and pocket the extra! It s also a common trick to use setup fees to recoup dollars lost because of low admin fees that were set as a first year rate to lock the client in and then raise their rate each year. Possible Extra Cost Items: Background Checks. EPLI (for example: $0.75 per employee, per week). Pre-employment testing. Additional cost per-claim, and flat fees for claims over a certain dollar amount. Recruiting. Resume screening. Interviewing. Customized employee handbooks. Performance appraisals. Rewards and recognition programs. Position descriptions. Wellness programs and tools. Drug-free workplace. Training (employee and managerial). W2 reprints. Bank wires. Unemployment claims processing year-end processing. Specialty reporting for job costing or certified payroll. Other specialty reporting. Online access to payment information or reports. HR software like HRIS. Timekeeping software and hardware. Software integrations and custom imports/exports of data. Payroll delivery (multiple check delivery locations will usually incur a Fedex charge). 18

20 Caps vs. No Caps (Wage Limits) Does the PEO Paying out caps vs. not paying out caps? Do they honor wage limits or caps? It has finally become very rare. But, there are still some PEOs that do not recognize wage caps. When negotiating with a PEO company, make sure you ask this question: Do you honor wage limits? Some PEOs don t and they simply won t bring it up. We at Employers Resource do honor wage limits that affect these key areas: Tax limitations. Executive wage caps (Work comp premiums). Some states disability insurance benefits. SUI Refunds Sometimes, a PEO will collect more SUI funds than are needed on behalf of the client. The state will issue a refund to the PEO for what was overpaid. Most PEOs refund this money to the client, but not all of them. Check the fine print here. It can be a significant amount of money at the end of a given year. Client Service Agreement Make sure you take a close look at the Client Service Agreement. This is what the PEO is actually agreeing to do at the rate they have quoted you. Make sure you understand the terms. Look for any fees that might surface if you choose to end the relationship, as well as any other hidden fees or charges. Look for clear and simple language. Is it saturated with legal jargon and attempt to confuse their clients? This can be a warning sign. 19

21 Pennies Now Value Later Don t be Penny Wise and Pound Foolish You get what you pay for, right? We know we should view pricing from the perspective of total value. In reality, though, that s not what we always do, and sometimes we really pay for it in the end. Sometimes, two products or services might look the same, but they don t cost the same. One appears cheaper than the other, so you go for the cheaper deal, right? We ve all been there. Well, we ve also all experienced those situations where that cheaper decision comes back to haunt us later, costing far more in time and money when everything's said and done. Never make a purchase based on price alone for anything. That s why it is so important to dive deeper and gather all the facts before you make commitments or sign any contracts. 20

22 Closing Thoughts We hope this guide has answered the questions you had about PEO billing, and what exactly makes up a PEO invoice. Now, you will be able to compare invoices that are in different formats and actually understand the numbers you re looking at in order to make better comparisons, and ultimately, better decisions. You will still run into some unique ways that PEOs do their pricing. However, in general this guide will help you understand the main concepts across the board. As you can see, there are also varying levels of billing transparency. Make sure you know what you re actually paying for, and be careful to always pay attention to the fine print! Good luck! We truly hope you find a PEO that fits your organization perfectly. They can be a tremendous partner in helping your company grow, make your life easier, and radically reduce the complexity of running your business. 21

23 Oh, In Case You re Wondering... Employers Resource is a PEO and we d be more than happy to tell you how our invoices look. Our invoice can be broken up into these sections: Employment Taxes (pass-throughs). Workers Compensation. Employment Benefits. Professional employer services. And we often show our clients the rate in per-check and total percentage formats on the same proposal/invoice. We also list out any additional costs outside of these four main areas in clear bullet point format. Interested in receiving a custom proposal? You can request a quote right here. We believe that the dreams of American business leaders are our country s most valuable resource. We exist so that you have more freedom to build these dreams and do more of what you love to do. We strive to have a deep understanding of your business and the unique challenges it faces related to having employees. Then, we make life easier for you and your employees by providing personalized and custom solutions to remove them. Our mission is to protect and set free the spirit of entrepreneurship - one dream, one business, and one paycheck at a time. 22