5 Hidden Costs of Being an Employer: How a PEO Helps Clients Reduce Unexpected Expenses
Quick look: The true cost of employment goes far beyond salaries. Payroll taxes, benefits, compliance, turnover, and productivity decreases can quickly add up, but they don’t have to overwhelm small business leaders. By offering a professional employer organization (PEO) solution, brokers can help clients access the scale, expertise, and tools needed to manage these hidden costs strategically.
When it comes to the expenses associated with hiring an employee, compensation is just the beginning. The total cost of employment includes taxes, benefits, insurance, compliance, and potential productivity drops, costs that can quietly add 30% or more on top of wages.
Small and midsize businesses (SMBs) can feel this strain most, often lacking the scale and human resource (HR) infrastructure of larger firms. Below, we break down some of the most significant hidden employer costs and how brokers can help reduce, manage, or even eliminate them by aligning clients with a professional employer organization (PEO).
1. Taxes and mandatory insurance
Taxes and insurance add up fast. In 2025, the employer tax rate for Social Security is 6.2% with a $176,100 wage base limit. Additionally, the employer Medicare rate is 1.45% with no cap.
Businesses must also pay federal unemployment (FUTA), state unemployment (SUTA), and workers’ compensation, which averages $1 per $100 of payroll, per the latest research.
How a PEO helps: A PEO becomes the “employer of record” for tax and insurance purposes, handling payroll tax filings, W-2s, and compliance. Because PEOs aggregate employees across their customer base, they often negotiate better workers’ compensation rates and administer them efficiently, reducing the risk of audit or penalties.
2. Health insurance
Employer-sponsored health coverage is one of the largest, sometimes unexpected, expenses. In 2024, the average annual family premium surpassed $25,500 (up 7% year-over-year). Of that amount, workers paid approximately $6,300, and employers covered the rest, about $19,200.
How a PEO helps: PEOs pool employees from multiple small businesses to access large-group health plans that may otherwise be out of reach. This often leads to richer plan options, more predictable renewal rates, and potentially lower premiums than SMBs could negotiate alone. Accessing enhanced benefits also strengthens recruiting competitiveness for smaller organizations, especially considering that just half of companies with 3-49 workers offer health benefits to at least some of their staff.
For brokers, partnering with a PEO also saves time and effort. A PEO’s employee benefits experts can compile tailored plan options, giving brokers ready-to-present solutions for their clients and prospects.
3. Absenteeism and presenteeism
Per Kaiser Permanente, absenteeism and presenteeism—when workers are physically present but unproductive—due to chronic illnesses and injuries, costs U.S. employers roughly $3,000 per employee per year.
How a PEO helps: Many PEOs offer employee assistance programs (EAPs) and comprehensive insurance coverage that promotes physical and mental health. Their HR Managers can also help SMBs develop PTO policies and provide guidance for managing absenteeism compassionately but effectively, reducing both absence and burnout.
A PEO partnership can also mean significantly improved productivity. The National Association of Professional Employer Organizations (NAPEO) reports that employers who work with PEOs have considerably higher employee engagement, ultimately increasing efficiency.
4. Recruiting and vacant positions
The average cost per hire is $4,700, according to the Society for Human Resource Management (SHRM). Further, the average time-to-hire rate is 44 days. During that time, managers may spend a significant amount of time interviewing, which can slow down projects.
How a PEO helps: Some PEOs, like ExtensisHR, provide full-cycle recruiting support, from job posting creation to offer letter consultations, at no additional cost. This access to talent pipelines, compliant job descriptions, and guidance on competitive compensation can help SMB clients reduce their time-to-fill and lower cost-per-hire.
5. Compliance risks and penalties
HR compliance violations, even if unintentional, can be extremely costly. In 2025, the penalty for a serious Occupational Safety and Health Administration (OSHA) violation is $16,550 (jumping to $165,514 for a willful or repeated violation). Additionally, I-9 paperwork violation fines range from $288 to $2,861 per form.
How a PEO helps: PEOs have teams of risk and compliance experts who track regulatory changes and provide proactive audits, reducing the chance of costly mistakes or penalties. Additionally, PEOs often use automated I-9/E-Verify systems and provide workplace safety program guidance.
ExtensisHR: helping SMBs experience growth and cost efficiency
A PEO doesn’t eliminate employer expenses, but it can reduce, stabilize, and simplify many of the biggest ones. NAPEO reports that companies using PEOs grow twice as fast, have 12% lower turnover, and are 50% less likely to go out of business. For clients, leveraging a PEO isn’t just about cutting costs; it’s about building resilience and fueling expansion.
Brokers gain valuable advantages from working with a PEO, too. The right partnership amplifies their ability to reduce employee benefits and workers’ compensation costs, while providing HR services that can help clients avoid costly missteps. This allows clients to focus more on growing their business and less on managing compliance, while brokers strengthen their value and deepen client relationships.
Looking to help your clients grow, compete, and maximize their budgets? ExtensisHR’s comprehensive PEO solution can help. Contact us today to learn more about a partnership.
