What's the difference between an EOR and a PEO, and which one do I need?

An employer of record becomes the legal employer of the worker, while a professional employer organization shares employment responsibilities with a client that is already an employer. Texas, which licenses PEOs, defines coemployment as a contractual relationship that "involves the sharing of employment responsibilities to covered employees in accordance with a professional employer services agreement" [7]. You keep your entity, the people stay your employees, and the PEO takes over payroll, benefits sponsorship, and an agreed portion of compliance work [14]. An EOR signs the employment contract itself through an entity it already operates in the worker's country, so you hold a services agreement with the provider rather than an employment contract with the person [10].

A PEO can only share responsibilities you already carry, so you have to be a lawful employer where the work happens, with a registered entity and the payroll and tax registrations that go with it [10]. An EOR asks nothing of you locally, because the employment sits inside its entity [10]. A US company hiring its first person in Portugal has no practical PEO option, since there is no local employer to share with.

US federal tax law does not recognize co-employment at all. The IRS states that "the Code does not define the term 'co-employer' and the concept is not recognized under federal tax law" [1]. The idea lives in state PEO statutes and private contracts, and for tax purposes the IRS looks for the common law employer, so a client that outsources payroll to an ordinary PEO "generally remains responsible for paying taxes and filing returns" [1]. Voluntary certification is the only mechanism that moves that federal liability [2][3].

None of this is legal or tax advice, since classification turns on specific facts in specific jurisdictions.

Who signs the employment contract

The EOR's local entity is the named employer on the contract, the payslip, and the statutory filings [10]. Under a PEO your entity stays on the employment relationship and the PEO joins it by contract, which is why the services agreement has to spell out which responsibilities each party holds [7].

Whether you need a local entity

A PEO requires you to be registered where the work happens, so a business using a PEO in three US states is registered in three US states [10]. An EOR removes that requirement and keeps your registration footprint at home [10]. Answer this before anything else, because it usually eliminates one model outright.

Who carries employment liability

Employment liability under an EOR sits with its entity, moderated by the indemnities in your services agreement [10]. Under a PEO the liability is shared, and not symmetrically across categories. Federal employment tax is the clearest case, because an ordinary PEO leaves the client responsible for the tax and the returns [1], while a certified PEO is solely liable for the taxes on wages it pays to work site employees [2][3].

How benefits are sourced

A PEO can sponsor a single welfare benefit plan that eligible employees of many client companies join, which is the basis of the pooled purchasing argument [8]. NAPEO, a PEO trade association, reports roughly 500 PEOs in the United States employing about 4.5 million people, so pools can be large; read that as industry research rather than neutral data [14]. An EOR provides the statutory local package plus whatever supplementary plans it has arranged in that country, and quality varies by market.

Where each model is available

EOR availability depends on local employment law, and several countries restrict it. Germany treats the arrangement as employee leasing, which requires a license from the German Labour Agency and caps a single assignment at 18 months [11]. PEO availability depends on your own registration plus, in the United States, state licensing; Texas requires a license for a provider with even one covered employee in the state [7].

How the pricing works

EOR pricing is normally a flat monthly fee per employee on top of salary and statutory employer costs. Deel publishes EOR pricing starting at $599 per employee per month and Remote publishes $699 [12][13]. US PEO pricing from those same vendors starts at $125 and $99, because your entity is still doing part of the work [12][13]. Traditional PEOs often quote a percentage of gross payroll instead, which changes how cost scales as salaries rise.

What certification does

Section 3511 of the Internal Revenue Code provides that a certified professional employer organization "shall be treated as the employer (and no other person shall be treated as the employer) of any work site employee" [2]. The IRS puts the practical version to customers directly: for work site employees, "the CPEO is solely liable for paying the customer's employment taxes" [3]. Certification is voluntary, so a PEO without it leaves the client responsible for the tax and the filings [1].

Where the relief stops

Relief covers work site employees, and only the wages the CPEO actually pays. For covered employees who are not work site employees, "a CPEO and its customer may both be liable with regard to remuneration the CPEO pays to non-worksite employees" [3]. Work site status turns on an 85 percent threshold measured at the customer's location, and the CPEO has to notify the customer when employees stop meeting it [4].

How to verify a CPEO

The IRS publishes lists of currently certified, suspended, and revoked CPEOs, refreshed by the fifteenth day of the first month of each quarter [6]. Check the exact legal entity name and EIN on your contract against that list, since a group can hold certification for one subsidiary and not another. CPEOs also file Form 8973 to report when a customer contract starts and ends [3].

What certification requires of the PEO

A CPEO posts a surety bond for federal employment taxes worth at least the greater of 5 percent of its prior year section 3511 liability, capped at $1 million, or $50,000, and it files quarterly CPA attestations covering tax deposits and working capital [5].

The state layer

State rules run in parallel with the federal program and do not track it. Texas licenses PEOs under Labor Code Chapter 91 and requires a license for a provider with even one covered employee in the state [7]. For state unemployment tax there, a licensed PEO "shall be the employer of the workers it provides to a client," and an unlicensed provider shifts that determination to the client [9]. Workers compensation is separate again, since in Texas either party may carry it and the services agreement has to name which one does [8]. Confirm the equivalent rules in every state where you have staff; this is general information rather than legal or tax advice.

You already have an entity where the person will work

A PEO is normally the better fit, because it works wherever you are already a lawful employer and published PEO rates run several hundred dollars per employee per month below EOR rates [12][13]. In the United States, filter to IRS-certified PEOs if federal employment tax exposure matters to your finance team [3][6]. Exit is simple, since you are already the employer, so leaving means moving payroll and benefits elsewhere without touching anyone's employment contract.

You have no entity in that country

An EOR is normally the only compliant route, because there is no local employer for a PEO to share responsibilities with [10]. Check that the provider holds its own entity there rather than subcontracting to a partner, and read the termination clause first, since statutory notice and severance get passed through to you.

You are hiring across several countries at once

An EOR handles that spread far better than opening entities in parallel, and it keeps your registration footprint in one place while you learn which markets deserve a permanent presence [10]. Plan the exit anyway, because moving employees onto your own entity later is a transfer of employment that some countries treat as a business transfer carrying protected terms.

Benefits pricing is your main reason for outsourcing

A US PEO fits better than an EOR, because a PEO can sponsor a single welfare benefit plan covering eligible employees across many clients [8]. Ask for the plan documents and the renewal history rather than accepting the pooled purchasing argument on its own.

You have five or more people in one country

Price your own entity against the fees. At $599 to $699 per employee per month, ten people in one country costs roughly $72,000 to $84,000 a year in provider fees alone [12][13], which sits inside the range where an entity plus local payroll starts to compete. Incorporation and accounting costs vary by country, so run both numbers.

EOR arrangements are restricted in some countries

Germany classifies the EOR model as employee leasing, so the provider must hold a license from the German Labour Agency, and without it "an employment relationship between the EOR's customer and the employee arises automatically by operation of law" [11]. Assignments are capped at 18 months and both parties face fines of up to 30,000 euros per violation [11].

Certification status is not a given

A PEO without IRS certification leaves you responsible for federal employment tax on your own employees, whatever the services agreement says [1]. Providers sometimes describe themselves as certified when only one affiliated entity holds the certificate, so check the exact name and EIN against the IRS public listing [6].

State accounts behave differently than buyers expect

Whether the PEO or the client is the employer for state unemployment tax is set by state law rather than your contract, and in Texas it flips to the client if the provider is unlicensed [9]. Workers compensation is separate again, and in Texas the services agreement has to name the party maintaining coverage [8].

The category labels are unreliable

Deel and Remote both sell EOR and PEO products from the same platform [12][13], and "global PEO" often describes what is legally an EOR. Ask which entity signs the employment agreement instead of sorting providers by the label on a pricing page.

Neither one is a staffing agency

A staffing agency sources candidates and supplies them for its own account, while both an EOR and a PEO start after you have already chosen the person.

An EOR is not a contractor arrangement

An EOR puts the worker on an employment contract with statutory entitlements attached, while a contractor stays self-employed. Several providers sell a separate agent of record or contractor of record service for that case.

A PEO is not a way to stop being an employer

Co-employment shares defined responsibilities without removing you from the employment relationship, and with an uncertified PEO the client stays responsible for its own employment taxes and returns [1].

"Global PEO" is not a third model

The phrase is marketing shorthand. In almost every case the structure underneath is an EOR, because genuine co-employment requires you to already be an employer in that country [10].

Neither model settles worker classification

Putting a genuine contractor through an EOR converts that person into an employee, which changes the underlying facts. Routing a misclassified worker through a PEO changes much less, because you remain an employer either way [1].