What Is a Payroll Service Provider & How Do You Choose the Right One?

Choosing the best payroll service provider should be among a business owner's top priorities. It's particularly important when considering just how time-intensive and costly it can be to manage payroll in house.

The following tips can help you get started with payroll services, whether you’re an established business owner or just getting started. If your business is just getting underway, we’ll walk you through the ins and outs of payroll service providers. If you're a business owner who has decided to transition away from a do-it-yourself payroll process, here's a look at key considerations to keep in mind.

What Is a Payroll Service Provider?

Payroll service providers are companies that offer payroll processing, tax filing, and other related services to businesses. Using a payroll service provider can help businesses save time and resources by automating administrative tasks, such as calculating compensation, withholding taxes and deductions, preparing checks or direct deposits, and filing federal, state, and local taxes.

What Do Payroll Service Providers Do?

Payroll service providers can take the guesswork out of the payroll process by managing assigned payroll tasks. While the business owner or internal payroll person will need to provide employee information, the best payroll services often handle the heavy lifting associated with calculating, verifying, and organizing payroll each period.

The exact services can vary from provider to provider, but typically, third-party payroll services will handle:

• Filing of state, local, and federal taxes.
• Tracking of employee benefits, such as vacation and sick leave.
• Reporting of new hires to the government.
• Tracking employee earnings.
• Generation of reports for company use.
• Automation of deductions for 401(k) contributions or insurance premiums.
• Online access to employee records and payroll documents.
• Creation and printing checks for manual signature or electronic signature release.
• Managing direct deposit.

Why Would Companies Choose To Use a Payroll Service?

Many companies choose to use a payroll service for the various features that help streamline payroll to save time and money. Payroll processing is a group of complex tasks governed by numerous rules and regulations, so using a third-party provider can help businesses stay up to date on changes so they can maintain their compliance with the applicable laws.

Additionally, third-party providers typically offer user-friendly interfaces with helpful tools to manage the entire payroll process, such as automated check generation, employee self-service portal for access to records and reports, electronic filing of taxes, and electronic payments of employees' wages. This helps businesses save time and resources that would have been used on manual operations.

Understanding Different Types of Payroll Services

Finding and choosing the best payroll provider may take some time and effort, but the payoff is worth it. Payroll providers operate under different models, so it's important not only to identify the best service provider for your business, but also the best service model. So, what is the best payroll service for your specific needs? Here's a snapshot of three distinct types of payroll systems most businesses typically choose from:

Professional Employer Organization (PEO)

A PEO allows companies to outsource key human resource functions like payroll and benefits. PEOs also provide guidance designed to assist small and mid-size companies in maintaining compliance with federal and state employment laws. Working with the right PEO can help business owners and their management teams stay focused on the business.

Generally speaking, a PEO assumes responsibility for payment of a business' employment taxes, the filing of tax returns, and ensuring that proper deposits and payments for taxes are made on a timely basis. For time- and energy-strapped employers, working with a PEO can free up a considerable amount of company resources that would otherwise be spent on payroll and other required, but time-consuming tasks.

Payroll Service Providers (PSPs)

A payroll service provider is a third-party service with the objective of meeting a business' Internal Revenue Service and state tax filing and deposit obligations. Basic services include collection of employee information from the employer and being responsible for printing checks and making direct deposits on the business' behalf.

Reporting Agents (RAs)

Reporting agents often serve as a link between the IRS and businesses. The goal of RAs is effective and efficient IRS tax compliance and collection. They help employers to fulfill required tax deposits and informational tax filings to the federal government.

Of course, as the IRS notes about outsourcing payroll, "employers are ultimately responsible for the payment of income tax withheld," so choosing the right payroll vendor is critical.

What Is the Best Payroll Service for You?

Enlisting a third-party payroll service is an approach increasingly used by businesses across the U.S. There are many compelling reasons to outsource your business payroll, including:

• Potentially significant savings in time and labor.
• Reduction of expensive payroll processing errors.
• Improved compliance with government regulatory and tax requirements.

Choosing a trustworthy and reliable payroll provider has become even more important in recent years with economic and societal changes. A reputable payroll provider can help you keep your company in compliance with federal, state, and local tax reporting guidelines.

But opting to outsource payroll is just the first step a business must take. Next comes selecting the right payroll service provider for your specific needs. So, what is the best payroll service for your business' needs?

What To Consider When Choosing a Payroll Service

There are several factors to consider when selecting the best payroll service for your business. Here are some tips on where to start:

Referrals and References

A common first step is asking fellow business owners for referrals (particularly in businesses similar to yours). Once you get a few referred names, conduct your due diligence to vet out their ability to meet your payroll needs. Start by reading online reviews and customer testimonials of each company, then contact each provider and request a list of satisfied client references.

Experience

Choosing a newly established payroll service provider because it offers discount pricing or some other incentive can be a risky endeavor. Making sure your employees are paid promptly and without error is a top priority and shouldn't be left to providers with little or no experience. Any established provider should demonstrate accuracy and reliability and offer additional resources beyond payroll.

A Personalized Approach

Not all businesses are created equal, and any quality outsourcing provider must be equipped to match their services to a company's specific needs. Quality providers can dig in and use their understanding of your business to customize their approach, avoiding a generic, one-size-fits-all strategy.

Strong customer service should be an essential element of this personalized approach. This includes around-the-clock support (not just on days when your company payroll is being processed). It should also include a single point of contact: ideally a highly trained, dedicated payroll specialist who can address a wide range of payroll and tax needs, and, most importantly, who understands the unique facets of your business.

Advanced Technology

A top-tier payroll service provider should offer advanced online payroll software, complete website functionality, and a proven track record of incorporating technological advancements to make their services even better.

Find out if the provider offers you and your employees access to information on an integrated platform accessible via both a web browser and a mobile app. It may also be important that your chosen provider's platform lives in the cloud, as cloud-based data is generally considered to more effectively protect and secure sensitive company information.

Request a trial run of the provider's payroll software to determine for yourself if it's easy to use. Try accessing data from a smartphone or other mobile device and beware of providers that rely upon outmoded technology to process their clients' payroll.

Special Services

What other services can the provider offer? Leading payroll service providers:

• Administer employee benefits and retirement plans.
• Assist with payroll taxes and sales tax payments.
• Process workers' compensation withholdings and claims.
• Offer time and attendance solutions.
• Can even support employee hiring, screening, and retention.

Many business owners are opting for such full-service providers since they enable them to focus more of their time and effort on growing the business.

Up-Front, Transparent Pricing

Some providers charge additional fees for routine transactions, such as hiring a new employee or for registering an employee for direct deposit. To avoid the unpleasant surprise of hidden fees, make sure the provider's pricing structure is clearly explained beforehand, specifying any supplemental charges and processing fees. See if the provider is willing to disclose the possibility of pricing changes in the near future.

A Dedicated Point of Contact

Business leaders have a lot on their plates. Your workday doesn't always end at 5 p.m., and you may need access to your payroll provider after traditional business hours. If outsourcing your payroll services lands you on hold for hours, or worse – no one answers the call – then consider choosing U.S.-based experts that provide a dedicated point of contact with wide availability. Having the ability to chat with a dedicated specialist or service manager may enable you to access the information you need anytime, from anywhere.

Robust Analytics

Payroll can be one of the largest expenses a company incurs. Even slight deviations in employees' work hours can throw a company budget into disarray. Industries with weekly or seasonal fluctuations, such as restaurants or landscaping companies, can have significant differences in payroll between seasons.

Some payroll services provide employee and HR analytics that may help you break down data by year, month, week, day, or hour. Look for a solution that allows you to compare your data to sales fluctuations to help you determine if you're overstaffed or understaffed and where you are most productive.

Reliable and Secure

There are many ways for businesses to outsource payroll services. However, not all payroll service providers keep security as a top concern. Unfortunately, some providers don't use cybersecurity best practices to keep your data safe, putting your reputation and employee information at risk. Others may be slow to fix errors in an application's code, causing the system to go offline, resulting in downtime.

Look for a payroll service provider that's well known in the industry with a long history of supporting clients in your sector. The company should clearly explain its data security practices, have a reliable server with a high uptime rate, and regularly update applications to meet the latest protocols.

Flexibility

Many of today's companies look for scalable payroll solutions that can adjust as needs grow or change. Some payroll services offer flexible tools, such as a human capital management (HCM) software and service platform, where customers can add or remove modules to support their business use cases. HCM services can help business leaders manage:

• Employee time and attendance records.
• Vacation or paid time off (PTO) tracking.
• Online payroll and automatic payroll tax administration.
• Third-party retirement programs.
• Hiring and onboarding tasks.
• Employee development and training.

Compliance Support Features

Many businesses don't have an HR department or even an internal HR person. Instead, the job is done by owners or managers who wear several hats. Adhering to laws and regulations can be tricky and time-consuming. On any given day, you may need to:

• Report new hires to state employment security and child support departments;
• Use the government's E-Verify system to verify employment authorization;
• Pay attention to state or local minimum wage changes;
• Adhere to health insurance requirements; and
• Comply with laws or regulations defining employee classifications.

Look for a payroll provider that stays on top of new or potential legislative and regulatory changes.

Questions To Ask Payroll Providers

To work with a top payroll company, one that can meet your needs now and as your business changes and grows, you may want to research many providers, from local and app-only to regional and national companies. What should you look for? What makes a payroll provider exceptional?

Here are some key questions to ask of each potential third-party provider:

• Do you understand the needs of my business?
• How easy will it be to switch from in-house payroll processing to an outsourced provider?
• Do you have a team specifically dedicated to getting my account set up and running?
• What are your support options? Do you provide around-the-clock service? Is there a dedicated, trained payroll specialist available to answer questions at my convenience?
• Is your company prepared at the outset to process employee payroll, as well as help me calculate, pay, and file my payroll taxes with the appropriate agencies?
• Do you have a tax compliance team that has an ongoing relationship with the IRS, state, and local agencies?
• What is the extent of your experience working with businesses of my size and in my industry?
• Are you willing to help me better understand the payroll process, including compliance with payroll taxes and regulations?
• Do you have a self-service option? Are you still willing to work with me if I wish to maintain control of certain aspects of my company's payroll process?
• How easy will it be for me to purchase your services and get things up and running with minimal disruption to my business?
• Does your company offer the option to integrate related services with your payroll system, such as time and attendance or HR administration?

When you hire a payroll provider, take time to learn more about what they do and how well they do it. Your goal is to find and select a payroll provider that is competent, stable, flexible, and easy to work with.

Tips for Using Third-Party Payroll Services

If you have determined that enlisting the skills and knowledge of a third-party payroll service is right for your business, how do you go about making the best use of their expertise? Here are valuable tips:

• Enroll your business in the Electronic Federal Tax Payment System (EFTPS) and confirm that your new payroll provider uses it when making tax deposits. As the IRS notes about selecting a payroll service provider, the free EFTPS service offers employers "safe and easy online access to their payment history when deposits are made under their Employer Identification Number," adding that this helps businesses "monitor whether their PSP or Reporting Agent (RA) is properly carrying out its tax deposit responsibilities."
• Also confirm that your RA offers you a written statement that clearly states it is the employer's responsibility to file returns and pay taxes on a timely basis. This statement should always be included in any contract between your business and the RA.
• Don't replace the third-party provider's address for your own. According to the IRS, employers should be sure their own address is on record with the tax agency. In this way, you will be sure to get any IRS-related correspondence as needed (bills, notices, etc.). This tactic is also useful in providing a means by which you can monitor the payroll provider and identify any unauthorized diversion of funds.

Ensure Your Payroll Provider Can Integrate With Your Existing Tools

Access to data and insights are critical for today's businesses. However, to get a clear view of your information, your systems need to connect seamlessly. Payroll providers may offer a range of integrations to help you share data with your technology stack. Popular integrations for payroll programs include platforms in various categories, such as:

• Hiring and HR
• Time and attendance
• Retirement and health benefits
• Finance, accounting, and compensation
• Point of sale systems

Selecting a qualified payroll service provider is one of the most important decisions you can make as a business owner. When switching to a payroll provider, take the time to examine your options and then make the decision that most benefits your business needs.

Insurance sold and serviced by Paychex Insurance Agency, Inc., 225 Kenneth Drive, Rochester, NY 14623. CA License #0C28207.

Professional employer organization (PEO) services provided by Paychex Business Solutions, LLC (Florida employee leasing license GL7), Oasis Outsourcing, LLC (Florida employee leasing license GL42), and their affiliates, which are licensed or registered to provide PEO services where required by law.