What Is a Payroll Provider and Are They Worth It?

A surprising 40 percent of respondents to a 2019 Global Entrepreneurship Monitor survey think starting a business is easy. But entrepreneurs know a successful business takes dogged hard work and unflinching resilience. Plus, careful task management, regular review and leveling up at the right times. 

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One of the big indicators your business baby is becoming an established company is when you outsource your payroll system to a specialist. For some companies, that means hiring a full-time staff member to process payroll. But most small businesses outsource this task to professionals. 

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That’s what this article is about. By the end, you’ll know exactly what a payroll provider does, how much they cost, and why you should consider one.

What is a Payroll Provider?

A payroll provider is a company that provides payroll services, like handling direct deposits, tax withholdings, and tax reporting. Payroll providers tend to work closely with human resources teams to ensure benefits administration runs smoothly. For example, they make sure retirement plan contributions and health insurance premiums are paid correctly.  

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They offer peace of mind to small business owners, as payroll companies tend to be more up to date on regulatory changes that affect payroll. They also offer efficiency, as they eliminate time-consuming tasks that require specialized training. 

How Much Does a Payroll Provider Typically Cost?

Payroll providers charge a base fee that ranges from $30 to $150 a month or more depending on the complexity of your payroll needs and the services you choose. The more complex your payroll, the higher your base price. Full-service payroll, where the provider delivers additional services like tax filing, costs more than a basic payroll plan.  

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In addition to the base rate, you’ll pay a fee per employee, typically $2 to $15 a head. That means that a business with 50 employees would spend between $130 and $900 a month or $1,560 and $10,800 a year. A payroll provider that also offers HR services can cost even more. The average small business spends between $3,000 and $7,000 a year on payroll services. 

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Contrast that with hiring a full-time employee to do payroll. A full-time bookkeeper will cost around $40,000 a year. And a full-time accountant costs about $60,000 a year. 

What Services do Payroll Providers Offer?

With a payroll provider, you can expect to get more than employee paychecks. Though services vary by company, you can expect:

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• Payroll processing: This can include issuing paychecks or pay cards or making direct deposits, depending on the provider. 
• Payroll tax payments and filing: This usually includes year-end reporting to the IRS and preparing tax forms.
• Workers’ compensation payments: They’ll make sure your insurance carrier has the right yearly payroll estimate for your workers’ comp premiums. Or you can use Hourly, which syncs your payroll data directly with your workers’ comp, so your premiums are based on actual numbers, and not a guess.
• Payroll deductions: Tax withholding and wage garnishment on the government end, plus withholdings for employee benefits (e.g., retirement plan contributions). 
• New-hire reporting: Required government reporting that verifies employees are not receiving workers’ comp and unemployment benefits in excess. And that they’re paying child support if they’ve been ordered by a court to do so. 
• Payroll reporting: Many service providers offer detailed reporting services so business owners can drill down into payroll data. 
• Employee self-service options: Self-service options let your employees take care of administrative tasks that would otherwise be on the business owner’s plate, like changing direct deposit information. 

Why Work with a Payroll Provider?

Payroll providers free up time (and often money) for leadership to focus on core business goals like profitability. The point of the service is not only to take a major task off the plate of key personnel but also to ensure that the task is done promptly, correctly, and with a guarantee. 

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Of course, it’s not purely an advantage. There are, as with all things, tradeoffs to outsourcing payroll. So let's take a closer look at the advantages and disadvantages of hiring a payroll service provider. 

Advantages of Working with a Payroll Provider

The main benefit of working with a payroll provider is that you save time, minimize costly errors, and increase security. These benefits alone are enough for the services to almost pay for themselves. But don’t forget about regulatory compliance. Did you know that nearly half of small businesses pay IRS penalties each year? Changes to tax laws happen all the time. Your payroll provider will stay on top of those changes, so you don’t have to. 

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We touched on payroll reporting earlier, but this is a powerful benefit. Understanding the full cost of your workforce helps you strategize for growth accordingly. A payroll company, for instance, can create a report on annual overtime trends. From there, you can see when you need a larger workforce and plan accordingly. 

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Payroll reports also provide insight into employee productivity and efficiency. You can use that information to identify your linchpin employees—the people who provide the most value in their role (or beyond their role). From there, you can work with them to fine-tune workflows and improve the onboarding process. And, of course, to ensure you’re retaining your best people. 

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Reporting tools give you a bird’s-eye view of your business and let you drill down into the details. Having a third party create reports for you is a huge advantage, as it’s time-consuming to teach yourself how to do this on your own.

Disadvantages of Working with a Payroll Provider

Cost is the number one disadvantage of outsourcing. Nothing is cheaper on the balance sheet than doing payroll yourself. But DIY-ing leaves you more vulnerable to errors unless you use top-notch accounting software. 

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Beyond cost, there are a few other disadvantages to consider. First, working with an outside team means you’ll have to contact them during office hours to resolve issues. This can lead to delays. Working with another team means you’ll also need to trust outsiders with sensitive financial information, so be sure you’re working with a reputable provider. 

Payroll Provider Options

Your payroll provider can take many forms and be purchased at many price points. Generally, the more complex the services offered, the higher the price. Here are the five most common options for managing payroll from most to least expensive.

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• In-house accountants: For larger businesses, an in-house accountant team can offer big advantages, including high-level feedback to guide strategy.  
• Payroll processing company: This type of business will do all or part of another business’s payroll. Outsourcing is less expensive than hiring in-house, but business owners will have less control over the payroll process.  
• Bookkeeper services: For small businesses with fewer employees, a bookkeeper may be suitable. You can hire an in-house bookkeeper or an independent contractor. Typically, it costs less to work with a contractor, but an employee offers far more access and availability. 
• Professional employer organization: A PEO offers full-service HR support, including payroll, benefits administration, and talent management. Unlike traditional payroll companies, a PEO shares employment responsibilities and liabilities. This type of contractual relationship is called co-employment. 
• Online payroll software: For business owners who want more control over the process, payroll software offers an inexpensive alternative to full-service payroll providers. Your team provides the inputs, and the software does the rest. Costs and value differ from company to company, so be sure to do your research. 

Popular Payroll Providers

The good news is that there are a ton of providers who offer a suite of payroll solutions to choose from. The hard part is choosing which one offers the best fit for you (which we’ll cover next). 

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Here is a short list of companies providing the best payroll services in the industry. 

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• ADP
• Gusto
• Hourly
• OnPay
• Paychex
• Paycor
• Quickbooks
• Zenefits

How to Choose a Payroll Provider

With so many options available, finding the right payroll provider can be a little overwhelming. That’s why we’ve prepared this list of eight crucial questions to evaluate if your prospective provider is a good fit. 

1. Do the core features of the provider’s services meet your needs?

What you need most from your payroll provider will depend on the specifics of your business. Do you have a lot of employees and an extensive benefits package? Do you need to be able to drill down into payroll costs and details? Or do you need basic services because you employ a small workforce? Be sure you understand what you need and what is offered by the provider. 

2. Does their fee fit your budget?

Every business works within a budget. How big your budget is for payroll services depends on your business’s current priorities and expenses. If you haven’t already, now is a great time to review your budget. You should also consider how time-savings and ease-of-use factors can impact your bottom line. 

3. What security measures does the provider use to ensure sensitive information stays private?

Anytime financial information is involved, security needs to be top of mind. While most payroll providers make security their highest priority, getting detailed information about how they protect customer information is still a good idea. You can also ask how often they refresh security training for staff. 

4. How does the provider stay up to date on regulatory and tax compliance rules?

Federal and state tax regulations change often. And, as your business grows, new rules may apply to you that didn’t when your business was smaller. It’s important to work with a provider with the correct processes in place to ensure your business is always in compliance. You’ll also need to know how the company deals with any compliance mistake should it make one. You can ask if the provider guarantees their work.

5. Does the provider’s software integrate with other business tools?

Every business has a unique suite of tools that are most important to its operations. When bringing in a payroll provider, it’s important that the new software offers seamless integrations with the management tools you love to use. There will always be a learning curve when using a new product or service, so the goal here is to make that learning curve as gentle as possible. 

6. Can the provider continue to meet your needs as your business scales and matures?

What do the next two to five years look like for your business goals? Are you growing at a rapid pace? If so, you’ll definitely want to work with a provider that can adjust its offerings to meet your needs (and budget) for every stage. A good place to find out how well the provider can adapt to different business needs is by looking at the different service packages it offers. 

7. Is the provider familiar with the specific needs of your industry?

Payroll needs in the restaurant industry differ from needs in the financial planning industry. While not absolutely necessary, it can be highly beneficial to work with a payroll provider that knows the idiosyncrasies of your industry. Specialists often know valuable tips and tricks that can help businesses save money and grow. 

FAQs

In case we didn’t get to all your burning questions, here are some of the most frequently asked questions—and their answers!

How do I know who my payroll provider is?

The fastest way to look up your payroll provider is by looking for the company name on your last pay stub. Many providers feature their name or logo prominently on their pay stubs. 

How many payroll providers are there?

There are literally hundreds of thousands of payroll providers and bookkeeping services in the U.S. And that number keeps on growing every year. The good news is that you’ll definitely have a ton of options when it comes to choosing the right provider to work with. The bad news is that you may suffer from option overload, so be sure to begin your search by reviewing your business needs and goals. 

What is a third-party payroll service provider?

A third-party payroll service provider is a completely independent entity that processes payroll and tax services for a business in exchange for a monthly fee.

Is it easy to change payroll providers?

Though in the past it was far more complicated to change payroll providers, these days most providers make the switch feel seamless. They appoint someone to guide you and your business through the transition and ensure that everything is done correctly. But, switching can incur fees if you do so before the end of your current contract. Additionally, it tends to be easier to switch at the end of the year, but it’s not absolutely necessary to do so. 

Choose a Payroll Provider Based on your Business Goals

If you’re unsure about the answers you’re looking for, it may be a good time to review your business goals and strategy. When you’re clear on how outsourcing payroll will help you, you’ll be able to choose a payroll provider with greater confidence. And, you’ll be more likely to hire a provider that fits your needs perfectly.