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

Choosing to work with a payroll service provider can help business owners save time and money, improve efficiency, and reduce risk. More importantly, it can free you to focus on business operations and growth.

Consider this: 34% of business leaders said they spend more than 10 hours per week on HR administration, including processing payroll, according to our 2025 Priorities for Business Leaders survey. The average time spent on HR tasks costs companies a staggering $171,997 annually—that's $3,308 per week. A payroll service provider can help you get those hours back and help you realize significant cost savings.

Payroll service providers support business owners by handling payroll processing, tax filing, and other related services. Using a payroll service provider can help you 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.

Whether you're an established business owner or just getting started, finding the right payroll provider can transform your business. Here's what you need to know.

What Do Payroll Service Providers Do?

Payroll service providers take the guesswork out of the payroll process by managing essential payroll tasks for small, medium-sized, and large businesses. While the business owner or internal payroll person must provide employee information, the best payroll services 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:

• Automating payroll processing, withholdings, and wage garnishment
• Filing state, local, and federal taxes
• Preparing year-end reports, including W-2 and 1099 documents
• Documenting and reporting new hires
• Generating reports for company use
• Automating deductions for 401(k) contributions or insurance premiums
• Providing online access to employee records and payroll documents
• Creating and printing checks for manual signature or electronic signature release
• Facilitating direct deposit and payroll deductions

Why Would Companies Choose to Use a Payroll Service?

Many companies choose to use a payroll service when they reach a growth stage where payroll processing becomes more complicated and time-consuming. A third-party provider can help you:

• Enhance Efficiency: Automate and streamline complex tasks so you can focus on your business's core needs.
• Boost Productivity: Save time and resources that would have been used on manual operations.
• Compliance Assistance: Help maintain compliance and stay up to date on changes to the numerous rules and regulations required by applicable state and federal employment laws.
• Leverage Technology: Use the provider's technology platform for tasks like automated check generation, on-demand reports, employee self-service portal, electronic tax filing, and electronic payments of employees' wages.

Understanding Different Types of Payroll Services

Finding and choosing the best payroll provider takes time and effort, but the payoff is worth it. Payroll providers operate under different models, so it's essential not only to identify the best provider for your business but also the best service model. Here's a snapshot of three distinct types of payroll systems to help you find the best payroll service for your specific needs:

Professional Employer Organization (PEO)

A PEO allows companies to outsource key human resource functions like payroll and benefits administration. PEOs may also provide guidance to assist small and mid-size companies in maintaining compliance with federal and state employment laws. Working with the right PEO can give business owners and their management teams more time and flexibility to stay focused on the business rather than managing back-office administration.

Generally speaking, a PEO assumes responsibility for the payment of a business' employment taxes, files tax returns, and ensures that proper tax deposits and payments 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 HR 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's 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 fulfill required tax deposits and informational tax filings with 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?

Choosing the right third-party payroll service starts with evaluating your reasons for outsourcing your business payroll and determining what kind of support you need. Next, look at the different service models and consider which one is the best fit for your situation.

For example, if you need help with human resource management beyond payroll, a PEO may be the best choice. If you need support only with tax compliance, you may choose to work with a reporting agent. However, if you are looking for someone to help you specifically with your payroll function, a provider that specializes in payroll services will likely be the best fit.

How To Choose a Payroll Provider

The best payroll provider for your business is the one that can demonstrate a clear understanding of your needs and the ability to provide a solution tailored to your specific requirements. As you consider your options, ask plenty of questions to help you get a feel for both the functionality of the service and the company's approach to customer support. Factors to consider include:

• Referrals and references
• Experience
• Personalized approach
• Integrated technology
• Add-on services
• Transparent pricing
• Dedicated point of contact
• Analytics and reporting
• Security
• Flexibility and scalability
• Compliance support

Let's look at each of these in more detail.

Referrals and References

You can begin curating a short list of options by asking for referrals from fellow business owners, particularly those with businesses similar to yours. Once you get a few referred names, conduct your due diligence. Ask questions like:

• How long have they been in business?
• Have they worked with businesses like mine?
• Will I have access to a support person?
• What does the implementation process look like?
• Have other clients been satisfied with the service?

Start by reading online reviews and customer testimonials for each company, both positive and negative. 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 they should be able to provide case studies and metrics that demonstrate results.

Personalized Approach

Not all businesses have the same needs. Large businesses need different support than small businesses do, and certain industries may have unique compliance requirements. A quality outsourcing provider must be equipped with knowledge of your business size, industry, and operations so they can match their services to your potential needs. The best providers will take time to learn more about your business so they can customize their approach rather than relying on a generic, one-size-fits-all strategy.

As part of this personalized approach, the provider should offer around-the-clock support (not just on days when your company payroll is being processed). They should also connect you with a single point of contact, ideally a highly trained, dedicated payroll specialist who can address a wide range of payroll and tax needs. Most importantly, your contact person should take time to understand the unique facets of your business and be available to answer questions as needed.

Integrated 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. Here are some things to look for:

• Integrated platform: Does the company offer a mobile app in addition to platform access via a web browser?
• Data synchronization: Does the payroll provider's technology integrate with your current tech stack to synchronize data and improve accuracy?
• Security: What security protocols are in place to identify threats and prevent unauthorized access? Look for best practices like automated threat monitoring, password management, encryption, access controls, and multi-factor authentication.
• Implementation support: How does the company manage platform integration and implementation? Are there any additional fees for training and setup?

To help you evaluate the software, request a trial run 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.

Add-On Services

Many payroll providers offer additional HR services beyond payroll processing. These services may be offered as a package, or they may be offered as individual services you can add for an additional fee. These services may include:

• 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
• Support employee hiring, screening, and retention

Some payroll providers offer technology platforms that can help businesses integrate payroll with other services. For example, a human capital management (HCM) software and service platform puts your payroll and HR data at your fingertips and may allow you to add or remove modules based on your HR needs. 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
• Benefits administration
• Third-party retirement programs
• Hiring and onboarding tasks
• Employee development and training

Opting for a full-service provider can enable you to focus more of your time and effort on growing your business rather than getting bogged down with HR administration.

Transparent Pricing

Some providers charge additional fees for routine transactions, such as hiring a new employee or 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. Ask for an unbundled quote and see if the provider is willing to disclose the possibility of pricing changes in the near future.

Dedicated Point of Contact

Your workday doesn't always end at 5 p.m., and time zone differences may mean you need to contact your payroll provider after traditional business hours. If calling your provider after hours lands you on hold – or worse, no one answers the call – you could end up wasting hours of valuable time. A dedicated point of contact solves this problem by ensuring that you have 24/7 access to someone who knows your business whenever you need them. Having the ability to call or chat with a dedicated specialist or service manager enables you to access the information you need anytime, from anywhere.

Analytics and Reporting

Payroll can be one of a company's largest expenses. 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 trends to help you assess staffing and productivity.

Security

Data breaches are an unfortunate reality in today's business environment. Strong cybersecurity protocols are a must for any business that works with confidential and sensitive personal information. Look for a payroll service provider that follows security best practices such threat and vulnerability management, conducts regular platform maintenance, and has robust access controls in place. The company should clearly explain its data security practices, have an industry certification or aligned with an industry framework, have a reliable server with a high uptime rate, regularly update applications to meet the latest protocols, and have a mature incident response plan.

A provider's reputation in the industry can also be a good indicator of how trustworthy they are and what kind of history they have supporting clients in your sector.

Flexibility and Scalability

As your company grows, you will need a scalable payroll solution that can grow with you and accommodate your changing needs. As you add employees, open new locations, or expand into new markets, your payroll needs will evolve. Your payroll provider should be able to seamlessly adjust to these changes while maintaining efficiency and accuracy.

The provider should also be flexible enough to handle seasonal hiring changes, onboarding and offboarding temporary workers, and payroll requirements in different geographic locations, including international markets.

Compliance Support

Compliance is a complex and high-stakes undertaking that requires comprehensive knowledge of the laws and regulations applicable in your state. A payroll provider can assist with tasks like:

• Reporting new hires to state employment security and child support departments
• Provide access to the government's E-Verify system for employment authorization
• Monitoring state and local minimum wage changes
• Adhering to health insurance requirements
• Staying up to date on new compliance requirements and regulatory changes

Ensure Your Payroll Provider Can Integrate With Your Existing Tools

Access to data and insights are critical for today's businesses. However, data does no good if it is locked away in a silo that can't connect with other systems. When you work with a payroll provider, ask them how they handle system integration and data migration, and be sure their platform works with your current software and applications. Payroll providers may offer a range of integrations to help you share data with various systems in your technology stack, including:

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

Costs of Working With a Payroll Service Provider

The cost of working with a payroll service provider depends on many factors, including your number of employees, location, business size, industry, and specific needs. In addition, providers may structure their pricing differently, which can make it challenging to compare costs. In general, service providers charge a monthly fee per employee. You can expect to spend between $30 and $100 per employee per month.

As you compare quotes from potential providers, be sure to ask for an unbundled quote that shows exactly what is included in the service fee and what would be considered an add-on.

Questions To Ask When Selecting a Payroll Provider

Outsourcing payroll to a third-party provider is a big decision that should be made with care. To find a provider that can meet your needs both now and in the future, research a variety of companies. But how do you find the right one for your business? What makes a payroll provider exceptional?

Here are some key questions to ask:

• Have you worked with businesses in my industry before? What is the extent of your experience?
• How easy will it be to switch from in-house payroll processing to an outsourced provider? What is the process?
• Do you have a team specifically dedicated to getting my account set up and running?
• How do you handle data migration and platform integration?
• What are your support options? Do you provide round-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 and help me calculate, pay, and file my payroll taxes with the appropriate agencies?
• Do you have a tax compliance team that is engaged in ongoing relationships with the IRS, state, and local agencies?
• 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 compare payroll providers, take time to learn more about what each company does and how well they do it. Your goal is to find and select a 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 some ways to make the most of your partnership.

• Monitor Tax Deposits Using EFTPS: When selecting a payroll service provider, confirm that they use the Electronic Federal Tax Payment System (EFTPS) when making tax deposits. According to the IRS, the free EFTPS service makes it easy for employers to safely access their payment history online. Your payroll provider should make deposits under your Employer Identification Number so you can ensure timely fulfillment of tax deposit responsibilities.
• Confirm Documentation: If you use a reporting agency (RA), they should provide 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.
• Use Your Business Address, Not the Provider's: Don't replace your address with the third-party provider's address in any paperwork or legal documents. The IRS recommends that employers verify that their own address is on record with the tax agency. This ensures that any IRS-related correspondence (bills, notices, etc.) is delivered to your business. This is also a useful way to monitor the payroll provider's activity and identify any unauthorized diversion of funds.

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