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How to choose a payroll company

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SmallBusiness.com How-tos are step-by-step instructions for specific small business tasks. They are created and edited by readers like you. You can help edit this How-to or you can create your own. Find more How-tos at the SmallBusiness.com How-to Hub.


Payroll can be a headache, especially for small-business owners with growing companies and an ever-expanding staff. Processing payroll requires a first-class computer or manual accounting system, and it also requires you to stay on top of changes in personnel, deadlines and tax requirements. Handing your payroll off to a processing company may save you time and money.

Questions to Ask

What services are offered, and do they suit my needs?

Most payroll processing companies do more than just calculate payroll and tax obligations for each employee; they also deliver and print checks, issue W-2 forms and provide management reports, automatic check signatures, envelope stuffing and direct deposit of checks. Some services offer tie-ins with 401K and Section 125 mutual fund plans and flexible spending accounts; others go a step further, offering integrated HR software systems that track information related to employee benefits as well as payroll data. Make sure that the service you choose is accessible and easy to use. Many companies now are beginning to offer payroll data transmission over the Internet, which allows managers to download payroll information from any computer with a modem. If you have a larger payroll, this might be a better option than going with a service that requires you to communicate payroll data via phone or fax.

What kind of customer service can I expect? You'll need to communicate regularly with your payroll provider, so make sure that there will be a personal account representative or team to personally handle your account. In fact, see if the agency can provide you with one central point of contact. If you have a special request like calculating bonuses or fringe benefits, you'll want to deal with someone who knows your business and is familiar with your needs. And if a glitch occurs, you certainly don't want to have to explain your situation to a different person every time you call.

What are the hidden charges/costs? Basic service for processing payroll costs about .80 cents to $2 per check, plus a base account fee and charges for additional services, such as tax filing and direct deposit. There may also be fees for adding or dropping employees, adjusting employee information or setting up your account. Identify which service features you're most interested in beforehand to avoid unnecessary charges. And watch out for providers that offer low base processing rates with expensive add-on features. Though most services will pay for penalties resulting from incorrect filing, you could be liable for the interest charges. Need to file local taxes or taxes in multiple states? Make sure you understand what the additional charges will be. You'll also want to know if you should expect a rate increase and what it will cost (and how long it will take) to reconcile any payroll mistakes.

What is the company's reputation? Before settling on an agency, be sure to check its efficiency and accuracy. Research bigger companies online and pay close attention to the feedback they receive from customers. Call the Better Business Bureau to check out local agencies. Talk to other businesses that have used the service and inquire about their experiences and the agency's pros and cons. Find out if the agency is bonded or insured to make sure that your business will not be negatively affected by any payroll outsourcing errors that could potentially occur. Knowing how long the average client stays with a particular company can also be helpful, since switching services isn't easy and is usually an ominous sign. If you still choose to process payroll in house there are sources to help. Some of those sources are the IRS.gov site and the DOL or Department of Labor's website.